Delhi High Court
The Commissioner Of Income-Tax vs Shri Ram Pistons And Rings Ltd. on 5 May, 2008
Author: Madan B. Lokur
Bench: Madan B. Lokur, Manmohan Singh
JUDGMENT Madan B. Lokur, J.
1. On 30th April, 2008 we had noticed that the question referred for our opinion as formulated in paragraph 15.1 of the Statement of Case has been wrongly framed. There is no dispute about this in so far as both learned Counsel for the parties are concerned. Consequently, on a reading of the facts mentioned in paragraph 15 of the Statement of Case we frame the following question of law:
Whether the Income Tax Appellate Tribunal was correct in law in disallowing sales incentive claimed by the Assessee under the incentive scheme which had expired on 30th April, 1981 but which continued till 30th June, 1981 as having no relevance for the Assessment Year 1983-84?
2. The question arises in the following circumstances: The Assessee maintains its accounts on a mercantile basis. It had floated a scheme, which was valid until 30th April, 1981 and in terms of which the Assessee was liable to pay to its dealers in cash an incentive for the sales made. The scheme was initially up to 30th April, 1981 but it appears to have been continued up to 30th June, 1981.
3. As a result of the extended scheme, not only were the dealers extended the incentives that were available under the earlier scheme but they were entitled to a higher graded incentive if the sales from 1st May, 1981 to 30th June, 1981 were added to the sales already made up to 30th April, 1981. In other words, a graded incentive was stipulated under the scheme as extended up to 30th June, 1981.
4. In terms of the scheme, as extended, the Assessee incurred a liability of Rs. 1,40,541/- and according to the Assessee this amount was liable to be adjusted in the Assessment Year 1983-84. The basis on which the Assessee had claimed this deduction for that year was that the liability had accrued and crystilised only on 30th June, 1981 when the Assessee came to know the actual sales made by its dealers.
5. On the other hand, the view taken by the Revenue was that since the Assessee was maintaining its accounts on a mercantile basis, the liability had accrued earlier and only the quantification of the incentive was postponed.
6. In our opinion, the Assessee has been able to make out a case in its favor particularly in view of the judgment of Gujarat High Court in Saurashtra Cement and Chemical Industries Ltd. v. Commissioner of Income Tax .
7. Before we actually go into the decision, we may note that two situations arise: The first situation is that the liability arises on one date but gets crystallized on a later date (30th June, 1981 in this case). It is submitted by learned Counsel for the Assessee that crystallization of the liability on a future date would necessarily relate back to the earlier period but the entitlement to a deduction would have reference to the date on which the liability gets crystallized. The second situation, which has been canvassed by learned Counsel for the Revenue, is where the liability is actually crystallized on an earlier date but it may be quantified on a future date.
8. In our opinion, the case of the Assessee falls in the first category and not in the second category.
9. In Saurashtra Cement and Chemical Industries Ltd., the Gujarat High Court noted as follows:
...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 was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that 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....
10. In so far as the present case is concerned, the liability to pay incentive to the dealers up to 30th April, 1981 cannot be disputed. However, the payment of additional incentive, on a graded scale and relating back to the pre- 30th April, 1981 period would depend upon the sales made by the dealers from 1st May, 1981 to 30th June, 1981. This additional incentive would actually crystallize only on 30th June, 1981 when the Assessee is informed of the actual sales made by the dealers.
11. The decision of the Supreme Court relied upon by learned Counsel for the Revenue in Bharat Earth Movers v. Commissioner of Income Tax relates to a completely opposite situation. In that case the Supreme Court observed as follows:
The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.
12. The law laid down by the Supreme Court in Bharat Earth Movers would not applicable to the facts of the present case as in that case the liability had accrued on an earlier date. In the present case it is possible that a dealer may not have any sale at all from 1st May, 1981 to 30th June, 1981 with the result that he would not be entitled to any additional incentive. However, if sales were made, then the additional incentive would be given on a graded scale and therefore the additional liability on the Assessee would only be known with any degree of certainty only on 30th June, 1981 and not earlier.
13. We may also note that in E.D. Sassoon and Company Ltd. and Ors. v. Commissioner of Income Tax, Bombay City the Supreme Court has observed as under:
...Income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody....
14. Applying this principle, in so far as the dealers of the Assessee are concerned, they would not have acquired a right to get additional incentive in the sense that the Assessee would not have known till 30th June, 1981 how much incentive the dealers had earned. On the other hand, in so far as the dealers are concerned, their entitlement would be known only when the sales were actually ascertained and determined and that was possible only on 30th June, 1981 and not on a date prior to that.
15. Learned Counsel for the Revenue sought to place reliance on Rattan Chand Kapoor v. Additional Commissioner of Income Tax, Delhi-II particularly on the follow passage:
We are of the view that a liability which is settled before the assessment is over can be appropriated to the relevant year in accordance with the Supreme Court's judgment, but if the liability is raised, say, ten years later as appears to be the case here, then it cannot be appropriated to that year and has to be claimed at a later date or not at all. The mercantile system of accounting visualizes entries being made in the account books and claims being made in respect thereof when the income has either accrued or is receivable and similarly an expense has to be entered when the obligation arises or the liability to pay arises. The entries are made in anticipation of actual payments.
16. The contention of learned Counsel for the Revenue is that the Assessee could have made a provision in its account books for the additional incentive and having failed to do so, it cannot claim the benefit in the subsequent assessment year. The argument of learned Counsel naturally proceeds on the basis that the liability had accrued on an earlier date which, as we have held, is not so. The liability had accrued on 30th June, 1981 and therefore no provision could have been made for the liability on an earlier date. Therefore, we are unable to apply the principle laid down in Rattan Chand.
17. Finally, we may only mention what has been articulated by the Bombay High Court in Commissioner of Income Tax, Delhi, Ajmer, Rajasthan and Madhya Pradesh v. Nagri Mills Co. Ltd. as follows:
We have often wondered why the Income tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.
18. In the reference that is before us there is no doubt that the Assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the Assessment Year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expend so much time and energy only to determine the year of taxability of the amount.
19. Be that as it may, we answer the question in the negative, in favor of the Assessee and against the Revenue.
20. The remaining question that requires to be considered, though on a different topic, is as follows:
Whether on the facts and in the circumstances of the case the Tribunal was right in law in allowing by way of revenue expenditure the payment of royalty to foreign collaborators....
21. A similar issue had arisen in ITR No. 70-71/1988 relevant to the Assessment Year 1981-82 in respect of an agreement entered into between the Assessee and M/s Riken Piston Ring Ind. Co. Ltd. of Japan (for short Riken). In so far the present question is concerned, the agreement between the Assessee and Riken is the same. In addition, we are also required to consider the terms of an agreement entered into between the Assessee and M/s Karl Smidth of West Germany.
22. It has been submitted by learned Counsel for the parties that the Assessing Officer had decided in favor of the Assessee in respect of a similar agreement entered into by the Assessee with Riken and M/s Karl Smidth of West Germany. We may also add that the same agreement in respect of Riken was considered by us in ITR No. 70-71/1988 relevant to the Assessment Year 1981-82 and in that decision which we rendered on 29th April, 2008 we had came to the conclusion that the agreement was merely an agreement for the right to use the technical knowhow.
23. In the present case, the agreement between the Assessee and M/s Karl Smidth of West Germany is similar to the agreement between the Assessee and Riken. Following the decision rendered in ITR Nos. 70-71/1988 and taking note of the fact that the Assessing Officer has already decided in favor of Assessee on the same agreement and the same issue, we answer the question referred to us in the affirmative and in favor of the Assesse and against the Revenue.
24. The reference is disposed of.