Delhi High Court
The Commissioner Of Income-Tax ... vs Dalmia Dadri Cement Ltd. on 3 February, 1992
Equivalent citations: 47(1992)DLT623, [1992]195ITR290(DELHI)
Author: D.K. Jain
Bench: D.P. Wadhwa, D.K. Jain
JUDGMENT D.K. Jain, J.
(1) In these two references (wrongly numbered as three references) under Section 256(1) of the Income-tax Act, 1961 (for short 'the Act'), at the instance of the Revenue, for the assessment years 1967-68 and 1968-69 the following questions of law have been referred for the opinion of this Court:-
1."Whether on the facts and in the circumstances of the- case the assessed is entitled to a deduction of the amounts of freight advantage payable by it to Caco as accrued and ascertained liability in respect of the previous years in question ."
2."Whether on the facts and in the circumstances of the case the assessed is entitled to a deduction in respect of its liability for the payment of gratuity to its employees and if so what is the basis on which such deduction could be permitted."
(2) Since, common questions of law arising out of identical facts are involved in both the references, these are being disposed of by a common judgment.
(3) During the relevant previous years, ending calendar years 1966 and 1967, the assessed was engaged in the business of manufacture and sale of cement. The sale price and distribution of cement have been subject to varied terms of control by the Government. Li order to appreciate the controversy revolving around question No. I, it is necessary to give the background of the nature and regulation pertaining to the sale and distribution of cement at various points of time, because, we feel the same has an important bearing on the issue involved. For this purpose, we can do no better than to quote from the judgment of this Court in L.P.A. No. 17 of 1970 (R. D.Aggarwala and another v. Union of India), wherein the validity of the Cement Control Order 1967, issued by the Central Government in exercise of its powers under the Industries (Development & Regulation) Act, 1951 was upheld :
"FROM1926 to July 1942 the market price of cement was free. During the said period, the indigenous industry is stated to have been struggling for its existence against foreign competition, and its then seven constituent units formed themselves into an association called the Indian Cement Manufacturers' Association. The said Association used to fix and regulate the selling prices. From August, 1942 to September 1946, the Government imposed under the defense of India Rules control over production, prices and distribution of cement and 90 per cent of the country's production was taken up for defense purposes. As consumption on Government Account decreased in later years, the Government in consultation with the A.C.C. (Associated Cement Companies Limited) and the Dalmia Group of Factories, agreed to release the surplus cement for public consumption and the price of such supplies was fixed in March 1944 at Rs. 70 per tonne f.o.r. (free on rail) destination. The price was being revised from time to time and varied between Rs. 70 and Rs. 60 per tonne during the period from March 1944 to the end of 1946. From October 1946, to the end of June 1956, after the lapse of the defense of India Rules, the Govt. exercised an informal control by fixing prices from time to time by executive orders. During that period, in 1953, the Tariff Commission conducted for the first time, an enquiry into the prices of cement and on the basis of the recommendations of the Commission, the Gov-eminent fixed revised prices of cement. The price structure recommended by the Commission followed the previous pattern and was a uniform f.o.r. destination price based on the A.C.C.'s cost of production taking them as fairly representative for the industry. From July 1, 1956 the State Trading Corporation of India (STC) took over the distribution of cement and, as a result, the f.o.r. destination prices which were in force previously underwent revision. Each producer was given a retention price for his cement on the basis of his ex-works cost, the uniform f.o.r. destination price being determined by the State Trading Corporation adding a pooled freight to the average of retention prices. In 1958, the Tariff Commission held a second inquiry into the prices of cement, and recommended individual ex- works prices for producers in accordance with the prevalent prices. The recommendation was accepted by the Government and the ex-works prices were revised from July 1, 1958. There was a further revision with effect from January 1, 1960. With effect from February 20, 1961 the equalised f.o.r. destination prices was fixed for naked cement, and packing charge was notified separately every quarter and collected from consumers. By a resolution, dated October 20, 1960, the Govt. of India, being of the opinion that a comprehensive review of the cement industry taking into account all aspects of the industry, such as production, prices, distribution, development etc. was necessary', requested the Tariff Commission to conduct a fresh inquiry, submitted its report on August 26, 1961....... The final fair ex-works selling prices of naked cement for 19 units in the industry were given in paragraph 14.2 of the report. The said prices varied from 67.50 to Rs. 103.00 per tonne. The Government considered the report, and passed a resolution on October 31. 1961......... In that resolution the Government, while agreeing in general with 'the approach of the Tariff Commission in its report, did not feel the increase, in full, recommended by the Commission to be necessary, and fixed the uniform ex-works price of naked cement at Rs. 69.50 per tonne for the industry. The Government allowed on extra price for certain units. The other ancillary recommendations made by the Tariff Commission were just noted by the Government, and it was stated that appropriate action thereon would be taken in due course. The Govt. further stated in their resolution as under:-
"Government are of the considered view that the existing system of differential prices, based on individual costs, is set conductive to efficiency and greater pro-duction, and that there should be a uniform price for the industry, so that greater pressure is exercised on units having higher costs to find economics and there is a measure of reward for these units able to achieve economics."
On the same date, the Government of India made the Cement Control Order, 196i....... In the Schedule to the Order were set out the prices per metric tonne at which each producer could sell cement free on rail ex-works. Out of the 21 factories mentioned in the Schedule, ex-factory price of Rs. 69.50 was fixed for twelve factories, Rs. 72.50 was fixed for five factories' Rs. 75 was fixed for three factories and Rs. 95 was fixed for one factory. Subsequently, the Government made an adhoc increase of Rs. 2.7? per tonne on July 1, 1963 a further increase of. Rs. 4 per tonne on July 1, 1965 and a still further increase of Re. 1 per tonne on January 1, 1966. Thus, on January 1, 1966, the ex-factory prices ranged approximately between Rs. 90.50 and Rs. 115. On August 26, 1965, the Prime Minister made an announcement in the Parliament that it had been decided in principle to decontrol cement except for the quantities required for the Government. For the purposes of implementation of the said announcement, the Cement Manufacturers' Association, Bombay, submitted on November 5, 1965, a Memorandum regarding the decontrol of cement..... after examining the said Memorandum, and after discussions with the industry on November 12, 196? the Government agreed to certain arrangements to he made by the Cement Manufacturers' Association. The Government agreed, inter alia :-
(A)that with effect from January 1, 1966 cement would be decontrolled, that the Government would revoke the cement control order, 1961... . .
(B)that with effect from January 1, 1966 there would be no legal authority .to control the production, price and distribution of cement throughout India, that the State Trading Corporation of India would also go out of the picture and the Department of Industry would no longer to responsible for the distribution of cement to various Government Consumers, Estate Governments, and other sponsoring authorities, and that each authority/consumer would, therefore, have to contact the Cement Manufacturers, Association for guidance;
(C)that, however, to enable a smooth change over from a long period of control to a period of decontrol, and to ensure that prices do not shoot up immediately after decontrol, the Cement Manufacturers' Association agreed to form their own Central Organisation called the "Cement Manufacturers Sales Co-Ordinating Organisation" with Headquarters in Bombay to take over the functions of the State Trading Corporation of India Limited so far as they relate to cement distribution; and (D)a quantity equivalent to 50 per cent of the total production of cement. . . . . .by each unit would be reserved for supply to Government indentors under the rate contract as per allotment indicated by the Department of Industry. By a letter, dated December 16. 1966 the President of the Cement Manufacturers' Association replied is the Government of India appreciating and expressing gratitude for the Government's decision to implement the policy of decontrol, and informing the Government that under legal advice the Association decided that the producers Organisation would be known as the "Cement Allocation and Co-ordinating Organisation (CACO)".
Thus, cement was decontrolled with effect from January 1. 1966 and the statutory control on price and distribution gave place to a form of informal self-regulating control by the industry itself through CACO. The above position continued till December 23, 1967, when the Government of India decided to introduce control again........ It was stated. that the distribution of cement in the country was at that time regulated by an organisation of the cement Industry called the Caco, that the said organisation had been functioning since January 1, 1966 and had been asked by the Government to ensure proper distribution of cement in the country on the basis of a uniform f.o.r. destination price, that in view of certain defects and difficulties noticed in the working of the said organisation, the Government have decided that the said organisation should not be entrusted with the distribution of cement from January 1, 1968, onwards, that the functions performed by it should be taken over by a Government controlled agency ........that the work relating to the distribution of cement in the country should be taken over by the Cement Corporation of India with effect from January 1, 1968 and that Cement Control Order 1967, would be issued so as to take effect from January 1, 1968. Accordingly the Cement Control Order 1967, was issued, and it came into force on January 1,1968."
(4) As we are concerned here with the operation of distribution through Caco in the calender years 1966 and 1967, it will also be necessary at this stage to make a reference as to how Caco came. into existence. The Memorandum of Association of Caco was drawn upon 16 February 1966 for constituting .a private company limited by guarantee. There were 15 subscribers to the memorandum, one of whom was the assessors nominee. The names of the first members who guaranteed the liability of the company to the maximum limit of Rs. 15 lakhs , were set out' and it was mentioned that every other member's maximum liability would be Rs. 1,00,000. In order to have a cogent idea of the main as well as the incidental and ancillary objects of Caoo, some of the relevant clauses of the memorandum may be set out:
(A)To promote co-operation amongst the manufacturers of cement m general and in regard to allocation and distribution of cement in particular:
(B)To control, promote and regulate the equitable distribution of cement at fair price and with that object inter aha to fix the destination price and the manufacturers' retention price; to determine the packing charges realisable by members to for the marketing comes of each member; to supervise the distribution arrangement and to frame such Scheme or Schemes lor the said object as may be necessary or expedient.
(C)To control, promote and regulate the distribution of cement to Government and other consumers throughout India by the Members of the Organisation and with that object inter alia to maintain and operate from time to time the distribution and adjustment accounts and such other accounts as may be proper and expedicnt.
(D)To frame, Schemes and by laws from time to time for -
(I).......... ..... ......
(II)fixing, levying, compelling payment of and recovery of fines, fee, penalties and subscriptions in connection with any of the object of the organisation. ........"
(5) On the same date viz., 16 February 1966, the Articles of Association were also drawn up. This was also signed by the above 15 subscribers. Article 7, extracted in the order of the Tribunal, provided for levy of penalty and expulsion in the event of any member contravening the directives of the general meeting of the Organisation or of the Governing Body.
(6) The Memorandum and Articles of Association were duly got registered and the company was incorporated on 18 May 1966.
(7) SIMUHANEOUS'Y with the above, i.e. on 16 February 1966 there was also drafted a scheme for fixation of price and allocation and distribution of cement. This scheme was deemed to be effective from I January 1966 and was to be binding on all the members inter-se as well as vis-a-vis the company. At this stage it will be useful to notice some of the clauses of the Scheme, extracted by tire Tribunal in its order. These are :
1.The provisions of this Scheme shall be deemed to be effective VE from the 1st day of January, 1966 and shall be binding on all Members of the Cement Allocation & Co-ordinating Organisation ( hereinafter referred to as the ''Organisation") and all contractual obligations and rights of the Members of the Organisation (hereinafter referred to as the "Members") and the organisation and as between the Members inter se shall continue to be effective for a period of one year subject to such amendments or alterations thereto as may be made from time to time by the Organisation in general meeting.
2.The Members who join the Organisation shall continue to be the Members thereof. Each of them undertakes that so long as it is engaged in the manufacture of cement, it shall (unless removed under the Articles of Association of the Organisation hereinafter referred to as "the Article") continue to be a Member of the Organisation and shall observe all rules, regulations, directions, directives and orders of the Organisation.
4.Such Member shall make supplies to all rail destinations throughout India on a uniform f.o.r. destination price as heretofore and for that purpose agrees to authorise the Organisation to fix uniform f.o.r. destination prices from time to time.
5.With a view to equalise the incidence of freight on each of them, each Member irrespective of freight actually incurred in dispatching cement as directed by the Organisation expressly empowers the Organisation to determine the annual average freight, each Member shall be bound by the annual average freight so determined.
6.Each of the Members agrees to accept and maintain the differential retention prices so fixed by the Organisation for each of them from time to time and for that purpose irrevocably empowers the Organisation to fix retention prices for each of them.
7.Each Member agrees that such of them who have been compelled by Government action to use oil instead of coal or have accordingly plants under installation without coal firing facilities as on 1st January, 1966 shall continue to be reimbursed the additional cost for using oil and authorise the Organisation to determine the quantum of the said reimbursement until discontinuance of the use of oil by the Member. The Members concerned undertake to explore the possibilities and take necessary steps to discontinue the use of oil and use coal instead as early as practicable and approach the Central Government both directly and through the Organisation for giving such facilities as may be required therefore.
8.The Organisation is empowered by each Member to issue directions and instructions to the Members from time to time pursuant to the powers vested in the Organisation by the Memorandum and Articles of Association and in implementation of this Scheme, and the Members undertake to comply with such directions and instructions.
9.If any defect is found or difficulty experienced in the working or operation of this Scheme the Organisation shall be entitled to rectify any such defect and remove such difficulty by issuing appropriate instructions or directions to the Member or to any of them.
12.The Organisation shall, in respect of the quota intended for distribution and sale to the public fix selling Zones for each Member on the lines of the Zones existing as on 1st January, 1966 subject to such adjustment or alteration as it may deem fit, both in respect of Inter-zone and intra-Zone supplies, and the decision of the Organisation in that respect shall be final and binding on the Members.
17.The Organisation is empowered and authorised to determine the f.o.r. destination station price at which the Members shall sell cement from time to time and, for that purpose, shall take into consideration and include, inter alia the following factors:
(A)Average retention prices payable to the Members as fixed by the Organisation from time to time;
(B)Average freight' on dispatches of cement including freight where applicable on clinker and cement transported from one factory to another for grinding and blending respectively, provided that and to the extent that such movements of cement and clinker for grinding and blending respectively are rational;
(C)Packing charges fixed by he Organization for each quarter;
(D)Excise Duty;
(E)Selling Agency Commission being Rs. 1.25 per tonne at present;
(F)Average incidence of reimbursement of additional cost of using oil as may be determined by the Organisation;
(G)Estimate exposes of the Organisation;
18.Each Member, shall, out of the f.o.r. destination price realised by it, retain:
(A)The retention price applicable to it:
(B)(i) The actual freight incurred by it on dispatches of cement ; (ii) Freight if applicable on the rational movement of clinker aad cement far the purpose of grinding and blending respctively;
(C)Packing charges as fixed by the Organisation:
(D)Excise Duty;
(E)Selling Agency;
(F)Reimbursement of additional cost for using oil, if applicable;
(G)Any other amount specifically authorized in wilting by the Organisation; and shall pass en the balance, if any, to the organisation within thirty days after expiry of the month to which the supplies relate. If such balance is not actually determined, payment shall nevertheless be made on the basis of an estimate which shall be as accurate as possible and the final adjustment shall be made subsequently as soon as the balance has been actually determined but in any event not later than forty five days after the end of the month to which the supplies relate.
19.The remittances by each Member, as set out in clause 18 shall be accompanied by a statement showing the f.o.r. destination price realised and the deductions made by it under the various heads mentioned in the said clause. In case the f.o.r. destination price is not sufficient to meet the above deductions as statement showing the relative deficit shall be committed to the Organisation, who shall reimburse the Member the amount due to it by the thirtyfifth day after the end of month to which the supplies relate.
21.THEOrganisation shall fix one uniform f.o.r. destination price at rail head for the whole of India in respect of supplies to the public and one uniform f.o.r. destination price at rail head for supplies to DGS&D indenters. In order to achieve this objective, the average freight to be included in the f.o.r. destination price shall cover;
(A)the freight payable on all dispatches of cement including railway freight, steamer freight, country craft rate freight, road transport freight or freight by any ether form of transport; and (B)freight on dispatches of clinker and cement for the purpose of grinding and blending respectively.
22.The Organisation shall ensure that no loss or gain accrues to any Member on account of freight. For this purpose each Member shall furnish a statement of the actual freight to- curred by it on dispatches made each month so as to reach the Organisation by the thirtieth day of the following month. The Organisation shall maintain an account known as "Freight Adjustment Account" and shall reimburse the amount due to such Member whose actual freight is higher than the all India average freight fixed by the Organisation. The Organisation shall make a final adjustment to the end of each year so as to equalise the freight charges of all the Members. This account shall also serve to meet the cost of freight on clinker and cement transported by any Member from one of its factories to another for grinding and blending respectively provided that such movements are rational. The amount, if any determined as receivable by the Organisation from any Member shall be adjusted against the credit balance, if any, in its account and the balance shall be forthwith paid by the member to the Organisation. The final credit I debit balance in this account shall be adjusted according to Clause 37 hereof.
31.Each Member agree that it shall make payments of amounts due by it to the Organisation from time to time within the time limit specified herein and of such other amount as may be determined by the Organisation as payable by it to the Organisation as payable by after setting off the credit balance if any in the Member's account. If any default is made by any Member, it shall be liable to pay interest at the rate of fifteen per cent per annum or such lower rate of interest as may be the maximum permissible by law on the such amount remaining unpaid after the stipulated date. The Organisation may also take such other steps as it may deem necessary for recovery of the said amount at risk as to cost and consequences of the defaulting Member.
36.If any Member commits a breach of any of the provisions of this scheme or any default is made by a Member in. complying with any instruction and/or directive issued by the Organisation, the defaulting Member, beside any other penalties shall be liable to pay to the Organisation for every such breach as the Organisation so decides to fine not exceeding rupees one lakh as may be determined by the Organisation at its absolute discretion".
(8) On 20 June, 1966 there was a general meeting of the Company, authorities admittedly attended by the assessed as well when all the acts to me organisation including the scheme right from January, 1996 were approved, conurmed, reified and adopted. There was a similar scheme drawn up for the calendar year 1967 which was also similarly approved by a General meeting of the company.
(9) From the above, it is clear that the whole idea of the scheme was that ail the cement manufactured in the country had to be sold at a fixed price, which might be called the "destination pace". Hovever, though the ultimate consumer paid the fixed "destination pries" in respect of the cement purchased by him, the amount so fixed was not to go to the manufacturer of the cement. So far as each member was concerned, the Caco fixed the retention price which each member was allowed to retain. The "destination price" was fixed after taking into account the average retention price and the average incidence of additional cost, freight charges, packing charges, excise duty, selling agency commission and the estimated expenses of the Organisation. The Caco determined the selling price of each of the members. The destination price received by the manufacturer could not be retained by him. He could only retain the retention price and the actual freight incurred by him on dispatches of cement. Sometimes it happened (and in the case of the assessed this was what happened) that the company incurred much less than the average freight and other charges included in the "destination price" in which event the surplus had to be passed on to the Caco within 30 days of each month Even if the actual figure could not be the company had to pay the surplus on an estimated basis subject to final, adjustments within 45 days of each month. On the other hand. in the case of certain other members their actual expenses exceeded the average taken into account in the destination price and in their case the destination price was insufficient to meet the various expenses. They were to submit to the Caco their deficit statements, whereupon the Caco would reimburse them to the extent of the deficit within 35 days of each month. Each of the members had to furnish to the Caco within 30 days of each month the details of actual freight in- curred by him. Caco maintained a freight adjustment account. It took into account me amounts receivable from the members whose actual expenses were less and it reimbursed to those members whose actual freight wa3 more. In the case of the assessed, as has been noted above, the actual expenses were very much less than the average expenses taken into account in fixing the destination price. The retention price in the case of the assessed had been fixed at Rs. 77.50 per ton Originally which was revised to Rs. 90.50 on 31 December, 1965 and again creased, on representations made by the assessed, to Rs. 96.00 per ten.
(10) Notwithstanding the fact that the assesses was a party to the above arrangements and was a signatory to the Memorandum to Association, the Articles of Association and the scheme drawn by the Caco, it had apparently certain reservations in mind. Starting with this initial reluctance, the assessed failed to make the payments of this freight surplus to the Caco every month as envisaged under the Scheme. Caco objected to this and there was sonic controversy between the assessed and the CACO. However, in August, 1966 the assessed remitted to the Caco the freight surplus received by it during the months of January to May, 1966. Subsequent to the above incident, the assessed continued to send remittances in respect of the other surpluses pertaining to the months of June, July, August and September, 1966.
(11) In December 1966, the assessed again raised an issue and disputed the right of the Caco to get the surplus from it. The Caco, however, did not accept the assessed's plea. Also about this time was d'rawn up a scheme for 1967 which again the assessed was a signatory to. Notwithstanding these, the assessed failed to pay the remittances due to the Caco under the scheme. For the previous year ending on 31 December, 1966 and relevant to the assessment year 1967-68 out of the total sum of Rs. 18,58,690.00 it paid only a sum of Rs. 14,96,760.00 to the CACO. The balance of Rs. 3,61,930.00 stood credited in the assessed's books in a 'Claim Suspense Account", due to CACO.
(12) Similarly, in the calendar year 1967, notwithstanding being a signatory to the scheme, the assessed continued its policy of protest and non-payment. The Caco did not relent and the assessed's attempt to get redress from the Government also failed. The Department of Industrial Development of the Government of India wrote to the assesses on 19 September 1967 requesting the assessed to implement the gentlemen's agreement. entered into earlier. T'his was followed up by a detailed letter dated 30 September 1967. On 1 October 1967 the assessed decided to associate itself from. the Caco and tendered its resignation with offect from 1 October 1967 from the membership of the orginisation. The net result of these activities was that' a sum of Rs. 21,42,751 which was the surplus due to the Caco from the assessed was rot paid to it but was credited to the "Claims Suspense Account.
(13) When the Caco did not receive the various amounts due to it, it made attempts to recover the same from the assessed and in turn the assessed made certain counter claim. On 18 October 1968 there was an agreement to refer the dispute to arbitration but the arbitrators could not agree. An application was filed before the Court for the appointment of an Umpire. But this application was returned to bs filed in Bombay. This was not done. The Caco thereafter filed a suit against the assessed, being suit No. 436 of 1969, praying for a decree of the amounts due to it with interest It was claimed that the memorandum, articles of association and the scheme in question constituted a contract between the assessed and the Caco under which the assessed was liable to the amounts. The assessed's purported resignation from the Caco was claimed to be ineffective, and it was claimed that the assessed was bound to continue as member up to 31 December 1967 and that its resignation had not been accepted by 'the CACO. It appears that on 18 September 1973 the parties decided to have the matter settled by arbitration but sometime hereafter there was a compromise. The order of content agreeing to arbitration was set aside and the shirt was decreed by consent. The assessed agreed to nav n sum of Rs. 28 lakhs in full and final settlement of the CACO's claim. The amount was payable in monthly Installments of Rs. 50.000 each between November 1974 and October 1975. Rs. 1 lakh each between November 1975 and May 1977 and Rs. 1.50.000 in June 1977 with interest at 6% on default. It was stated that the parties had agreed to the terms of consent on 21 June, 1974.
(14) When the Income-tax assessment for the assessment year 1967-68 was taken up, the Income-tax Officer was of the opinion that the surplus railway freight received by the assessed and retained by it formed part of the; assesses's income assessable to Income-tax. He, therefore, brought the entire receipts to tax. He also declined to allow the assessed the benefit of the deduction claimed in respect of the amounts credited to the "Claims Suspense Account". He, however, allowed as deduction the actual amount reimbursed by the assessed to Caco under the aforesaid arrangement during the relevant previous year. A similar treatment was accorded by the Income-tax Officer for the assessment year 1968-69 as well.
(15) The Appellate Assistant Commissioner also took the same view in appeal and the matter had to be carried in further appeal to the Income Tax Appellate Tribunal by the assessed.
(16) The Tribunal by its consolidated order for both the assessment years held that the assessed was entitled to the deduction of the freight advantage which had to be passed on to CACO. In doing so the Tribunal relied on the judgment of the Supreme Court in the case of Kedar Nath Jute Manufacturing Company Ltd. v. Commissioner of Income Tax (1971) 82 Itr 363.(1) It is this part of the order of the Tribunal that has given rise to the first question, set out above.
(17) It was contended by the learned council for the Revenue that the provision for payment of freight advantage to Caco could not be allowed as deduction in the instant case as it was merely a provision for a contingent liability. He further submitted that the liability for payment of freight advantage not being a statutory liability, the ratio of the. decision of the ' Supreme Court in Kedar Nath Jute Manufacturing Company's case (supra) was not applicable. In support, he relied on the decision of the Allahabad High Court in the cars of Commissioner of Income-tax v. Oriental Motor Car Pvt. Ltd. (1980) 124 Itr 74.(2) (18) In Kedar Nath Jute Manufacturing Company's case, the assessed company, which followed the mercantile system of accounting, incurred liability on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1954-55. The sales tax demand was raised pending the Income-tax assessment for that year. The Income- tax Officer rejected the assesse's claim for deduction of that amount on the ground, (i) that the assessed had contested the sales tax liability in appeals and (ii) that it had made. no provision in its books of account with regard to the payment cf that amount. The pleas to the higher authorities or courts taken. by the assessed contesting its liability to pay the sales tax ultimately failed. It was held bythe Supreme Court that the moment a dealer made either purchases or sales, which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment, The assesses, which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year. That liability did not cease to be a liability because the assessed had taken the proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessed did not prevail. The court further held that whether the assessed is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessed might take of his rights; nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.
(19) Thus, in so far as The statutory liabilities are concerned, the issue appears to be settled that if the statutory liabilities arises in a particular year, then an assessed maintaining his books of accounts on the mercantile system of accounting". is entitled to claim a deduction in the year in which the liability arises notwithstanding the fact that he is taking .steps To dispute his liability.
(20) However, presently we are concerned with a case where a provision is made for discharge of a liability in future not under a statute but under an agreement to which some dispute is also raised by the assesses.
(21) Before we attempt to answer this question. it will be worthwhile to recount certain principles which have been laid down in various pronouncements on the issue involved.
(22) In Calcutta Company Ltd. v. Commissioner of Income- tax (1959) 37 Itr 1(3) the assessed had sold plots of land for building purposes undertaking to develop them within six months by laying out roads providing drainage and installing lights etc. In the accounts of the Company, maintained according to the mercantile system, the Company had credited the full sales price of the plots agreed to be paid by the purchasers but not actually received and against the price debited an estimated sum of expenditure for the development it had undertaken to carry out, even though no part. of the amount was actually spent. The Supreme Court held that having reward to the accepted commercial parties and trading principles and there being no prohibition in against it in the Income-tax Act. de of such estimated liability even the though it did not come earlier any specific provision of Section 10(2) of the Indian Income-tax Act, 1972, was permissible. It was observed that the assesses had undertaken an unconditional obligation which was enforceable against it and, therefore, the liability was not contingent upon the happening; of a future event.
(23) In Commissioner of Income Tax v. Gemini cashew Sales Corporation (1967) 65 Itr 643, (4) the Supreme Court pointed out that the present value, on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right. Where, however, the obligation of the trader is purely contingent no question of estimation its present that value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation can able of commercial valuation. The Court ruled at where the liabi1ity the whole of the period that business is carried on, wholly contingent and does not rais any definite obligation during the time the business is carried on, it cannot fall within the expression "expenditure laid out expanded wholly or exclusively" for the purpose of the business, (24) In Commissioner of lncom'3-tax, Madras v. Andhra Prabha Pvt. ltd.. (1986) 158 Itr 416 (5) a question had arisen as to whether an assessed was entitled to the deduction of the estimated gratuity payable under an a.sreemeat. The Supreme Court relying on its earlier decision in the case of Shri Saiian Mills Ltd., (1985) 156 Ttr 585 held that the liability having arisen under an agreement accrued in the relevant year of accounts and that claim would be admissible provided the provision for gratuity was based on "a legal and scientific basis".
(25) The real test, therefore, is that if the amount eventually payable could be properly ascertained and its value commercially determined by an actuarial valuation, which may be fastened on an assessed, in any year of accounting, that could be considered as deductible from its gross profits for the year, in which such a liability is incurred. Thus, the question to be considered in this case is whether the assesses had incurred enforceable legal liability under the aforesaid arrangement with Caco and ft was capable of being commercially valued in the relevant previous year by an actuarial valuation.
(26) We have, therefore, to examine the arrangement/scheme under which assessed was obliged to pass on the freight advantage to Caco, since the solution of the case would depend on the analysis of assessed's obligations under the said Scheme. As noted above, cement was partially de-controlled with effect from 1, January, 1966 and the statutory control on price and distribution gave place to a formal form of self-regulating control by the cement industry itself through Caco, which arrangement in a way had the approval of the Government of India inasmuch as de-control was subject to certain conditions, one of these being that the cement industry shall form a common distributing organisation on the lines of State Trading Corporation of India to ensure d'istribution of cement in an equitable manner on the basis of uniform For destination price. All the cement manufacturers, including the assessed, were fully aware that this was a major condition subject to which the Government had agreed to partially de-control the cement. If the assessed and for that matter the whole of the private cement industry was to free itself from the clutches of Government control, it had no option but to agree to the said Government conditions, float a producers organisation, be its member and abide by its rules and regulations.
(27) As already observed, scheme in question had been examined by the Government of India and had its blessings. This is further clear from the letter dated 30, September 1967 of the Government of India. Ministry of Industrial Development and Company Affairs, addressed to the assessed in respondent to its letter regarding its objection to the reimbursement of freight advantage to CACO. The said letter is one of the annexures to the statement of the case and the relevant portion thereof may usefully be extracted below : "As you are no doubt aware, Governments agreement to de-control from 1 January, 1966 v. as subject to certain conditons. In the first place, it was equipped that the cement industry should form a common distributing organisation on the lines of State Trading Corporation of India Limited to take over the entire production of the country for distribution and arrange distribution in an equitable manner on the basis of a uniform f.o.r. destination price. Individual factories were entitled to only the retention prices as they were getting prior to decontrol, plus the expansion allowance and whatever is available in the freight pool should be used for ensuring even distribution of cement throughout the country, if necessary by transporting cement over long distances from surplus areas to deficit areas. Therefore, your claim that you are entitled to the freight advantage is not correct. Caco is a 'no profit no loss' organisation. The surpluses, if any, in the freight pool should be utilised by them only with the concurrence of Government. Your action in having withheld the freight advantage from October. 1966 has resulted in a loss to the CACO. They can neither afford this loss nor can afford to increase the f.o.r. price. Under the system of decontrol at present working and as agreed to by Government, it is the Government's firm opinion that you should return to Caco whatever sums have been appropriated by you and it is Government's earnest desire that you should continue as a Member of Caco and ensure its smooth working."
(28) In the light of the aforesaid letter and assessed's continued association with Caco as its member there is no doubt that the assessed and Caco were bound with the terms of the scheme in question. Furthermore, the assesses acted under the scheme and in fact charged only destination price for the cement supplied by it as fixed by CACO. If the assessed did not want to accept the scheme or be bound by it, it could have stayed out of Caco like a few other small companies in the country did.
(29) From a reading of Clause 13 of the scheme, formulated for fixation of price allocation and distribution system with effect from I June 1966, extracted above, it would appear that a member's liability to pass on the excess freight to Caco arose immediately on the expiry of 30 days of the month to which the supply was related. The only option available to a member was that it could make the 5nal adjustment within 15 days thereafter. Thus, the liability to pay the freight advantage arose forthwith, though it could be adjusted finally within 45 days of the end of the month to which the supply related. As we read the Scheme, there appears to be nothing uncertain, tentative or contingent in the matter of assessed's liability to pay the freight advantage. It was an unqualified liability which was fastened on the assessed on account of its being a party to the whole arrangement with a view to enjoy other benefits of decontrol. In this view of the matter we are of the opinion that the liability that arose under the said arrangement/scheme was quite ascertainable and it could not be said to be a contingent liability simplicitor. The only dispute, if at all, was with respect to the quantum of liability but assessed's obligation under the said clause, we feel, was definite and certain and the attempt made by it to get out of its inability to pay to Caco the freight advantage by raising certain disputes could not in any way detract from or retard the efficacy of the liability imposed on it under the said arrangement. We may, however, hasten to add that we are not holding that in all cases, a mere breach of contract creates an enforceable liability. It would depend on the facts and circumstances of each case. Therefore, we are of the view that in the instant case the liability arising under the said scheme could very well be said to be analogous to the one arising under a statute-
(30) We are, therefore, of the view that the assessed is entitled to the deduction of the freight advantage, which it is liable to pass on to Caco, in the year in which this liability has been incurred under the said Scheme and the opinion expressed by the Allahabad High Court in Commissioner of Income Tax v. Oriental Motor Car Co. (P) Ltd. (supra) is not applicable on the facts of this case. In that case, while holding that assessed's liability on account of infringement commission could not be allowed in the year when it was demanded by its principals, the Court had observed that the amount so claimed was negotiable and till the assessed admitted its liability at a particular rate, it was not an ascertainable liability, which, we feel, is a significant distinguishing feature in the present case. We are, therefore, in agreement with the conclusion of Tribunal that the assessed is entitled to a deduction of the amount of freight advantage payable by it to Caco in respect of the previous years in question.
(31) So far as the second question is concerned, learned counsel for the Revenue has very fairly conceded that answer to this question stands concluded against the Revenue by a Bench decision of this Court in Dalmia Dadri Cement Ltd. v. Commissioner of Income-tax, Delhi (Central), (1980) 126 Itr 851, (6) In this view of the matter, we do not propose to go into greater details of the claim made by the assessed on account of its liability for the payment of gratuity to its employees and record our agreement with the view taken by the Tribunal that liability on this account should be allowed if capable of being worked out on an actuarial basis in the relevant previous years.
(32) For all these reasons, we answer both the questions referred to this court by the Tribunal in the affirmative, that is, in favor of the assessed and against the Revenue. As the assessed is not represented before us, we make no order as to costs.