Per Shri D. S. Meenakshisundaram, Judicial Member - The Ravalgaon Sugar Farm Ltd., the appellant herein, is a company carrying on the business in the manufacture of sugar, confectionery, sugar candy and sugar machinery. This appeal relates to its assessment for the assessment 1977-78, for which the previous year ended on 30-9-1976. The dispute in the present appeal pertains to following two additions made by the departmental authorities to the income of the appellant :
i. Rs. 16,86,799 credited to levy sugar sale suspense account. ii. Rs. 64,534 credited to sales tax set-off account.
2. In paragraph 4 of the assessment order, the ITO stated as follows, for adding the credit in levy sugar sales suspense account :
'It is seen from the records, that the assessee-company has transferred Rs. 16,97,374 to levy sugar sales suspense a/c being difference received by the company between the price notified by the Government and price paid. The assessee-company has not taken any credit in the profit and loss a/c. The assessee-company should have offered the same for taxation as the amount is received by the company though bank guarantee have been given to Bombay High Court. As the assessee is following the mercantile system of accounting, I consider the same as income of the assessee and add back to total income of the assessee-company.'
3. When the assessee carried on the matter in appeal, the Commissioner (Appeals) held that what the ITO had tried to tax was not a mere claim to a profit but the actual profit earned on the sale proceeds, that as per the account book of the assessee, the levy sugar had been sold at the price allowed by the Court not at the price fixed by the Government and, hence, the ITO had rightly the profit realised on the sales effected as per the account books maintained. He further held that the decision in the case of CIT v. Associated Commercial Corpn.  48 ITR 1 (Bom.) relied on by the assessee, would not apply to the facts of the present case. The Commissioner (Appeals) further held that the provision of a bank guarantee was only in respect out that in the assessees case, they were dealing with the actual sale proceeds on one side and the bank guarantee for a contingent liability in future. The Commissioner (Appeals) further observed that there was no evidence that the ownership of additional price realised over the reduced control price fixed by the Government had been diverted by an overriding title in favour of the equalisation fund. The Commissioner (Appeals) was of the view that the surrendering to the equalisation fund was also contingent on a lower price being fixed by the Court in the future and that even on that date, the Court had not fixed the final price. The Commissioner (Appeals) held that as it was, the assessee was the full owner of the amounts received on the basis of the Courts interim order and nobody hand any overriding title to the additional amount received over the reduced control price fixed by the Government He, therefore, rejected the second argument of the assessee that the ownership of the additional amount realised as per the Courts interim order was diverted by an overriding title to equalisation fund as of no substance. He held that the amount of Rs. 16,86,799 was actually part of the sale proceeds of the assessee on the basis of the entries in the account books and, hence, part of the income of the assessee. He, therefore, rejected the assessees appeal on this ground. He further observed that as and when the assessee had to return a part of the amount in case the Court fixed a lesser price than the price fixed by the interim order, the ITO had to allow the difference which had to be deposited with the equalisation fund as deduction in the assessment of the year when the liability was known.
4. The appellant feels aggrieved by this decision of the Commissioner (Appeals) and has come up in appeal to the Tribunal.
5. Shri B. K. Khare, the learned charted accountant for the appellant, submitted that the reasoning and conclusion of the Commissioner (Appeals) were erroneous and not justified by the facts of the case. The learned counsel pointed out that the assessees title to the entire amount of Rs. 16,86,799 was in dispute, as the appellants writ petitions challenging the orders of the Central Government fixing the price of sugar were still pending before the Bombay High Court. He further submitted that this amount of Rs. 16,86,799 was received by the assessee under an order a passed by the Court on 26-2-1976, by furnishing a bank guarantee in terms of the said order pending the final decision of the Court in the writ petition and that, therefore, the assessee had no right, title or interest in the said amount which it had transferred to the suspense account, as directed by the Court in its first interim order dated 19-9-1975. The learned counsel further argued that the title of the appellant to this amount was in further jeopardy on account of the passing of the Levy Sugar Price Equalisation Fund Act, 1976, which was brought into force with effect from 1-4-1976 by a notification of the Government of India dated 25-3-1976. The learned counsel referred us to section 2(b) defining excess realisation, section 3(3) (a) and 3(3) (b) of the said Act and contended that in view of the above provision, which had come into force during the previous year, the assessee had no title in the amount of Rs. 16,86,799 and that, therefore, it could not be considered as its income in the year of account. The learned counsel submitted that the fact that the assessee had credited this amount in its books of account would not make it its income. He further submitted that the entire reasoning of the Commissioner (Appeals) was erroneous and contrary to the well settled principles of law on the subject and, therefore, the addition of Rs. 16,86,799 should be deleted.
6. Shri A. A. Makhija, the learned departmental representative, submitted that the decision of the Supreme Court, in the case of Kedarnath Jute Mfg. Co Ltd. v. CIT : 82ITR363(SC) , answers all the objection of the appellant against the taxing of this amount as its income in this year. The learned departmental representative relied on the finding of the authorities below and pointed out that when the appellant had realised this amount as part of its price on the sale of levy sugar, the other circumstances mainly the pendency of the petition or the passing of the Levy Sugar Price Equalisation Fund Act, would be of no consequence, since the entire amount had come into the hands of the appellant as part of the sale proceeds. He submitted that this amount which was part of the trading receipts of the assessee, was rightly brought to charge as forming part of the income of the appellant in the year under appeal.
7. It is seen from the papers placed before us by the learned counsel for the appellant that by an order dated 28-11-1974 under the Sugar (Price Determination for 1974-75 Production) Order, 1974, the price of levy sugar of D-29 grade sold by the appellant was fixed at Rs. 156.99 with immediate effect by the Government. Subsequently, the price of levy sugar was reduced to Rs. 140.31 by a second amendment order passed by the Government on 11-7-1975 with effect from 12-7-1975. Again by its order dated 29-11-1975, the Government fixed the price of levy sugar D-29 grade at Rs. 140.31 with immediate effect. Later, on 9-2-1976, by an amendment order, the Government fixed the price of levy sugar at Rs. 142.96, which was further enhanced by a second amendment order dated 3-8-1976 to Rs. 155.56. All the above orders passed by the Government fixing the price of levy sugar manufactured by the assessee, have been challenged by the assessee as illegal and void, in its writ petition in Special Civil Application No. 3600 of 1975 on the file of the Bombay High Court. In the said writ petition, the appellant has impleaded the Union, of India, the Food Corporation of India and two others as respondents. In paragraph 23(f) of its writ petition, the appellant has prayed for an order, pending the hearing and final disposal of its writ petition, to the Union of India, Respondent No. 1, 'to order purchase of levy sugar by itself or its nominees from the appellant only on the payment of price of Rs. 219 per quintal or such other price and on such other condition or conditions as this Court may deem fit'. There is no dispute that this writ petition field by the appellant is still pending decision before the Bombay High Court.
8. Pending the final disposal of the writ petition, the High Court has passed interim orders on three dates, viz., 19-9-1975, 16-12-1975 and again on 26-2-1976. In the first order dated 19-9-1975, their Lordships of the Bombay High Court permitted the appellant to sell levy sugar at the rates prevailing prior to the second amendment order dated 11-7-1975 and further directed the appellant to maintain a separate account of the sale of levy sugar pending the disposal of the petition. By their order dated 16-12-1975, their Lordships stayed the operation of the Sugar (Price Determination for 1974-75 Production) Order, dated 28-11-1974, as against the appellant and other petitioners and directed the respondents to pay the petitioners at Rs. 156.99 per quintal for D-29 grade sugar or at the corresponding rates of other sugar fixed under the sugar (Price Determination for 1974-75 Production) Order dated 28-11-1974. The order dated 26-2-1976, passed by their Lordships, embodies the consent terms under which an interim arrangement was arrived at between the appellant and other petitioners and the Government of India and other respondents in the writ petition. While para 2 of this Order restrains the respondents from enforcing or implementing their impugned order dated 29-11-1975 or the amendment order dated 9-2-1976 pending the hearing and final disposal of the writ petition, the appellant was allowed any one of the options regarding the excess price collected by it from the respondents during the pendency of the petition. The appellant opted for the method of furnishing a bank guarantee to the Registrar of the High Court in respect of the full difference between the price notified by the order dated 28-11-1974 and the price fixed by the later order dated 29-11-1975 for deliveries made up to 8-2-1976 and the order dated 9-2-1976 for deliveries made on or after that date with interest at 12 percent per annum.
9. We set out below the details of levy price difference realised during the year ended 30-9-1976, of the appellant under the above order of the Court :
No. of Bags
Diff. per Bag
Total amount of diff.
29-11-1975 to 8-2-1976
29-11-1975 to 8-2-1976
9-2-1976 to 2-8-1976
9-2-1976 to 2-8-1976
3-8-1976 to 30-9-1976
10. From the above facts, it would be noticed that the entire amount has been paid under the orders of the Court on the appellant furnishing security in the form of a bank guarantee to the Registrar of the High Court, pending the final disposal of its writ petition. It is no doubt true that the money has come into the hands of the appellant. But at the same time, it had come into the appellants hands under the orders of the Court. Whether the appellant would be entitled to retain the entire amount or any part of it, is still a matter of decision by the High court in the writ petition. Till such final decision is pronounced by the High Court, it cannot be stated that the appellant has any title to the above amount of Rs. 16,86,799. To our mind, the case of the appellant is similar to that of a trustee who holds certain property or funds in a fiduciary capacity.
11. In fact, this position would be further clear from the provision of the Levy Sugar Price Equalisation Fund Act, a copy of which is available at pages 82 to 86 of the appellants paper book. According to section 2(b) (ii) of this Act, excess realisation. in relation to each grade of levy sugar 'includes any realisation representing the difference between the controlled price and the price allowed by the court by an interim order, if such interim order is set aside, whether, by the Court which made the order or in appeal or revision'. Section 3(1) establishes as Fund to be called the Levy Sugar Price Equalisation Fund. Section 3(2) (a) directs that the amounts representing all excess realisation made by the producers, irrespective of whether such excess realisation were made before or after the commencement of this Act, shall be credited to the Fund. Section 3(6) expressly declares that the obligation to credit amounts representing excess realisation to the fund shall be in addition to any penalty which may be imposed for the contravention of any penalty which may be imposed for the contravention of any provision of this Act. Section 7 of the Act specifically states that the excess realisation shall not be paid to any producer of sugar in the following words :
'Notwithstanding anything to the contrary contained in any other law for the time being in force or in contract, no amount, representing excess realisation made by a producer or excess realisations made by a producer under the cover of a any guarantee given by any person shall be paid to any producer.'
12. A perusal of the above provisions of the Levy Sugar Price Equalisation Fund Act, clearly establishes that the title of the appellant to the amount of Rs. 16,86,799 is in serious doubt, dispute and jeopardy, till a final decision is pronounced by the High Court in the writ petition. It is not a mere contingent liability as held by the ITO and the Commissioner (Appeals). On the contrary, there is a statutory liability imposed on the part of the appellant to pay over the excess realisation to the Levy Sugar Equalisation Fund under the Act, after the decision of the High Court, fixing the price that the appellant would be entitled to realise in respect of the sales during this period.
13. In our view, the case of the appellant is directly governed by the decision of the Calcutta High Court in the case of CIT v. Hindusthan Housing & Land Development Trust Ltd. : 108ITR380(Cal) . In that case, the dispute before the High Court was whether the enhanced amount of compensation amounting to Rs. 7,24,914 was income arising or accruing to the assessee during the previous year, relevant to the assessment year 1956-57. In that case also, the enhanced compensation amount awarded by the arbitrator with further recurring compensation was the subject matter of an appeal preferred by the State Government to the High Court. During the pendency of the appeal, the State Government deposited a sum of Rs. 7,36,691 which the assessee withdraw after furnishing a security bond on 9-5-1956. The revenue sought to charge the above amount as the income of the assessee. Their Lordships of the Calcutta High Court negatived the revenues claim in the following words of the report :
'. . . With regard to the enhanced amount which was subsequently fixed by the order of the arbitrator, the said amount cannot be said to be determinate amount as the said amount is now pending appeal in the High Court. The enhanced amount may be affirmed by the High Court, may be reduced by the High Court or the entire enhanced amount may be disallowed. In the instant case the claim for the said further amount is in jeopardy and the right of the assessee to receive any further amount is also clearly unsettled. Unless the question of payment of any enhanced compensation is decided and the amount of enhanced compensation becomes determinate and payable, the said amount cannot, in our opinion, be said to accrue or arise. The further amount awarded by the arbitrator forms in reality at this stage the subject-matter of a mere claim or an assertion on the part of the assessee to receive the said amount, but the said claim has yet to be accepted by the Court. The fact that the assessee was allowed to withdraw the said amount after furnishing the security bond, does not, in our opinion, affect the position and does not make the amount of compensation either determinate or payable. Apart from the question that actual payment is not a material consideration in the matter of compensation in a case where the accounts are maintained on the mercantile system, in the instant case the said payment received by the assessee cannot be considered to be payment of any compensation, as the right of the assessee to receive any further compensation or the amount of the further compensation has not yet been adjudicated upon and decided. The said receipt is really the receipt of a particular sum pursuant to an order of the Court on the security bond executed by the assessee and on the basis of terms and conditions mentioned in the said bond. We are, therefore, of the opinion that the Tribunal in the instant case was right in coming to the conclusion that the said extra amount of compensation amounting to Rs. 7,24,914 was not income which accrued or arose during the previous year relevant to the assessment year 1956-57 ...' (p. 394)
14. In our view, the above ratio of the decision of the Calcutta High Court is directly applicable to the facts of the present case. It would be seen that in the instant case, the appellants claim for the excess amount realised by it is in jeopardy and that the right of the appellant to receive any further amount is also clearly unsettled. Unless the question of payment of any enhanced price is decided by the Court and the amount of enhanced price becomes determinate and payable, the said amount cannot be said to accrue or arise to the assessee. The further amount collected by the assessee under the orders of the Court is in reality at this stage the subject-matter of a mere claim or an assertion on the part of the assessee to receive the said amount. But the said claim is yet to be accepted by the Court. The fact that the assessee was able to realise the excess amount after furnishing a bank guarantee would not, in our opinion, affect the position and make the amount received either determinate or payable. It is in reality a receipt of a particular sum pursuant to the order of the Court dated 26-2-1976, on furnishing a bank guarantee in terms of the said order.
15. To the same effect is the decision of the Bombay High Court in CIT v. Nadiad Electric Supply Co Ltd. : 80ITR650(Bom) , wherein it was held that sending the bills amounted merely to making a claim for the amounts mentioned in the bill; the mere sending of bills did not create a legal enforceable right in the assessee-company, not a corresponding legal enforceable obligation on the municipality. Their Lordships finally held that the assessee-company was under no obligation to credit in its books of account, even though they were maintained on the mercantile system, any amount for the electricity supplied by it to the municipality calculated at any rate other than the rate of 19 paise per unit and the only amount which could be brought to tax in this connection was the amount calculated at the rate of 19 paise per unit. A perusal of the facts of this decision shows that though the facts are not identical to the present case, the ratio of this decision of the Bombay High Court, which is in line with the decision of the Calcutta High Court, quoted above, is equally applicable to the facts of the present case.
16. In CIT v. A. Gajapathy Naidu : 53ITR114(SC) , the Supreme Court held that when an ITO proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely, (i) what is the system of accountancy adopted by the assessee; and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued if he come to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the ITO under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose.
17. In paragraphs 11 and 12 (supra), we have already pointed out with reference to the relevant provisions of the Levy Sugar Price Equalisation Fund Act, that the assessees title to the sum of Rs. 16,86,799 is not yet settled by the decision of High Court and that there is also a statutory obligation imposed on the assessee to pay over the excess realisation on such decision of the High Court to Levy Sugar Price Equalisation Fund. We cannot brush aside these facts and hold that the amount of Rs. 16,86,799 received by the assessee should be treated as income of the assessee-company in the year under appeal.
18. In the light of the above discussion, we are unable to agree the revenue that the excess realisation of Rs. 16,86,799 is taxable as income in the hands of the assessee in this year. We are also unable to agree with the revenue that the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) is of any assistance to the revenue in bringing to charge this amount in this year. On the contrary, the Calcutta High Courts decision in Hindusthan Housing & Land Development Trust Ltd.s case (supra) has distinguished this decision of the Supreme Court at pages 391 and 392 of the reports by pointing out that this decision does not lay down that a claim necessarily accrues on the basis of a mercantile system of accounting, even though the claim is not determined and payable. We therefore, respectfully follow the three decisions of the Supreme Court, and the Bombay and Calcutta High Courts, referred to above, and hold that the amount of Rs. 16,86,799 cannot be regarded as income which accrued or arose to the assessee during the previous year relevant to the assessment year 1977-78, and that it cannot be brought to change in this year. Accordingly, we delete the said amount of Rs. 16,86,799 from the income of the assessee.
19. The next addition is of Rs. 64,534 under the head Sales tax set off account. The ITO added this amount for the following reasons discussed in paragraph 13 of his order :
'It is seen from the records that the assessee-company is entitled to get set off of sales tax paid in excess at Rs. 64,534 as on date of year ending of books of account and claim is made with the sales tax authorities but assessment is pending with sales tax authorities. As the assessee-company is following mercantile system of accountancy, the set off (i.e., refund) receivable from sales tax authorities is considered are equal and Rs. 64,534 is added to the total income of the assessee-company.'
20. The Commissioner (Appeals) upheld the ITOs action as justified, as the assessee itself had taken for this amount on the a basis of the set off due to it as per the sales tax return field. He further held that if the final set off of sales tax determined is less, the assessee could make necessary adjustment in the sales tax liability in the year till the final position is known. He, therefore, rejected this ground also.
21. Shri B. K. Khare, the learned counsel for the appellant, submitted that this amount of Rs. 64,534 was shown as a liability under the head sundry creditors in the assessees balance sheet, that this relief of set of the sales tax assessment in the relevant year and that the assessees working of set off was provisional, which might or might not be allowed by the sales tax department. He argued that this amount could not be treated as income as it did not constitute any receipt till the sales tax assessment was completed and the refund due to the assessee was granted by the sales tax department. He further submitted that the appellant was following a regular method of accounting by transferring the amount to profit and loss account on the finalisation of the sales tax assessment for each year. The learned counsel, therefore, submitted that this addition also was not justified and that the same should be deleted.
22. The learned departmental representative, Shri A. A. Makhija, relied on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) and contended that the amount in question was rightly brought to tax in the hands of the assessee.
23. It is seen from the assessees letter dated 25-3-1980 addressed to the ITO that this amount of Rs. 64,534 is shown as a liability and included in the sundry creditors in the balance sheet of the assessee. The revenue does not dispute the assessees claim that the appellant follows a regular method of accounting by transferring the amount in its sales tax set off account to the profit and loss account on the finalisation of the sales tax assessment for each year. It was explained by the learned counsel for the appellant that this set off is claimed by the appellant on the assessees purchase of raw materials while submitting its sales tax returns and that the assessees working of the set off was only provisional. In our opinion, the principles which we have applied in respect of the earlier addition of Rs. 16,86,799 are equally applicable in respect of this amount of Rs. 64,534 also. A mere credit entry in the assessees books of account for this set off would not make it a receipt of income by the assessee or entitle the assessee to receive this amount from the sales tax department who have to determine the exact amount of set off due to the assessee as per the Sales Tax Act while finalising the sales tax assessment. The entries in the books of account of the assessee are only in the nature of a claim made by the assessee before the sales tax authorities. In fact this is shown as a liability and included in the sundry creditors in the balance sheet of the assessee. On these facts, we are unable to agree with the revenue that this amount represented any income of the assessee in this year of account. Accordingly, we delete this addition also.
24. In the result, the appeal is allowed.