Calcutta High Court
Commissioner Of Income-Tax vs Shree Krishna Gyanoday Sugar Ltd. on 17 July, 1989
Equivalent citations: [1990]186ITR541(CAL)
JUDGMENT Ajit Kumar Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, the following questions of law have been referred to this court :
"(1) Whether, on the facts in the circumstances of the case, the Tribunal was justified in holding that the perquisites in terms of Rule 3 of the Income-tax Rules, 1962, alone would be the ceiling in the hands of the assessee-company under Section 40(c)(iii) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest paid or payable for the arrear cess for delayed payment should be allowed as a legitimate business expenditure while computing the assessee's total income for the previous year corresponding to the assessment year 1977-78 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the legal expenses in connection with the writ petition filed by the assessee against the Government orders under the Sugar Control Order should be allowed as business expenditure ?"
2. The facts relating to the first question are that the Income-tax Officer made a disallowance of Rs. 22,664 in terms of Sub-section (5) of Section 40A of the Income-tax Act, 1961, on account of certain perquisites, including concessional residential accommodation. The working of the disallowance of Rs. 22,664 has been given by the Income-tax Officer as annexure to the assessment order for the assessment year 1977-78. On appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer on this point.
3. The matter was taken up in appeal to the Tribunal. The Tribunal accepted the assessee's plea by observing as follows :
"As regards the perquisite relating to accommodations provided to the directors, we hold that, on parity of reasoning, the perquisite in terms of Rule 3 of the Income-tax Rules, 1962, alone would be the ceiling in the hands of the assessee-company under Section 40(c)(iii) of the Income-tax Act, 1961. This view is supported by the decision of the Calcutta High Court in the recent case of Britannia Industries Co. Ltd. [ 1982] 135 ITR 35."
4. This question came up for consideration before this court, in Income-tax Reference No. 773 of 1979 (CIT v. Ashoka Marketing Ltd. [1990] 181 ITR 493) where the judgment was delivered on April 25, 1989.
5. Following the said decision, we answer the first question in this reference in the negative and in favour of the Revenue.
6. The second question pertains to the claim for deduction for interest on canecess amounting to Rs. 4,59,953. The assessee, by its letter dated February 14, 1980, filed before the Inspecting Assistant Commissioner of Income-tax in the course of proceedings pending before him under Section 144B. No provision was made in the accounts maintained by the assessee.
7. But it had, however, made a reference to it in Schedule H of the balance-sheet. Neither the Income-tax Officer nor the Inspecting Assistant Commissioner discussed the said claim under Section 144B but, in the assessment order, the said amount was not considered for deduction from the total income.
8. The assessee appealed against the aforesaid order of the Income-tax Officer to the Commissioner of Income-tax (Appeals) who duly considered the claim made by the assessee with reference to the note in Schedule H of the balance-sheet and the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429, and the decision of the Patna High Court dated August 19, 1976 in Civil Writ Jurisdiction Case No. 1121 of 1972 and held that, in view of the decision of the Patna High Court dated August 19, 1976, the interest was not statutorily leviable and, therefore, there was no question of allowing it by way of deduction from the assessee's total income.
9. The assessee appealed against the aforesaid order of the Commissioner of Income-tax (Appeals) to the Tribunal and submitted before it that, though it was true that the Hon'ble High Court at Patna had quashed as ultra vires Sub-rule (2) of Rule 46A of the Bihar Sugar (Regulation of Supply and Purchases) Rules providing for levy of interest, the said rule had since then been validated with retrospective effect by the Bihar Sugar-cane Ordinance, 1968, promulgated in January, 1968. Thus, although the judgment of the Patna High Court had quashed the levy of interest under the Bihar Sugar Factories Control Act for the season 1962, the Ordinance had come with retrospective effect for the levy of the same, and, therefore, it was urged that the Commissioner of Income-tax (Appeals) was not correct in ignoring the claim of the assessee by reiving on the judgment of the Patna High Court and in not considering the effect of the Ordinances of 1968 and 1975. The Tribunal accepted the above claim of the assessee.
10. In the context of the aforesaid facts and circumstances, the question which calls for determination is whether the interest on cane cess is allowable as a deduction in computing the business income of the assessee. A contention has been raised that, since no provision was made by the assessee for the amount claimed, the assessee is not entitled to get the deduction. In our view, this contention has no substance. It is true that the assessee has not created a separate provision for this liability in the accounts. However, by note 2 under Schedule II, the assessee has given reasons therefor. The reasons are :
"No provision has been made in respect of interest on cane cess outstanding Rs. 4,59,953. It has been decided by the Patna High Court in 1961-62 season claim case that interest is not recoverable. In view of the same, the management is of the opinion that the existing provision will cover the liability up to this year."
11. This claim of the assessee, even if otherwise sustainable, cannot be defeated on the ground that no provision was made. Reference may be made to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, where the Supreme Court has laid down that if an assessee follows the mercantile system of accounting, he is entitled to claim a deduction even though the expenditure is not actually expended. It is enough if the liability for such expenditure accrues. If in law, the liability accrued, its accrual will not be defeated or fail by reason of the assessee not making the relevant entries in his books of account.
12. The note extracted above would show that the liability was outstanding. The assessee admitted that the interest payable was outstanding and constituted a liability, although no separate provision was made. In the opinion of the management, the existing provision would cover the liability up to this year. There is no dispute that the assessee has also claimed the deduction before the authorities by its letter dated February 14, 1980. in connection with the proceedings under Section 144B, but as indicated earlier, the said claim was neither considered nor discussed by the Income tax Officer nor by the Inspecting Assistant Commissioner. In our opinion, the assessee did not make a separate provision regarding the aforesaid liability, admittedly, in view of the decision of the Patna High Court dated August 19, 1976, and the existing provision was sufficient to cover the liability up to the year in question. Nothing turns on the view taken by the management in making a separate provision for this liability which was claimed by a letter before the authorities.
13. It has also been contended that the claim of the assessee relates to the unpaid amount of cess for the years 1976-77 and 1977-78. We are afraid, there is no such finding that the liability relates to the years prior to the previous year in question. According to the assessee, the interest claimed is in accordance with the rate of interest prescribed under the Ordinance. There is no finding or material to the contrary. There is no question of interest on arrears of cess relating to previous years. Admittedly, the assessee has been following the mercantile method of accounting and any liability which had accrued in the previous year can be claimed as a liability even though actually not paid. The question then arises whether this claim is allowable or not.
14. The assessee-company has a sugar mill at Lauriya in the District of Champaran and the sugar cess is payable under the provision of Section 29 of the Bihar Sugar Factories Control Act, 1937. The interest, penalty and fine, which were in arrears for the session 1961-62 were sought to be realised by the State Government and, in this connection, the assessee filed a writ petition before the Patna High Court in case No. 1121 of 1972 and the Patna High Court has held that the second proviso to Rule 46A(2) framed for implementing the aforesaid Act and which provided for the levy of interest was found to be beyond the rule-making power inasmuch as the Act itself did not provide the limits of the standards in relation thereto. Therefore, the Patna High Court held that the proviso was beyond the rule-making power and accordingly not enforceable. In the statement of the case made by the Income-tax Appellate Tribunal, "B" Bench, Calcutta, in the assessee's own case to this court for the assessment years 1967-68, 1968-69 and 1969-70, it has been stated that the Bihar Sugar Cane Ordinance, 1968, was promulgated on January 12, 1968, in the background of the decision of the Patna High Court and validated the action taken under the Bihar Sugar Factories Control Act with retrospective effect. In other words, the Ordinance had revalidated the levy of interest retrospectively. Even in the Ordinance 1973 (No. 47 of 1973), Sub-section (3) of Section 49 thereof provides for levy of interest on the amount of arrears of tax on sugar cane payable under Sub-section (1) thereof. Section 51 of the Ordinance prescribes the rate of interest at 11% per annum. Therefore, it is clear that the levy of interest is no longer left to the rule-making power of the authorities, but became part and parcel of the Ordinance, which acquired the force of law and which would be subsequently enacted as law when approved by the State Legislature.
15. By the retrospective legislation the factual or legal situation had been altered. Interest on cess was retrospectively imposed. The law was thus retrospectively amended providing for imposition of interest which was not permissible under the unamended law. The Ordinance was effective to validate such imposition which removed the defect pointed out by the judgment of the Patna High Court and the law was, therefore, amended with retrospective effect validating such impost. Accordingly, the decision of the Patna High Court in writ jurisdiction was ,,no longer applicable and the assessee was fastened with the liability to pay interest.
16. As regards the nature or allowability of the claim, the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, which related to liability to interest payable on arrears of cess under Section 3(3) of the U. P. Sugarcane Cess Act, 1956, would apply, on parity of reasoning, with equal force to the case of the assessee. It has been held therein that the interest payable on arrears of cess was in reality part and parcel of the liability to pay cess and it is an accretion to the cess and the liability to pay interest is as certain as the liability to pay cess. Further, it has been observed that as soon as the prescribed date is crossed without payment of cess, interest begins to accrue and it is not a penalty but is in the nature of compensation paid to the Government for delay in the payment of cess. We are, therefore, of the view that the assessee is entitled to the deduction claimed and allow the claim.
17. For the foregoing reasons, the second question is answered in the affirmative and in favour of the assessee.
18. The third question relates to the legal expenses of Rs. 11,695 incurred in connection with the writ petition filed in the Calcutta High Court challenging the Sugar Control Order and asking the High Court to permit it to collect excess price of sugar. The Calcutta High Court allowed the assessee-company to realise the sale price of sugar over the price fixed by the Government, but such sale price realised was to be secured by a bank guarantee and was to be kept in a separate account till the final disposal of the writ petition. The expenditure in question amounting to Rs. 11,693 had been incurred in pursuing the aforementioned writ petition. The claim of the assessee to allow the said expenditure was negatived by the Income-tax Officer who pointed out that the excess sale price realised by the assessee had not yet become part of the sale proceeds because the same was directed to be kept in a separate account by the High Court, and, therefore, the expenditure in question could not be related to the earning of the income. The Commissioner of Income-tax (Appeals), however, reversed the above order of the Income-tax Officer by observing that whatever might be the nature of the accounting entries made by the assessee, it was clear that the writ petition was filed in the interest of the business in getting a better sale price for the sugar and as such this expenditure was allowable as proper business expenditure under Section 37 of the Income-tax Act, 1961. The aforesaid order of the Commissioner of Income-tax (Appeals) was challenged by the Revenue before the Tribunal and reliance was placed on the reasons given by the Income-tax Officer for making the disallowance. On behalf of the assessee, the order of the Commissioner of Income-tax (Appeals) was supported. The Tribunal, after consideration, held that the order of the Commissioner of Income-tax (Appeals) was justified and that "in this case it is only in the interest of the business that the assessee has incurred the expenditure in the capacity of a businessman and the test laid down by the Supreme Court in the case of Malayalam Plantations Ltd. [1964] 53 ITR 140 is satisfied."
19. Mr. Bagchi, learned counsel for the Revenue, has contended that, in this case, Section 80VV would be applicable. The expenditure could be allowed to the extent of Rs. 5,000 only. We are, however, unable to accept this contention. Section 80VV provides that "in computing the total income of the assessee, it shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under the Income-tax Act, by way of tax, penalty or interest." The aforesaid writ petition was not concerned with the determination of any liability under the Income-tax Act by way of tax, penalty or interest. The assessee was challenging the validity of the Sugar Control Order.
20. In our view, the principles laid down by the Supreme Court in CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 will apply to the facts and circumstances of this case. Business expediency may not require that all expenses be incurred for earning immediate profits. Such expediency may also require that expenses be incurred to save business from coercive process and unlawful expropriation so that business may remain on sound footing and may earn greater profits in future. Where an assessee takes any steps for reducing its liability to tax which results in more fund being left for the purpose of carrying on the business or where the assessee takes steps for increasing the sale price for generating more funds for the purpose of carrying on business, there is always a possibility of higher profits. Accordingly, in determining whether an expenditure was deductible, the essential test which has to be applied was whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits. In our view, legal expenses claimed by the assessee are allowable as business expenditure. Even otherwise, the expenditure was incidental to the business arid was necessitated or justified by commercial expediency. Accordingly, the expenditure is deductible.
21. In the result, we answer the third question in the affirmative and in favour of the assessee.
22. There will be no order as to costs.
23. Leave is given to Miss M. Seal to file vakalatnama within two weeks.
Bhagabati Prasad Banerjee, J.
24. I agree.