Income Tax Appellate Tribunal - Ahmedabad
Govind Glass & Industries Ltd. vs Assistant Commissioner Of Income Tax on 27 March, 1996
ORDER
Jordan Kachchap, J.M.
1. This appeal by the assessee is directed against order dt. 23rd Feb., 1994, of the CIT(A), Ahmedabad, and the relevant asst. yr. is 1990-91.
2. The first disputed point which is covered by ground Nos. I. 1 to I. 12 relates to the confirmation of disallowance of Rs. 1,07,02,500 by the CIT(A) on account of price difference of gas supplied by ONGC to the assessee.
2.1. The assessee is a private limited company and follows mercantile system of accounting. For the relevant assessment year under consideration its accounting period ended on 31st March, 1990. The assessee is having business of manufacturing and sale of different kinds of glasses. During the assessment proceedings the Assessing Officer (AO) came across with the fact that since 14th Sept., 1981, the ONGC used to supply natural gas at a graded rate of Rs. 770 to Rs. 963 per 1000 cubic metres and for which there was agreement for 5 years which expired on 14th Sept., 1986. The ONGC expressed its inability for supply the natural gas on the old rate and it increased its price to Rs. 2,877 per 1000 cubic metre. The assessee approached the Hon'ble Gujarat High Court. The Hon'ble High Court gave an interim order directing the ONGC to supply the natural gas at Rs. 1,050 per 1000 cubic metres which was finally decided on 21st Dec., 1989, in pursuance to the judgment of Hon'ble Supreme Court and whereby the High Court fixed the rate at Rs. 1,400 per 1000 cubic metres. In pursuance of the said order dt. 21st Dec., 1989, of the Hon'ble High Court the assessee-company was to pay the price difference i.e., Rs. 350 (Rs. 1400 - Rs. 1050) per 1000 cubic metre for the period from 15th Sept., 1986, to 31st March, 1989, which amounted to Rs. 1,19,02,499 (rounded off to Rs. 1,19,02,500). The AO further noted that the assessee debited the aforesaid amount of Rs. 1,19,02,500 in its books of account taking that the liability was crystallised during the period relevant for the assessment year under consideration. The AO further noted that since the arrear was heavy and as such on approach of the assessee the Hon'ble High Court also allowed the assessee to pay the said arrear on instalments of Rs. 4 lakhs per month and the assessee made payment upto 31st March, 1990, as under :
Rs.
12th Jan, 1990 4,00,000
10th Feb., 1990 4,00,000
7th March, 1990 4,00,000
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Total 12,00,000
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The AO particularly noted that since the assessee was maintaining mercantile system of accounting it should not have debited the aforesaid liability of Rs. 1,19,02,500 in this year because the amount in question was expenditure or liability for the earlier period from 15th Sept., 1986, to 31st March, 1989. The AO, therefore, called upon the assessee as to why the claim was not to be denied to the assessee. The assessee contended before the AO that though the liability pertained to period from 15th Sept., 1986, to 31st March, 1989, but that being a disputed liability which was finally crystallised during the previous year relevant to the asst. yr. 1990-91 under consideration the assessee was entitled to have that debited in the books of account as it followed mercantile system of accounting and in support of its contentions the assessee relied on the following decisions of various High Courts :
1. CIT vs. Orient Supply Syndicate (1982) 134 ITR 12 (Cal)
2. CIT vs. Roberts Mclean & Co. Ltd. (1978) 111 ITR 489 (Cal)
3. CIT vs. Phalton Sugar Works Ltd.
(1986) 162 ITR 622 (Bom)
4. Swadeshi Cotton Mills Co. Ltd. vs. CIT (1980) 125 ITR 33 (All) 2.2. However, those contentions of the assessee did not find favour with the AO. The AO distinguished the decisions relied on by the assessee and according to him, the liability was for the period from 15th Sept., 1986, to 31st March, 1989, and further that since assessee having followed mercantile system of accounting should have claimed the expenditure on accrual basis in the relevant assessment years. According to him, for correct computation of profit the liability or expenditure was to be claimed in the year of accrual itself. As per the law the liability accrued in the respective year since when ONGC raised the price of the gas and the assessee was in know of that. It was observed by the AO that bringing the liability to dispute was not going to affect the accrual of the liability. On the point of accrual of liability year to year as well as since the assessee was following the mercantile system of accounting the liability should have been claimed in the respective assessment year and for correct computation of profit he relied on various judgments of different High Courts as follows :
1. Jaina Talkies vs. CIT (1980) 122 ITR 970 (All)
2. Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC)
3. Shrikant Textiles vs. CIT (1971) 81 ITR 222 (Bom)
4. CIT vs. Guranditta Mal Shanti Prakash Zira (1987) 164 ITR 774 (P&H)
5. CIT vs. Tata Chemicals Ltd. (1986) Taxation 82 (3) - 236 (Bom)
6. CIT vs. Investigation & Security Service (India) Pvt. Ltd.
(1990) 182 ITR 358 (AP)
7. L. J. Patel & Co. vs. CIT (1974) 97 ITR 132 (Ker)
8. Pope the King Match Factory vs. CIT (1963) 50 ITR 495 (Mad)
9. CIT vs. Venguard Insurance Co. Ltd. (1974) 97 ITR 546 (Bom)
10. Mysore Tobacco Co. Ltd. vs. CIT (1978) 115 ITR 698 (Kar)
11. CIT vs. Brijmohandas Laxmandas (1979) 117 ITR 121 (All)
12. Addl. CIT vs. M. P. Sugar Mills P. Ltd. (1984) 148 ITR 203 (All)
13. CIT vs. Shri Sarvaraya Sugars Ltd. (1987) 163 ITR 429 (AP).
2.3. The AO, however, considering the fact that since the assessee paid Rs. 12 lakhs on instalments of Rs. 4,00,000 per month in pursuance to order of Hon'ble Gujarat High Court he took that amount as crystallised by the High Court during this assessment year only and applying the ratio laid down in the decision of Hon'ble Karnataka High Court in the case of CIT vs. ABV Gowda (Decd.) (1986) 157 ITR 697 (Kar) and Hon'ble Madhya Pradesh High Court in the case of Sarupchand Hukam Chand Pvt. Ltd. (1982) 133 ITR 295 (MP) held that the amount in question accrued in the assessment year under consideration and accordingly out of total claim of Rs. 1,19,02,500 he allowed Rs. 12 lakhs only and disallowed the remaining amount of Rs. 1,07,02,500.
2.4. Being aggrieved by the aforesaid order of the AO the assessee went in appeal before the CIT(A). Before the CIT(A) the assessee relying upon various judgments of different High Courts as referred to above and further decision of Hon'ble Patna High Court in the case of S. K. G. Sugar Ltd. (1974) 96 ITR 194 (Pat), Hon'ble Calcutta High Court reported at (1981) 129 ITR 62 (Cal) and further on the judgment of Hon'ble Allahabad High Court in the case of Brijmohan Das Laxman Das (1979) 117 ITR 121 (All) (supra) it was submitted that liability in question was a contractual liability and the assessee was under no obligation to pay the excess claim made by the ONGC and that was why the dispute arose which was finally settled and crystallised by order of Hon'ble Gujarat High Court, dt. 21st Dec., 1989, in pursuance of the order of Hon'ble Supreme Court. It was emphasised that no doubt the assessee was following mercantile system of accounting but the liability being disputed the same could not be said to have accrued from year to year and so there was no question of claiming the same in earlier year. However, those contentions of the assessee did not find favour with the CIT(A). The learned CIT(A) confirmed the order of the AO. However, inadvertently he confirmed the entire claim of Rs. 1,19,02,500 instead of Rs. 1,07,02,500. Being still aggrieved and dissatisfied with the impugned orders of the authorities below now the assessee is in appeal.
2.5. Shri J. P. Shah, the learned counsel of the assessee, vehemently objected to the order of the learned CIT(A). According to him, the matter in controversy was not considered properly and in right perspective. Explicating the matter and while referring to page 646 of the paper book and chronological list of the events he said that in or about 1978-79 Gujarat Industrial Development Corporation formed an industrial estate at Kadi with a view to develop the industry in backward area and accordingly invited entrepreneurs to start factories. An arrangement was made with the league of the ONGC for supply of the natural gas to the unit which were to come up in that industrial estate. Gujarat Industrial Development Corporation (GIDC) entered into contract with the assessee-company to have the natural gas supplied from ONGC for a period of 5 years from 14th Sept., 1981, at graded rate from Rs. 770 to Rs. 963 per 1000 cubic metres plus other charges like royalty and service charges, etc. The said agreement remained in force upto 14th Sept., 1986, and there was a provision for renewal after giving 9 months' notice by either side. The learned counsel said that on 13th Dec., 1985, the assessee wrote to GIDC to extend the contract. The GIDC however, by its letter dt. 5th May, 1986, decided not to renew the agreement and directed the assessee-company to approach ONGC directly for supply of the natural gas. Maintaining the argument, the learned counsel said that initially ONGC was not willing to supply gas directly but thereafter demanded on exorbitant price of Rs. 2,878 per 1000 cubic metres. The assessee-company from its sources came to know that ONGC had made exorbitant demand for gas from gas consuming units of Baroda in like manner and those units approached the Gujarat High Court challenging the exorbitant price fixation of the gas. The assessee-company also, therefore, filed Special C.A. No. 4685 of 1986 on 5th Sept., 1986. The learned counsel of the assessee referred to pages 7 to 43 and 0 (sic) to 92 in paper book Nos. 1 and 2 respectively. The learned counsel said that the said Special Civil Application No. 4685 was heard analogously with similar other Special Civil Applications and same was disposed of on 8th Sept., 1986, by a single Judge. The Hon'ble Judge passed an interim order directing ONGC to supply gas to the assessee at a rate of Rs. 1,050 per 1000 cubic metres. The said order dt. 8th Sept., 1986, could be seen at pages 44 and 45 of the paper book No. 1. The learned counsel further said that against said order the ONGC filed a Letters Patent Appeal (LPA) No. 298 seeking modification. However, in the meantime, ONGC had approached the Hon'ble Supreme Court in the matters of other entrepreneurs and the Hon'ble Supreme Court revised the price of the gas and so in consequence to that the LPA No. 298 of 1987 was modified by a Bench of two Judges. The Hon'ble Judges by order dt. 21st Dec., 1989, ordered that ONGC was entitled to charge at the rate of Rs. 1,400 per 1000 cubic metres for the period from 15th Sept., 1986, to date as against Rs. 1,050 charged earlier. The learned counsel of the assessee referred to pages 1 to 3 of the paper book set No. 1. According to that order the ONGC was to raise bill for differential price for the period from 15th Sept., 1986, to 31st March, 1989, for a sum of Rs. 1,19,02,499.72. The learned counsel of the assessee having further referred to pages 4 to 6 of the paper book set No. 1 which were the revised bills dt. 5th March, 1990, received from ONGC, submitted that ultimately the liability towards the payment of the gas was finalised and settled in the accounting year relevant to the assessment year under consideration. Maintaining his submissions, the learned counsel said that no doubt the assessee-company was maintaining mercantile system of accounting and the amount in question pertained to earlier years right from 15th Sept., 1986, to 30th Nov., 1989, on account of difference of enhanced price but the same being under dispute and finally settled during the accounting year relevant to the assessment year the assessee was entitled for deduction of the same in this assessment year. The learned counsel emphasised that since enhancement in the price of the natural gas by the ONGC was in dispute and not yet settled, the same was contingent dependent upon the decision of the Gujarat High Court as well as the Hon'ble Supreme Court. The same could not be said to have accrued during the preceding years. The learned counsel reiterating submitted that the price of the gas was in a graded scale from Rs. 770 to Rs. 963 per 1000 cubic metres but the ONGC hiked the price to Rs. 2,878 per 1000 cubic metres which was very high and the same went in litigation before Hon'ble High Court and Supreme Court and so under such circumstances when the entire controversy as to fixation of the price being in liquid form the question of accrual of the liability did not arise. The learned counsel said that the matter was finally decided by the judgment of Hon'ble Gujarat High Court dt. 21st Dec., 1989, and consequent upon that bill was raised by ONGC, dt. 5th March, 1990, the liability for the payment arose in the accounting year relevant to the assessment year under consideration. The learned counsel said that the assessee accordingly made provision in its books of accounts for this year. The learned counsel having referred to annual report for the accounting years 1988-89 and 1989-90 compiled at pages 48 and 49 respectively compiled in paper book set No. 1 submitted that the assessee was aware that liability was contingent and that is why in the accounting year 1988-89 it made special note of the fact that the liability was not provided for because the rate difference of the gas supplied by the ONGC was in dispute but for the accounting year 1989-90 a special note was made that in view of the judgment of Hon'ble Gujarat High Court, dt. 21st Dec., 1989, the liability being ascertained and having been accrued during that financial year the provision for the said liability was to be made in the books of accounts and accordingly the provision was made to the tune of Rs. 1,19,02,499.72. The learned counsel emphasised that liability was crystallised and accrued during the financial year relevant to the assessment year under consideration and so the same was to be allowed as a deduction in this year. The learned counsel of the assessee in support of the aforesaid submissions relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Swadeshi Cotton & Flour Mills Pvt. Ltd. (1964) 53 ITR 134 (SC). The learned counsel said that in that case the matter of profit bonus to its employees for the calendar year 1947 was in dispute under the Industrial Disputes Act which was finally settled on 13th Jan., 1949. It was held by the Hon'ble Supreme Court that since the matter being disputed and was settled by an award of Industrial Tribunal in 1949 the same was to be deductible in the calendar year 1949 relevant to the asst. yr. 1950-51. The learned counsel further referred to decision of Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mills Co. Ltd. vs. CIT (1980) 125 ITR 33 (All). The learned counsel said that in that case also the assessee was following mercantile system of accounting and an expenditure to the tune of Rs. 18,533 relating to the period from 1st April, 1957, to 31st March, 1958, was under dispute which was finally settled in the calendar year 1959. The learned counsel said that in that case the Tribunal had accepted the claim of the Revenue that expenditure pertained to earlier period than the accounting year under consideration could not be allowed in the asst. yr. 1960-61. The learned counsel said that the Hon'ble High Court held that the matter having been settled in calendar year 1959 for which assessment year was 1960-61 the claim was to be allowed in this year. The learned counsel of the assessee referred to another judgment of Hon'ble Allahabad High Court in the case of CIT vs. Banwarilal Madanmohan (1977) 110 ITR 868 (All). He said that in that case also the assessee was maintaining accounts on mercantile system and the matter of the sales-tax liability was disputed. The learned counsel said that just like in the present case in that case also additional sales-tax was raised but the same was disputed. It was added by the learned counsel that the Hon'ble High Court held that the liability for the excess amount over that for which provision was made accrued in the year in which it was quantified and so in that view of the matter it was an admissible deduction in computing the assessee's income for the asst. yr. 1962-63. Yet further the learned counsel of the assessee relied on the order of the Ahmedabad Bench of the Tribunal in the case of A&Co. vs. ITO (1985) 22 TTJ (Ahd) 258. The learned counsel said that in that case also the assessee being in occupation of the office premises availing the services rendered by other firms right from accounting year 1977. The firm in question claimed for the first time service charges for the accounting year 1979 and also for earlier two accounting years. The question was whether the assessee was entitled to have deduction of the entire liability in the accounting year 1979 or not. The Tribunal held that since the claim was made in the accounting year the assessee was entitled for the deduction in the asst. yr. 1980-81 even though some part of the claim pertained to the earlier year. The learned counsel said that in the present case also after the settlement of the dispute relating to the price of the gas the bill was raised by the ONGC the claim was made. The learned counsel said that the enhancement of the price of the gas by ONGC at the rate of Rs. 2,878 was mere tentative and not certain and so there was no question of accrual of the liability. According to him, the decision as cited above, squarely covered the case of the assessee. The learned counsel of the assessee having further referred to two orders of the Tribunal relating to the cases of other entrepreneurs submitted that the Revenue was not consistent in its stand. It was added by him that in the matter of some of the assessee the Revenue took a contradictory stand. The learned counsel referred to Tribunal's order dt. 3rd Dec., 1991, in ITA Nos. 715, 1490 and 1996/Ahd/1988 in the case of Alembic Glass Industries Ltd., Baroda, for the asst. yrs. 1983-84 and 1984-85. He also referred to order dt. 21st July, 1987, in ITA No. 2449/Ahd/1985 for asst. yr. 1982-83 in the case of IAC vs. Gujarat State Fertiliser Co. Ltd. In both cases identical issue had come before the Tribunal because in those cases also the price of the gas supplied to those assessees was enhanced and the same was in dispute. The learned counsel said that in the case of Alembic Glass Industries Ltd. the Revenue had taken a contrary stand. In that case the CIT(A) had reversed the order of the AO and directed him to allow deduction in the year in which the Supreme Court decided the disputed matter. The CIT particularly observed that the liability was not that of a statutory liability under any provision of law but a contractual liability and so such liability was settled by the decision of the Supreme Court and was allowable in the accounting year in question in which it was settled. The Tribunal confirmed the said order of the learned CIT(A). The learned counsel of the assessee reiterated that in that case the Revenue had taken a reverse stand. Referring to the case of Gujarat State Fertiliser Co. Ltd. (supra), the learned counsel said that in that case also the CIT(A) has accepted the assessee's claim for deduction in the accounting year in which the matter was settled by the Court. The learned CIT(A) in that case relied on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 (SC). The learned counsel said that the Tribunal sustained that order. He further said that in that case Reference Application of the Revenue being R.A. No. 841/Ahd/1980 was rejected by the Tribunal. The learned counsel said that the Revenue had approached the Hon'ble High Court under s. 256(2) of the IT Act to have reference against the order of the Tribunal on that disputed point also but the Hon'ble High Court by order dt. 17th Nov., 1990, rejected the move of the Revenue. The learned counsel referred to those orders compiled in the paper book. The learned counsel of the assessee further submitted that in the case of Gujarat State Fertiliser Co. Ltd. for the asst. yr. 1983-84 the Revenue took a stand which was contradictory to the stand taken in this case. In that case of Gujarat State Fertilisers Co. Ltd. the matter relating to the enhancement of the price of the gas was yet to be decided but still the assessee claimed deduction on accrual basis as it was following mercantile system of accounting. However, the Revenue did not allow the assessee's claim holding that liability was not definite and ascertained, rather it was a contingent liability based on the draft agreement. The learned CIT(A) confirmed the same. The Tribunal however, accepted the claim of the assessee with CIT(A)'s modification and against which the Revenue preferred reference application which it ultimately withdrew. The learned counsel of the assessee drew our attention to the order of the Tribunal and the reasons for allowing the withdrawal of the aforesaid reference application.
The learned counsel having referred to a copy of agreement-cum-settlement entered into between the Revenue and M/s Gujarat State Fertilizers Co. Ltd. submitted that as per cl. 4 of the settlement the Revenue allowed the entire claim of the said assessee in the asst. yr. 1991-92 in respect of the enhanced price of the gas. The learned counsel having referred to decision of Hon'ble Supreme Court in the case of Indian Cement Ltd. vs. Controller of Central Excise (1989) 2 SCC 676 submitted that the extension of the benefit of administrative decision should be equally made available to other assessees also who were on the same footing. The learned counsel said that it was a matter of excise duty and with regard to a particular assessee the matter came for consideration whether the excise duty was leviable or not. The Hon'ble Supreme Court held that the view taken by the Government in favour of another assessee in another case should be extended to all similar cases. The learned counsel of the assessee said that the present assessee's case was like that of Gujarat State Fertiliser Co. Ltd., Baroda. In that case, all along the Revenue's stand was that contingent liability should be allowed when it was settled or crystallised or when the contingency was over. The learned counsel said that even for the asst. yr. 1983-84 when the decision by the Tribunal went against the said assessee meaning thereby that assessee was to get deduction on accrual basis to some extent even in that case ultimately the Revenue came forward and resolved the matter through an agreement dt. 23rd Dec., 1993, compiled at pages 4 to 11 of the third set of paper book. As per cl. 4 of the agreement the Revenue allowed the deduction of the entire additional liability in respect of the enhanced cost price in one lump sum and consequent upon that the Revenue withdrew its reference application No. 4/Ahd/1993 in which the matter in controversy was question for reference in a different shape. The Tribunal by its order dt. 24th March, 1994, in that view of the matter, rejected the said reference application allowing withdrawal. The learned counsel of the assessee having taken recourse to the decision of Hon'ble Supreme Court in the case of Indian Cement Ltd. vs. Collector of Central Excise (supra) reiterated that by the said administrative action in the case of Gujarat State Fertiliser Co. Ltd. which was a public limited company the Revenue allowed the claim of said assessee for deduction in one bulk there seems no reason why the present assessee would be debarred from such benefit.
2.6. Shri J. P. Shah, the learned counsel of the assessee, having referred to some workings compiled at Annexures A, B and C and placed at pages 93 to 96 of the paper book submitted that even otherwise also in either cases there was hardly any saving or benefit to the assessee. The learned counsel referring to Annexure C compiled at page 96 of the second set of paper book submitted that the following were the additional claim on account of enhanced price of the gas :
Accounting year Assessment year Additional claim Rs.
1986-87 1987-88 23,08,123
1987-88 1988-89 44,35,593
1988-89 1989-90 51,58,784
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119,02,500
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He said that enhancement was made from 15th Sept., 1986, to 31st March, 1989, which was disputed upto the apex Court and was finally decided on 21st Dec., 1989, relating to the asst. yr. 1990-91 under consideration. The learned counsel referring to Annexure A compiled at page 93 submitted that in asst. yr. 1987-88 after claiming differential gas consumption charges payable to ONGC and further adjusting the unabsorbed investment allowance, unabsorbed business losses and unabsorbed depreciation the taxable income was nil. Similarly, in asst. yr. 1988-89 also after adjustment of the claim of differential gas consumption, unabsorbed investment allowance, unabsorbed business loss and unabsorbed depreciation, the taxable income was nil. Similar was the position in asst. yr. 1989-90 where there was nil income and so in those assessment years even on accrual basis the differential amount was allowed as deduction there would be no tax. In the asst. yr. 1990-91 under consideration there was a positive taxable income even after adjustment of unabsorbed investment allowance, unabsorbed business loss and unabsorbed depreciation, etc. The learned counsel having referred to Annexure B compiled at page 95 of the paper book submitted that the position of the total income if full liability of the ONGC towards the gas price differential charges was allowed as a deduction in asst. yr. 1990-91 in that case are also the total taxable income comes to Rs. 3,22,000 which was not of much avail as contended for the Revenue. The learned counsel emphasised that keeping in view the collection of revenue there was hardly any difference. Of course the learned counsel also referred to the relevant assessment as well as appellate orders for the asst. yrs. 1987-88 to 1989-90 in support of the working placed at Annexures A, B and C of the paper book. The learned counsel reiterated that even considering from various angles the Revenue was not going to lose on account of the tax. Recounting his submissions, the learned counsel said that since the differential gas charges was not in dispute and not yet crystallised or settled the same could not be claimed as a deduction on accrual basis though the assessee was maintaining mercantile system of accounting. He added that even otherwise also keeping in view that the Revenue itself was not consistent in its stand it did not have a good case. The Revenue in identical matter of controversy should not take inconsistent stand no discrimination should be made on that account to the assessee. According to the learned counsel of the assessee, the order of the learned CIT(A) was not justified and the same requires to be set aside.
2.7. Shri P. N. Dixit, the learned Departmental Representative, on the other hand, strongly supported the orders of the authorities below and in particular the order of the learned CIT(A). He stated that it was admitted fact that the assessee was following mercantile system of accounting. As per mercantile system of accounting the liability accrued should have been debited. To be more specific the learned Departmental Representative submitted that the assessee-company was receiving gas supply from ONGC through the GIDC on the basis of agreement.
When the agreement came to an end on 14th Sept., 1986, it approached the GIDC to extend the agreement which was refused and the assessee was directed to approach the ONGC to have a direct dealing for supply of the gas and consequent upon that the ONGC agreed to supply the gas to the assessee on a payment of the same at the rate of Rs. 2,877 per 1000 cubic metres. The assessee-company utilised the gas supplied by ONGC. The assessee-company in that view of the matter was very much knowing the liability for payment of the utilised gas to ONGC. It did not matter that the assessee disputed the sale rate or the enhanced price rate of the gas from the graded rate of Rs. 770 to Rs. 963 per 1000 cubic metres to a flat rate of Rs. 2,877 per 1000 cubic metres. The learned Departmental Representative emphasised that the liability for payment of the gas utilised by the assessee-company was very much there and the assessee having been followed mercantile system of accounting should have claimed the liability on accrual basis. It was emphasised that the liability was not contingent or fluid as was claimed by the learned counsel of the assessee. The learned Departmental Representative further stated that while disputing the revised rate of the cost price in the High Court the assessee-company obtained the order for continuance of the supply of the gas by ONGC and in that way the assessee-company was very much in know of its liability as to payment of the revised rate of the gas. The learned Departmental Representative of the Revenue submitted that the assessee-company did not even make any provision for the payment of the same and so under such circumstances of the case, now it cannot claim for deduction of the aforesaid amount of Rs. 1,19,02,500 on the ground that the said liability accrued only during the previous year relevant to the assessment year under consideration. The learned Departmental Representative submitted that liability pertained to the period from 15th Sept., 1986, to 31st March, 1989, and since the assessee was maintaining mercantile system of accounting the liability towards the payment of the enhanced gas price accrued during the aforesaid years. The learned Departmental Representative said only because there was a dispute the liability could not be said to have been deferred or postponed. The learned Departmental Representative further said that the aforesaid liability also could not be said to be a contingent liability. The learned Departmental Representative said that though the assessee-company disputed the enhanced price of the gas by ONGC which was finally settled by order of the Hon'ble Gujarat High Court as on 21st Dec., 1989, even then since the liability which was enforceable was to be allowed in the year to which it related because the assessee was maintaining mercantile system of accounting. The claim of the assessee would be allowed on accrual basis and in support of these submissions he relied on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). In that case also the assessee was following mercantile system of accounting and incurred a liability of Rs. 1,49,776 on account of sales-tax. In that case, it was held that the moment a dealer made either purchase or sale which were subject to sales-tax the obligation to pay the tax arose. It was added that although that liability could not be enforced till quantification was effected by the assessment proceedings the liability for payment of tax was independent of the assessment and so the assessee which followed the mercantile system of accounting was entitled to deduct from the profit and gains of business the liability to sales-tax which arose from the sales made by it during the relevant previous year. The learned Departmental Representative said that in that case also the liability to sales-tax was disputed but the deduction was allowed in the year in which the sales were effected. The learned Departmental Representative said that here also the assessee received and consumed gas during the period from 15th Sept., 1986, to 31st March, 1989, and so the price difference occurred due to the enhancement of the price was said to have been accrued during that period and so in that view of the matter, the assessee was entitled for deduction during the relevant accounting period in which the gas was consumed and utilised. The learned Departmental Representative referred to another decision of Supreme Court in the case of Laxmipat Singhania vs. CIT (1969) 72 ITR 291 (SC). In that case on failure of the company to declare the dividend the AO applied provision of s. 23A of the Indian IT Act, 1922, and ordered that a sum of Rs. 3,32,691 should be deemed to have been distributed among the shareholders including the assessee of that case who was following mercantile system of accounting. The company was also maintaining the mercantile system of accounting. It is to be further noted that on 24th April, 1942, the company made available out of its reserve Rs. 2,98,000 as dividend to its shareholders and in pursuance to that Rs. 23,328 was credited to the account of the said assessee who held 1,333 shares in the said company. The AO brought the said amount for taxation in asst. yr. 1943-44. The matter was disputed and ultimately the Hon'ble Supreme Court held that the AO was not free to tax the same in the asst. yr. 1943-44 because by dint of order passed under s. 23A of the Indian IT Act, 1922, on 18th Nov., 1941, the dividend of Rs. 3,32,691 should be deemed to have been distributed among the shareholders as on the date of the general meeting. The learned Departmental Representative by citing this authority exerted to impress upon that even the disputed liability or expenditure was liable to be allowed as deduction in the year in which it accrued. Yet further the learned Departmental Representative having referred to another decision of Hon'ble Supreme Court in the case of CIT vs. T. N. K. Govindarajulu Chetty (1987) 165 ITR 231 (SC) submitted that even in the matter of the receipt of interest along with the compensation for acquisition of the property by the Government the interest was held to have accrued in the year during which the acquisition was done and payment was made because in that case the assessee was following the mercantile system of accounting. To be more specific, the learned Departmental Representative said that a compensation of Rs. 5 lakhs for acquisition of the property by the Government was determined in 1949. The Government paid Rs. 2,54,815 in asst. yr. 1955-56 and Rs. 3,73,831 in the asst. yr. 1956-57. The excess of Rs. 1,28,716 over the compensation of Rs. 5 lakhs was treated as interest amount was to be allocated between those two years. On reference the Hon'ble High Court in view of the maintenance of mercantile system of accounting by the assessee held that when the compensation amount due to the assessee was paid in each of the relevant asst. yrs. 1955-56 and 1956-57 the said interest amount was to be spread over the year between the date of acquisition and the date of the actual payment. The learned Departmental Representative reiterated that since in the present case also the assessee was following mercantile system of accounting the liability for payment of the enhanced price of the gas to ONGC accrued during the period from 15th Sept., 1986, to 31st March, 1989. According to him, the liability was not contingent, rather that was an enforceable liability during the period as mentioned above. In course of his argument the learned Departmental Representative exerted to distinguished the various authorities relied upon by the learned counsel of the assessee. Relating to the agreement dt. 3rd Dec., 1993, between GSFC and IT Department and thereby allowing the company to have deduction in one lump sum the entire liability in respect of the enhanced gas price for the asst. yr. 1991-92 the learned Departmental Representative said that that case had no relevance to the present case. It was entirely a matter of the Department's internal administrative matter. Relating to tax effect and the working given by the learned counsel of the assessee the learned Departmental Representative said that in order to avoid the tax the assessee-company claimed deduction of the entire liability of Rs. 1,19,02,500 in this assessment year alone. The learned Departmental Representative reiterated that the order of the learned CIT(A) was justified and the same requires no interference.
2.8. We have heard the rival submissions from both sides and gone through the appeal record. We have also gone through the papers compiled in the three sets of paper book and considered them also. In this appeal, the factual aspect are not disputed that the assessee-company in pursuance to an agreement with GIDC used to get natural gas from ONGC for its industry at Kadi Industrial Estate. The said agreement was for a period of 5 years w.e.f. 14th Sept., 1981, to 13th Sept., 1986. According to that agreement ONGC was to realise the price of the gas at a graded rate from Rs. 770 to Rs. 963 per 1000 cubic metres plus other charges like royalty, service charges, etc. The said agreement expired and the assessee approached the GIDC for renewal of the agreement but GIDC declined and directed the assessee-company to approach ONGC directly. The ONGC was willing to supply gas directly at a price of Rs. 2,878 per 1000 cubic metres. The assessee-company disputed the same in the Hon'ble Gujarat High Court having filed a Special Civil Application No. 4658/1986, dt. 5th Sept., 1986 (pages 7 to 43 and 1 to 93 respectively in paper book Nos. I & II). The Hon'ble High Court disposed of that Special Civil Application by order dt. 8th Sept., 1986, and gave direction to ONGC to continue the supply of the gas at the rate of Rs. 1,050 per 1000 cubic metres. However, ONGC challenged that order having filed a LPA No. 298. However, on the basis of the order of Hon'ble Supreme Court which proceeded on account of the matter being disputed by other entrepreneurs the LPA No. 298 of 1987 was disposed of by an order dt. 21st Dec., 1989, by the Gujarat High Court. This order can be seen at pages 1 to 3 of paper book No. I. According to that order the price of the gas was fixed at Rs. 1,400 per 1000 cubic metres for the period from 15th Sept., 1986, to date as against Rs. 1,050 per 1000 cubic metres as was ordered earlier by the Hon'ble High Court. According to that order, the ONGC was entitled to recover in total an amount of Rs. 1,19,02,499.72 on account of the sale price difference for the period from 15th Sept., 1986, to 31st March, 1989. Since the amount was heavy, on the prayer of the assessee-company the Hon'ble High Court further directed that the assessee was to pay the arrear in instalments of Rs. 4 lakhs per month and during the assessment year under consideration, i.e., upto 31st March, 1990, had paid the following amounts :
Rs.
12-1-1990 4,00,000 10-2-1990 4,00,000 7-3-1990 4,12,000
In pursuance to that order the ONGC revised the bill for supply of gas by Bill No. AMD/OBG/AC/SALE/89-90/3904, dt. 5th March, 1990, with the annexure compiled thereto. The xerox copies of these bills could be seen at pages 6 and 7 of the paper book No. 1 which covers the period from 14th Sept., 1986, to 31st March, 1989. Following is the yearwise figures on account of the price difference which can be seen at Annexure C compiled at page 96 of the paper book No. 2 :
Accounting year Assessment year Additional claim or the amount on account of price difference Rs.
1986-87 1987-88 23,08,123
1987-88 1988-89 44,35,539
1988-89 1989-90 51,58,754
-------------
1,19,02,500
-------------
2.9. As said above there is no dispute as to aforesaid factual aspect of the case. According to the Revenue, since the assessee was following mercantile system of accounting as it used the natural gas, supplied by ONGC and also knowing that ONGC has raised the price of the natural gas the additional liability on account of the enhancement in the price accrued the moment the supply was received by the assessee and so the assessee is entitled to have deduction of any liability according to accrual basis and not the entire liability at one time on the basis that the same accrued only in the accounting year relevant to the asst. yr. 1990-91. Of course, according to the assessee since the very enhancement of the price of the gas has been a matter of dispute which even went upto the Hon'ble Supreme Court it had remained uncertain during the accounting years 1986-87, 1987-88 and 1988-89 and so in that view of the matter there has been no question of debiting the liability. What amount is to be debited or if at all any provision is to be made on what basis the same was to be done as it has been very much uncertain. According to the assessee, the liability has been ascertained and crystallized only by dint of the judgment of Hon'ble Gujarat High Court, dt. 21st Sept., 1989, and in consequence to which ONGC has raised the bill the liability has accrued in the year under consideration and so that has rightly been claimed in this year and to that effect a clear-cut note was made in the annual report of the directors as well as in the audited books of accounts and which can be seen at page 49-Q of the paper book No. 1. However, it is to be noted that out of the total price difference the assessee has already paid Rs. 12 lakhs. The AO has allowed that amount and in that view of the matter, out of the total liability of Rs. 1,19,02,500 only Rs. 1,07,02,500 is disputed. Before us, the question is as to in which year the assessee is entitled to have deduction of the same, i.e., in which year liability accrued. In order to have answer of this question perhaps it will be beneficial for us to go through some of the decisions of the Hon'ble Supreme Court as well as other High Courts. The assessee as well as the Revenue have relied upon certain decisions in support of their respective proposition. According to the assessee in quintessence the liability being disputed and finally crystallized in the assessment year under consideration by the order of the Hon'ble High Court it is to be allowed in the assessment year under appeal. To the contrary, as has already been said, according to the Revenue, the assessee is not entitled for deduction of the same in this year because the assessee was following mercantile system of accounting and further that liability having been accrued in the earlier period the assessee is entitled for deduction in those years only.
2.10. The Hon'ble Supreme Court in the case of CIT vs. Swadeshi Cotton & Flour Mills Pvt. Ltd. (supra) has considered the year of allowability relating to the bonus in which case also the assessee was following the mercantile system of accounting. In this case, there was a dispute as to payment of profit bonus to the tune of Rs. 1,08,325 to its employees for the calendar year 1947. The amount was finally settled by an award dt. 13th Jan., 1949, under the Industrial Disputes Act. The question arose for which assessment year the amount is to be debited and claimed as deduction. The Hon'ble Supreme Court has observed that "it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that therefore the sum of Rs. 1,08,325 had to be deducted in the calendar year 1949 relevant to the asst. yr. 1950-51. An employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication."
2.11. The Hon'ble Allahabad High Court in the case of CIT vs. Banwari Lal Madan Mohan (supra) held that the liability is to be allowed as a deduction when it has been finally determined. It was a case in which the family business was converted into a firm. The family maintained mercantile system of accounting. There was a dispute as to the sales-tax liability which has been in excess of the amount for which provision was made. The Hon'ble High Court has held as follows :
"..... It might be that, so far as sales-tax liability is concerned, that is not a contingent lability but inasmuch as the HUF had been following the mercantile system of accounting and making provision for the tax only on estimate basis, it was in the year in which it was quantified finally that the actual liability for sales-tax was finally determined. The excess amount over that for which provision had been made thus undoubtedly accrued in the year in which it was finally quantified. This quantification took place in the financial year relevant to the asst. yr. 1962-63."
2.12. The Hon'ble Calcutta High Court in the case of CIT vs. Roberts McLean & Co. Ltd. (supra) took an identical view. In that case also the assessee was maintaining mercantile system of accounting and there arose certain difference between the company and its sole-selling agent relating to the remuneration to the selling agent. The matter was referred to arbitration and an award was made against the company on 14th March, 1960, for Rs. 1,05,284.43 with interest thereon at the rate of 5-1/2% from January, 1959, upto the date of the award. The question arose in which year expenditure was allowable whether in the accounting year ending 31st July, 1960, or in the earlier year. The Hon'ble High Court having relied on judgments of Hon'ble Supreme Court and its own viz., Indian Molasses Co. (P) Ltd. vs. CIT (1959) 37 ITR 66 (SC), CIT vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC), CIT vs. Shewbux Jahurilal (1962) 46 ITR 688 (Cal) and CIT vs. Hindusthan Housing & Land Development Trust Ltd. (1977) 108 ITR 360 (Cal) held as follows :
"If an agreement was arrived at between the parties in terms of cl. II of the agreement it could then be said that the company had incurred a liability under the contract in the earlier year, but there is nothing on the record to show that any such agreement was arrived at and, therefore, it must be held that the liability of the company was a contingent or an inchoate liability in the earlier year and it was finally determined by the said award in the accounting year. Accordingly, it must also be held that the company had incurred a business liability not in the earlier year but in the accounting year."
2.13. In another case the Hon'ble Allahabad High Court in the case of A. P. S. Cold Storage & Ice Factory vs. CIT (1979) 119 ITR 709 (All) considered the matter of award given by the arbitrator which was yet to be made rule of law by the Court. In the facts of the case the Hon'ble High Court observed as follows :
"..... In the present case, although the arbitrators had given their award, it was not enforceable against the assessee, as it had not been made a rule of the Court, and no decree had been prepared on its basis. It is settled law that till such time that an award is not made a rule of the Court, and a decree obtained on its basis, it cannot be enforced against the party against whom it had been made. Thus, in the previous year all that existed was a mere award against the assessee, and it, at best, created a contingent liability, viz., that the liability would fructify in the event of the same being made a rule of the Court. As respects the decision of this Court, no decree was passed on the award by the Court, and as such no liability in praesenti was created against the assessee."
In yet another case being Jaina Talkies vs. CIT (supra), the Hon'ble Allahabad High Court considered the dispute relating to the provident fund contribution for the yeas 1962 to 1964 with reference to the mercantile system of accounting and its deductibility as expenditure. In this case the assessee was maintaining mercantile system of accounting with financial year as accounting year. The assessee was to pay provident fund contribution for the years 1962 to 1964 but the assessee disputed the said liability. The matter was finally decided by the High Court on 26th Oct., 1970, and even the writ petition was dismissed on 4th Feb., 1970. The assessee made the payment during the financial year 1970-71 and claimed deduction in 1972-73. The Hon'ble Court did not allow the claim in 1972-73 rather observed that the matter would have been different if the deduction would have been claimed during the period in which the final decision of the disputed matter was taken by the High Court.
2.14. The Hon'ble Allahabad High Court in the case of CIT vs. Oriental Motor Car Co. (P) Ltd. (1980) 124 ITR 74 (All) considered the matter relating to the accrual of liability on account of infringement commission. In that case the assessee was maintaining mercantile system of accounting. The assessee was dealing in tractors, etc. It supplied tractors to Public Works Department which in turn distributed those tractors to various districts. The assessee's principal required the assessee to pay infringement commission on the sale of those tractors to its various dealers in other districts as the dealer in other districts were entitled to commission on the sale of those tractors. The payment of infringement commission was settled on 11th May, 1972. In the aforesaid background of the case the Hon'ble Court was of the following view :
".. although the principal had made a claim for infringement commission, the assessee was contesting that rate, and not admitting his liability. The assessee agreed to pay an amount of Rs. 650 per tractor on the 19th May, 1972, i.e., after the relevant previous year had closed. The liability was of a contractual nature and crystallised only when the assessee agreed to the payment of Rs. 650 per tractor, and not at any point of time earlier. Therefore, the deduction of the sum of Rs. 32,650 on account of infringement commission in the accounting period relevant to the asst. yr. 1972-73 could not be allowed as the liability did not arise in the relevant previous year."
2.15. The Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mill Co. Ltd. vs. CIT (supra) took the view that contractual liability accrued only when it was accrued or finally settled. In that case a distinction was made as to statutory liability and the contractual liability. According to that decision, accrual of the statutory liability could not be postponed only for want of ascertainment but however the contractual liability or obligation arose when the same was ascertained. The headnote of that decision reads as follows :
"Where the assessee follows the mercantile system of accounting the quantification of ascertainment cannot postpone accrual of a statutory liability. Whether the assessee is entitled to a particular deduction or not, in the case of a statutory liability, it will depend on the provision of law relevant therefor, and not on the view which the assessee might take of his right; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. On the other hand, if the liability is based on some contractual obligation, it arises only when it is ascertained. Unless the liability has become an ascertained sum of money, it no doubt exists but proceedings have yet to be taken to determine the exact amount. A vague liability to make a payment cannot be entered in the accounts."
2.16. Recently the Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT (1995) 213 ITR 523 (Guj) while considering the expenditure relating to the earlier years on account of payment of fee to expert held that the expenditure could not be disallowed merely because they related to earlier years. What the Hon'ble High Court laid down is that after proper investigation and crystallisation only any disallowance if at all ought to have been done. While deciding the said point the Hon'ble High Court observed :
"... Having considered the material on record we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense related to the transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallised and quantified during the previous year so as to be required to be adjusted in the books of accounts of the previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year."
2.17. From the various decisions as we have quoted above it is to be seen in what manner the principles of law have been exemplified. In the present case, the liability of the assessee has not accrued on account of or in pursuance to any provisions of the law. In other words, the liability is not a statutory liability. The assessee's liability is manifestly in pursuance to the decision of the Hon'ble High Court. No doubt, the assessee by dint of an arrangement through the GIDC used to get supply of the natural gas. There was an agreement in between the assessee-company and GIDC for five years which expired on 14th Sept., 1986. The ONGC enhanced the price of the gas to Rs. 2,877 per 1000 cubic metres as against the graded rate of Rs. 772 to Rs. 963 per 1000 cubic metres. That was disputed. There is no evidence in appeal record to show that on any occasion during the period from 15th Sept., 1986, to 31st March, 1989, the assessee agreed to pay enhanced rate of the gas. The matter in dispute has been finally decided by the Hon'ble High Court on 21st Dec., 1989. So, manifestly in view of the aforesaid fact, the liability of the assessee cannot be said to be a statutory and naturally it cannot be said to have accrued to the assessee as a liability from year to year. No doubt, since the assessee has been consuming the gas in continuation of the earlier agreement and further in pursuance to the direction of the Hon'ble High Court there was a liability but that liability was uncertain and inchoate. The liability was yet to be finally settled and crystallised and under such circumstances unless the liability is ascertained sum of money it cannot be said to be enforceable liability. The liability was there but it was uncertain and something or some proceedings were yet to be carried out to determine the exact amount. In books of accounts any vague liability cannot be entered into and claimed as a deduction. The liability being in existence but that was not certain and crystallised the same cannot be said to have accrued only because the assessee has been following the mercantile system of accounting. In the latest judgment of Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT (supra) it has been observed very clearly that merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability is determined and crystallised in the year in question on the basis of maintaining accounts on mercantile system. So, from the various authorities and the principles as laid down therein it is manifest that unless the liability is ascertained and crystallised that cannot be said to have accrued and there existed any enforceable liability. In the present case the liability of Rs. 1,07,02,500 has accrued and become enforceable liability only on 21st Dec., 1989, when the Hon'ble Gujarat High Court gave its judgment. That is the date on which the liability can be said to have crystallised and accrued as a liability in the relevant asst. yr. 1990-91 as the assessee is maintaining its books of accounts on mercantile basis.
2.18. No doubt, the learned Departmental Representative has referred to the decision of Hon'ble High Court in the case of Laxmipat Singhania vs. CIT (supra) but this decision does not support the Revenue's case. In that case the Hon'ble Supreme Court at page 294 has observed as follows :
"It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, income cannot be taxed twice. It is not open to the ITO, if income has accrued to the assessee and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as income of another year on the basis of receipt."
From the above principles of law it is to be noted that accrual of the liability is prime factor. In the case of the present assessee which is under consideration before us we have already seen that accrual of the liability came to pass only by the decision of the Hon'ble High Court dt. 21st Dec., 1989. The case before the Supreme Court was completely different. In that case in view of the provision under s. 23A(1)(iv) of the IT Act, 1922, the income deemed to have accrued in a particular year. The AO assessed the same in later year on receipt basis and so in that view of the matter the Hon'ble Supreme Court observed that the ITO cannot ignore the accrual of income in a particular year and to add in the total income of the assessee. So, this judgment is not helpful to the Revenue. Similarly, the decision in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (supra) by Hon'ble Supreme Court is also of no avail to the Revenue because in that case the matter of sales-tax was involved which was a statutory liability and according to the provisions of the said statute sales-tax liability or obligation to pay sales-tax arose when purchase or sale of merchandise was made. But in the present case it is a matter not related to a statutory liability, rather loosely it can be said that it is a controversy relating to contractual liability. Yet more even the decision in the case of CIT vs. T. N. K. Govindarajulu Chetty (supra) is also of no avail to the Revenue. In that case the interest on compensation has been allowed to be spread over in asst. yrs. 1955-56 and 1956-57. In that case the amount of interest was not uncertain or disputed as in the case of the present assessee. So regard being had to the entire facts and circumstances of the case and the various authorities laying down the principles of law, we are of the view that the claim of the assessee is correct. The liability being disputed which has even travelled upto the Hon'ble Supreme Court and has been finally decided by Hon'ble Gujarat High Court on 21st Dec., 1989, and became crystallised and determined on that particular day which falls within the previous year relevant to the year under consideration, i.e., asst. yr. 1990-91. The assessee having followed mercantile system of accounting, the liability in question is said to have accrued in the previous year relevant to the assessment year as said above, and so in that view of the matter, the assessee is entitled to have the deduction of the same in the assessment year under appeal.
2.19. Even otherwise also, there are other aspects on which the assessee's claim for deduction of the aforesaid amount of Rs. 1,07,02,500 in this assessment year cannot be denied. From the material available in the appeal record particularly the Tribunal's earlier order dt. 3rd Dec., 1991, in the case of Alembic Glass Industries Ltd. vs. ITO, ITA Nos. 715 and 1490/Ahd/1988 for the asst. yrs. 1983-84 and 1984-85 and in the case of IAC (Asst.) vs. Gujarat State Fertilizer Ltd. in ITA No. 2449/Ahd/1985 for asst. yr. 1982-83, order dt. 21st July, 1987 and RA No. 841/Ahd/1988 for the asst. yrs. 1987-88 and 1988-89, order dt. 15th Jan., 1988, and order of Hon'ble Gujarat High Court dt. 17th Nov., 1990, in ITA No. 117 of 1986 in the case of CIT vs. Gujarat State Fertilizer Co. Ltd., it is to be noted that the Revenue in identical matter has not been consistent towards the matter of controversy. In those cases the stand of the Revenue was completely contrary to the stand taken in the matter of the present assessee. In those cases the assessees' claim was for deduction on accrual basis of the enhanced price of gas by ONGC. The Revenue disputed the same with the contention that since the liability occasioned due to rise in the price of the gas was disputed by those assessees and which was subject-matter before the Court of law the same was uncertain and yet to be crystallised. Even in the case of Gujarat State Fertilizer Co. Ltd. for asst. yr. 1982-83 on the denial of the Revenue's case by the Tribunal the Revenue preferred reference application which was rejected by the Tribunal. Against that order of the Tribunal rejecting the reference application the Revenue approached the High Court with application under s. 256(2) of the IT Act. That application was also rejected by the Hon'ble High Court. Even recently in the case of Gujarat State Fertilizer Co. Ltd. for the asst. yr. 1983-84 the Revenue having entered into an agreement with that company, dt. 3rd Dec., 1993, compiled at pages 4 to 11 of the paper book No. 2 allowed the deduction of the entire liability in respect of the gas price owing to increase in the same. The Revenue took such decision only after elaborate discussion and examination of the pros and cons of the matter and also in view of the order deciding the crystallisation of the price of gas by the order of the Hon'ble Supreme Court. It is to be further mentioned that in pursuance to that settlement the Revenue withdrew its reference application for the asst. yr. 1983-84 from the Tribunal. We may point out here that the learned counsel of the assessee rightly placed the grievance of the present assessee against the Revenue because in identical matter at one hand the Revenue allowed some of the assessees to have deduction of the entire liability in the year in which the liability has been settled but in the case of the present assessee the Revenue is denying the same. In our considered view, the assessee of the present case is also entitled to have a similar treatment as is given to other assessees in identical matters and this proposition very much gets support from the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. vs. Collector of Central Excise (supra) on which the learned counsel of the assessee has relied upon. In that case the Hon'ble Supreme Court was of the view that the extension of the benefit of the administrative decision is to be given to all assessees who fall in same category. For, it is to be noted that in that case a particular decision was taken by the Excise Department as to the leviability of excise duty. A view was taken by the Department in favour of one of the assessees in another case. As said above, the Hon'ble Supreme Court has held that the same view is to be extended to all similar cases. In our considered view, in view of the facts and circumstances and particularly in view of the administrative decision taken in the matter of Gujarat State Fertilizer Co. Ltd. for allowing the liability in one lump sum in pursuance to the agreement settling the dispute why not in the case of the present assessee when the matter in dispute has been settled by the decision of Gujarat High Court in a particular year is to be allowed for deduction considering the same to have accrued in that particular year. Even otherwise also the Revenue's approach disputing the matter in controversy does not seem to be impartial and in fact in view of the decision of the Hon'ble Supreme Court and in order to have consistency with regard to a particular matter of controversy there should not have been any dispute as to the claim for deduction of the aforesaid liability of Rs. 1,07,02,500 in the year under consideration.
2.20. Yet more, it is to be seen that even otherwise also, by not accepting the claim of the assessee to have deduction of the liability in asst. yr. 1990-91 the Revenue is not placed better off in any manner. During the course of his argument, the learned counsel of the assessee Shri J. P. Shah having invited our attention to pages 93 to 95 of the paper book which are the working of each asst. yrs. 1987-88, 1988-89, 1989-90 and 1990-91 giving the details as to the tax effect. From the above working it is to be seen that in asst. yrs. 1987-88, 1988-89 and 1989-90 there was nil income in each assessment year after adjustment of the unabsorbed investment allowance, unabsorbed business loss, unabsorbed depreciation and allowing the deduction of the amount on account of difference of the price enhancement chargeable by the ONGC. In asst. yrs. 1987-88, 1988-89 and 1989-90 the calculation is shown after giving deductions of Rs. 23,08,124, Rs. 44,35,593 and Rs. 51,58,784 in the respective assessment year. In asst. yr. 1990-91 consequent to the earlier three years the ultimate total income has been worked as follows :
----------------------------------------------------------------------
Asst. yr. Total income Unabsorbed Unabsorbed Unabsorbed
1990-91 assessed investment business depreciation
before set allowance loss
off
Rs. Rs. Rs. Rs.
---------------------------------------------------------------------- Total income computed vide order under s.
250 giving effect to CIT(A)'s order vide order of Asstt. CIT, dt. 18th March, 1994, before setting off of loss and depreciation and investment allowance which were unabsorbed (Annex. H) (1) 2,61,31,013 17,06,697 20,78,332 2,20,23,984 17,06,697 20,78,332 2,20,23,984 17,06,697 20,78,332 2,20,23,984
-------------------------------------------------
(2) 2,58,09,013 Nil Nil Nil
------------------------------------------------- Net taxable income after set off of carried forward investment allowance business loss and unabsorbed depreciation (3) = (1) - (2) 3,22,000 It is reiterated that owing to nil income in those three assessment years there was no tax. Similarly, a following working has been given as to what will be the effect if the entire liability on account of the price difference is allowed in the asst. yr. 1990-91 as per the claim of the assessee :
The position of total income if full liability of ONGC gas price differential charges is allowed to be deducted in asst. yr. 1990-91 Amount Rs.
Total income as per order giving
effect to CIT(A)'s order passed
by Dy. CIT, Spl. Range-8 (Asst.)
on 18th March, 1994 (Annex. 'H') 1,10,24,500
Less : Claim for ONGC gas price difference
(Rs. 1,19,02,500-12,00,000) paid 1,07,02,500
--------------
Total income 3,22,000
--------------
From both the above workings it is to be seen that the total income in either of the case comes to Rs. 3,22,000. So in that view of the matter, the Revenue is not going to gain or is placed better off if the assessee's claim for deduction of the entire liability in the asst. yr. 1990-91 is denied.
2.21. To sum up our findings, we may reiterate that on this point there is merit in the case of the assessee. In the present case, no doubt the assessee has been maintaining mercantile system of accounting but the liability having been accrued in the previous year relevant to the asst. yr. 1990-91 the assessee is entitled to have deduction of the same in this assessment year. There has been liability which can be said to have Fisted in earlier years but it was uncertain and inchoate. The liability has not been a statutory liability and so it cannot be said that it has accrued as per the provisions of the law rather the liability being disputed there has been no certainty about that liability. This liability has been crystallised by the decision of Hon'ble Gujarat High Court only on 21st Dec., 1989, which falls in the previous year relevant to the asst. yr. 1990-91. Even otherwise also, the Revenue should have taken a pragmatic approach because in identical matter it has taken a contrary stand in the matters of other assessees and even by dint of agreement allowed such liabilities as a deduction in pursuance to an agreement settling the dispute in the year of settlement. Yet more, it is to be noted that from the point of view of tax effect the Revenue is not going to be benefited if the claim of the assessee is allowed from year to year in which it is alleged to have accrued. Rather from the working as placed we find that the total income in either case is identical. In our considered view, on this point the order of the learned CIT(A) is not justified and so we reverse it.
3. The next disputed point covered by Ground No. 2.1 and 2.5 relates to disallowance of the claim of interest paid to GIDC amounting to Rs. 4,88,611 by the CIT(A).
3.1. In course of assessment proceedings the AO noted that the assessee was to make a payment of interest of Rs. 4,88,611 to GIDC and accordingly it claimed deduction for the expenses. The AO further noted that the assessee had disputed the said liability and had approached the GIDC for waiver of the aforesaid amount. The GIDC has agreed to waive the interest only upto Rs. 10,000. According to the learned AO the matter was still under dispute and since assessee did not make any payment of the disputed liability on account of the interest he disallowed the claim for deduction of aforesaid amount of Rs. 4,88,611. The assessee disputed the same before the CIT(A). The learned CIT(A) confirmed the same. He observed that interest liability was for the earlier years. The assessee was aware that if the instalment of the tenancy revenue was not paid it would be liable to pay interest. Knowing full well the assessee neither made any provision in earlier years nor claimed for deduction and now the liability was still disputed claim for deduction could not be allowed. Against that order of the learned CIT(A) now the assessee is in appeal.
3.2. Shri J. P. Shah, the learned counsel of the assessee, strongly objected to the order of the learned CIT(A). He submitted that authorities below particularly the CIT(A) failed to appreciate the facts of the case in right perspective. He said that the assessee had taken on lease plot No. 17 at Kadi Industrial Estate and all the instalments of the lease were paid but, in spite of that GIDC raised bills for making the payment of penal interest and other charges to the tune of Rs. 5,45,437. The learned counsel of the assessee in course of his arguments referred to letter dt. 2nd Nov., 1989, compiled at page 50 of the paper book. The learned counsel said that through that letter the assessee informed GIDC that it paid towards full and final settlement of the instalments as per scheme submitted to the District Court at Mehsana for Rs. 14,941 through cheque bearing No. 0311178, dt. 2nd Nov., 1989, and at the same time requested for waiver of the penal interest and other charges. A copy of the Misc. Civil Appeal No. 1987 was compiled at pages 106 to 122. The learned counsel referred to the letter dt. 5th Feb., 1990, which was a reply from the Regional Manager of GIDC. Through that letter the GIDC informed that according to their policy the Corporation would waive the penal interest to the maximum of Rs. 10,000 only and further it was informed that as per the statement of the account the arrear was Rs. 5,45,437. The learned counsel referred to page 52 also which was the account in the books of GIDC. The learned counsel emphasised that the liability in question was settled during the previous year relevant to assessment year under consideration. There was no dispute as the AO himself recorded that as per the Corporation's policy only Rs. 10,000 could have been waived from the penal interest. It was further said by the learned counsel that since the liability in question was crystallised after settlement and as the assessee was following mercantile system of accounting the liability for the payment of the interest accrued and became liable on accrual basis and so in that view of the matter, the claim of the assessee for deduction could not be denied. The learned counsel of the assessee in this regard also relied on the submissions and case laws which were placed before us while arguing the first disputed point.
3.3. On the other hand, Shri P. N. Dixit, the learned Departmental Representative, strongly supported the order of the learned CIT(A). He said that in pursuance to land lease agreement for plot No. 17 at GIDC Industrial Estate, Kadi (NG) the assessee was to pay lease rent amount as per the agreed instalment and if it did not fulfil the same it was liable to pay penal interest. The learned Departmental Representative added that the liability in question on account of penal interest was for default in making the payment of instalment. The learned Departmental Representative added that the assessee did not make any provision in books of accounts towards expenses to be incurred for penal interest though it was maintaining its account on mercantile basis and so under such circumstances now it cannot claim the deduction in this assessment year. He also took support on this disputed point from his earlier submissions and case law which were pressed into service at the time of submissions for the first disputed point.
3.4. After careful consideration of submissions from both sides and the material available in appeal record, particularly keeping in view the papers compiled at pages 50 to 52 of the paper book we find that the payable penal interest finally crystallised in the previous year relevant to the assessment year under appeal itself. The letter dt. 5th Feb., 1990, from the GIDC coupled with the statement of account makes it clear that the assessee was in arrear of Rs. 5,45,437 which included penal interest also and out of which Rs. 10,000 according to the existing policy of the Corporation could have been waived. The Department's plea that since assessee did not make any provision for the impugned liability is not going to negate the claim of the assessee. For the elaborate reasons which we have recorded above in paras 2.8 to 2.21 while dealing with the first point we find that since liability has been crystallised in this year itself and as the assessee maintained its accounts on mercantile basis the assessee is entitled to have the deduction of the same on accrual basis and not on the payment basis. This issue stands decided in favour of the assessee.
4. The next disputed point relates to electricity expenses in director's residence. This issue is covered by Ground No. 3.1 to 3.2. We may mention here that at the time of hearing the learned counsel of the assessee did not press this issue and so it stands dismissed as not pressed.
5. The next disputed point relates to confirmation of disallowance of Rs. 15,000 on conveyance expenses. This issue is covered by Ground No. 4.1 to 4.5.
5.1. The AO out of the total claim of Rs. 39,935 on account of the conveyance expenses disallowed Rs. 20,000 considering that the expenditure on account of the personal use of the car by the director could not be ruled out. The learned CIT(A) however, out of Rs. 20,000 gave a relief of Rs. 5,000 and sustained Rs. 15,000.
5.2. Shri J. P. Shah, the learned counsel of the assessee, in this regard submitted that disallowance was merely on presumption and without appreciating the facts. He said that directors had their own cars and whatever expenditure was incurred towards conveyance that was wholly and exclusively for the business purpose. In course of his submissions, the learned counsel of the assessee referred to pages 54 and 57 of the paper book. He said that before the learned CIT(A) by letter dt. 19th Feb., 1994, as well as having filed a complete detail of the expenditure it was made clear that no expenditure was borne by the assessee on personal motor car or personal use of the official car. The learned counsel said that the addition was arbitrary and without any basis.
5.3. On the other hand, Shri P. N. Dixit, the learned Departmental Representative, of course, relied on the order of the learned CIT(A). He emphasised that personal use of the company's car by the directors could not be totally ruled out. He said that only a reasonable disallowance of Rs. 15,000 was sustained. According to him, the order of the learned CIT(A) was justified and the same required no interference.
5.4. After careful consideration of submissions of both sides and the material made available in the appeal record, we do not think that the addition sustained by the learned CIT(A) is justified. It appears that the assessee had filed the entire detail of the expenses and nothing has been brought in the appeal record to point out that if a particular expenditure is towards the personal purpose of the directors. There is no justification for sustaining the aforesaid amount of Rs. 15,000. We reverse the order of the learned CIT(A) on this point.
6. The next disputed point relates to confirmation of disallowance of Rs. 15,050 relating to payment of club membership and Rs. 18,940 on account of guest house expenses.
6.1. The payment to membership in club has been disallowed by the AO and sustained by the learned CIT(A) on the ground that the expenditure has no nexus with the business of the assessee, rather it was for the personal entertainment of the directors.
6.2. Shri J. P. Shah, the learned counsel of the assessee, emphasised that the membership was obtained in the name of the directors only out of business expediency. It was explained by him that prospective customers were entertained and conferences or dialogue were held in club keeping in view the interest of the business and it was not correct that the membership of the club was obtained for personal entertainment.
6.3. Of course, Shri P. N. Dixit, the learned Departmental Representative, relied on the order of the learned CIT(A) and emphasised that there was no evidence to show that if out of that membership the assessee was benefited in any manner.
6.4. After careful consideration of submissions from both sides and the material available in the appeal record we agree with the submissions of the learned counsel of the assessee. Entertaining the prospective buyers or business conferences in club with the directors cannot be totally ruled out. The order of the learned CIT(A) on this point is not justified and we reverse his order. However, so far as the claim of expenditure incurred for Rs. 18,914 on guest house is concerned the assessee is not entitled for the same. No doubt, the assessee has relied on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Gaekwad Mills Ltd. (1992) 193 ITR 734 (Guj) wherein the Hon'ble Court has held that the expenditure incurred on residential accommodation in nature of the guest house cannot be disallowed. However, that decision relates to the asst. yr. 1971-72. The learned counsel also referred to Item No. 7 of Form No. 3CD compiled at page 59 to show that the persons using the guest house were paying for lodging and boarding for which a separate account was being maintained. But now, in view of the Explanation to sub-s. (4) to s. 37 and further introduction of sub-s. (5) by Finance Act, 1983, the expenditure incurred on the guest house is not allowable. So on this point, we sustain the order of the learned CIT(A).
7. The next disputed point relates to initiation of penalty proceedings under s. 271(1)(c). However, this issue was not pressed and so it stands dismissed as not pressed.
8. The next disputed point relates to levy of interest under ss. 234B and 234C of the IT Act.
8.1. After hearing both sides and going through the appeal record it appears that this issue has not been considered by the learned CIT(A) though same was raised and contended before him. This issue, therefore, is restored back to him for consideration.
9. In the result, the appeal is partly allowed.