Kerala High Court
Commissioner Of Income-Tax vs Kumaran And Co. on 4 June, 1991
Equivalent citations: [1992]194ITR85(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.P. Balanarayana Marar, J.
1. The following two questions of law have been referred to this court at the instance of the Revenue :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in finding that the liability to pay the kist and interest is not at all obliterated by the Kerala High Court judgment ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law and in fact in reversing the order of the Commissioner of Income-tax (Appeals) and in holding that the assessee should be allowed deduction of the entire amount of Rs. 14,79,808 ?
2. The assessee is a registered firm. They were abkari contractors. We are concerned with the assessment year 1982-83 for which the relevant accounting period ended on March 31, 1982. During the year, the appellant was a successful bidder in bidding 14 arrack shops. The total kist payable for those shops was Rs. 24,16,900. The appellant paid only Rs. 10,51,413 as on the last date of the previous year, i.e., March 31, 1982. This amount included Rs. 84,653 being the interest on security deposit. A balance amount of Rs. 13,65,487 towards kist apart from interest of Rs. 1,14,321 was due. The appellant made a provision for these amounts in the account as on March 31, 1982. The Income-tax Officer disallowed the provision stating that the appellant had no liability to pay any further kist as the matter was to be adjudicated afresh by the Kerala Government in view of the decision in Issac v. Assistant Excise Commissioner [1984] KLT 88. The Income-tax Officer disallowed the provision aggregating to Rs. 15,33,264. The assessee appealed before the Commissioner of Income-tax. The Commissioner concurred with the Income-tax Officer and held that there was no further liability for payment of kist as on March 31, 1982. Further, the Commissioner allowed deduction of Rs. 6, 83,250 and Rs. 1,12,990 by way of kist and interest paid by the assessee as per the directions of this court. To that extent, the appeal was allowed. On second appeal, the Income-tax Appellate Tribunal disagreed with the Commissioner of Income-tax and held that the liability to pay the balance of kist and interest was very much there on March 31, 1982. The Appellate Tribunal relied on the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363. The Tribunal held that the provision made by the assessee in his accounts for an amount of Rs. 14,79,808 is allowable. It is thereafter at the instance of the Revenue that the two questions aforementioned were referred to this court for decision.
3. Assailing the order of the Income-tax Appellate Tribunal, learned counsel for the Revenue strenuously contends that the Tribunal has committed an error of law in treating the amount payable as a liability when the amount had not been quantified. Till such quantification is made, the State has no right to enforce the liability, according to counsel. In order to make a provision, there should be a debt due to the Government and no debt was due from the assessee as on March 31, 1982, the reason being that there had not been a determination of the amount payable. Complaining that an adequate additional quantity of arrack was not supplied by the Assistant Excise Commissioner in accordance with the rules and the contract executed by the assessee and the Government, a writ petition was filed before this court as 0. P. 7250 of 1982, seeking, inter alia, a direction to the State of Kerala not to enforce monthly payments due, calculated on the basis of the bid amount, except those amounts payable on the basis of the arrack supplied. The original petition was disposed of by a Division Bench by a judgment dated November 14, 1983 (see [1984] KLT 88). The judgment pronounced by the Bench in 0. P. No. 2325 of 1981, wherein an identical question was raised for consideration was adopted by the Bench. Allowing the writ petition, a writ of prohibition was issued restraining the respondents, the State of Kerala, the Tahsildar, Ottapalam, and the Assistant Excise Commissioner, Palghat, from recovering by coercive steps the kist amounts from the petitioners for the year 1981-82 until and unless the quantum thereof is properly determined on a reasonable and fair basis according to law. The Revenue recovery proceedings, if initiated, shall stand quashed. Annexure-B is a copy of the judgment in that original petition. The judgment in 0. P. 2325 of 1981 is reported in [1984] KLT 88. The recovery of the kist amount due from the assessee in that case was restrained by a writ of prohibition unless and until the quantum thereof is properly determined at a reasonable and fair basis, according to law. That decision was rendered on November 14, 1983. The assessment was made on October 19, 1984. There was thus no liability on the part of the assessee to pay any amount as on March 31, 1982, according to counsel for the Revenue. The liability arises only on determination of the amount and, as and when that amount is determined, that could be claimed as a provision in the year in which such determination is made. But, it is pointed out by learned counsel for the respondent that the assessee was following the mercantile system of accounting and the liability to pay the kist amount was incurred during the year 1981-82. The inclusion of that amount by way of provision for that year is, therefore, permissible, according to counsel. The assessment order does not show the method of accounting nor is any mention made in the order about the method. The appellate order of the Commissioner and the order of the Tribunal is also silent on that aspect. But the Department and the assessee had proceeded on the basis that the assessee had maintained its books of account in accordance with the mercantile system. Sri Balachandran, learned counsel for the assessee, has brought to our notice that, in many of the orders of the assessing authority, the method of accounting is not shown. Not only that, the entry against the column "method of accounting" is shown blank in the assessment order. No reference is also seen made about the method of account; ing in the assessment order. The Commissioner of Income-tax and the Appellate Tribunal had also not adverted to this fact. However, it is pointed out by counsel for the assessee that the accounts are maintained on the mercantile system of accounting and no dispute has been raised by counsel for the Revenue. The Income-tax Officer, the Commissioner of Income-tax (Appeals) and the Tribunal had proceeded on the basis that the assessee was maintaining accounts on the mercantile system. We have, therefore, to proceed on the basis that the assessee was following the mercantile system of accounting.
4. The question that falls for consideration is whether the balance amount payable towards kist and interest can be validly deducted in the computation of business income. If the method of accounting is the cash system, it would qualify for deduction only in the year in which it was actually paid. On the other hand, if the method of accounting is the mercantile system, deduction will be permissible in the year to which the liability relates. Learned counsel has cited the decision in Kedarnath Jute Manufacturing Co. [1971] 82 ITR 363 (SC). In that case, the Supreme Court was considering whether unpaid and disputed sales tax liability could form the basis of a claim for deduction for the purpose of income-tax. The High Court of Calcutta was of the opinion that such liability could not form the basis of a claim for deduction. Differing from the view of the Calcutta High Court, the Supreme Court held that the assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the amount of sales tax which it was liable under the law to pay during the relevant accounting year. It is observed that the liability remained intact even after the assessee had taken appeals to higher authorities or courts. The Supreme Court held (p. 366) ;
"An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed."
5. It is observed that it is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum, liability, etc. Reference was made to the decision in Pope the King Match Factory v. CIT [1963] 50 ITR 495 (Mad). In that case, a demand for excise duty was served on the assessee. He debited that amount in his accounts on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. He was objecting to the assessment and seeking to get the order of the Collector of Excise reversed. The Madras High Court held that the assessee incurred an enforceable legal liability on and from the very date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not, in any way, detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. The Supreme Court observed that the above decision of the Madras High Court lays down the law correctly. The assessee was, therefore, entitled to make a provision for the balance kist amount payable together with the interest thereon. He is entitled to a deduction when the liability accrues and the liability accrues as soon as the auction is knocked down in his favour and the contract is entered into between him and the State.
6. In this connection, counsel for the Revenue has raised a contention that the amount having not been quantified in the year of assessment, deduction could be claimed in the year in which the amount is determined. This contention is unsustainable. It is pointed out by learned counsel for the assessee that the revenue recovery proceedings alone were stayed by this court and there was no embargo on the State proceeding with the determination of the amount. There has not been a cessation of liability. If, ultimately, the assessee succeeds and the liability is wiped out or reduced in part as a result of the adjudication of the amount by the State, the Department is not without any remedy. The Department can bring the amount to tax under Section 41(1) of the Income-tax Act. That section makes ample provision in such a situation. Interpreting this provision, the Allahabad High Court in the decision in J. K. Synthetics Ltd. v. O. S. Bajpai ITO [1976] 105 ITR 864 had held thus (p. 881) :
"In short, what this provision means is that if an assessee has been allowed a deduction in the computation of its total income of any liability on account of loss or expenditure and if, subsequently, the liability of the assessee on account of such loss or expenditure is remitted or ceases, that part of the liability which is remitted or ceases shall be treated to be the income of the assessee of the previous year in which such remission or cessation takes place."
7. Section 41(1) is, therefore, attracted only if a past liability has ceased or is remitted. That contingency arises only on the quantification of the balance amount payable towards kist on a consideration of the factors directed to be looked into by this court in the original petition filed by the assessee. So long as that is not done, the assessee is entitled to claim deduction in respect of the liability to pay the balance kist amount for which provision has been made in the account books. That is the position in spite of the fact that the liability has been disputed by the assessee.
8. Learned counsel has a further contention that the liability is contractual and the provision made for the balance kist amount payable is not an allowable deduction. A contention is seen to have been taken by the State in 0. P. No. 2325 of 1981 (Issac Peter's case [1984] KLT 88), that the dispute is in the realm of contract and, therefore, the relief, if any, to which the petitioners are entitled has to be agitated in a civil court without resorting to proceedings under article 226 of the Constitution. After adverting to the arguments advanced on both sides, this court held (at p, 101) :
"The position, therefore, is that we find on a proper consideration of the contentions raised by the parties, that the respondents were under a statutory obligation to permit the issue of such quantity of arrack in excess of the announced monthly quota as was demanded by the petitioner to meet the local requirements ; the respondents having failed to fulfil partially, if not fully, that obligation, the respondents are estopped from demanding the payment of the full bid amount...."
9. Learned counsel for the Revenue has drawn attention to the Bench decision of this court in CIT v. K. Natarajan [1990] 185 ITR 352. The question that arose for consideration was whether the assessee, a dealer in foreign liquor, who has delayed payment of the kist amount due to the Government, was entitled to claim deduction of the interest paid. It is observed that the finding of the Tribunal that the payment of interest was only under a contract is not challenged. That finding was based on material. This court found no reason to depart from the said finding. On that basis, it was held that the payment of interest was not for infraction of any law. It was found to be a permissible deduction. It is the contention of counsel that interest was payable under a contract and the deduction claimed by the assessee includes interest also. This court has no doubt observed that payment of interest was only under a contract. But it cannot be disputed that the liability to pay the balance kist amount is a statutory liability which is an allowable deduction in the very year to which that liability relates. In CIT v. K. Natarajan [1990] 185 ITR 352, this court was only considering the entitlement to claim deduction of the interest paid. This court has found that it is a permissible deduction. That decision is, therefore, of no assistance to the Revenue.
10. We are, therefore, of the view that the Tribunal has not committed any error in law in finding that the provision made by the assessee in its accounts for the balance kist amount and the interest payable thereon are allowable. By the judgment in O. P. No. 7250 of 1982 (annexure-B), this court has only restrained the State from recovering by coercive steps the kist amount from the assessee for the year 1981-82. Such restraint is in force only until the quantum payable is properly determined on a reasonable and fair basis according to law. It is open to the State to determine the liability and claim the amount from the assessee. The Tribunal is of the opinion that the liability to pay the kist and interest is not at all obliterated by the judgment of this court in Issac Peter's case [1984] KLT 88. The reason given by the Tribunal is that the judgment of the High Court was pronounced on November 14, 1983, and the assessee's accounting year ended on March 31, 1982, i.e., before the judgment in Issac Peter's case [ 1984] KLT 88. For that reason, the Tribunal would say that the decision of this court was not in force on March 31, 1982. This, no doubt, is an erroneous view. This court has only laid down the law as far as the liability to pay the balance kist amount till the determination of such amounts in accordance with the directions given in the judgment. This court has adopted that judgment in 0. P. No. 7250 of 1982 filed by the respondent herein. The Revenue was, therefore, bound to follow the judgment in Issac Peter's case [1984] KLT 88. Still, the provision made in the accounts was found to be allowable on the basis of the decision in Kedarnath's case [1971] 82 ITR 363 (SC). Though the reason stated by the Tribunal is erroneous, the Tribunal was right in relying on the decision in Kedarnath's case [1971] 82 ITR 363 (SC) and finding that the liability to pay the balance of kist and interest was very much there on March 31, 1982. The finding that the liability to pay such amount is not at all obliterated by the Kerala High Court judgment is perfectly justified. The Tribunal has not committed any error in reversing the order of the Commissioner of Income-tax and in holding that the asses-see should be allowed deduction of the entire amount of Rs. 14,79,808.
11. Both the questions referred to us are answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
12. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.