Kerala High Court
Standard Tea Exports vs Commissioner Of Income-Tax on 11 October, 1991
Equivalent citations: [1992]198ITR573(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.A. Nayar, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal, Cochin Bench, referred the following questions of law said to arise from the Tribunal's order for the assessment year 1980-81.
" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the claim for deduction of Rs. 3,40,000, a provision made for future interest?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 10 per cent. of the export price did not constitute income of the assessee for the assessment year 1980-81 ?"
2. The assessee is an exporter of tea. During the previous year relevant to the assessment year 1980-81, the assessee exported tea to Sudan. It had borrowed from the Bank of Baroda for exporting tea. Interest was payable to the bank up to the close of the previous year ending on December 31, 1979. The Income-tax Officer found that, out of Rs. 4,23,490 debited towards interest and bank charges, a sum of Rs. 3,40,000 was only a provision made by the assessee for interest which it may become liable to pay during the subsequent years. The case of the assessee was that Sudan is ' a country which had difficulty in meeting its export payment. Therefore, persons who had exported goods to Sudan had to wait for considerable period of time to realise the full sale proceeds. The exports to Sudan had been guaranteed by the Export Credit and Guarantee Corporation Limited only to the extent of 90 per cent. of the billed amount. Therefore, there is risk to the extent of ten per cent. to the assessee. The assessee, to cover up the loss, jacked up the export price of tea. Since only 90 per cent. had been guaranteed by the Export Credit and Guarantee Corporation, the assessee made a provision of a sum of Rs. 3,40,000 for the year ending on December 31, 1979, towards the possible loss out of exports to Sudan, It was admitted by the assessee before the Income-tax Officer that no interest was outstanding to the bank as on December 31, 1979. The claim before the Income-tax Officer was towards a possible loss on account of interest for the period after December 31, 1979, on amounts payable to the bank consequent on the discounting of the export sale bills. The Income-tax Officer found that there was no accrued interest as on December 31, 1979, and in that view of the matter, he rejected the claim for deduction. In appeal, the stand of the assessee was that the parties in Sudan who imported tea had been overcharged since the assessee had invariably to provide for interest due to delay in realisation of the sale proceeds and that, even though this amount is included in the bill, 90 per cent. of it alone constituted the real income. The Commissioner of Income-tax (Appeals) did not accept the contention of the assessee and sustained the order of disallowance made by the Income-tax Officer. On second appeal, the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). It is thereafter, that the two questions hereinbefore mentioned were referred to us.
3. We heard counsel Mr. P. C. Chacko for the assessee and Mr. P. K. R. Menon for the Revenue.
4. The Income-tax Officer noted that the claim to the extent of Rs. 3,40,000 was only a mere provision on account of interest which the assessee may become liable to pay on the outstanding amounts to the Bank of Baroda in future. The Income-tax Officer stated that several opportunities were given to the assessee to explain how the amount of Rs. 3,40,000 is arrived at and whether it represented the interest due to the bank on outstanding advances for the previous year ending on December 31, 1979. The assessee's representative finally wrote to the Officer that no interest is outstanding to the bank as on December 31, 1979, and the sum of Rs. 3,40,000 is only the expected loss on account of interest for the period after December 31, 1979, on the amounts payable to the bank on account of discounting of export sale bills. The Income-tax Officer, therefore, found that the amount in question was not even an accrued interest as on December 31, 1979, and even though the assessee kept the mercantile method of accounting, there is no ground for deduction of the amount from the profits of the year. The contention of the assessee was that, when they exported tea, they always overcharged their clients in Sudan taking into account the interest due, because of the delay in realisation of the sale proceeds. According to the assessee, therefore, the real income will not be the difference between the sale price and the purchase price. The real income taxable will be what the assessee receives after paying heavy interest to the bank. Even for ascertaining the real income, the expenditure must have been actually incurred or liability must have accrued during the year. If the liability is accrued, in view of the fact that the assessee maintained accounts on mercantile basis, deduction can be undoubtedly allowed. But the Commissioner of Income-tax (Appeals) also found that the amount of Rs. 3,40,000 sought to be deducted by the assessee is a contingent liability of a year other than the year of account. The appellate authority also found that no interest to the bank is outstanding as on December 31, 1979, and interest, if at all, will be only for future years. The same view has been upheld by the Tribunal also.
5. The question argued before the Tribunal related to the real nature and character of the claim of deduction. The claim was considered on the basis of interest or amount covering the risk. As the assessee's representative failed to tell them what exactly is the nature of the risk and as the Tribunal could not get a clear answer, the Tribunal also did not find any risk except the factor of delay which was translated in terms of interest. Therefore, the basis of the claim was only interest and, admittedly, there was no accrued interest payable for the previous year. The amount was claimed only as an expected loss on account of interest for the period ending on December 31, 1979, and no part of the claim was related to the previous year.
6. Counsel for the assessee referred to the decisions in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), CIT v. Kerala State Drugs and Pharmaceuticals Ltd. [1991] 192 ITR 1 ; [1991] 2 KLT 104 (Ker), Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) and CIT v. Nav Bharat Nirman (P.) Ltd. [1983] 141 ITR 723 (Delhi). These are authorities for the proposition that when the assessee keeps account on the mercantile basis, the accrued liabilities can be allowed as deduction, even though the liability has not been cleared actually. When the assessee keeps mercantile system of accounting, income, even though not realised, but which has accrued, will be deemed to have been received and liabilities which are accrued, even though not really paid, will be deemed to have been spent. In Kedarnath Jute Mfg. Co. ltd. v. CIT [1971] 82 ITR 363, the Supreme Court observed that fat page 366) :
" 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. It can again not be disputed that the liability to payment of sales tax had accrued during the year of assessment even though it had to be discharged at a future date. In Pope the King Match Factory v. CIT [1963] 50 ITR 495 (Mad), a demand for excise duty was served on the assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed, he debited that amount in his accounts on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court had no difficulty in holding that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. In our judgment, the above decision lays down the law correctly."
7. The liability for sales tax which arose on sales made by the company during the relevant previous year was allowed as a deduction irrespective of the fact whether the amount had been paid or not. In Calcutta Co. Ltd.'s case [1959] 37 ITR 1 (SC), the assessee bought lands and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. When the plots were sold, the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in its turn, undertook to carry out the developments within six months. In the relevant accounting year, the assessee actually received in cash only a portion of the sale price of lands but, in accordance with the mercantile system of accounts adopted by it, it credited in its accounts the full sum representing the sale price of lands. It also debited an estimated sum of expenditure for the developments it had undertaken to carry out even though no part of that amount was actually spent. The Supreme Court held that it was an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. This and other decisions cited by counsel for the assessee only laid down the principle that accrued liabilities can be deducted when the assessee keeps mercantile system of accounting, even though the amount is not actually spent. These decisions have no application to the facts in question as there is a clear finding that no part of the amount of Rs. 3,40,000 accrued by way of interest or otherwise as a liability to the bank as on December 31, 1979. In the decision in Shree Sajjan.Mills Ltd. v. CIT [1985] 156 ITR 585, 598 (SC), it was held that the contingent liabilities are not allowable as a deduction. The Supreme Court held that :
" Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which was deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. (See in this connection, the observations of this court in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC)). A distinction is often made between an actual liability in praesenti and a liability de future, which for the time being is only contingent. The former is deductible but not the latter."
8. Similarly, in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC), it was held that expenditure which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. Counsel argued that what is taxable under the Income-tax Act is only income and the Income-tax Officer cannot conjure up an income on the basis of the method of accounting kept by the assessee which is not the real income of the assessee. When the assesee receives the sale proceeds of tea from Sudan, there will be a long delay and, therefore, an interest liability ought to have been conceded as a matter of trade practice by the income-tax authorities. That, according to counsel, is the basis for the real income concept for taxation purpose. We do not find any substance in this contention on the facts of this case. The assessee, admittedly, maintains the mercantile basis of accounting and that means that all the consequences of that method of accounting will follow. The income accrued will be deemed to have been received and the liability accrued Will be deemed to have been spent and, on that basis, the taxable income is arrived at. On the facts of this case, we do not find any justification for the claim of deduction of Rs. 3,40,000 being a provision made for future interest.
9. Therefore, we answer question No. 1 referred to us in the affir mative, that is in favour of the Revenue and against the assessee. On the facts of the case, we hold that question No. 2 does not arise from the order of the Appellate Tribunal.
10. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.