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Motilal Padampat Sugar Mills vs Commissioner Of Income-Tax

High Court Of Judicature at Allahabad|30 April, 1974


JUDGMENT Satish Chandra, J.
1. The assessee is a company which carries on the business of manufacture and sale of sugar. For the assessment years 1960-61 and 1961-62 in one of its revised returns the assessee claimed a deduction of Rs. 1,00,000 in each year as deferred cane price under the price-linking formula envisaged by Section 3A of the Sugarcane Control Order, 1955. This claim was rejected by the Income-tax Officer on the ground that the liability had not accrued and that the assessee, though he was maintaining accounts on the mercantile system, had not made entries in its profit and loss account showing this liability. This view was upheld in appeal. The Tribunal took the same view in second appeal. At the instance of the assessee the following question of law has been referred for the opinion of this court:
"Whether, on the facts and in the circumstances of the case and on a true and proper interpretation of the Sugarcane Control Order, 1955, and orders made thereunder, the liability for additional sugarcane price under the price-linking formula was incurred by the assessee-company in the relevant previous year ?"
2. During the pendency of the appeal before the Appellate Assistant Commissioner, the chairman, Sugarcane (Additional) Price Fixation Authority passed an order on 28th December, 1964, quantifying the liability of the assessee to pay the additional price at Rs. 6,07.280 for the assessment year 1960-61 and Rs. 9,95,285 for the assessment year 1961-62. Consequently, before the Appellate Assistant Commissioner the assessee claimed a deduction of additional sum of Rs. 5,07,280 for the first, and an additional sum of Rs. 8,95,285 for the subsequent year. The Appellate Assistant Commissioner permitted the assessee to amend his claim accordingly, He, however, rejected it on the ground mentioned above.
3. The crucial question which requires consideration is whether the liability for the additional sugarcane price accrued during the assessment years in question in which the sugarcane was admittedly purchased by the assessee-company.
4. In Commissioner of Income-tax v. Janki Sugar Mills Co. Ltd. [1972] 84 ITR 348, 350 (All) a Division Bench of this court construed the provisions of the Sugarcane Control Order and held I "It appears from the record before us that the minimum price had been fixed under paragraph 3(1) of the Sugarcane Control Order and all that was necessary then was to compute the additional price payable by virtue of paragraph 3(3A) of the Order......Clause (3A) imposes a personal liability upon the producer of sugar to pay to the sugarcane grower or the growers' co-operative society from whom he purchased his sugarcane an amount in addition to the price fixed under paragraph 3(1) of the Control Order. It is a liability which arises as soon as the sugarcane has been purchased and the minimum price fixed in respect of such purchase under the Control Order. The liability does not depend upon any other circumstance for its accrual. No order of the Cane Commissioner or other authority is necessary. As soon as the purchase is effected and the minimum price is fixed no further condition needs to be satisfied before the liability arises."
5. In Kundan Sugar Mills v. Commissioner of Income-tax [1977] 106 ITR 704 (All), another Division Bench held that the liability created under Clause (3 A) is an accrued liability and was not a contingent liability.
6. These are direct authorities on the point that under the Sugarcane Control Order the liability in respect of the additional cane price accrues as soon as the sugarcane is purchased and the minimum price therefor has been fixed. In the present case it is not disputed that both these events happened during the previous years relevant to the assessment years in question. Thus, it is clear that the assessee incurred the liability to pay the additional cane price during the relevant assessment years. It was in no sense of the term a contingent liability.
7. On behalf of the revenue it was urged that the assessee-company was maintaining accounts on the mercantile system. It had none the less not passed entries showing the accrual of this liability. The assessee-company was disputing its liability. In view of these special facts, it is argued, it cannot, in law, be held that the liability to pay the additional price had accrued till the time when the dispute was settled and the liability was actually quantified in 1964.
8. In Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 363 (SC) the Supreme Court has held that the question whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto, and not on the view which the assessee may take of his rights, nor can the existence or absence of the entries in his books of account be decisive or conclusive of the matter. Thus, if in law the liability accrued, its accrual will not be defeated or fail by reason of the assessee not making the relevant entries in his books of account.
9. A Division Bench decision of this court in Commissioner of Income-tax v. Poonam Chand Trilok Chand [1976] 105 ITR 618 (All) is also material and in point. There the assessee who was a dealer under the U.P. Sales Tax Act collected from its customers an aggregate sum of Rs. 43,165 on account of purchase tax leviable on the sale of rab. This amount was carried in the account books in a reserve account called "reserve for purchase tax" instead of being debited to the profit and loss account. The assessee did so because it was disputing its liability to pay the purchase tax on the ground that it was not a first purchaser of rab and so was not liable under Section 3D of that U.P. Sales Tax Act. However, at the time of submitting his quarterly returns he paid to the department a sum of Rs. 11,534, retaining the balance of Rs. 31,631. In proceedings under the Income-tax Act the Income-tax Officer treated this amount of Rs. 31,631 which was the balance of the amount remaining unpaid as the assessee's income from business. A Division Bench relying upon the Supreme Court decision in Kedarnath Jute Mfg. Co.'s case [1971] 82 ITR 363 (SC) held that any assessee who follows the mercantile system of accounting is entitled to claim deduction even though the expenditure is not actually expended and that it was enough if the liability for such expenditure accrues. The fact that the assessee did not make appropriate entries in its books of account but kept the amount in reserve account would not also alter the position. The entries in the books of account are not in any way determinative of an item of income or expenditure. It is thus evident that since in law the liability to pay an additional price did accrue in the year in which the sugarcane was purchased, and within which the minimum price was fixed, the assessee was entitled to claim deduction of a reasonable estimated amount, or, in the alternative, if during the course of the assessment proceedings the actual amount is quantified, the quantified amount. In the present case the amount in respect of this liability had been quantified and so the assessee was entitled to the deduction of the entire amounts.
10. We, therefore, answer the question referred to us in the affirmative, in favour of the assessee and against the department. The assessee will be entitled to costs which are assessed at Rs. 200. The fee of the learned counsel for the department is also assessed at the same figure.
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Motilal Padampat Sugar Mills vs Commissioner Of Income-Tax


High Court Of Judicature at Allahabad

30 April, 1974
  • S Chandra
  • H Seth