Calcutta High Court
Shree Annapurna Financing Co. P. Ltd. vs Commissioner Of Income-Tax on 28 September, 2004
Equivalent citations: (2005)194CTR(CAL)501, [2005]273ITR284(CAL)
Author: D. K. Seth
Bench: D.K. Seth
JUDGMENT D. K. Seth, J.
1. The assessee, a private limited company, sold yarn on behalf of M/s. Bilaspur Spinning Mills and Industries, a sister concern, on consignment basis. The assessee earned commission on such sales and claimed that the "carrying charges" were to be paid to the bankers of M/s. Bilaspur Spinning Mills and Industries (Bilaspur Industries for short) towards utilisation of certain credit facilities by the assessee. The carrying charges generally included bank charges, bank interest, etc., which the assessee was allegedly required to reimburse. As such, carrying charges has been disallowed in the past to the assessee as well as other assessees of this group, the Assessing Officer has disallowed the carrying charges for the assessment year under consideration which come to a sum of Rs. 27,90,717. In appeal the Commissioner of Income-tax (Appeals) confirmed the same since they were being disallowed in the earlier years. The assessee preferred an appeal before the Tribunal. The Tribunal had affirmed the order of the Commissioner of Income-tax (Appeals). In this context, the present appeal has been filed. The appeal was admitted on the grounds as quoted below :
(i) Whether the Tribunal was justified in law in holding disallowance of carrying charges of Rs. 27,90,717 ?
(ii) Whether the finding of fact is perverse ?
Appellant's submission:
2. Mr. Khaitan, appearing on behalf of the appellant, contends that the amount which was payable to Bilaspur Industries was retained by the assessee, who utilised the same for the purpose of its business. The income earned out of this retained amount was shown as its income under the head "Income from business or profession" and was so taxed. In the process, it had shown the amount payable by Bilaspur Industries to its bankers from which Bilaspur Industries had borrowed the capital, payable as carrying charges by the assessee to Bilaspur Industries. In effect this was attempted to be shown as interest payable on the amount retained by it though described as carrying charges. According to him, this amount was laid out or expended wholly and exclusively for the purpose of earning the income. As such the assessee is entitled to a deduction permissible under Section 37 of the Income-tax Act, 1961.
3. He relied on a decision in Calcutta Co. Ltd. v. CIT to contend that whether the amount is paid or not the moment the liability accrues, according to the accepted commercial practice and trading principles, the amount is to be treated as expended by the assessee in the course of carrying on its business and incidental to the business and thus allowable as deduction in arriving at the profits and gains of the business in the absence of any prohibition against it expressed or implied in the Act. Relying on the decision in Bharat Earth Movers v. CIT , he contended that the liability in praesenti is to be treated as an expenditure laid out or expended for the purpose of earning the income solely and exclusively for the purpose of business even though such liability may be discharged at a future date. He placed reliance in Amrish and Co. v. CIT in order to contend that while computing taxable profits for the year under consideration, it is required to deduct not only the payments actually made but also the payments though payable in a subsequent year, in case such liability could be satisfactorily estimated. Merely because subsequently there may be a reduction or even extinction of liability it would not have the effect of converting such accrued liability into a contingent liability. Just as receipts though not actual receipts but accrued dues are brought in for income-tax assessment so also liabilities accrued dues would be taken into account while working out the profits and gains of the business. Under the mercantile system of accounting, a liability already accrued though to be discharged at a future date would be a proper deduction while working out the profits and gains of the business. He further contended that even if it can be presumed that ultimately the amount may not be paid either by the assessee but that such a contingency is covered under Section 41 of the Income-tax Act, 1961, inasmuch as in such event, it would again be eligible for being assessed.
The respondent's contention:
4. Mr. Som, learned counsel for the Department, pointed out that the reflection of the carrying charges as accrued liability of the assessee was, in fact, a device to avoid taxes at the hands of its sister concern. He referred to the accounts for the assessment years of the Bilaspur Industries and as well as the other two sister concerns to point out that this has never been shown to be a liability of the assessee. Inasmuch as Bilaspur Industries has not reflected this amount in its account either as income or otherwise, neither it has shown the liability towards the bank charges. This part has been shown to be neutral in its account. It has neither shown the liability towards the UCO Bank nor as amount receivable from the assessee.
5. He has also pointed out that there is no nomenclature of carrying charges either in the accounting system or in the Income-tax Act, inasmuch as this amount was never spent for the purpose of carrying any goods. On the other hand, it is alleged to be utilised for payment of interest, which the Bilaspur Industries is liable to pay to the UCO Bank. Admittedly, there is no privity of contract between the assessee and the UCO Bank. Therefore, the interest payable to the UCO Bank by Bilaspur Industries even if paid by the assessee is to be routed through Bilaspur Industries and as such it would be an income at the hands of the Bilaspur Industries, since it is a compensation for retention of the amount payable to Bilaspur Industries by the assessee. He referred to Section 2(28A) and pointed out that the definition of interest does not include any carrying charges.
6. He further contended that in the absence of any contract between the assessee and the Bilaspur Industries for payment of interest or carrying charges, no liability can be said to have accrued. In the earlier years, these were disallowed. The assessee suddenly converted its accounting into mercantile system for the relevant assessment year deviating from the earlier receipt system. Therefore, no relief can be had by the assessee.
7. He also refers to Section 194A and points out that if it is payable by the assessee, in that event, it would definitely be an income for Bilaspur Industries in respect of which the assessee is liable to deduct tax at source under Section 194A of the said Act. This has not been so done. Thus, the entire conduct of the parties and the way in which this amount is being reflected in the accounts clearly indicates that these were a colourable device to avoid tax as was rightly held by the Assessing Officer, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.
Appellant's reply:
8. In reply, Mr. Khaitan contended that in order to assess the eligibility of deduction, it is not necessary to look into the account of others or as to how the others have shown it in their books of account. Even if it is described as carrying charges, it would be a compensation for the utilisation of the credit facility, i.e., the amount payable to Bilaspur Industries since retained by the assessee. Therefore, it would be entitled to a deduction under Section 37.
The questions:
9. After having heard learned counsel for the parties, the questions that fall for our determination are as to (1) whether the income could be assessed at the hands of the assessee, (2) whether the assessee is entitled to claim deduction of the interest payable under Section 37. In order to determine the second question, it is to be examined whether this amount could be said to have been spent or expended wholly or exclusively for the purpose of earning the income by the assessee out of the amount utilised by it.
Whether the income could be assessed at the hands of the assessee :
10. Whether this is a colourable device to help someone else to avoid tax or not, is not relevant for the purpose of assessing the income at the hands of the assessee. If someone avoids tax, in that event, it would be its own liability and for which in this case Bilaspur Industries would be liable. But an income when assessed at the hands of the assessee, it has to be assessed under the provision of the Act.
11. Once it is shown to be an income of the assessee, it becomes assessable in the hands of the assessee. Having regard to the facts and circumstances of this case, this income is assessable at the hands of the assessee irrespective of the fact as to how it has been reflected or treated in the accounts of Bilaspur Industries.
Whether the assessee can claim deduction under Section 37:
12. It is pointed out by Mr. Khaitan that this amount is not in the nature described in Sections 30 and 36. Neither it is in the nature of capital expenditure nor personal expenses of the assessee. Since this qualification has been satisfied, therefore, this amount comes within the purview of Section 37. At the same time, he has pointed out that this expenditure is payable on account of retention of the amount payable to Bilaspur Industries and out of this amount retained, the assessee has earned the income. Therefore, this amount is an expenditure laid out or expended wholly and exclusively for the purpose of business. Since the income has been shown under the head "Profits and gains of the business", therefore, this is deductible under Section 37.
13. If it can be shown that this liability has accrued and the expenditure has been incurred, in that event, there is no scope for disallowing this expenditure on the score of Section 37 even if it is shown as accrued liability payable in future and has not been paid. An accrued liability and the estimated expenditure incurred in discharging the same is deductible from the profits and gains and the amount to be expended could be debited in the accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a contingent one since it is always open to the income-tax authorities to arrive at a proper estimate thereof having regard to all the circumstances of the case. Under the mercantile system, it is an accepted commercial practice and trading principle that the estimated amount, which would have been expended by the assessee in carrying on the business and incidental to its business, would be an allowable deduction in arriving at the profits and gains of the business. The above proposition was so laid down in the decision in Calcutta Co. Ltd. . The liability in praesenti though to be discharged in future is not a contingent one. If it is shown to be a business liability and if it arises in the accounting year, the liability is eligible for deduction. If the provision is made by the assessee for meeting the liability incurred by it, in that event, it would be allowed as a deduction. Such a view was taken in Bharat Earth Movers . In a mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of the business. Just as receipts though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. The possibility of reduction or even extinction of the liability would not have the effect of converting the liability into a contingent one. In computing its taxable profits of a particular year, the assessee may properly deduct not only the payment actually made but also the amount payable in a subsequent year. It was so held in Amrish and Co. .
Whether the amount was spent or expended for the business :
14. The definition of interest in Section 2(28A) defines to mean any amount payable in respect of any monies borrowed or debt incurred including a deposit, claim or other similar right or obligation or in respect of any credit facility. In this case, admittedly, the assessee had availed of the facility of credit by retaining the money payable to Bilaspur Industries, which is also a debt incurred by it or a deposit of the retained amount of Bilaspur Industries with the assessee. Therefore, any amount payable on account of use of such fund as compensation or otherwise would amount to interest payable.
15. Whether the assessee deducts this amount under Section 194A or not, will not change the nature and character of the amount payable. On account of default of deduction under Section 194A the assessee would be exposed to or liable for the consequence of non-deduction. But that would not convert the character of the amount payable to something else. In this case, the credit availed of was utilised for earning the income. If any interest is payable 6r accrues due on such amount which was utilised for the purpose of earning the income out of the business, then such interest would definitely be an expenditure laid out and expended wholly and exclusively for the purpose of the business for earning the income.
16. It is contended by Mr. Som that there is no agreement or contract showing that the assessee is liable to pay interest or pay for interest or compensation to Bilaspur Industries or that the assessee would be liable to pay the interest payable by Bilaspur Industries to the UCO Bank. There is no scope for transfer of the debt or liability payable to a bank when the assessee was not the debtor of the UCO Bank. Mr. Som seems to be right. Admittedly, the liability cannot be transferred. The assessee cannot be the debtor. It cannot be liable to pay interest payable by Bilaspur Industries to the UCO Bank. But if it appears from the conduct of the parties that the assessee would be paying some amount which the Bilaspur Industries might be spending to meet its interest payable to the UCO Bank, in that event, the assessee cannot be held liable for any consequence other than that of payment to be made to Bilaspur Industries by it. The liability or income of Bilaspur Industries is a different question, which can be determined at the hands of the Bilaspur Industries and would not be determined on account of the reason of its being retained by the assessee.
17. Now the question arises as to whether this is a device or a colourable exercise to avoid income or not. Surely, the assessee is separately assessed. The question has to be looked into at the hands of the assessee, i.e., whether it itself is avoiding income or not. If by reason of the assessee's business Bilaspur Industries has avoided tax, in that event, it would be the Bilaspur Industries, which would be liable for such avoidance.
Conclusion:
18. From the discussions made above, it appears that the income earned by the assessee out of the amount payable to Bilaspur Industries, since retained by it, is an income at the hands of the assessee, irrespective of its liability towards Bilaspur Industries and the manner in which Bilaspur Industries has treated the same in its own account. In case any amount is detained even if it is not proved that there is any agreement for payment of interest thereon, even then on account of retention, compensation in the form of interest would be payable whether demanded or not in praesenti, but the assessee deems it accrued/due and which is capable of being calculated/estimated and is shown in its account though payable in future, it would be a liability of the assessee laid out or expended for utilisation of the amount in order to earn the income in the course of its business. How Bilaspur Industries would be dealing, is wholly immaterial for the purpose of assessing the income at the hands of the assessee. In these circumstances, the amount having been laid out or expended for the purpose of earning the income, even though payable in future, shown in its account under the mercantile system of accounting is eligible for deduction under Section 37.
Order:
19. In the result, the appeal succeeds and is allowed.
20. Learned Tribunal shall determine the question in the light of the observations made in this order in this appeal and assess the same at the hand' of the assessee in accordance with law.
21. The first part of the question that has been raised is answered in the negative, against the Department and in favour of the assessee and the second part is answered in the affirmative, in favour of the assessee anc against the Department.
22. Urgent xerox certified copy of this judgment is made available to the parties, if applied for, on usual terms.
R.N. Sinha, J.
23. I agree.