Income Tax Appellate Tribunal - Mumbai
National Rayon Corpn. Ltd. vs Deputy Commissioner Of Income-Tax on 26 September, 1994
Equivalent citations: [1994]51ITD621(MUM)
ORDER
K.C. Singhal, Judicial Member
1. These are two appeals, one by the assessee against the order of the CIT(A) dated 26-1-1993 while the revenue's appeal is against the order of the CIT(A) passed under Section 154 dated 10-1-1994.
2. Ground Nos. 1 to 3 and 12 to 14 in assessee's appeal as well as ground raised by the revenue involve common issue and, therefore, are being disposed of by this common order.
3. The issue involved is regarding the ascertainment of liability in respect of power charges payable to Maharashtra State Electricity Board for the purpose of computation of income under Section 28 as well as Section 115J.
4. The brief facts of the case are that the assessee-company during the assessment year 1990-91 had made provision of Rs. 3.81 lakhs in its books of account in respect of liability relating to power charges amounting to Rs. 220.01 lakhs and liability of interest thereon amounting to Rs. 80.81 lakhs. The liability admittedly does not pertain to the year in question but pertains to the earlier years, i.e., 1983 onwards. The assessee while computing its income claimed this liability as deduction out of the profits of the current year. Similarly for the computation of book profits under Section 115J the assessee excluded this liability as according to it, this liability was ascertained liability within the meaning of Section 115J -Explanation (c).
5. The DCIT asked the assessee to show cause why the claim of the assessee be not rejected as the liability does not pertain to assessment year 1990-91. The assessee-company explained vide its letter dated 19-3-1993 that the liability in question was a disputed one which had been crystallised during the period relevant to assessment year 1990-91. It was explained that this liability was in respect of excess demand charges of Rs. 130.92 lakhs pertaining to the period from December 1983 to April 1986 and delayed payment charges of Rs. 89.09 lakhs pertaining to December 1983 to March 1989 and interest on excess demand charges of Rs. 80.81 lakhs. As there was a lock-out and the company was in heavy losses, the company approached the Maharashtra State Electricity Board (hereinafter called MSEB) for waiver/reduction of excess demand charges. The request was not accepted by the MSEB. However, nothing was conveyed to the assessee by the MSEB in writing though according to the assessee they had agreed in principle in July 1990 to reduce the contract demand from 46.208 KVA to 36.000 KVA with effect from 1-5-1986, ultimately the MSEB informed the assessee about this reduction vide letter dated 21-9-1992. As the company knew about this in July 1990 it made provisions for this liability in the books for the financial year 1989-90. Regarding delayed payment charges and interest it was explained that the company was unable to pay the demand due to heavy losses. The MSEB was charging delayed payment charges at the rate of 2% of the bill amount as well as 18% interest on the outstanding amount. The company made representation to the MSEB for not charging the delayed payment charges as interest had already been charged. The MSEB was also requested to waive the same as the company was a sick unit under BIFR. However, the MSEB declined to accept the request of the assessee and therefore the assessee had to make provision for the same. Since interest was automatic liability provision for this had to be made along with the provision for main demand. It was also explained by the assessee that dispute was crystallised in early 1990 and therefore provisions were made in books for financial year 1989-90.
6. The DCIT however rejected the explanation of the assessee on three grounds, viz. : -
(1) The liability did not relate to assessment year 1990-91;
(2) The liability was crystallised only in assessment year 1983-84 as the letter was issued by the MSEB in September 1982; and (3) No payment had been made in the assessment year 1990-91.
Hence, the amount of Rs. 500.81 lakhs was added to the profits shown by the assessee for computing book profits. The claim of the assessee for deduction of the same under Section 28 was also rejected.
7. The CIT(A) confirmed the order of the Assessing Officer on the ground that the bills of demand had been raised in the month of April 1990, i.e., after the end of the assessment year 1990-91. So according to the CIT(A), the liability was crystallised in April 1990 relevant to assessment year 1991-92.
8. However, subsequently the assessee applied to the CIT(A) for rectification under Section 154. In the rectification proceeding, the CIT(A) found that bill of April 1990 was a cumulative bill of earlier bills. He, therefore, came to the conclusion that the assessee was saddled by the arrear demand from month to month and allowed the claim of the assessee. The Assessing Officer was directed to exclude this liability from the computation of book profits under Section 115J as the liability was an ascertained one. However, no reduction was made so far as additions made in computing the income under Section 28.
9. The learned counsel for the assessee, Shri S.M. Inamdar has vehemently argued that since the liability towards power charges was in dispute and the dispute was finally decided in early 1990, the liability was crystallised in assessment year 1990-91 and, therefore, this liability had been rightly excluded by the CIT(A) for the purpose of computation of book profits under Section 115J. However, he submitted that for the same reason, the CIT(A) should have deleted the addition of this amount from the computation of income under Section 28. When the Bench asked him to explain the nature of the liability it was explained by him that when the power connection was sanctioned there was an agreement between the MSEB and the assessee. According to the agreement, the minimum amount of power charges had to be paid irrespective of power consumption. It is these minimum charges which have been described as excess demand charges.
10. On the other hand, the senior departmental representative strongly opposed the order of the CIT(A) under Section 154. According to him neither the liability related to the year in question nor it was crystallised during this year. He submitted that there was no evidence to establish that dispute was settled in early 1990, i.e., prior to 1-4-1990. It is a simple statement of the assessee in this regard and the same cannot be accepted. On the contrary the evidence was against the contention of the assessee as the letter was written by the MSEB on 21-9-1992 which is the date relevant to assessment year 1993-94. He also referred to notes forming part of the account appearing at page 71 of the paper book to show that liability towards the MSEB was contingent. He also referred to the order of BIFR (Board for Industrial and Financial Reconstruction) dated 17-8-1988 appearing at pages 10 to 12, which states that MSEB has not agreed to waive power charges and interest thereon. In view of this he argued that at the best the liability was crystallised on the date of this order and therefore it was not a liability of this year. Therefore no deduction could be given on this liability in computation of income under Section 28 and also could not be excluded while computing the book profits under Section 115J as no provision could be made by the assessee-company in respect of earlier liabilities.
11. In rejoinder the learned counsel for the assessee submitted that the order of the BIFR was not final. He invited our attention to the last para of the order which states that Board has decided to address the Chief Minister of Maharashtra as the Bench felt that without these concessions and relief the viability of the company was doubtful. He, therefore, contended that the matter was kept open for negotiation. Regarding making of provision for earlier years he contended that there was no provision in the Companies Act or in Income-tax Act prohibiting the assessee to make such provision. The assessee was well within its rights to make such provision.
12. We have heard the rival contentions and perused the material placed before us. The real question in these two appeals relates to the date of ascertainment of the liability. To resolve this bone of dispute the approach of neither party is accepted. The contention of the assessee that the liability was crystallised in early 1990 cannot be accepted for three reasons :-
Firstly, there is no evidence on the record to establish the same. It is a mere submission of the assessee without any supporting material.
Secondly, the explanation of the assessee before the DCIT vide letter dated 19-3-1993 as reproduced in the order of the Assessing Officer is self-contradictory. It has been explained in that letter that the MSEB had in principle agreed to reduce the contract demand in July 1990 with effect from 1 5-1986. On the other hand in the same explanation it had been written that the dispute was settled at the highest level in early 1990. This explanation has been extensively quoted by the Assessing Officer in this order at pages 3 and 4.
Thirdly, there was no dispute of the liability at all. The assessee-company's representative before the MSEB was only for waiver/reduction of the demand charges.
In our opinion, it was an enforceable liability which could not be converted into non-enforceable liability by making representation to the MSEB for waiver/reduction. Therefore, we are unable to accept the contention of the assessee that the liability was crystallised in the assessment year 1990-91.
13. The contention of the revenue that the liability was crystallised either on the date, i.e., 30-9-1992 when the MSEB informed the assessee-company for reduction of contract demand from 46.208 KVA to 36,000 KVA with effect from 1-5-1986 or on 17-8-1988 when the BIFR passed the order also cannot be accepted. As already mentioned by us in the earlier para that there was no dispute at all regarding the accrual of the liability and the representation of the assessee was simply a mercy petition for waiver. The contention of the revenue that the liability crystallised subsequently either on the date of order of the BIFR or on the letter was issued by the MSEB cannot be accepted.
14. In order to dispose of these appeals it is necessary to determine the year in which the liability had been ascertained. In our considered opinion the liability under the agreement crystallised on the happening or occurrence of event mentioned in the agreement. In the present case, the assessee was under obligation to pay the minimum demand of power charges referred to as "excess demand charges" as soon as the demand raised by the MSEB was served upon the assessee-company. It is this event under the agreement which makes the demand of power charges into an enforceable debt recoverable from the assessee. Therefore, the liability in the present case accrued from month to month on the basis of demand raised by the MSEB. Once this liability accrued, it could not be converted into non-enforceable liability by making representation to the MSEB for waiver or reduction of the liability. To take care of the situation the Legislature has introduced Section 41 according to which if there is any remission or cessation of the liability accrued in the earlier years the same could be assessed in the year of remission or cessation. Therefore the liability which had accrued in the earlier years cannot be deducted while computing business income under Section 28. On the other hand, the liability was an ascertained one so far as the assessment year 1990-91 is concerned and the assessee-company was within its rights to make a provision in respect of this ascertained liability. There is no provision in the Companies Act or Income-tax Act which may prohibit the assessee in making such provision. There is no requirement under Section 115J for exclusion of provision to meet an ascertained liability even if it related to an earlier year. Therefore, in our opinion, the CIT(A) was justified in directing the Assessing Officer to exclude this liability from the computation of book profits under Section 115J. This will dispose of the revenue's appeal in IT Appeal. No. 1900/B/94 and the assessee's ground Nos. 1 to 3. The revenue's appeal is therefore, dismissed. Since the order was rectified by the CIT(A) the ground Nos. 1, 2 and 3 of the assessee's appeal become infructuous. The ground Nos. 12 to 14 of assessee's appeals are also rejected in view of our finding that liability had already accrued on month to month basis in the relevant years, Le,, in the years the bills were raised by MSEB for the first time. Hence, the same cannot be deducted in computation of income under Section 28 for assessment year 1990-91.
15. to 22. [These paras are not reproduced here as they involved minor issues.]