Income Tax Appellate Tribunal - Madras
Income-Tax Officer vs South India Viscose Ltd. on 13 January, 1988
Equivalent citations: [1988]27ITD501(MAD)
ORDER
D.S. Meenakshisundaram, Judicial Member
1. This appeal by the revenue arises out of the income-tax assessment of M/s. South India Viscose Ltd., the assessee herein. The assessment year is 1981-82, for which the previous year ended on 31-3-1981. The assessee is a Public Limited Company carrying on business in the manufacture and sale of Woodpulp and Viscose Yarn from Bluegum wood, etc. The revenue has raised as many as 21 grounds in its grounds of appeal which may be classified under the following 8 heads:
(i) Interest on deferred payment
(ii) Interest paid and Guarantee Commission
(iii) Incentive Bonus
(iv) Medical Reimbursement for the purpose of disallowance under Section. 40A(5)
(v) Extra Shift Allowance
(vi) Malaysian Project Expenditure
(vii) Forest Lease Demand
(viii)Deduction under Section 80J in respect of Pulp Unit.
2. We have heard Shri K.R. Ramamani and Shri Janardhanaraja, the learned counsels for the assessee and Shri B.C. Mohanthy, the learned Departmental Representative and carefully considered their submissions in the light of the materials placed before us.
3 to 19. [These paras are not reproduced here as they involve minor issues.]
20. The next objection of the revenue in this appeal is to the decision of the Commissioner (Appeals) directing the Income-tax Officer to allow the two amounts of Rs. 26,82,365 and Rs. 27,30,734 as admissible deductions in the computation of the assessee's business income for the year under appeal. This objection of the revenue is contained in ground Nos. 7 to 11 of the grounds of appeal before the Appellate Tribunal.
21. The assessee had claimed a sum of Rs. 43,38,034 as Bonus Payment, out of which the Income-tax Officer allowed only a sum of Rs. 16,07,300 on the basis of what he called the bonus formula, which was also subject to rectification according to the Income-tax Officer. He did not accept the assessee's claim for deduction of the incentive payment of Rs. 26,82,365 and the further amount of Rs. 27,30,734 as bonus; in terms of settlements entered into by the assessee-company with the Employees' Union on 22-10-1980 before the Dy. Commissioner of Labour, Coimbatore under Section 12(3) of the Industrial Disputes Act, 1947.
22. When the matter went before the Commissioner of Income-tax (Appeals), he examined the assessee's claim with reference to the agreements signed by the company with its Employees' Union on 22-10-1980 and held that the payment of incentive of Rs. 26,82,365 was not covered by the Payment of Bonus Act and was, therefore, clearly allowable as a deduction under Section 37 of the Income-tax Act. As regards the sum of Rs. 27,30,734 the Commissioner held that this amount formed an integral part of a total claim of Rs. 43,38,034 being bonus of 20 per cent paid for the previous year in terms of the settlement dated 22-10-1980, that to describe this payment of bonus as ex gratia would be a travesty of fact, that a dispute existed and had to be solved, could not be doubted and that in fact the assessee's business suffered a serious setback due to a prolonged strike. As regards the quantum of allowable bonus based on the calculation made under the Bonus Act, the Commissioner held that the standard laid down was not an unalterable one. He pointed out that even Section 22 of the Payment of Bonus Act referred to the possibility of a dispute between the employer and his employees with respect to the bonus payable under the enactment, that when such industrial dispute had to be referred to investigation and settlement under the Industrial Disputes Act, 1947 and that the provisions of that Act would apply to that issue. The Commissioner held that under Section. 18 of the Industrial Disputes Act, 1947, it was obligatory on the parties to honour an agreement arrived at under Section 12 of that Act and that in addition to the above, Section 34 of the Bonus Act did not preclude the parties from entering into a separate agreement for grant of bonus which would then prevail over the provisions of the Act, subject to the condition that the bonus could not exceed a maximum of 20 per cent. The Commissioner pointed out that such a limit had been observed in the present case. He, therefore, held that the assessee's claim for the deduction of a further sum of Rs, 27,30,734 was justified and accordingly allowed the assessee's claim. The Revenue challenges this decision of the Commissioner of Income-tax (Appeals) before us.
23. Before us, Shri B.C. Mohanthy, the learned Departmental Representative submitted that the Commissioner (Appeals) erred in allowing the assessee's claim for deduction of these two amounts, as there was no Allocable Surplus in the year under appeal. He relied on the recent decision of the Kerala High Court in the case of CIT v. P. Alikunju, M.A. Nasir, Cashew Industries [1987] 166 ITR 611 and submitted that this decision had considered payments of bonus which were not covered by the Payment of Bonus Act and held that such payments would be covered by the second proviso to Section 37(l)(ii) of the Income-tax Act, 1961. The learned Departmental Representative submitted that the agreement at pages 89 to 91 of the assessee's Paper Book entered into on 22-10-1980 clearly showed that though it was termed as an incentive bonus, it was actually productivity bonus and would, therefore, be covered by Section 31A of the Payment of Bonus Act He then referred to Section 34 of the Bonus Act which was introduced with effect from 25-9-1975 and contended that all contracts or awards would be subject to the Payment of Bonus Act. Shri Mohanthy argued that Section 31A stood apart as it was excluded by Section 34, since the said payment was in lieu of normal bonus. He contended that it was not open to the assessee to claim normal bonus and also productivity bonus as deductions admissible under the Payment of Bonus Act. He argued that in the present case, the assessee had claimed two payments of bonus to its employees, that if the incentive bonus of 12 per cent was allowable under Section 31A of the Bonus Act, the further payment of 20 per cent bonus amounting to Rs. 27,30,734 would be hit by Section 34 read with Section 17 of the Bonus Act. In short, the Revenue's contention is that the assessee was not entitled to claim both the amounts as deductions in the computation of its business income. He, therefore, argued that the decision of the Commissioner (Appeals) allowing both the amounts as an admissible deduction was erroneous. He further submitted that the decision of the Madras High Court in the case of CIT v. Sivanandha Mills Ltd. [1935] 153 ITR 623 relied on by the Commissioner (Appeals) was the subject-matter of further appeal pending before the Supreme Court and that the said decision had not become final.
24. Shri K.R. Ramamani, the learned counsel for the assessee filed before us a statement showing the various amounts paid by the assessee to its employees during the year under appeal as incentive payment and bonus under the two agreements entered into by the assessee-company on 22-10-1980 copies of which were available at pages 86 to 91 of the assessee's Paper Book. The learned counsel accepted the factual position that the allocable surplus for this year was nil as pointed out by the learned Departmental Representative. The learned counsel, however, contended that the decisions of the Commissioner (Appeals) allowing these two payments were based on sound principles contained under the Payment of Bonus Act as well as the decision of the Madras High Court in the case of Sivanandha Mills Ltd. (supra) which is specifically referred to by the Commissioner of Income-tax (Appeals) to allow the assessee's claim for incentive payment of Rs. 26,82,365. The learned counsel further relied on the circular issued by the Central Board of Direct Taxes which is published in 152 ITR (St.) 204 and submitted that this circular was only clarificatory of the correct legal position and that the payment of bonus of 20 per cent was strictly in conformity and within the limits prescribed by the Payment of Bonus Act and is, therefore, admissible under the first proviso to Section 36(l)(ii) of the Income-tax Act, 1961 as stated in this circular. The learned counsel pointed out that the earlier circular of the Board dated 4-12-1980 is published at page 1544 of Vol. 2 of Sampath Iyengar's Law of Income-tax (7th Edn.). Shri K.R. Ramamani argued that the assessee was entitled to the deduction of both these payments made to its employees under valid agreements entered into with them under the provisions of the Industrial Disputes Act and that the Commissioner (Appeals) had rightly allowed the same, and that no interference was called for with this decision. He further submitted that the decision of the Kerala High Court relied on by the learned Departmental Representative was inapplicable to the facts of the present case as it related to bonus allowable under the second proviso to Section 36(l)(ii) of the Act whereas the assessee's claim for bonus under the Payment of Bonus Act was admissible under the first proviso to Section 36(l)(ii), while the assessee's claim for deduction of incentive bonus was allowable under Section. 37(1) of the Income-tax Act as held by the Madras High Court in the case of Sivanandha Mills Ltd. (supra).
25. We have perused the terms of agreements dated 22-10-1980 entered into by the assessee with its employees under Section 12(3) of the Industrial Disputes Act, 1947, copies of which are available at pages 86 to 91 of the assessee's Paper Book. The first agreement at pages 86 to 88 relates to payment of bonus amounting to Rs. 27,30,734. This agreement shows that the Union had raised a demand for bonus for the accounting year ended 31-3-1980 and that the said demand was taken up for consideration by the Dy. Commissioner of Labour, Coimbatore and that a settlement was reached between the parties in the course of the conciliation proceedings held on 20-10-1980. As per this agreement, the management had to pay their workmen bonus equivalent to 20 per cent of their salary or wages as defined in Section 2(27) of the Payment of Bonus Act, 1965 earned during the period 1-1-1979 to 31-3-1980 in full and final settlement of the claim of the workmen on the profits of the year. Clause 2 provides that the payment of bonus was subject to the provisions of the Payment of Bonus Act, while Clause 3 provides that the said payment of bonus shall be made on 25-10-1980. In view of the aforesaid specific terms contained in this agreement, it is clear that the amount of Rs. 27,30,734 paid by the assessee represents bonus paid by the assessee-company under the Payment of Bonus Act, 1965 and, therefore, it would be allowable under the first proviso to Section 36(l)(ii) of the Act. The Commissioner (Appeals) was, therefore, right in allowing this claim of the assessee. This is also supported by the latest circular of the Central Board of Direct Taxes issued in Circular No. 414 dated 14-3-1985 published in 152 1TR (St.) 204. There is no dispute that this bonus is within the limits prescribed under the Payment of Bonus Act, 1965. Therefore, the Commissioner (A) was right in allowing this amount as an admissible deduction in the computation of the asaessee's business income for this year.
26. The other amount of Rs. 26,82,365 was paid as incentive bonus under the second agreement dated 22-10-1980, a copy of which is available at pages 89 to 91 of the assessee's Paper Book. We set out below the terms of settlement arrived at between the parties in this agreement for facility of reference:
Terms of settlement:
1. It is agreed that in consideration of the co-operation and unstinted efforts of the workmen, by which higher production has been made possible in the first two quarters of the yea.r 1980-81, the management agree to pay an incentive bonus equivalent to 12 per cent of the annual wages earned during the period from 1-1-1979 to 31-3-1980.
2. The payment shall be made on 10-11-1980.
3. In view of the payment, workmen assure their continued cooperation for maintaining high production.
27. A perusal of the aforesaid settlement shows that the payment was made as an incentive to the workmen to put in better efforts to ensure higher production. This payment was not made under the Payment of Bonus Act, though it is called an incentive bonus. In our view, this payment would be squarely covered by the decision of the Madras High Court in Sivanandha Mills Ltd.'s case (supra) which is relied on by the Commissioner of Income-tax (A) in his order. This decision, which is in Sivanandha Mills Ltd.'s case (supra) specifically refers to incentive bonus and holds that the Bonus Act has no application to incentive bonus and that, therefore, the said payment of incentive bonus is allowable under Section 37 of the Income-tax Act.
28. Recently, their Lordships of the Madras High Court accepted the finding of the Appellate Tribunal in the case of CIT v. Srivilliputhur Co-operative Mills Ltd. [Tax Case Petition Nos. 453 and 454 of 1986, dated 29-1-1987] that the payment of amount in addition to the bonus prescribed under the Payment of Bonus Act was in the nature of ex gratia payment and will not partake the nature of bonus and was, therefore, not hit by the ceiling prescribed under the first proviso to Section 36(l)(ii) of the Income-tax Act, 1961, having regard to the decision of the Supreme Court in Sasson J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261. Their Lordships held that the settlement between the employer and the Union specifically provided in respect of 3 per cent additional amount which has been paid to be in consideration of cordial and smooth working of the mills in the relevant year, that it was, therefore, not a payment linked with profit and was out of commercial expediency and that the expenditure in the form of such a payment was clearly incurred wholly and exclusively for the purpose of the business of the assessee. Their Lordships, therefore, held that in view of the aforesaid decision of the Supreme Court the question of law sought to be raised by the Commissioner did not really arise and, therefore, rejected the petitions of the Commissioner under Section. 256(2) of the Act. The ratio of this latest ruling of their Lordships of the Madras High Court is also applicable to the facts of the present case as the terms of settlement, which are quoted in para 26 supra, would show that this payment of incentive bonus was in consideration of the co-operation and unstinted efforts of the workmen by which higher production was made possible in the first two quarters of the year 1980-81 and also to assure the continued co-operation of the workmen for maintaining high production. Thus, the expenditure was in the nature of ex gratia payment and did not partake of the nature of bonus so as to be hit by the ceiling prescribed under the first proviso to Section 36(l)(ii) of the Act. On the contrary, this payment of incentive bonus is an expenditure incurred by the assessee wholly and exclusively for the purpose of the business out of commercial expediency and it was not linked with the profits. Respectfully following these two decisions of the Madras High Court, we hold that this amount of Rs. 26,82,365 was rightly allowed by the Commissioner (A) under Section. 37(1) of the Act. In the view we have taken in the light of these two decisions of the Madras High Court which are in favour of the assessee, it is not necessary for us to examine the decision of the, Kerala High Court in the case of P. Alikunju, M.A. Nazir, Cashew Industries (supra) relied on by the Revenue. We, therefore, confirm the order of the Commissioner of Income-tax (A) on this point and reject these grounds.
28A. The next item in dispute is the sum of Rs. 70,23,923 which has been allowed by the Commissioner (Appeals) under the head "Forest Lease Demand". In the course of the assessment proceedings, the assessee claimed before the Income-tax Officer that it has received a demand for the sum of Rs. 1,41,00,637 as lease arrears due to the Forest Department on account of enhancement of price for pulpwood, etc., from the Chief Controller of Forests on 23-4-1982 and that the sum of Rs. 70,23,923 out of this demand related to the year under appeal and that, therefore, the same should be allowed as a deduction in the computation of its business income. The Income-tax Officer disallowed the assessee's claim for the reason that the prices of wood seldom changed, that the determination of price had been challenged by the Company by filing a petition in the Court, that the order of the Government was made only on 23-4-1982, a date much later than the close of the accounting year and finally on the ground that the Annual General Body before whom the accounts of the current year were placed on 24-8-1981 had not been apprised of the increase in prices and that, therefore, the claim could not be considered for adjudication in the year under appeal. He, therefore, disallowed the assessee's claim for this deduction.
29. The Commissioner of Income-tax (Appeals), however, did not agree with the Income-tax Officer's conclusions. He held that the absence of a provision in the accounts of the Company for the year ended 31-3-1981, placed before the General Body on 24-8-1981 for adoption could hardly be relevant as the accounts were adopted in the Annual General Body Meeting of the Company before the final determination of the purchase price by the Government. He also held that except for the fact that the price had remained tentative in the year, the assessee-Company did not have any knowledge of the exact quantum of the upward revision that the prices would suffer and that, therefore, the issue whether the accounts placed before the General Body did or did not contain any notation about the payment of enhanced price was totally irrelevant for decision in an income-tax case, where the matter on issue was, whether the liability to pay the additional price had arisen and had to be considered in the year or not. After referring to the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and of the Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495 which was approved by the Supreme Court, the Commissioner of Income-tax (Appeals) held that the absence of entries in the books of account would not jeopardise the allowance of the assessee's claim. He also disagreed with the view of the Inspecting Asstt. Commissioner that the decision of the Supreme Court would be applicable only to a case of statutory liability and not a case of contractual liability. The Commissioner (Appeals) relied on a passage at page 1150 of Sampath Iyengar's Law of Income-tax (7th edn.) and held that a host of decisions of the High Courts supported the view that where statutorily the purchase price of a commodity was fixed/ determined and where an additional price was called upon to be paid by the user of the raw-material, the increased quantum of liability would be deducted in the year for which the liability arose. Applying the aforesaid principles to the facts of the present case, the Commissioner held that the supplier of the raw-material was the Government of Tamil Nadu, that no other source of raw-material was available to the assessee in view of the vast quantities of the wood that it requires, that the Government of Tamil Nadu had only indicated a tentative price as was evident from its order and that such a price was bound to be finally fixed. The Commissioner held that since that liability was a liability of the year in which the supplies were made, the additional payment had to be recognised for that year, though the final determination that price may be postponed to a subsequent date. For this view, he derived considerable support from the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) and further held that there need be no entries in the books of account in the year in which the liability is claimed as a deduction. In this view of the matter, the Commissioner (Appeals) allowed the assessee's claim for the deduction of Rs. 70,23,923. This is being objected to by the Revenue in ground Nos. 18 and 19.
30. Before us, Shri B.C. Mohanthy, the learned Departmental Representative relied on para 8 of the assessment order and pointed out that the demand from the Chief Conservator of Forests for the lease arrears of Rs. 1,41,00,637 was received by the assessee only on 23-4-1982 out of which Rs. 70,23,923 related to this year. He then referred us to the directions given by the Inspecting Asstt. Commissioner wherein he had stated that this amount became an ascertained liability only on 23-4-1982 and that the assessee's claim for deduction of this amount was rightly disallowed by the Income-tax Officer. The learned Departmental Representative referred us to the letter of the Chief Conservator of Forests to the assessee for the supply of wood to be made to the assessee in 1980-81 at page 6 of the Paper Book and pointed out that provisional rates were fixed in this letter and that para 3 of this letter showed that there was no accrued liability to the assessee till the. revision was made by the Government, Shri Mohanthy contended that till such a revision was made by the Government, it would be only a contingent liability and would arise only when the Government enhanced the rate. In this connection Shri Mohanthy relied on the, decision of the Madras High Court in the case of Pope the King Match Factory (supra) where a distinction between contingent liability and enforceable legal liability was pointed out and submitted that in the case of the present assessee the liability was tentative, provisional and unascertained as on the last date of the accounting year, i.e., 31-3-1981 and hence there was no enforceable legal liability which had arisen or accrued in the year of account which would entitle the assessee to claim the deduction. In support of his submission, Shri Mohanthy relied on the decision of the Supreme Court in the case of CIT v. A. Gajapathy Naidu [1964] 53 ITR 114. He further referred to the decision of the Delhi High Court in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 as well as the decision of the Calcutta High Court in the case of Shalimar Chemical Works (P.) Ltd. v. CIT [1987] 34 Taxman 298 and contended that the assessee's claim for deduction was for a liability not in praesenti but only in futuro and that, therefore, it was not admissible. He, further, relied on the last para of the judgment of the Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC) and submitted that in the preaent case, there was no existing liability on the part of the assessee to pay these arrears in the year of account and that it was a case of inchoate and contingent liability which was not admissible in law. Shri Mohanthy contended that the present case was more akin to the case of A. Gajapathy Naidu (supra), on facts. He, therefore, argued that the Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for deduction in the year under appeal.
31. The learned counsel for the assessee, Shri K.R. Ramamani submitted that the Government order dated 12-3-1980 as well as the later order dated 23-4-1982 conclusively established that the supply of raw-materials to the assessee had taken place during the year under appeal and that the said raw-materials had been utilised by the assessee in the manufacture of its products in the year under appeal. The learned counsel submitted that the liability on the part of the assessee to pay the price for the raw-materials purchased by it from the State Government of Tamil Nadu had arisen or accrued immediately after the raw-materials are supplied to the assessee during the year under appeal. He argued that only the quantification of the price for the raw-materials supplied, was postponed. He pointed out that the Government had fixed tentative prices subject to the fixation of the final prices at a later date. The learned counsel further relied on para 3 of the letter dated 12-3-1980 which was also relied on by the Revenue and contended that this paragraph fixed the liability of the assessee to pay the additional price that may be finally fixed by the Government as per the undertaking given by the assessee even before the supply of the raw-materials started, that, therefore, there was an enforceable legal liability on the part of the assessee to pay this amount, the moment the goods were supplied to the assessee by the State Government of Tamil Nadu and hence the assessee had rightly claimed this amount as a deduction in the computation of its business income for the year under appeal. The learned counsel submitted that neither the absence of entries in the books of account nor the absence of approval of the Board of Directors would be decisive of the issue, regarding the admissibility of the assessee's claim for deduction. The learned counsel further submitted that as the assessment was not completed but was still open, when the assessee received the demand for this additional price from the Chief Conservator of Forests on 21-4-1982, the assessee was entitled to this deduction on the authority of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). The learned counsel submitted that the allowance of the assessee's claim for deduction by the Commissioner of Income-tax (Appeals) was strictly in accordance with the ratio of the said decision as well as the principles and practice of accountancy and brought to charge the true income of the assessee for the year under appeal. The learned counsel further submitted that the decision of the Supreme Court in Hindustan Housing & Land Development Trust Ltd.'s case (supra) at 530 would rather support the assessee's case rather than the Department's case. He further submitted that the assessee's claim was not for the deduction of any contingent or unascertained or provisional liability but for an ascertained liability which was enforceable at law as per the undertaking given by the assessee in terms of the letter dated 12-3-1980 before the supply of the raw-material started in the year under appeal. In support of his submissions the learned counsel relied on the decision of the Gujarat High Court in the case of Nagri Mills Co. Ltd. v. CIT [1981] 131 ITR 257 and further relied on the passage appearing in para 7(b) on page 1187 of Vol. 2 of Sampath Iyengar's Law of Income-tax (7th edn.). The learned counsel finally submitted that the decision in A. Gajapathy Naidu's case (supra) also supported the assessee's contentions in the present appeal as the assessee's legal liability to pay the amount in question had arisen in the year under appeal, when it executed the undertaking even before the supply of raw-materials began in terms of the letter of the Chief Conservator of Forests on 12-3-1980. He, therefore, submitted that the decision of the Commissioner of Income-tax (Appeals) on this point was correct and that the same should be upheld.
32. The Commissioner of Income-tax (Appeals) has quoted the relevant portion of the Government order in GO MS No. 482 dated 21-4-1982 in the body of his order under which the assesses had to pay this additional price of Rs. 70,23,923 to the Government of Tamil Nadu. It is with reference to the terms of this Government Order that the Commissioner had held that there was an ascertained liability on the part of the assessee to pay this amount during the year of account and that, therefore, it would be an allowable deduction in the computation of the assessee's income for this year in accordance with the mercantile system of accounting followed by the assessee and on the authority of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). The Commissioner of Income-tax (Appeals) has also referred to the fact that the prices for supply of wood to the assessee were tentatively fixed by the Government on the basis of the rates fixed for 1979-80. The learned counsel placed before us a copy of the Government Order dated 12-3-1980 under which an ad hoc allotment of pulpwood was made by the Government of Tamil Nadu to the assessee-company pending fixation of the rate for the supply of the same. After setting out the quantity of pulpwood allotted to the assessee-company in each of the five Divisions specified in the order, para 3 of this letter which is relevant for our purpose and which fixed the provisional rates for the wood supplied, is quoted below for facility of reference:
3. Provisionally a rate of Rs. 150 (Rupees one hundred and fifty only) per tonne of Bluegum, Rs. 135 (Rupees one hundred and thirty-five only) per tonne of Eucalyptus Grandis wood should be collected from the company. Administrative charges at the provisional rate of 5 (five) per cent the cost of wood also should be collected from the Company. Before execution of the agreement, the Company will have to give an undertaking to the concerned District Forest Officers that they will pay the difference in the rates of the cost of wood and Administrative charges if a higher rate is fixed by the Government for 1980-81 allotment, immediately on demand. The detailed instructions issued in this office Circular No. 29/79 dated 12-7-1979 as amplified in this office ref. S/545/78 dated 4-3-1980 should be followed scrupulously.
It would be noticed from the aforesaid paragraph 3 that the assessee-company has to give an undertaking to the concerned District Forest Officers before the execution of the agreement to the effect that the assessee-company would pay the difference in the rates of the cost of the wood and administrative charges, if a higher rate is fixed by the Government for 1980-81 allotment, immediately on demand. We may mention here that in the Government Order GO MS No. 336 dated 24-3-1981 which relates to the allotment for 1981-82 the Government of Tamil Nadu had fixed the revised tentative rates for the pulpwood supplied for that season and para 2(ii) of this GO contains the following direction regarding a similar undertaking:
2. The ad hoc allotment ordered in para 1 above is subject to the following conditions:
(i) The Company should execute fresh agreements in the prescribed format on stamped paper with the District Forest Officer/Wild Life Warden concerned for the supply of Pulp Wood.
(ii) The Company should give an undertaking on stamped paper in the prescribed format agreeing to pay whatever price that is finally fixed for the supply of pulpwood from 1-4-1981.
[Emphasis supplied] It is in pursuance of these orders that the assessee got supplies of pulpwood which are the raw-materials for its factory from the Government of Tamil Nadu after executing the undertaking specified in the 2nd Government order referred to above and also the agreement subsequently executed as per the said Govt. orders. Thus, the liability of the assessee to pay the price that may be finally fixed by the Government of Tamil Nadu for the pulpwood supplied by them under these Government orders is already fixed under these Government orders and has arisen on the execution of the undertaking and the agreement by the assessee-company in favour of the Government of Tamil Nadu. Otherwise the assessee would not get the supply of raw-materials in accordance with these Government orders. Government Order No. MS 488 dated 21-4-1982 fixes the final price for the pulpwood supplied to the assessee during the years 1980-81 and 1981-82. This GO further fixes the tentative price for the wood supplied to the assessee during 1982-83 as would be evident from para 4 of this GO. Further para 5 also requires similar undertaking from the assessee on stamped paper in the prescribed form agreeing to pay whatever price that is finally fixed for the supply of wood from 1-4-1982. There is no dispute before us about the fact that this demand had been raised by the Government for this additional price for the raw-materials supplied by them during the year 1980-81 which is relevant for the assessment year 1981-82. There is also no dispute that the assessee has to pay this demand for additional price as fixed by the State Government in accordance with the undertaking given by it to the Government.
33. On the above facts, the argument on behalf of the Revenue is that the demand raised by the State Government was purely a contingent one as the assessee had filed a writ petition before the High Court. However, the Commissioner (Appeals) has clarified that the assessee did not file any writ petition challenging the Government's order but had only made representations to the State Government itself, against the final prices fixed by them but the said representations were not successful. This factual position is now accepted by both sides.
34. We are unable to agree with the Revenue that there was no liability on the part of the assessee to pay this additional price which was finally demanded by the Government by their order dated 21-4-1982 and that it was only tentative, provisional, contingent and unascertained as on the last date of the accounting year and that consequently there was no enforceable legal liability that had arisen or accrued in the year of account. We may mention here that there is no dispute before us about the tentative rates of prices that were fixed by the Government by their order dated 12-3-1980 as it has been allowed by the department itself as the cost of the raw-materials. The dispute is only in regard to the additional price which the assessee is called upon to pay to the Government consequent to the order dated 21-4-1982. In our view, the liability on the part of the assessee to pay the additional price was fixed once and for all on 12-3-1980 itself, or at any rate on the execution of the undertaking and the agreement by the assessee in favour of the Government of Tamil Nadu agreeing to pay the additional price that may be finally fixed for 1980-81 allotment immediately on demand by the Government. Only its quantification had been postponed till the fixation of the final price. When once the final price is fixed by the Government of Tamil Nadu and demanded from the assessee, the assessee is bound to pay the same. It is the balance of the price or cost for the raw-materials supplied to the assessee by the State Government and it is payable by the assessee in terms of its undertaking to the Government. Thus, there is a legally enforceable liability on the part of the assessee to pay this additional price of the raw-materials received by it during the previous year, the moment the State Government fixed the final price and raised the demand. The last two acts on the part of the State Government, namely fixing the final price and raising an additional demand against the assessee are only parts of the process of quantification of the liability of the assessee for the balance of the price.
35. In CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134, the Supreme Court held that an employer who follows the mercantile system of accounting creates a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication, that the system of reopening of the accounts does not fit into the scheme of the Income-tax Act, that as far as the receipts are concerned, there can be no reopening of accounts and that the position is the same in respect of the expenses. Their Lordships followed their earlier decision in the case of A. Gajapathy Naidu (supra). In our view this decision of the Supreme Court is directly applicable to the facts of the present case.
36. The other decisions cited at the Bar by both sides related to assessment of amounts received by an assesses as income in his hands and, therefore, are not apposite. The following passage appearing at page 1187 of Sampath Iyengar's Law of Income-tax (7th edn.), Vol. 2 which was cited on behalf of the assessee throws considerable light on the point at issue:
(b) IF LIABILITY HAS ACCRUED QUANTIFICATION IN ACCOUNT YEAR IMMATERIAL:
When a liability has accrued and has become a liability in praesenti, the circumstance that it has not been ascertained in the accounting year, is immaterial. An estimate may be made of the accrued liability and such estimated sum be deducted from the profits and gains of the business in order to ascertain the net profits of the year. Any difficulty in estimating would not convert the accrued liability into a conditional one, dependent upon the actual incurring of the expenditure.
The decision of the Supreme Court in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 is relied on and also discussed in great detail on the same page in support of the abovesaid proposition. Again, on the same page it is stated as follows:
Normally, an assessee maintaining his books according to the mercantile system of accounting should value or quantify at least provisionally the amount of the liability and debit it in the books for claiming a deduction, though where the existence of the liability is clear, the failure to make an entry in the books would not be fatal to the claim.
The learned author has relied on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) in support of this.
37. In CIT v. India Cements Ltd. [1975] 98 ITR 69 it was held by their Lordships of the Madras High Court that as the Managing Agency agreement provided for remuneration on the basis of the net profits after allowing depreciation in accordance with the Income-tax Act and the Rules, any payment in excess of an agreement, cannot be considered as one spent for the purpose of the business and hence, the amount paid was not an allowable deduction under Section. 10(2)(xv) of the Indian Income-tax Act, 1922. In the said case there was a payment of Rs. 73,272 by way of managing agency remuneration as a result of higher depreciation being available to the managed company by amendment of law retrospectively. While answering the question referred to them in the negative, in favour of the Revenue and against the assesses, their Lordships held as follows at pages 72 and 73 of the reports:
When once a rule is made to take effect retrospectively from an anterior period, we have to imagine that the amended rule had always been in existence even from the anterior date. This is a well established proposition and needs no further elucidation. If that be so, the calculation made by the assessee on the basis of the unamended rule is incorrect and the payment made to the managing agents an over-payment. It is not in dispute that if the managing agent's remuneration will have to be calculated on the basis of the amended rule, the sum of Rs. 73,272 now in question would be an amount not paid in accordance with the agreement. By calculating the depreciation allowance at a smaller figure than that provided under the amended rule, the net profits had been arrived at at a higher figure thereby resulting in over-payment to the managing agents. Since the managing agency agreement only provides for 10 per cent of the net profits as allowable under the provisions of the Income-tax Act and the Rules, any payment in excess of that agreement, in our opinion, cannot be considered as one spent for the purpose of the business,
38. Applying the aforesaid principles to the facts of the present case, it is clear that there was a liability on the part of the assessee to pay this additional price as fixed by the State Government, that the said liability had accrued or arisen to the assessee during the accounting year relevant for the assessment year 1981-82 in pursuance of the undertaking given by the assessee to the Government of Tamil Nadu in terms of its order dated 12-3-1980 and that only the quantification of this additional price was postponed till the Government passed its final orders fixing the final price in GO MS No. 488 dated 21-1-1982. As the assessee's assessment was not completed and as the liability for payment of this additional price had been finally ascertained by the demand made by the Company by their letter dated 21-4-1982, it has become an ascertained liability and the assessee is entitled to claim the same in the year of account in accordance with the mercantile system of accounting which was regularly employed by the assessee. The absence of any entries in the books of account would be of no consequence or decisive on this issue. The demand for the additional amount of Rs. 70,23,923 by the Government of Tamil Nadu on the fixation of the final price, is neither a contingent demand nor a tentative demand but it is a final demand and an ascertained liability which has been quantified by the Government of Tamil Nadu on 21-4-1982. Therefore, the assessee is entitled to claim this amount as a deduction in the year of account in the computation of its business income. The demand raised by the Government is an enforceable demand at law, in view of the undertaking given by the assessee even before the supply of raw-material commenced during the accounting year. We, therefore, hold that the Commissioner (Appeals) was right in accepting the assessee's claim for deduction of this amount in the year of account. We accordingly confirm his order on this point and reject these grounds.
39. In the result, the appeal is treated as allowed in part for statistical purposes.