Krishak Bharati Cooperative ... vs Commissioner Of Income Tax & ...
2013 Latest Caselaw 3729 Del

$~Part -IIB (R-32 & 33)
*       IN THE HIGH COURT OF DELHI AT NEW DELHI
+                INCOME TAX APPEAL NOS. 84/2000 & 85/2000


                                        Date of decision: 23rd August, 2013


        KRISHAK BHARATI COOPERATIVE LIMITED
                                                              ..... Appellant
                              Through Mr. Rajat Navet, Advocate.

                              versus

        COMMISSIONER OF INCOME TAX & ANOATHER
                                                           ..... Respondents

Through Mr. N.P. Sahni, Sr. Standing Counsel & Mr. Ruchesh Sinha, Advocate.

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA

SANJIV KHANNA, J. (ORAL):

The petitioner, a multi-State Cooperative Society, has filed two

appeals under Section 260A of the Income Tax Act, 1961 (Act, for

short), which relate to Assessment Years 1987-88 and 1988-89. By

order dated 7th November, 2000, the following two substantial

questions of law were admitted for hearing:-

"(1) Whether in the facts and circumstances of the case an amount of Rs.1,88,17,168/- was deductible from the petitioner's income as a deduction, by virtue of Section 36(1)(iii), on account of interest accrued in respect of capital

converted into loan for the period 1st July, 1986 to 30th June, 1987?

(2) Whether in the facts and circumstances of the case an amount of Rs.62,66,667/- was deductible from the petitioner's income as a deduction, by virtue of Section 36(1)(iii), on account of interest accrued in respect of capital converted into loan for the period 1st April, 1986 to 30th June, 1986?"

2. The facts are not in dispute. The appellant had built a fertilizer

plant at Hazira, West Bengal. Government of India held equity share

capital in the appellant society. By their letter dated 20th April, 1988,

the Government of India converted a part of their equity share capital

amounting to Rs.16 crores into a loan with retrospective effect; Rs.6

crores from 26th December, 1983 and Rs.10 crores from 20th January,

1984. As a result of the said conversion, the appellant became liable to

pay interest on the said amount, which was payable with effect from

26th December, 1983 on loan of Rs.6 crores and 20th January, 1984 for

loan of Rs.10 crores. Interest payable on the said loan was capitalised

upto 28th February, 1986, i.e., the date on which the commercial

production started in the fertilizer plant at Hazira.

3. In respect of Assessment Year 1987-88, the appellant had filed

return of income on 20th June, 1987 and for the Assessment Year 1988-

89 the return of income was filed on 28th June, 1988. In the two

returns, interest payable for the aforesaid period to the Government of

India in terms of letter dated 20th April, 1988 was not treated as an

accrued liability. Interest payable on or after 1st March, 1986 in view

of the letter of the Government of India dated 20th April, 1988 was not

shown and claimed as an expenditure in the profit and loss account

filed with the two returns. However, during pendency of the

assessment proceedings, the appellant filed revised returns (dates are

not available) and claimed deduction of interest under Section

36(1)(iii) for the period 1st March, 1986 to 30th June, 1986 (four

months) amounting to Rs.62,66,667/- and Rs.1,88,17,168/- for the

period 1st July, 1986 to 30th June, 1987 (it is apparent that the

accounting year of the assessee during the two years was from 1st July

to 30th June of the relevant previous year).

4. The Assessing Officer did not accept the claim for interest on the

ground that the liability had not accrued during the relevant previous

years but had accrued subsequently only because of letter dated 4 th

April, 1988.

5. In first appeal, the appellant assessee did not succeed in the

Assessment Year 1987-88 but succeeded in the Assessment Year 1988-

89.

6. The appellant and the Revenue preferred appeals before the

tribunal against the two conflicting orders passed by the first appellate

authority.

7. The tribunal by their common order dated 6th December, 1999

has accepted the stand of the Revenue and observed that the liability to

pay interest had not accrued during the relevant previous years and,

therefore, the interest which was payable in terms of letter dated 4 th

April, 1988 written by the Government of India cannot be claimed as

an expenditure under Section 36(1)(iii) of the Act in the two

assessment years. It can be claimed as an expenditure in the period

relevant to the assessment year when letter dated 4 th April, 1988 was

written and received.

8. At the very outset, we note that the appellant is following

mercantile system of accounting. Under the said system, both accrued

credits and liabilities have to be taken into consideration. Accrual

normally takes place before the amount is actually received or paid.

Expenditure as a debt or a legal liability once incurred is treated as

expenditure, even before it is actually disbursed.

9. There is difference between contractual liabilities and

statutory liabilities. Statutory liabilities are incurred under the statute

and become payable in terms of the charging Section of the applicable

statute. Contractual liabilities, on the other hand, become due and

payable as per the terms of the contract and when quantification is

settled by an agreement or otherwise. In the present case, the

transaction in question was contractual in nature and not statutory,

though Government of India was a party to the said transactions with

the appellant-assessee as it had invested substantial amounts, including

Rs.16 crores, which was subsequently vide letters dated 4th April, 1988

and 24th April, 1988 converted into a loan. These two letters state that

in view of the official cost estimates, the Government of India had

decided, in partial modification of their earlier letter dated 25 th March,

1986, to convert an amount of Rs.16 crores already drawn by the

appellant as equity into loan with retrospective effect. Interest on the

said amount, which was now converted into loan, should be disbursed

and paid to the Government of India. Letter dated 20 th April, 1988

further clarified and stated that conversion of equity into loan would be

in two stages; Rs.10 crores would be treated as converted into a loan

with effect from 20th January, 1984 and Rs.6 crores would be treated as

converted into a loan as on 26th December, 1983. The said letter

further records that dividend of 3% for the cooperative year 1986-87

might be worked out and paid on Rs.328 crores in place of Rs.344

crores. It is apparent that dividend had already been paid and the letter

further records that interest may be paid to the Government of India

immediately after making adjustment of dividend on Rs.16 crores with

effective date of conversion of Rs.16 crores mentioned in the letters.

10. It is clear from the said correspondence that Government of

India was earlier a shareholder and was entitled to dividend on share

capital to the extent of Rs.16 crores, which had been issued or were

allotted by the appellant-assessee. Pursuant to the letters dated 4th

April, 1988 and 20th April, 1988 there was a change in the character of

the relationship between the parties to the extent of Rs.16 crores, which

became a loan for the first time. The relationship of a shareholder

came to an end. The said conversion took place after end of the

respective previous years, subject matter of the present appeals. We do

not think, in these circumstances, it can be held that the liability had

accrued or crystallised during the relevant assessment years. It is clear

that the liability had accrued and had crystallised subsequently after the

end of the previous years on 30th June, 1986 and 30th June, 1987.

During the previous years, the appellant assessee had no clue or even

an indication that this liability might accrue or the shareholding to the

extent of Rs.16 crores would be converted into a loan. Before the said

letters, neither the appellant was liable to pay any amount as interest

nor Government of India had any right to claim any interest from the

appellant. Government of India was entitled to dividend and in fact it

appears that dividend had been paid. Till the two letters were written,

there was not even a possibility or whisper that any liability would

accrue or arise. Government of India did not have any right to claim

interest before these two letters were written and or were accepted by

the appellant, whether under pressure or otherwise.

11. Profits and gain of business are computed on ordinary

commercial principles. However, when there is a statutory interdict or

stipulation, regardless of the ordinary commercial principles, the

statute has to be followed. Section 36(1)(iii) of the Act does not help

the appellant -assessee in form of any statutory interdict. There is no

statutory provision that this amount should be allowed as interest

accrued pursuant to the two letters dated 4th April, 1988 and 20th April,

1988. No such contention has been raised or even argued. We do not

think that under the ordinary principles of accountancy the two

amounts were liabilities. It was only after letters dated 4th April, 1988

and 20th April, 1988, interest became payable and accrued liabilities

were incurred. Interest became due and payable for the first time.

Period for which interest became payable, is different and should not

be confused with time/date when liability accrued. As per the ordinary

principles of commercial accountancy, the said liabilities cannot be

allowed as an expenditure in the earlier years.

12. In Commissioner of Income Tax, Madhya Pradesh etc. versus

Swadeshi Cotton and Flour Mills Private Limited, 1964 (53) ITR 134

bonus was paid in the year 1949, after an award under the Industrial

Disputes Act. However, as the books for the year 1948 was not closed,

this amount added and shown as expenditure in the year relating to the

years 1948 and 1947. Referring to the nature and character of bonus in

the said case, i.e., profit bonus, it was observed that it was not wages

and at least not a liability for computing income tax as it was not an

expense in ordinary course of term. It was also observed that

reopening of accounts does not fit in with the scheme of the Indian

Income Tax as was observed in Commissioner of Income Tax versus

A. Ganpathy Naidu, 1964 (53) ITR 114, which relates to case of

receipts but the proposition of law could be equally applied to

expenses. [see also Laxmi Devi Sugar Mills Vs. CIT, (1993) 200 ITR

603 (SC)].

13. In Metal Box Company of India Limited versus Their

Workmen, 1969 (73) ITR 53, the Supreme court was concerned with

liability towards gratuity under the statutory provisions and whether

the amount calculated on actuarial valuation of the estimated liability

could be treated as expenditure in the profit and loss account. It was

observed that estimated liability under the gratuity schemes when

properly ascertained, it was possible to arrive at proper discounted

present value. Liability, though contingent provided it is discounted

i.e. its present value, if ascertainable, could be taken as trading

expenses once they were sufficiently certain, capable of valuation and

if profits cannot be properly estimated without taking them into

account. It was a case of an accrued liability in praesenti but payable

in future.

14. Learned counsel for the appellant has relied upon

Kedarnath Jute Manufacturing Company Limited versus

Commissioner of Income Tax, 1971 (82) ITR 363 (SC) and submits

that in this case the assessee was following mercantile system of

accounting and the claim of expenditure was allowed though no entry

had been made in the books of accounts. The facts of the said case are

distinguishable as the liability under the said case was under the sales

tax laws, i.e., statutory liability, which was created and had accrued

when a dealer either made the sales or purchases and the obligation to

pay tax had arisen and was attracted. In Laxmi Devi Sugar Mills

versus Commissioner of Income-Tax (supra), the government had

issued a notification on December 23, 1960 declaring that the workers

were entitled to bonus after the concerned accounting year for the

assessee had ended on September 19, 1960. The Supreme Court

observed that the accounting year concerned therein was one prior to

the coming into force of the Bonus Act. Therefore, there was no

existing liability upon the assessee to pay bonus during the said

accounting year. In other words, during the relevant accounting year,

the liability to pay bonus had not fastened on to the assessee. The

liability itself was created subsequent to the closing of the accounting

year. In the said situation, merely because the assessee has made a

provision would not entitle a deduction under section 10(2)(x) read

with section 10(5) of the Indian Income-tax Act, 1922.

15. In Commissioner of Income-tax versus Shri Goverdhan Ltd.

(1968) 069 ITR 0675, the court observed that it is well established that

the income may accrue to an assessee without actual receipt of the

same and if the assessee acquires a right to receive income, the income

can be said to have accrued to him though it may be received later on,

on it being ascertained. The legal position is that a debt is a liability

payable in praesenti or in future but it should have arisen and

obligation must have come into existence. The fact, that the amount

has to be ascertained, does not make it any less a debt, if the liability is

certain and what remains is only a quantification of the amount:

debitum in praesenti, solvendum in futuro.

16. Payment of a liability is distinct from creation or accrual of

the liability and under the mercantile system profits and gains of

persons are computed on the basis of principle of accrual during the

period for which profits and gains have to be computed. It is not

material that the liability is to be discharged at a future date or by

mistake or failure, no entry of the accrued liability was made in the

books of accounts. An assessee will be entitled to a particular

expenditure or deduction depending upon provisions of law and not on

the basis of existence or absence of entries in the books, which are not

conclusive. The same principle applies to accrual of income.

17. The supreme Court in Bharat Earth Movers versus

Commissioner of Income Tax, 2000 (245) ITR 428 has observed that

quantification or discharge of a liability of future date is not relevant

but what is to be determined for allowing a business liability is to

ascertain whether the liability had accrued and that the assessee was

certain about incurring the liability. In other words, the liability should

be capable of being estimated with reasonable certainty though actual

quantification may not be possible. If these requirements are satisfied,

the liability is not contingent. The liability is in praesenti though to be

discharged at a future date, even if the future date on which the liability

is discharged is not certain. The same principle applies to receipts,

which have to be added and brought to tax in mercantile system of

accounting. Again in Chief Commissioner of Income Tax versus

Kesaria Tea Company Limited, 2002 (254) ITR 434 it has been

observed that unilateral action on the part of the assessee by way of

writing off liabilities in their accounts does not necessarily mean that

the liability has ceased in law. In the said case, the profit tax liability

had not ceased finally. In the present case, the liability had not accrued

and was not even in contemplation of the appellant till letter dated 4 th

April, 1988 was issued, which is after the end of the two previous

years. Till then, Rs.16 crores was part of the equity share capital and

was not regarded and treated as a loan. The two previous years had

come to an end on 30th June, 1986 and 30th June, 1987, long before the

letter dated 4th April, 1988 was issued.

18. We will be failing, if we do not mention reference made by the

appellant to a decision of this Court in Additional Commissioner of

Income Tax, Delhi-II versus Rattan Chand Kapoor, 1984 (149) ITR

1, which relies upon Kedarnath Jute Manufacturing Company

Limited (supra). The said case again relates to a statutory liability, i.e.,

sales tax liability. The assessee had received demand notices for

earlier years in the period relevant to the Assessment Year 1964-65.

Revenue insisted and submitted that the assessee was following

mercantile system of accounting and, therefore, the sales tax liability

relating to earlier period cannot be allowed in the Assessment Year

1964-65. The contention was rejected observing that the decision in

Kedarnath Jute Manufacturing Company Limited (supra) was

distinguishable and was not an authority for the proposition that the

assessee could not have claimed deduction or expenditure in the year in

question. It was in the context of the factual matrix of the said case

that it was observed that if statutory liability was determined after the

end of the relevant assessment year, the assessee could still claim the

said liability in the year in which the demand was raised or the order

was passed. A Division Bench of the Delhi High Court took pragmatic

view of the situation as sometimes statutory liabilities are determined

or demand is raised after contest, much later and by that time, return

for the earlier assessment year stands filed or assessment proceedings

have come to an end. This is not the factual position in the present

case. In the present case, the liability itself had arisen much later with

the letter dated 4th April, 1988. This is the date on which liability

towards loan got created for the first time and the shares issued to the

Government of India were treated as either cancelled or null and void

and a loan and interest liability came into existence. It is on this date

that the appellant became liable to pay interest, though for earlier

period also. The letter dated 4th April, 1988 changed the nature of the

transaction and relationship completely from that of a shareholder to a

creditor and a debtor. Before the said date, the said liability did not

exist as there was no relationship of a creditor and debtor between the

Government of India and the appellant. The contention of the

appellant that letter dated 4th April, 1988 was a unilateral letter, does

not appear to be correct and in any case does not affect the outcome or

legal position. The appellant accepted the said letter and has acted

upon it. Therefore, the contention that it was a unilateral act is ill-

founded and would not in any case negate the effect of the said letter.

19. Similarly, reliance on the decision of the Bombay High Court in

Additional Commissioner of Income Tax versus Buckau Wolf New

India Engineering Works Limited, 1986 (157) ITR 751 is equally

futile. In the said case, the assessee had made payment of Rs.20,000/-

but the liability to pay entire amount of Rs.1 lac had accrued. Once

accrual has taken place, there is no difficulty, when an assessee is

following mercantile system of accounting. The present case is one

where accrual has not taken place in the years in question.

20. In view of the aforesaid legal position and discussion, the

questions of law mentioned above are answered in favour of the

respondent-Revenue and against the appellant-assessee. The appeals

are dismissed. No order as to costs.

SANJIV KHANNA, J.

SANJEEV SACHDEVA, J.

AUGUST 23, 2013 VKR/NA