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Commissioner of Income Tax Vs. Bojraj Textiles Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case (Appeal) No.712 of 2005
Judge
ActsIncome Tax Act, 1961 - Section 260A
AppellantCommissioner of Income Tax
RespondentBojraj Textiles Mills Ltd.
Appellant AdvocateMr.T.Ravikumar, Adv
Respondent AdvocateMr.R.Kumar, Adv
Excerpt:
[chitra venkataraman; k.ravichandra baabu, jj.] income tax act, 1961 - section 260a -- the assessee herein is a textile mill. admittedly, the assessee could not produce the yarn in hank form. in order to avoid any penal consequences as provided for by the textile commissioner's order, the assessee had to purchase hank yarn to discharge the obligation, by purchasing from other textile mills.  the assessee filed an appeal before the commissioner of income tax (appeals). in the light of the above, the tribunal allowed the assessee's case......the facts and circumstances of the case, the tribunal was right in holding that the provision for hank yarn obligation is allowable as a deduction in this assessment year when the assessee has not fulfilled its obligation and textile commissioner had extended the time for fulfilment till 31.3.95?2. as far as the first substantial question of law is concerned, both counsel agree that the said issue is covered by the decision reported in [2003] 262 itr 375 (commissioner of income-tax vs sakthi textiles ltd.) in favour of the assessee. the only other question which remains for consideration is as regards the deductability provision made in respect of hank yarn obligation to be performed by the assessee.3. in the decision reported in [2000] 245 itr 428 (bharat earth movers vs. c.i.t.).....
Judgment:

PRAYER: Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras 'C' Bench dated 28.01.2005 in ITA No.1027/MDS/1997.

 (Judgment of the Court was pronounced by CHITRA VENKATARAMAN,J.)

1. The following substantial questions of law arise for consideration in this Tax Case Appeal, relating to the assessment year 1994-95:

1. Whether in the facts and circumstances of the case, the Tribunal was right in allowing a deduction of the amounts spent on purchase of overhead travelling cleaner?

2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the provision for hank yarn obligation is allowable as a deduction in this assessment year when the assessee has not fulfilled its obligation and textile commissioner had extended the time for fulfilment till 31.3.95?

2. As far as the first substantial question of law is concerned, both counsel agree that the said issue is covered by the decision reported in [2003] 262 ITR 375 (Commissioner Of Income-Tax vs Sakthi Textiles Ltd.) in favour of the assessee. The only other question which remains for consideration is as regards the deductability provision made in respect of hank yarn obligation to be performed by the assessee.

3. In the decision reported in [2000] 245 ITR 428 (Bharat Earth Movers Vs. C.I.T.) (S.C), the Apex Court pointed out as follows:

" The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

4. It further laid down the following principles in the matter of considering the deductability of a liability:

"(i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid;

(ii)Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business;

(iii)A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability;

(iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. "

Keeping the law declared by the Apex Court on the background, the facts herein need to be seen.

5. The assessee herein is a textile mill. As per the Textile Commissioner's order, the assessee had to produce certain percentage of yarn in the form of hank. Admittedly, the assessee could not produce the yarn in hank form. In order to avoid any penal consequences as provided for by the Textile Commissioner's order, the assessee had to purchase hank yarn to discharge the obligation, by purchasing from other textile mills.

6. It is seen from the narration of the facts that the notification as regards the production of hank yarn was the subject matter of dispute before the Courts. Ultimately, on the said notification upheld by the Apex Court in respect of units which could not discharge their obligation, the Textile Commissioner passed a circular dated 22.2.1994, the relevant portion of which reads as follows:

"(ii)that in case you have not fulfilled the obligation for any of the past quarterly period(s) and if you find any difficulty to cover the past obligation/shortfall, you may represent under clause 8(4) of the Textiles (Development and Regulation) Order, 1993 to the Textile Commissioner, Post Bag No.11500, Bombay 20, as early as possible but in any case not later than 15.3.94, along with your proposal indicating your programme for fulfilling your past obligation(s) in quarterly instalments so as to fulfill the obligation latest by 31.3.95 in the prescribed proforma given overleaf. "

7. As far as the present case is concerned, admittedly, the assessee had the time of discharging its obligation till 31.3.1995 as by way of an extended period, but for which, it should have discharged its obligation by 31.3.1994. Thus, with the liability already accrued, the assessee made a claim of deduction. The Assessing Authority, however, rejected the said claim on the ground that the assessee's obligation did not come into being during this year. Since the liability crystallized only in the next year for finalising the agreement on purchase obligation, the claim for deduction was rejected. The assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) viewed that when the Textile Commissioner had allowed the assessee to perform its obligation by 31.3.1995, the obligation to purchase from various producers would vary, depending upon the market rate at the time of purchase. Thus in the absence of definiteness as to the price that the assessee would have to pay to discharge his obligation and when the time for discharge had been extended till 31.3.1995, the question of allowing any deduction on actual basis did not arise. Hence, the hypothetical price fixation cannot be a ground to qualify the grant of deduction. In the light of the above, the Commissioner of Income Tax (Appeals) rejected the contentions of the assessee based on the circular issued by the Textile Commissioner. The Commissioner of Income Tax (Appeals) also viewed that the time to make the actual liability thus postponed to 31.5.1995, one cannot state that the liability had arisen this year.

8. Aggrieved by this, the assessee went on appeal before the Tribunal, which, however, agreed with the assessee and allowed the appeal. The Tribunal pointed out that when there is a statutory obligation attached to the assessee to fulfil the hank yarn obligation, though the purchase price, as such, might not have been known to the assessee, yet, whatever be the shortfall of the price, would always be determined at the time when the agreement was entered into by the assessee. This, however, did not stand in the way of the assessee making a provision on the basis of market price, which could not be weighed as a hypothetical one. In the light of the above, the Tribunal allowed the assessee's case. Aggrieved by this, the Revenue has come on appeal before this Court.

9. As already seen, it is not denied that the assessee's obligation to produce the hank yarn was very much there during the relevant assessment year. But for the Textile Commissioner's circular dated 22.2.1994, the assessee would have had to fulfil the statutory obligation during the accounting year relevant to the assessment year under consideration either by producing the hank yarn by itself or purchase the obligation performed by other mills. Admittedly, the correctness of the decision of the Textile Commissioner imposing a liability of making hank yarn, was a subject matter of litigation before the Courts and on the Courts upholding the circular of the Textile Commissioner, many of the mills which could not perform their obligation within the time stipulated, had to approach the Textile Commissioner for postponing the obligation. As evident by the circular dated 22.2.1994, the liability which otherwise would have to be discharged during the year, was extended till 31.3.1995, which means that the liability had already accrued for the assessee to discharge and only as a matter of adjustment, the performance was postponed to the next year. The liability thus already crystallized as on the date when the original stipulation was available and only as a matter of convenience, it was postponed to 31.3.1995, it is difficult to accept the case of the Revenue that there was no liability in this year for the assessee to make the provision. In the light of the above-said facts and that the performance of this obligation/liability had already crystallized as a liability and even though the actual quantification in terms of the market price of hank yarn, which the assessee would have to pay by way of discharging his obligation, stood postponed to the next year, we do not think that the assessee's claim for the year under consideration should be rejected.

10. As pointed out by the Apex Court, when the liability admitted is of reasonable certainty, the mere fact that the actual quantification might take place in the next year, per se, would not stand in the way of the assessee being granted the deduction. The assessee, admittedly, is maintaining the account on mercantile basis. In that event, the decision of the Apex Court reported in [2000] 245 ITR 428 (Bharat Earth Movers Vs. C.I.T.) (S.C), directly applies to the facts of the case. Hence, we have no hesitation in rejecting the Revenue's case, thereby confirming the order of the Tribunal.

In the result, the Tax Case Appeal stands dismissed. No costs.


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