Cit vs Dhampur Sugar Mills Ltd.

ORDER R.K. Agrawal, J.

The Income Tax Appellate Tribunal, Delhi has referred the following questions of law under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for opinion to this court:

"1. Whether on the facts and in the circumstances of the case, the learned Tribunal was right in law in holding that the amount of Rs. 12,66,429 being excess levy sugar price was not taxable in the hands of the assessee-company in the year under consideration ?

2. Whether on the facts and in the circumstances of the case, the learned Tribunal was right in law in deleting the interest of Rs. 2,89,026 and also in confirming the deletion of interest of Rs. 1,43,282 on the amount of excess levy sugar price claimed by the assessee-company?"

2. The present reference relates to the assessment year 1974-75 for which the relevant previous year ended on 30-9-1973. The assessee is a public limited company engaged in the manufacture and sale of crystal sugar. The Government of India vide notification dated 15-6-1972, issued under section 3 of the Essential Commodities Act, 1955 fixed the price of levy sugar of D-30 grade (exclusive of excise duty) for the Central Zone at Rs. 138.87 per quintal. The assessee was required to supply the sugar to the nominees of the government at the above rate. The assessee felt that the price fixed was low. It, therefore, filed a writ petition before this court wherein an interim order was passed on 27-7-1972 whereby the Government of India was restrained from giving effect to the impugned notification dated 15-6-1972 on the condition that the assessee furnishes bank guarantee before the Registrar of this court in respect of the difference between the price fixed by the Government and the price at which the sugar was actually sold. The assessee was, therefore, allowed to charge the higher price of Rs. 188.21 per quintal for the sale of the levy sugar from the nominees of the government. The assessee complied with the above requirement of the order of this court. The assessee collected a sum of Rs. 23,12,210 up to 30-9-1972 during the assessment year 1973-74 in excess of the amount as per the price fixed by the government. During the assessment year in question for which the accounting year was 1-10-1972 to 30-10-1973, the assessee collected another amount of Rs. 12,66,429 from 9-10-1972 to 30-2-1973 in excess of the price fixed by the government. The question before the Income Tax Officer arose regarding the assessability of this amount of Rs. 12,66,429. It was pointed out to the Income Tax Officer that the assessee's writ petition has been dismissed by this court vide order dated 13-3-1975. It was made clear by this court that the dismissal would not effect the right of any person entitled to claim any relief with regard to any excess price charged by the assessee in appropriate proceeding. It was, therefore, claimed before the Income Tax Officer that the assessee became liable to refund the amount to the persons from it was charged in excess of the price fixed by the government. It was further pointed out to the Income Tax Officer that since then the Government of India had passed the Levy Sugar Price Equalisation Fund Act, 1976 (hereinafter referred to as 'the Levy Act') which came into effect on 1-4-1976. Under the Levy Act, the government had created Levy Sugar Price Equalisation Fund. Under section 3 of the Levy Act, the assessee was required to transfer the excess sugar price to the fund along with interest @ 12.5 per cent p.a. from the date of realization of the amount to the date of its transfer. It was urged before the Income Tax Officer that in view of the aforesaid provisions the amount was to be transferred to the Levy Sugar Price Equalisation Fund with interest @ 12.5 per cent p.a. from the date of realization to the date of transfer and, therefore, the amount of Rs. 12,66,429 did not belong to the assessee. It was further claimed before the Income Tax Officer that the assessee was also entitled to the deduction of interest on the above amount which was payable to the aforesaid Fund. It was also stated before the Income Tax Officer that in the assessment year 1972-73, a similar amount was taxed by the Income Tax Officer but the addition was deleted by the Appellate Assistant CITand his order was upheld by the Tribunal. In the assessment year 1973-74, the Income Tax Officer himself did not tax it. The Income Tax Officer rejected the assessee's contention. He observed that in the year under appeal, the amount was realised as part and parcel of the sugar price and, therefore, it formed part of the sale proceeds of sugar and was liable to be taxed as the assessee's income. The Income Tax Officer further observed that the order of the Tribunal had not been accepted by the department and the matter had been taken in reference to this court. The Income Tax Officer, as a corollary, also rejected the assessee's claim for deduction of interest. The assessee appealed to the Appellate Assistant CITwho accepted its claim that the amount of Rs. 12,66,429 did not form part of the assessee's income. The Appellate Assistant CITalso found that the Supreme Court in its judgment dated 6-11-1972 in the case of Panipat Sugar Mills had upheld the validity of the fixation of price of levy sugar by the Government of India. He further found that the Supreme Court, vide order dated 8-7-1975, in the case of L.H. Sugar Factories and Oil Mills Ltd. v. Union of India (supra), had also confirmed that the excess money realized by the assessee should be made over to the government which would in turn disburse the same to the respective claimants. He also took note of the fact that the Levy Act provided that all such excess realization made before or after the commencement of the Levy Act was to be credited to the Levy Sugar Price Equalisation Fund. He, therefore, held that the excess amount realized by the assessee represented its liability and that it did not acquire any right over it. He accordingly directed the deletion of Rs. 12,66,429. The Appellate Assistant CITthen dealt with the claim of the assessee for the deduction of interest. He agreed in principle that the assessee was entitled to such deduction. He accordingly allowed the interest on the above amount of Rs. 12,66,429 which came to Rs. 1,43,282. It was claimed before the Appellate Assistant CITthat the assessee was also entitled to the deduction of another interest of Rs. 2,89,026 on the amount of Rs. 23,12,210 collected upto 30-9-1972. The Appellate Assistant CITrejected this claim observing that this was not relevant for the assessment year under consideration. The department challenged the findings of the Appellate Assistant CITwith regard to the deletion of Rs. 12,66,429 as also with regard to the allowance of interest amount to Rs. 1,43,282. The assessee, on the other hand, challenged the disallowance of interest of Rs. 2,89,026.

3. The Tribunal upheld the deletion of the amount of Rs. 12,66,429 on the ground that it was not taxable in the hands of the assessee as its income. It further held that interest of Rs. 2,89,026 and Rs. 1,43,282 is allowable as deduction in view of the provisions of section 3 of the Levy Act.

4. We have heard Shri A.N. Mahajan, the learned counsel for the revenue, and Shri Rakesh Ranjan Agrawal, the learned counsel for the respondent.

5. The learned counsel for the revenue submitted that as the amount of Rs. 12,66,429 has been realized towards excess levy sugar price, it was a trading receipt at the hands of the respondent, assessee and, therefore, ought to have been included while computing the income. He further submitted that the liability to pay interest did not accrue during the assessment year in question as the Levy Act came into force on 1-4-1976. He relied upon a decision of the Apex Court in the case of K.C.P. Ltd. v. CIT(2000) 245 ITR 421 (SC).

6. The learned counsel for the respondent-assessee, however, submitted that the respondent had realized the amount of excess levy sugar price under the interim order passed by this court on 27-7-1972 in the writ petition filed by it. It was required to furnish security in the form of bank guarantee for the amount realized by it every month and the court had observed that it will be open to the court to deal with the bank guarantee and pass order as to how that amount is to be distributed at the time of final order on the writ petition. He, thus, submitted that the amount so realized was hedged with certain conditions and, therefore, it cannot be said that the assessee had unfettered right to deal with the amount of excess levy sugar price. It was subject to further orders which may have been passed by this court. He relied upon the following decisions:

(i) CIT v. Chodavaram Co-operative Sugars Ltd. ( 1987) 163 ITR 420 (AP);

(ii) CIT v. Mysore Sugar Co. Ltd. (1990) 183 ITR 113 (Karn.);

(iii) Dhampur Sugar Mills Ltd. v. CIT (1991) 188 ITR 787 (All.);

(iv) CIT v. Seksaria Biswan Sugar Factory (P) Ltd. ( 1992) 195 ITR 778 (Bom.);

(v) CIT v. Janta Co-operative Sugar Mills Ltd. (1998) 233 ITR 635 (Punj. & Har.);

(vi) CIT v. South India Sugars Ltd. (2001) 248 ITR 92 (Mad.);

(vii) CIT v. Sharda Sugar Industries Ltd. ( 1999) 239 ITR 393 (Bom);

(viii) CIT v. Walchandnagar Industries Ltd. (2003) 262 ITR 212 (Bom); and

(ix) CIT v. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524` (SC).

He also submitted that against the judgment of this court in the case of Dhampur Sugar Mills Ltd. (supra), i.e., inter parte, and which related to the assessment year 1972-73, the department's Special Leave Petition No. 5162 of 1995 has been dismissed by the Hon'ble Supreme Court, vide order dated 4-12-1995, as time-barred as well as on merit. According to him, as Special Leave Petition has been dismissed on merit also, the judgment of this court relating to earlier assessment year, i.e., 1972-73, is binding upon the authorities and, therefore, the amount of excess levy sugar price was not includible in its income. He further submitted that the liability to pay the amount of interest in question under the Levy Act had accrued during the present assessment year and, therefore, had rightly been allowed as it is following the mercantile system of accounting.

7. Having heard the learned counsel for the parties, we find that under the interim order passed by this court on 27-7-1972, the respondent-assessee has realized the excess levy sugar price. The interim order passed by this court is reproduced below:

"Issue notice. Notices have been accepted on behalf of respondent Nos. 1 and 3. By Shri G.K. Sahai on behalf of the respondent No. 3 by Shri S.S. Bhatnagar.

Heard counsel for the parties. Respondents are restrained from giving effect to the impugned order dated 15-6-1972 issued in exercise of the powers given under section 3 of the Essential Commodities Act, 1955 on condition that the petitioner furnishes bank guarantee before the Registrar of this court in respect of the difference between the price fixed by the government and the price at which the sugar is actually sold. The bank guarantee shall be furnished to the satisfaction of the Registrar of this court every month in respect of the transaction in that month within four weeks of the actual sale. It will be open to this court to deal with the bank guarantee and pass orders as to how that amount is to be distributed at the time of final orders on the writ petition."

8. Subsequently, the writ petition preferred by the respondent in which the aforesaid interim order had been passed, had been dismissed vide judgment and order dated 13-3-1975 with the following observations:

"In the result the petition fails and is dismissed without any order as to costs. The security furnished by the petitioner under the interim order of this court is discharged. The bank guarantee will be returned to the counsel for the petitioner. It is made clear that nothing contained in this order will effect the right of any person entitled to claim any relief with regard to any excess price charged by the petitioner in appropriate proceedings."

9. From a reading of the aforesaid two orders, it will be seen that the respondent was required to furnish security in the form of bank guarantee with the Registrar of this court every month in respect of the difference between the price fixed by the government and the price on which the sugar was actually sold. How the bank guarantee would be dealt with and how the amount is to be distributed, was to be considered by this court at the time of final orders. Thus, the respondent had realized the excess price under the interim order of this court which was not unconditional but hedged with certain conditions.

10. In the case of the respondent-assessee itself for the assessment year 1972-73, this court has held that the difference amount cannot be treated to be its income.

11. In the case of Chodavaram Co-operative Sugars Ltd. (supra), the Andhra Pradesh High Court has held that the right to collect the amount in excess of the price fixed by the Controller for the assessment year 1974-75 was saddled with obligation to deposit the amount in a separate account and the assessee was always held accountable for the excess pending the decision of the Supreme Court. The provision of the Levy Act imposed an obligation upon the assessee to repay the money to the constituent where the excess price was collected before or after the commencement of the Act and, therefore, the assessee did not collect the excess sale price as part of its trading receipt.

12. In the case of Mysore Sugar Co. Ltd. (supra), the Karnataka High Court has held that the assessee was permitted to collect the amount in question only in pursuance of the interim order made by the High Court, which was subject to several conditions, to make the right absolute and, therefore, the collection made by the assessee at an enhanced rate, is an inchoate as this extra amount did not accrue to the assessee until the finalisation of the dispute pending before one court or the other. It is only on the final determination of the amount that right to such income in the nature of levy price would arise or accrue, until then there is no liability in praesenti in respect of the additional amount of price claimed by it. The Karnataka High Court had applied the principles laid down in the first class of cases noticed by the Hon'ble Supreme Court in the Hindustan Housing & Land Development Trust Ltd case (supra) where it was held that where the right to receive the payment is in dispute and it is not merely a question of quantifying the amount to be received, no income would arise or accrue till the price is finally fixed.

13. In the case of Seksaria Biswan Sugar Factory (P) Ltd. (supra), the Bombay High Court has agreed with the view taken by the Karnataka High Court in the aforementioned case.

14. In the case of Janta Co-operative Sugar Mills Ltd. (supra), the Punjab and Haryana High Court has agreed with the aforementioned decisions of the Andhra Pradesh High Court, the Karnataka High Court and the Bombay High Court and had held that the difference in price of the levy sugar realized by the assessee could not be treated as its income arising or accruing to it for the relevant assessment year 1975-76 as the difference of price in levy sugar realized by it under the orders of the High Court, was hedged by certain conditions.

15. In the case of K.C.P. Ltd. (supra), the Apex Court was considering the realization of excess levy sugar price during the assessment year 1972-73 on the basis of an interim order passed by the Andhra Pradesh High Court on 31-3-1970, which was to following effect:

". . . the operation of notification issued by the respondent herein namely the Union of India, Ministry of Food and Agriculture, Community Development and Co-operation, New Delhi, dated 20-2-1970 and 1-3-1970, insofar as it relates to Zone No. 2 be and hereby is suspended pending further orders on this petition and it is further ordered that the petitioners be and hereby are permitted to sell sugar at the rate prevailing prior to the said notification, i.e., at Rs. 131.01 plus excise duty pending further orders on this petition." (p. 423) The Apex Court has held that:

"In the case at hand, the excess amount of Rs. 14,96,130 was realized by the appellant-company in the ordinary manner of its business activities and as the price of sugar sold by it. The amount was retained by the assessee as price of sugar sold by it though the right of the appellant-company to realize the amount was the subject of dispute. The interim order of the High Court, looking to the phraseology employed therein, would not make any difference in the nature of receipts by the assessee. Though learned senior counsel for the appellant submitted that the excess amount was retained in a separate account, that would also not make any difference in our opinion. Firstly, the consistent view of this court, as noticed hereinabove, is that merely maintaining a separate account under a heading given by the assessee would not alter the nature of the receipt if it actually be a trading receipt. Secondly, nothing is available on record to find out how and in what manner the separate account was maintained by the assessee." (p. 426)

16. The decisions of the Andhra Pradesh High Court in the case of Chodavaram Co-operative Sugars Ltd. (supra), of the Karnataka High Court in the case of Mysore Sugar Co. Ltd. (supra) and of the Bombay High Court in the case of Seksaria Biswan Sugar Factory (P) Ltd. (supra) were considered and were distinguished by the Apex Court on the ground that one common feature of all the orders is that the realization of excess levy sugar price of the respective assessee was hedged by certain conditions. The Apex Court has held as follows:

"...The decisions so relied on are CIT v. Mysore Sugar Co. Ltd. (1990) 183 ITR 113 (Karn.); CIT v. Seksaria Biswan Sugar Factory Ltd. (1992) 195 ITR 778 (Bom) and CIT v. Chodavaram Co-operative Sugars Ltd. (1987) 163 ITR 420 (AP). We have carefully perused the decisions. It is clear from the facts stated by the High Courts that in each of the cases the assessee's right to realize the excess price was the subject-matter of dispute pending in the High Court and the High Courts had passed different interim orders pursuant to which the respective assessees were collecting the excess price. Though the interim orders of the High Courts are differently worded in the three cases, one common feature of all the orders is that the realization of the excess price by the respective assessees was hedged by several conditions one of which was that the assessee shall refund the amount received in excess of the price fixed in the event of the pending dispute being decided adversely to the assessee by the court. Thus the receipt of the amount by the assessee was clearly in associated with a liability to refund the amount, which liability was ascertainable and quantified. Such is not the case at hand. . . ."(p. 427)

17. In the case of South India Sugars Ltd. (supra), the Madras High Court has applied the distinction pointed out by the Apex Court in the decisions of the Andhra Pradesh High Court, the Karnataka High Court and the Bombay High Court referred to above, in the case of K.C.P. Ltd. (supra).

18. In the case of Hindustan Housing & Land Development Trust Ltd. (supra), the Apex Court has laid down that

18. In the case of Hindustan Housing & Land Development Trust Ltd. (supra), the Apex Court has laid down that ". . there is a clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles ...." (p. 530)

19. In the case of Sharda Sugar Industries Ltd. (supra), the Bombay High Court has followed the aforementioned decisions and had held that

19. In the case of Sharda Sugar Industries Ltd. (supra), the Bombay High Court has followed the aforementioned decisions and had held that "The law is thus well-settled that where the right to receive payment is in dispute, no income will arise or accrue. In the present case, admittedly, the amounts in question were collected and retained by the assessee as deposits pending the final decision of the writ petition by the Allahabad High Court pursuant to the interim order of that court and that too subject to furnishing a bank guarantee in respect thereof. There was a serious dispute about the right of the assessee to receive the amount collected by the assessee. In other words, the right to receive the amount was inchoate or contingent. The extra amount did not accrue to the assessee until the finalisation of the dispute pending in the court in favour of the assessee. The assessee was accountable for the excess collection and obliged to refund the same if so directed by the court. Such amounts collected by the assessee are not assessable as the income of the assessee. In that view of the matter, in our opinion, the Tribunal was right in coming to the conclusion that the amounts in question were not assessable in the hands of the assessee in the assessment years under consideration." (p. 398)

20. Similar view has been taken in the case of Walchandnagar Industries Ltd. (supra).

21. Applying the principles laid down by the Apex Court in the cases of K.C.P. Ltd. (supra) and Hindustan Housing & Land Development Trust Ltd. to the facts of the present case, we find that here also the right to collect/realize extra levy sugar price was on account of the interim order dated 27-7-1972 passed by this court, which was hedged with certain conditions. Thus, the right to receive the payment had been in dispute. It, therefore, did not form part of the trading receipt of the respondent-assessee. We are in respectful agreement with the earlier decision of this court, which is inter parte relating to previous assessment year 1972-73. In this view of the matter, we answer the first question of law in the affirmative, i.e., in favour of the assessee and against the revenue.

22. So far as the question as to whether the amount of interest of Rs. 2,89,026 and Rs. 1,43,282 on the amount of excess levy sugar price is allowable deduction or not is concerned, it may be mentioned here that the Levy Act came into effect from 14-1976. The liability for payment of interest arose only after the Levy Act came into force, i.e., 1-4-1976. Prior to it, there was no liability. No, doubt, it is true that, under the provisions of the Levy Act, the respondent-assessee was liable to deposit the entire amount of excess levy sugar price along-with interest at the rate of 12.5 per cent p.a. The Apex Court in the case of K.C.P. Ltd. (supra) has held that the transfer of amount to the Levy Sugar Price Equalisation Fund to the government at a subsequent date, does not have any bearing on the taxability of the amount which was a trading receipt on the earlier assessment year.

23. There is a distinction between the actual liability in praesenti and a liability de juturo which for the time being is only contingent. The former is taxable but not the latter as held in Peter Merchant Ltd. v. Stedeford (1948) 30 Tax. Cas. 496; Indian Copper Corpn. Ltd. v. CIT (1977) 110 ITR 434 (Pat.); CIT v. Instrumentation Ltd. (1987) 167 ITR 354 (Raj.); Standard Mills Co. Ltd. v. CIT (1998) 229 ITR 366 (Bom). It is also settled that an assessee who follows the mercantile system of accounting, is entitled to claim a deduction even though the expenditure is actually not expended. It is enough if the liability for such expenditure accrues. If in law the liability accrued, this accrual will not be defeated or fail by a reason of the assessee not making entries in the books of account as held in the case of Kederanath Jute Mfg. Co. Ltd v. CIT (1971) 82 ITR 363 (SC). It is also well settled that if a business liability has definitely arisen in the accounting year, a deduction should be allowed although the liability may have to be estimated and discharged at a future date, as held in the case of Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC); Kundan Sugar Mills v. CIT ( 1977) 106 ITR 704 (All.) and Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC). At the same time, if the liability to a particular sum has been incurred during the accounting year and if otherwise the sum is allowable as a revenue expense, then whether the sum has been actually paid or not is immaterial; the liability so incurred has got to be allowed as a revenue expense, as held by the Apex Court in the case of Haji Lal Mohd. Biri Works v. CIT (1997) 224 ITR 591 (SC). It is also well-settled that in the case of a statutory liability, the accrual depends upon the term of the statute. The quantification or ascertainment cannot postpone its accrual to the extent of admitted liability, as held in the case of CIT v. L.H. Sugar Factory & Oil Mills (P) Ltd. (1978) CTR (All.) 211; CIT v. Swadeshi Mining & Mfg. Co. Ltd. (1978) 112 ITR 276 (Cal.); CIT v. Swadeshi Mining & Mfg. Co. Ltd. (1979) 118 ITR 975 (Cal.); CIT v. Shri Sarvaraya Sugars Ltd. (1987) 163 ITR 429 (AP); CIT v. Aggarwal Rice & General Mills ( 1989) 180 ITR 29, 31 (Punj & Har); CIT v. Ram Chand Kanshi Ram (1989) 180 ITR 114, 166 (Punj & Har). Where a statute imposes liability with retrospective effect, such liability, even for past years, accrues in the accounting year wherein the statute first comes into operation, as held by the Calcutta High Court in the case of CIT v. West Ghusick Coal Co. Ltd. (1981) 129 ITR 62 (Cal). Further it is not in all cases correct to say that a statutory liability created in a particular year, becomes liability for deduction in that year under the mercantile system of accounting. It depends on the facts and circumstances of the case and on statutory provisions in that regard, as held by the Calcutta High Court in the case of CIT v. Padmavati Raje Cotton Mills Ltd. (1993) 203 ITR 375 (Cal.). In the aforesaid case an ordinance levying market fees was promulgated on 15-5-1980. The demand for the market fees relating to earlier years was made during the accounting year relevant to the assessment year 1983-84. On these facts, it has been held that though the statutory liability was created in the year 1980, the said liability became real and enforceable when the demand was made. Therefore, the assessee was held entitled to deduction in respect of such demand for the assessment year 1983-84.

24. The Levy Act, as already mentioned hereinbefore, came into force on 1-4-1976. By section 3(1) of the Levy Act, a fund, called the Levy Sugar Price Equalisation Fund, was established. Sub-section (2) of section 3 provides that all amount representing excess of realization made by the assessee irrespective of whether such realizations were made before or after the commencement of the Levy Act, to be deposited in the said fund. If the realization has been made before the commencement of the Levy Act, then the amount had to be deposited within 30 days and if the realization was after the commencement of the Levy Act, then within 30 days of the date when such excess realization was made, along with interest @ 12.5 per cent p.a. from the date when such amount was realized. Thus, from the provisions of the Levy Act, it is seen that the amount of excess realization along with interest is to be deposited within a specified period after the commencement of the Levy Act, i.e., 1-4-1976.

25. Applying the principles laid down in the aforementioned cases to the facts of the present case, we are of the considered opinion that the liability accrued only after 1-4-1976 and not before that date. In this view of the matter, the amount of interest which the respondent was liable to pay on excess realization of sugar price to the fund, cannot be said to have accrued during the relevant previous year ending on 30-9-1973, relating to the assessment year 1974-75.

26. In view of the foregoing discussion, our answer to the question No. 2 is in the negative, i.e., in favour of the revenue and against the assessee.

27. However, in view of the divided success, the parties shall bear their own costs.