Income Tax Appellate Tribunal - Amritsar
Income Tax Officer vs Ramesh Stone Wares on 16 March, 1998
Equivalent citations: (1998)62TTJ(ASR)93
ORDER
G.L. Garoo, A.M. The revenue has filed appeal against the order passed by the Commissioner (Appeals) vide order No. Commissioner (Appeals)/IT/BTI/348/89- 90 dated 11-9-1991 and taken following grounds in appeal :
On the facts and in the circumstances of the case the learned Commissioner (Appeals) has erred in allowing the claim of the assessee in respect of additional freight of Rs. 1,24,937 relating to the period from 5-4-1986 to 18-2-1988.
2. The learned Departmental Representative relied on the order passed by the assessing officer.
3. The appellant made a claim of Rs. 1,25,945 on account of penal freight paid to Railway Department. The appellant explained to the assessing officer that freight is originally charged by the Railway Department on coal keeping in view of the capacity of the wagon. The coal is weighed later on by the Railway authorities and excess of the weight from actually charged weight is liable for payment of freight as well as penal freight. The appellant pleaded that they have no control on the despatch of the coal by the coal company who are loading the coal in accordance with their own procedure and according to their own system. The appellant filed complete details of freight charged, R.R. No. overweight and additional freight payable alongwith penal freight. The assessee also filed copy of the petition filed at the Calcutta High Court against the demand of freight and penal freight on the overload coal wagon. The Hon'ble High Court decided the issue in favour of the appellant vide order, dated 10-1-1989, and the railway again reissued a demand vide letter dated 15-3-1989 consequently and the demand and liability became final. Accordingly, the appellant made claim for the assessment year 1989-90 by debiting the same to the coal account. It was also explained that even though the demand was raised but the stay was granted by the High Court. The assessing officer observed that the additional freight demand is of the nature of penalty and, therefore, same is to be disallowed because it is penalty on the negligence on the part of the assessee in loading excess weight. He has also observed that disallowance is made because the same is not relevant to the purchases made during the year under consideration. The matter was adjudicated upon the Commissioner (Appeals), who has given his findings as follows:
"2.4. I have given due consideration to the arguments of the learned counsel and I have also examined the assessment record as well as the case law on the point. The plea of the learned counsel is correct that coal is loaded by Eastern Coal Fields India Ltd. through their mechanical plants and assessee has no role in the loading of wagons. I have also examined the instructions issued by the Railway vide their No. XG. 2117/48/Pt. VI, dated 23-2-1987, in which it has been stated that in case wagon is overloaded then additional freight will be charged. The details of additional freight charged have also been examined and the notice of demand issued by the Railway on 15-3-1989, when the stay was vacated has been examined. All this leads to the conclusion that penal freight has been charged not for unlawful activity but on account of overloading of wagons over which the appellant had no control whatsoever. Since overloading of wagons was a part and parcel of the business activity the amount can be regarded as expended wholly and exclusively for the purpose of business on account of bona fide purchase of coal from Coal India Ltd. As such the penal freight is allowable: CIT v. Panna Lal Narottam Das (1968) 67 ITR 667 (Bom).
This view is also supported by the following decisions Apeejay (P) Ltd. v. CIT (1978) 114 ITR 544 (Cal) (expenditure incurred in connection with re-exportation of the goods imported without valid licence);
Nanhoomal Jyoti Prasad v. CIT (1980) 123 ITR 269 (All); demurrage paid for delay in taking delivery); and CIT v. Reliance Water Supply Service of India (P) Ltd. (1980) 126 ITR 199 (All) (amount paid to government as penalty and damages for delay in execution of contracts).
In view of the foregoing discussion, addition made to the tune of Rs. 1,25,945 is disallowed".
4. The issue is to be decided from two angles. The first angle is whether the expenditure debited is penal in nature. We are of the opinion that the expenditure is not penal in nature because it is not the infringement of law but same is violation of contract that too not by the appellant but by his agent i.e. Coal Authority of India. In terms of an agreement, if coal is finally found by the Railway authorities to be overloaded then the appellant has to pay additional freight charges which according to the terminology of the contract is called as penalty freight.
5. The second issue relates to the relevant previous year in which this expenditure can be legally and logically claimed. It is quite clear on the record that the penal freight was raised in earlier years. The first point of the claim will logically relate to the year when the penalty freight bills were raised by the Railways. The appellant filed petition before the Hon'ble Calcutta High Court who stayed the payments raised in the freight bills. Therefore, issue remained, if the liability is disputed which is the year when such liability under mercantile system is to be claimed. The revenue relied on various case law cited in the grounds of appeal. The first law relates to CIT v. Aggarwal Rice & General Mills (1989) 180 ITR 29 (P&H). The Honble jurisdictional High Court has given following finding of the fact:
"This court has held in CIT v. United India Woollen Mills (1981) 132 ITR 457 (P&H), that where an assessee follows the mercantile system of accounting, he has to claim deduction on the basis of accrual of liability and if liability is quantified later on in another assessment year, that makes no difference and in that year the deduction cannot be allowed. That case is fully applicable to the facts of the present case. We had also an occasion to deal with this type of matter in Sirsa Industries v. CIT (1989) 178 ITR 437 (P&H) and took the same view following the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. v. CIT (1971) 82 ITR 363 (SC), although, on the facts of that case, the matter was decided in favour of the assessee"
The revenue has relied in the case of CIT v. Travancore Titanium Products Ltd. (1993) 183 ITR 78 (Ker) which deals with the observation of the Honble High Court that year of making claim of a bill is the year in which the bill is raised and not the year in which the bill is finalised. In CIT v. United India Woollen Mills (1981) 132 ITR 457 (P&H), the facts of the case of the appellant are almost same. The Hon'ble jurisdictional High Court has relied on the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and gave following observations:
"A reference to the decision of the Supreme Court in the above paragraph is to Kedarnath Jute Mfg. Co.'s case (supra) no opinion has been expressed on the question in hand, the following observations made therein leave no manner of doubt that an assessee who has adopted a mercantile system of accounting would not be entitled to claim a deduction qua the liability discharged in the accounting year and would be entitled to do so only in the accounting year in which the liability accrued.
"Now, under all sales-tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings the liability for payment of tax is independent of the assessment. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed"
Again, according to sub-section (1) of section 145 of the Income Tax Act, income chargeable under the head "Profits and gains of business or profession" or Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. The chargeable income of the assessee for the assessment year 1971-72, therefore, has to be computed according to the mercantile system of accounting according to which the assessee would be entitled to those deductions, the liability for which has accrued and not for those which have been discharged, in the accounting year. It was not disputed that the liability to pay the amount in dispute, on account of purchase tax, arose in the year 1967-68 and not in the accounting year. The deduction qua this amount, therefore, could be claimed by the assessee in the year in which the liability to pay it actually accrued and the fact that the authorities entitled to enforce the liability issued notice for its payment in the accounting year would be of no consequence. The reasons given in CIT v. Nathmal Tolaram (1973) 88 ITR 234 (Gau) that there is no provision under the law which dissentitles the assessee to debit such amount later when an enforceable demand is made by the appropriate authority is, therefore, not sustainable because the bar, if not expressly, is impliedly contained in the said provisions of sub-section (1) of section 145 which makes it imperative that the chargeable income shall be computed in accordance with the method of accounting regularly employed by the assessee."
The fourth case law relates to CIT v. K.A. Karim & Sons & Ors. (1981) 133 TR 515 (Ker)(FB). The similar view was held by the Hon'ble Kerala High Court. The Hon'ble Supreme Court has laid the law in Kedarnath Jute Mfg. Co.'s case (supra) whereby the Hon'ble Supreme Court has held that if an assessee follows mercantile system of accounting then he is entitled to deduct from the profits and gains of the business liability which has accrued during the period for which the profits and gains were computed. In the case of the appellant, it is abundantly clear that the additional penal freight bill was issued to him in the previous year prior to the previous year relevant to the assessment year under consideration. Under the mercantile system, he was to make the claim in the year when such bills were raised irrespective of the fact that for the recovery of the amount, the Hon'ble High Court granted the stay. It was also immaterial that part of contract was sub judice.
6. We are, therefore, of the opinion, that the Commissioner (Appeals) has not taken into account the relevance of the period to which these liabilities relate. The Commissioner (Appeals) has given finding that the penalty freight is an allowable liability. He has rightly relied on the case law as mentioned by him in his order.
7. Keeping in view the above observations, the order passed by the Commissioner (Appeals) is vacated and the order of the assessing officer is restored.
8. In the result the appeal of the revenue is allowed.