Income Tax Appellate Tribunal - Mumbai
Godavari Sugar Mills Ltd. vs Deputy Commissioner Of Income Tax on 30 November, 2007
Equivalent citations: (2008)115TTJ(MUM)788
ORDER
P. Madhavi Devi, J.M.
1. The only grievance of the assessee in this appeal is that the CIT(A) erred in not granting deduction of bank interest of Rs. 3,72,10,370 and upholding the decision of the AO.
The brief facts of the case are that the assessee is a company engaged in the manufacture of sugar. The AO at the time of the original assessment Under Section 143(3) noticed that the assessee has made a claim of a deduction of Rs. 3,72,10,370 from its profit regarding the interest amount payable on cash credit for Sakharwadi/Lakshmiwadi factories to the Bank of India. He disallowed the claim for deduction on account of interest payable to the extent of Rs. 3,72,10,370 to the Bank of India on the ground that it is shown as contingent liability in the annual report of the company and that it has not crystallized during the year. On appeal, the CIT(A) remanded the matter back to the file of the AO directing him to verify the facts and also to consider the correspondence from the Bank of India stating that the bank has debited the above amount to the account of the assessee and thereafter allow the claim of the assessee. During the course of remanded proceedings, the assessee submitted that initially in its return of income the assessee had not claimed deduction from the profit for interest of Rs. 3,72,10,370 payable on cash credit for Sakharwadi and Lakshmiwadi factories not charged by Bank of India and it was shown in the annual report under the head 'Contingent liability' (not provided for). However, the assessee received two letters dt. 6th Dec, 1988 and 19th April, 1989 from Bank of India making the demand and on the basis of these letters, the company has claimed the amount of Rs. 3,72,10,370 as deduction from the business income at the time of assessment. It was submitted that this interest amount which is due from 27th Dec, 1985 was deferred by the bank due to the continuous losses incurred by the factories and the bank had not waived the interest and has raised the demand vide its certificates dt. 6th Dec, 1988 and 19th April, 1989. The assessee thus prayed for the allowance of interest as deduction from the business income for the asst. yr. 1989-90 on the principle of crystallisation of the liability and the mercantile system of accounting followed by it. The AO, however, was not satisfied with the submissions of the assessee and observed that there were contradictions in the facts mentioned before the CIT(A) and the facts reported to the AO in the remand proceedings. He observed that the assessee claimed before the OT(A) that the bank had debited the above interest to the account of the assessee company, whereas it is now claimed that the bank has not debited this interest to the account of the assessee company and that the bank has not charged the above interest. He further observed from the break-up of the amount given, that part of the interest is pertaining to earlier years and therefore, is not allowable as deduction during the year as the liability to pay the same has not been crystallised during the year. As regards the certificates issued by the bank on 6th Dec, 1988 and 19th April, 1989, the AO observed that in these letters there is only the working of interest and the bank has neither charged interest to the account of the company, nor has the company accounted for it during the year and that is the reason why the assessee had shown it as 'contingent liability' (not provided for) in its balance sheet. He further observed that the assessee's case was pending before the BIFR since 1983 and it could not be said that the liability to pay interest has become final during the year as the negotiation for waiver or remission of interest for the year started before the end of the year. He further observed that these two factories of the assessee company at Sakharwadi and Lakshmiwadi were closed in the year 1985 and no business activities were carried out due to which the interest liability of the same cannot be considered against the existing business of the assessee company. He thus, disallowed the claim of the assessee. Aggrieved by the same, the assessee filed an appeal before the CIT(A), who observed that though the bank had debited the interest in the accounts for all the years starting from 1985 and ending with 1989, yet the assessee did not claim such amount as deduction in different assessment years mainly because it had gone before BIFR in 1983 and was all the time pressing for waiver of interest and such waiver did take place in the year relevant to the asst. yr. 1991-92, when this amount was waived off pursuant to the order of BIFR. He further observed that the liability of interest was finalised in 1991 when the BIFR passed an order and the final figure of interest arrived at Rs. 1.83 crores has finally been allowed by the Department i.e. Rs. 1.39 crores in the asst. yr. 1990-91 and Rs. 44.14 lakhs in the asst. yr. 1991-92 and so there does not remain any liability for any further amount of interest which could be considered for being allowed here in the relevant assessment year i.e. 1989-90. He also referred to the decision of his predecessor for the asst. yr. 1991-92 dt. 4th July, 1994 in support of his conclusion. Aggrieved by the same, the assessee is in second appeal before us.
The learned senior counsel for the assessee, Sri S.E. Dastur, while reiterating the submissions made by the assessee before the authorities below, submitted that the assessee had a cash credit arrangement with the Bank of India and was liable to pay interest thereon. The interest accrued from the asst. yr. 1987-88 to' 1989-90 at a total of Rs. 3,72,10,370, which is claimed as expenditure during the relevant assessment year, as the bank had issued certificates during the relevant assessment year. He submitted that the bank debited the interest on quarterly basis and the assessee being a sick industry had filed an application before the BIFR and therefore in its books of account, the interest liability to be paid was not recorded. He submitted that this was due to the prayer of the assessee before the BIFR to waive thus interest. Meanwhile, the bank debited the assessee's account with the interest and issued the certificates to this effect which compelled the assessee to claim deduction after filing of the return of income, but during the assessment proceedings. He drew our attention to p. 7--para 13 of the assessment order, wherein the Bank of India letters dt. 6th Dec, 1988 and 19th April, 1989 are referred to. He submitted that the BIFR in August, 1991 had waived the total interest payable to Bank of India and also directed that Section 41(1) will not apply to the assessee. For the proposition that because of pendency of assessee's application before BIFR for the waiver of interest, it cannot be said that there is no liability, the learned senior counsel placed reliance upon the decision of the Bombay High Court in the case of Srikant Textiles v. CIT wherein the High Court was dealing with a case of demand for payment of excise duty on goods purchased by the assessee and the amount of demand was entered into accounts as expense, though the liability to pay the duty was disputed. The Hon'ble Court held that as the duty was levied and the demand for that sum was not withdrawn or cancelled and the offer to levy excise duty at a different date under the compounded levy system was made on express condition that the assessee should agree to pay duty calculated on the basis of compounded levy system and this condition was not accepted by the assessee, the liability to pay the excise duty remained an ascertained liability and the assessee was entitled to have this amount allowed as expenses. It was further held that the fact that by the second notice of demand, the reduced amount of excise duty was claimed after the accounting year was closed cannot be the basis for a finding that by the letter dt. 22nd Oct., 1958, the assessee firm was definitely or specifically informed that excise duty in respect of business of the assessee firm in the accounting year was being recalculated on a fresh basis. He also drew our attention to p. 99 of the paper book wherein the BIFR has directed that Section 41(1) will not apply to the assessee. He submitted that the direction to this effect was on the premise that deduction is allowed during the assessment year. Thus, according to him the interest payable is allowable during the relevant assessment year.
2. The learned Departmental Representative, on the other hand supported the order of the authorities below and submitted that the assessee had shown the bank interest as the contingent liability in its books of account and the contingent liability is allowable as a deduction only when it is crystallized. He submitted that during the relevant assessment year, the said liability had not been crystallized. He submitted that this interest was also subsequently waived by the order of the BIFR in August, 1991 and therefore, this claim did not become final during the relevant assessment year. In support of his contention that contingent liability is not allowable, he relied upon the decision of Gujarat High Court in the case of Alembic Chemical Works Ltd. v. Dy. CIT . In the alternative and without prejudice to his submissions above, the learned Departmental Representative submitted that the assessee cannot claim for deduction of the liability for the period from the asst. yr. 1985 to 1989-90 and can claim for the liability relating to the asst. yr. 1989-90 only. The other objection of the learned Departmental Representative is that the two factories of the assessee company i.e. Sakharwadi and Lakshmiwadi were closed down in the year 1985, therefore, the interest liability of the same cannot be considered against the existing business of the assessee company. For this proposition, he relied upon the following decisions:
(a) L.M. Chhabda & Sons v. CIT ;
(b) Associated Cement Companies Ltd. v. CIT
(c) Waterfall Estates Ltd. v. CIT. .
3. Having heard both the parties and having considered their rival contentions, the basic question before us is whether during the relevant assessment year the bank interest is an ascertained liability as claimed by the assessee or is it a contingent liability as held by the AO. As per the statement of interest payable to the Bank of India filed by the assessee, it is seen that the interest is payable to the Bank Of India from 27th Dec, 1985 to 31st March, 1990. The interest is charged quarterly and it is totalled to an amount of Rs. 3,72,10,370 as on 31st March, 1989. The assessee has claimed this expenditure from the profit during the relevant assessment year. No doubt, the assessee has shown this liability as a contingent liability (as not provided for) in its annual report. The assessee has submitted that being a sick industry, it was before the BIFR since 1983 and had sought waiver of interest as one of its prayers due to which it did not make any payment to the bank nor had it accounted for it in its books of account and has shown it as a contingent liability in its balance sheet. However, during the previous year relevant to the asst. yr. 1989-90, the assessee has received two letters from the bank dt. 6th Dec, 1988 and 19th April, 1989, wherein the interest has been worked out from 27th Dec, 1985 to 30th Sept., 1988 and 1st Oct., 1988 to 28th March, 1989 respectively. Thus, it can be said that the bank has made a demand for payment of these amounts vide letters mentioned above. These letters have thus crystallized the liability of the assessee to pay the bank interest for the relevant period. This has resulted in the claim of the assessee for deduction of the said amount during the assessment proceedings and the CIT(A) has accordingly remanded the issue to the file of the AO to consider the same. The AO had proceeded on the presumption that the bank had not debited the interest to the assessee's account during the period and therefore, it was not a liability during the period. This cannot be accepted. We have perused the copies of the letters dt. 6th Dec, 1988, 19th April, 1989 and 4th April, 1990 issued by the bank placed at pp. 1 to 3 of the paper book filed by the assessee. It is stated therein that amount of interest is payable by the assessee for the period 27th Dec, 1985 to 30th Sept., 1988, 1st Oct., 1988 to 31st March, 1989 and for the period during the year ending 31st March, 1990 respectively. It is not mere working of the interest. The bank had also enclosed the statement of account for the said period. The bank without debiting the account of the assessee could not have issued the letters dt. 6th Dec., 1988, 19th April, 1989 and 4th April, 1990 and the statement of account working out the interest. The bank has in fact, advised the assessee to provide for the said amount in assessee's P&L a/c and balance sheet as on 31st March, 1990. Thus, it cannot be said that the bank has not charged any interest from the assessee or that it has not debited the assessee's account for the interest.
4. The other objection of the AO was that the assessee had closed down the factories at Sakharwadi and Lakshmiwadi in the year 1985 and therefore, no business activities were carried out due to which the interest liability of the same cannot be considered against the existing business of the assessee company. The learned Departmental Representative had placed reliance upon the decision of the Supreme Court in the case of L.M. Chhabda & Sons, cited supra, wherein the Court was dealing with the case of an assessee who was carrying on the business of exhibiting cinematograph films and claimed deduction of mesne profits paid for the calendar year relevant to the asst. yr. 1955-56. The claim was disallowed by the AO on the ground that the business of that particular Talkies was not carried on by the assessee during that year. The apex Court held that it could not be said that the venture of Prakash Talkies was a part of a general business of exhibiting films carried on by the assessee and from the mere circumstance that the result of the accounts of the different ventures was entered in the accounts maintained at the head office, no inference necessarily arose that the exhibition of films in different theatres constituted the same business. It was further held that there" is no such general principle that where an assessee carries on business ventures of the same character at different places it must be held as a matter of law that the ventures are parts of a single business and whether different ventures carried on by the assessee form part of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the different ventures constitute parts of the same business.
5. The Bombay High Court in the case of Associated Cement Companies Ltd. (supra), followed the above decision of the apex Court in holding that if an assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, it cannot claim allowance Under Section 37 of the IT Act, 1961, of an outgoing attributable to the business which is closed against the income of its other businesses in that year. Similar view was expressed by the Madras High Court in the case of Waterfall Estates Ltd. (supra).
In the case on hand, from the facts on records and applying the ratio laid down by the apex Court in the case of L.M. Chhabda & Sons (supra), it is to be seen if the Lakshmiwadi and Sakharwadi units constitute parts of the same business of the assessee. It is nobody's case that the assessee is carrying on any other business other than manufacture of sugar. The location of a sugar mill/factory depends upon the availability of the raw material i.e. sugarcane in order to reduce the exorbitant transportation charges and thus ultimately the cost of production. The presence of the units at different places by itself as held by the apex Court, does not make them different businesses. In the absence of specific findings by the authorities below that these units were carrying on different business from that of the other units of the assessee and the objection of the AO being only that these units have been shutdown in 1985, we are satisfied that the claim of deduction of interest is allowable during the relevant assessment year. However, if the interest is allowed in any other year as observed by the CIT(A) appropriate steps need to be taken in those years.
6. The CIT(A) had confirmed the order of the AO on another ground that liability of interest was finalised in the year 1991 when the BIFR passed the order. This conclusion of the CIT(A) also cannot be upheld in view of the decision of the Bombay High Court in the case of Srikanth Textiles, cited supra. When we apply the rationale laid down by the Hon'ble High Court in the above case, it has to be held that the liability has crystallized when the bank has issued the letters furnishing the details of interest payable and not when the BIFR has passed the order in August, 1991. The letters of the bank are in a way demand notices, though issued at the instance of the assessee and therefore, it can be said that the liability has crystallized during the relevant assessment year and subsequent waiver thereof in the year 1991-92 is of no consequence for determination of liability during the relevant assessment year. In this view of the matter, we are of the opinion that the assessee is eligible for deduction of the entire amount of Rs. 3,72,10,370 during the relevant assessment year when the demand has been raised by the Bank of India.
7. The assessee's appeal is accordingly allowed.
8. This is a cross-appeal filed by the Revenue. The Revenue has raised the following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in entertaining fresh evidence in the form of certificate dt. 17th April, 2000 filed before him and in disposing the issue in favour of the assessee without providing an opportunity to the AO which is in contravention to Rule 46A of the IT Rules, 1962.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to allow the provision of sugarcane price of Rs. 29,72,592 which is shown as the amount of earlier period in the P&L a/c.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting Rs. 9,51,114 from the disallowance of Rs. 11,51,144 made by the AO Under Section 37(1) of the Act.
9. As regards the grounds No. 1 and 2, the brief facts of the case are that the AO had disallowed the amount of Rs. 29,72,592 being the provision for estimated balance of sugarcane price. The AO was of the view that allowability of the same will be decided in the year in which the amount has actually been paid. Before the CIT(A), it was claimed that the above amount did not pertain to the earlier years but it pertained to the period from 1st Oct., 1988 to 31st March, 1989 relevant to the asst. yr. 1989-90. The CIT(A) thus, directed the AO to verify the claim and if the amount pertains to the year under consideration to allow the same. During the assessment proceedings, the assessee submitted before the AO that in the printed P&L a/c, through oversight, the assessee had included the amount of Rs. 29,72,592 as expenses of earlier period, whereas it really pertains to purchases made during the period 1st Oct., 1988 to 31st March, 1989 at Rs. 10 per tonne on 2,97,259.20 MTs of sugarcane purchased in this period. It was submitted that as per the practice followed by the assessee which is accepted by the Department, the balance cane price is allowed in subsequent years of payment in cases where the amount of cane price is determined after finalisation of accounts of a particular year, whereas this amount of Rs. 29,72,592 is a provision made in the relevant year itself and thus, allowable in the relevant assessment year. The assessee also submitted the xerox copy of the certificate dt. 23rd Nov., 1989 from the auditors' certifying the quantity of cane purchased and the provision made @ Rs. 315 per tonne in the accounts for the same. The AO however observed that this copy of the auditors certificate does not specify that this amount pertains to the relevant assessment year i.e. 1989-90. He thus, rejected the claim of the assessee. Aggrieved by the same, the assessee filed an appeal before the CIT(A). Before the CIT(A), the assessee submitted the certificate of the chartered accountant dt. 17th April, 2000 in support of the explanation to the provision of sugarcane price @ Rs. 10 per MT and also filed statements showing the sugarcane purchased and the value thereof for the asst. yrs. 1987-88, 1988-89 and 1989-90 in support of its claim that the provision of Rs. 29,72,592 is pertaining to the period relevant to the asst. yr. 1989-90 and that it has not been claimed elsewhere. The CIT(A) after considering all these material directed the AO to allow the assessee's claim. Aggrieved, the Revenue is in appeal before us.
10. The learned Departmental Representative while supporting the order of the AO, submitted that before the AO the assessee had submitted (at p. 5 of the assessment order) that the company had to pay a total ex-field cane price of Rs. 358 per tonne for the 1988-89 season and had already provided for balance cane price during subsequent accounting year 1989-90 (asst. yr. 1990-91) at Rs. 43 per tonne (Rs. 358-315) already provided in asst. yr. 1989-90. He also drew our attention to the auditors' certificate dt. 23rd Nov., 1989, which is also reproduced at p. 6 of the assessment order, wherein the total price payable is shown at Rs. 315 per MT including cane purchase tax rebate at Rs. 12 per MT and there was no provision of Rs. 29,72,592 @ Rs. 10 per tonne in the said certificate. Thus, according to him, the entire amount of Rs. 1,98,46,300 has been shown as pertaining to the earlier years in assessee's P&L a/c. He submitted that a fresh certificate dt. 17th April, 2000 of the chartered accountant filed before the CIT(A) and admitted and relied upon by him is in violation of Rule 46A and it is against the facts of the case.
11. The learned Counsel for the assessee, on the other hand, supported| the order of the CIT(A) and submitted that the assessee had initially erroneously submitted the purchase details as relating to prior period and had submitted the correct working before the CIT(A) who had deleted the disallowance after considering the details and material before him and that there is no discrepancy in the order of the CIT(A).
12. Having heard both the parties and having considered their rival contentions, we find that the sugar cane price is initially fixed at a tentative figure and there is a provision made for the balance at an estimate basis pending the fixation of final price by the Government of India. In this case, the assessee has during the relevant assessment year, purchased 2,97,259.222 MTs of sugarcane and has provided for it at Rs. 315 ex-field price excluding the cane price rebate at Rs. 15 per MT in its accounts. The assessee had stated that by oversight, it included this amount in the amounts of earlier period in the printed P&L a/c. Before the CIT(A), in the second round of litigation, the assessee filed a certificate dt. 17th April, 2000 issued by its chartered accountant, M/s Ambalal Thakkar & Co., the copy of which is placed before us. We have taken it on record. The contents of the letter dt. 23rd Nov., 1989 and 17th April, 2000 are reproduced hereunder:
23rd Nov., 1989:
This is to certify that Godavari Sugar Mills Ltd. has purchased for the season 1988-89 2,97,259.222. MTs sugarcane and has paid/provided at Rs. 315 ex-field price including cane purchase tax rebate, at Rs. 12 per MT in the accounts for the eighteen months period ending 31st March, 1989, as per the books of account produced before us and as per the information and explanation given to us, is as under:
1st instalment at Rs. 240 including purchase
tax rebate at Rs. 12 per MT
7,13,42,213.28
2nd instalment at Rs. 45 per MT 1,33,76,664.99
3rd instalment at Rs. 30 per MT 89,17,776.66
___________________
9,36,36,654.93
___________________
For Ambalal Thakkar & Co.
Sd/-
(G.P. Bhatt)
Partner
17th April, 2000:
Certificate
This is to certify that the Godavari Sugar Mills Ltd. had purchased 2,97,259.222 MT of sugarcane for the season 1988-89 and had made provision and payment @ Rs. 315 per MT ex-field (including cane purchase tax rebate of Rs. 12 PMT) in the books of account of the company for the period from 1st Oct., 1987 to 31st March, 1989 (18 months period).
We further certify that the payment of the said sugarcane purchased was made as under:
Amount
1st instalment @ Rs. 240 PMT 7,13,42,213.28
(Including purchase tax rebate Rs. 12 per MT)
2nd instalment @ Rs. 45 PMT 1,33,76,664.99
3rd instalment @ Rs. 20 PMT 59,45,184.44
-do- @ Rs. 10 PMT 29,72,592.22
__________________
Total provision & payment made Rs. 315 PMT 9,36,36,654.93
Less : cane purchase tax rebate @ Rs. 12 PMT recd., 35,67,110.00
from Government of Karnataka, included in cane price
__________________
Amount debited to P&L a/c 9,00,69,544.93
__________________
The above are as per books of account of due company and as per information and explanation given to us.
For M/s Ambalal Thakkar & Co.
Mumbai Chartered Accountants
Dt. : 17th April, 2000 (G.P. Bhatt)
M. No. 4849
13. On comparison of the said certificate with the certificate dt. 23rd Nov., 1989, we find that the third instalment mentioned in the certificate dt. 23rd Nov., 1989 is shown at Rs. 30 per MT, while in the certificate dt. 17th April, 2000, there is break-up of Rs. 30 as Rs. 20 and Rs. 10 and the total provision and payment made is @ Rs. 315 per MT only. There is no discrepancy as far as the total figures are concerned. The powers of the CIT(A) are co-terminus with that of AO. When there are no discrepancies in the documents filed before the AO and also before the CIT(A), the CIT(A) need not call for any remand report from the AO and as such, there is no violation of the provisions of Rule 46A of the IT Rules. The CIT(A) after considering the factual matrix of the case has held that the provision of Rs. 29,72,592 for the period 1988-89 was, through oversight, included in the amount of earlier period and has rightly directed the AO to allow the said amount during the relevant assessment year. We do not see any reason to interfere with the order of the CIT(A). These two grounds of appeal of the Revenue are, therefore, rejected.
14. As regards ground No. 3, it is seen that the CIT(A) in his order dt. 22nd March, 1993 had observed thus:
There is no break-up of sundry expenses claim of Rs. 9,07,237. Therefore, the AO has treated some part of such expenses as of disallowable nature, therefore, to be fair, and reasonable, I restrict the disallowance out of Rs. 9,07,237 at Rs. 2,00,000.
15. The AO while giving effect to the said order of the CIT(A) worked out the disallowance of Rs. 11,51,114 as under:
(i) to restrict disallowance of Rs. 2,00,000 out of sundry expenses;
(ii) to disallow @ 15 per cent of the remaining balance of expenses i.e. of Rs. 63,40,763.
He, thereafter worked out the disallowance to Rs. 9,51,114. The CIT(A) has considered the matter at length and has held that the total disallowance Under Section 37(1) as directed by the CIT(A) was to be restricted to Rs. 2,00,000 which is out of the sundry expenses of Rs. 9,07,273 which is part of Rs. 72,42,000 and disallowance to the extent of Rs. 2,00,000 only was to be confirmed. He, therefore, deleted the balance of Rs. 9,51,114, which in our opinion, is the correct interpretation of the order of the CIT(A) dt. 22nd March, 1993. Thus, the order of the CIT(A) needs no interference and therefore, this ground of appeal is also rejected.
In the result, the Revenue appeal is dismissed.