Delhi High Court
The Commissioner Of Income Tax ... vs Dalmia Bharat Sugar And ... on 4 April, 2014
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on : 04.04.2014
+ ITA 129/2014
THE COMMISSIONER OF INCOME TAX (LTU).....
Appellant
Through : Sh. Sanjeev Sabharwal, Sr.
Standing Counsel with Sh. Ruchir Bhatia, Jr.
Standing Counsel.
versus
DALMIA BHARAT SUGAR AND INDUSTRIES LTD.
..... Respondent
Through : None.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1. In this appeal against the order of the Income Tax
Appellant Tribunal (hereafter the "ITAT") dated 27-9-2013 in
appeal no. ITA no. 5257/Del/2010, the CIT argues that the
ITAT erred in deleting the addition by the Assessing Officer
(hereafter the "AO"), of an amount claimed as a deduction in
A.Y. 2005-06, even though the expenditure was allegedly
incurred in the previous year 1996-97 towards cane price
arrears, pursuant to a notification issued in 1997.
2. During the assessment proceeding in respect of returns
filed by the assessee, the AO noted that the assessee had debited
differential sugar cane price amounting to ` 12,08,81,801/-
ITA 129/2014 Page 1
relevant to previous years 1996-97, 2002-03, 2003-04. The
assessee was then asked to show cause why these amounts
should not be disallowed as deductions in the A.Y. 2005-06,
since they ought to have been claimed in respect of the relevant
previous years in which the liability was incurred. The assessee
responded that in respect of financial year 1996-97, the
Notification dated 15-11-1997, issued to fix cane price was
challenged by the company and was consequently first, quashed
by the High Court of Allahabad, but later upheld by the
Supreme Court by its order dated 4-5-2004. Liability under the
notification consequently only arose in 2004. In respect of
financial years 2002-03 and 2003-04, it was submitted that the
notification imposing liability was only issued during the
financial year 2004-05, thus constraining the assessee into
claiming the deduction in the A.Y. 2005-06. The AO rejected
the assessee's explanation on the ground that the liability had
arisen in the financial year 1996-97 itself, since the company
was following mercantile system of accounting (by which an
expenditure has to be claimed when accrued), and in any event,
liability cannot be said to have arisen in 2004 when the Supreme
Court upheld the notification. Even in respect of financial years
2002-03 and 2003-04, although the notification was issued in
those years by the Government, it was only when the Supreme
Court upheld the power to fix price of sugar cane that
notifications dated 30-6-2004 and 5-10-2004 were reissued.
Consequently, the AO added ` 60,20,743/- and the deduction
ITA 129/2014 Page 2
was reduced accordingly. The Commissioner of Income Tax-
Appeals (hereafter referred to as "CIT-A") confirmed the order
of the AO. The ITAT, however, allowed the appeal of the
assessee, noting that the Allahabad High Court had quashed the
notification in 1996 itself, and, therefore, there was no occasion
for the assessee to incur liability for payment of arrears till the
Supreme Court upheld the Government's power to issue the
notification in 2004.
3. In this appeal against the ITAT's order, the CIT only
challenges the ITAT's order in respect of previous year 1996-
97. The CIT argues that the assessee followed the mercantile
system of accounting and thus, it should have shown the
expenditure as having occurred when it was incurred, i.e. in
financial year 1996-97, regardless of the assessee's challenge of
the notification before the High Court. Moreover, since it was
an ascertained liability, the expenditure ought to have been
provided for in the financial year 1996-97. The assessee, on the
other hand, argues that the ITAT's order ought to be confirmed.
4. The law in this regard is settled that a deduction must be
claimed when an ascertained legal liability accrues to the
assessee, even if the expenditure in discharge of the liability is
made much later. See Kedarnath Jute Manufacturing Co. Ltd. v.
CIT, (1972) 3 SCC 252; Pope the King Match Factory v. CIT,
[1963] 50 ITR 495, CIT v. Bharat Carbon and Ribbon
Manufacturing Co. (1999) 6 SCC 434. The only exception to
ITA 129/2014 Page 3
this principle is Section 43B of the Income Tax Act, which
details the limited circumstances in which deductions can be
allowed, in the computation of income of the previous year in
which the sum was actually paid. In both Kedarnath (supra) as
well as Pope the King Match Factory (supra), it was held that
since the liability was incurred in the relevant previous year,
when the demand by the tax authorities was received, and only
the quantum of the demand was under challenge, the deduction
ought to have been claimed in the computation of income in the
relevant previous year in which the liability was incurred.
5. Concededly, the cane price fixation notification itself was
under challenge before the Allahabad High Court and
subsequently, on appeal, before the Supreme Court, on the
ground that the State Government lacked the power to issue
such notification. In other words, the liability to make payment
of the price differential itself was under challenge. Thus, there
was no clear and ascertained legal liability till the date that the
Supreme Court upheld the notification in 4-5-2004, as the
Allahabad High Court had quashed the notification on 11-12-
1996.Consequently, this Court finds that this expenditure could
have been claimed only in the A.Y. 2005-06.
6. This Court also holds that the entitlement of an assessee
to a deduction depends on the relevant provision of law and not
on the manner of accounting followed by the assessee. See
Kedarnath (supra). Thus, the question of whether the assessee
ITA 129/2014 Page 4
followed the mercantile system of accounting or the cash system
is immaterial here.
7. For the above reasons, no substantial question of law
arises for consideration. The appeal is accordingly dismissed.
(S. RAVINDRA BHAT)
JUDGE
(NAJMI WAZIRI)
JUDGE
APRIL 04,2014
ITA 129/2014 Page 5
