Commissioner of Income Tax vs Somaiya Organics (India) Ltd.

This is a reference application by the Commissioner, Lucknow, u/s 256(2) of the income tax Act, 1961 (''the Act'') requesting that the Tribunal, Allahabad, be directed to make a statement of the case and to refer the following two questions : "1. Whether, on the facts and under the circumstances of the case, the Tribunal was, in law, justified in holding that the claim of liability of Rs. 49,28,841 as bond fees, purchase tax and licence fees was a statutory liability and allowable ?

Whether, on the facts and under the circumstances of the case, the Tribunal was justified, in law, in allowing the claim of the deduction of Rs. 49,28,941 by way of liability as bond fees, purchase tax and licence fees as there was no such claim before the Assessing Officer ?"

It has been vehemently argued by Mr. Pradeep Agarwal that it is not a case of statutory liability for the reason that the exemption granted earlier had been withdrawn by the Government and in a similar matter, a writ petition filed by the assessee challenging the withdrawal of such a concession, is pending in the Allahabad High Court. It was very ably and vehemently contended that the liability is a contingent liability and as such, the assessee''s claim has been rightly refused by the assessing authority as well as the first appellate authority. The Tribunal had held that the bond fees, purchase tax and licence fees had not been left by the State of UP in accordance with provisions of the Act and the rules framed thereunder and the liability in question had arisen during the year under consideration. The assessee who follows the mercantile system of accounting was entitled to deduction of the same from the profits-gains of the business. The Tribunal was of the view that the liability to pay fees under tax in question had arisen under the statute and as such, it was a statutory liability. Hence, the reference in question is only of academic nature and is not referable as a question of law.

As far as the next question is concerned, the Tribunal was of the view that the revenue had nowhere placed either before the first appellate authority or the Tribunal that the claim of deduction of liability in question cannot be allowed because no such claim was made before the Assessing Officer. Hence, the question No. 2 does not arise out of the order of the Tribunal and this question is also not referable to the High Court.

A similar question cropped up in CIT v. Somaiya Organics (India) Ltd. 1995 UPTC 1329 before a Division Bench at Allahabad wherein the factual matrix was that for the assessment year 1982-83, the Central Excise authorities raised a demand in the sum of Rs. 59,90,985. The assessee claimed a deduction for the aforesaid amount which was not allowed by the Assessing Officer on the ground that the High Court had stayed the recovery of the said amount and, therefore, the liability to pay the amount was merely contingent and, hence, no deduction can be claimed in respect of contingent liability. On appeal, the Commissioner (Appeals) upheld the view taken by the Assessing Officer. On further appeal, the Tribunal held that the liability is a statutory liability and since the assessee was maintaining accounts in mercantile system, the liability was allowable as a deduction in view of the decision of the Supreme Court in the case of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, . The Tribunal held that the High Court had merely stayed the realisation of the amount. By this application, it was prayed that the Tribunal be directed to make a statement of the case and refer the question "Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in allowing the assessee''s claim for deduction of Rs. 58,92,363 on account of licence fee, purchase tax and bond fee the levy of which had been stayed by the High Court"? for the opinion of the Court.

In the light of the aforesaid facts and circumstances, it was observed that the controversy raised by the Commissioner in the proposed question, has been already settled by the decision of the Supreme Court as well as the decisions of the High Courts and the question is, therefore, not a referable question of law and the application was rejected.

This Court in Commissioner of Income Tax Vs. Poonam Chand Trilok Chand, took the same view. In Commissioner of Income Tax Vs. J.K. Synthetics Ltd., , it was observed that deduction in the year in which the demand was raised, even though the assessee disputed the liability before the High Court and the High Court decided the dispute in favour of the assessee; and the Excise Department preferred an appeal before the Supreme Court which was pending. Thus, even where the High Court had quashed the demand the deduction was held allowable because, the excise department having preferred an appeal to the Supreme Court, the matter was subjudice and was not finally decided. The same view was again taken in 1994 UPTC 941, in which also the assessee disputed the demand on account of difference in cane price actually paid by the assessee to the cane grower refixed by the Central Government. The assessee challenged the demand and succeeded in securing a decision from the High Court in his favour. An appeal was filed in the Supreme Court. But the High Court held that the assessee was entitled to claim deduction for the demand and the Court declared to call for a reference u/s 256(2).

In the case of Commissioner of Income Tax, Orissa Vs. Kalinga Tubes Ltd., , it has been observed by the Supreme Court that when the assessee is following mercantile system of accounting, in case of sales tax payable by the assessee, the liability to pay sales tax would accrue the moment the dealer made sales, which are subject to sales tax. At that stage, the obligation to pay the tax arises. Raising of dispute in this connection before the higher authorities would be irrelevant.

That present case, squarely covers the legal proposition which was the subject-matter of decision before the Supreme Court in the cases of Kedarnath Jute Mfg. Co. Ltd. (supra) and Kalinga Tubes Ltd. (supra) and several decisions of this Court. Hence, we are definitely of the view that the controversy raised by the Commissioner in the proposed question stands already settled by the Supreme Court as well as this Court and the question is not such which could have been referred to as a question of law. In view of the said situation, the reference application is rejected.