Commissioner of Income Tax vs Cochin Refineries Ltd.

Sujata V. Manohar, C.J.—The Department desires the following questions to be directed to be raised by the Tribunal and referred to us for determination :

"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction on the ocean loss of Rs. 4,46,92,480 in the assessment for the assessment year 1981-82 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding :

(i) ''the liability to bear ocean loss in excess of 0.5 per cent by the refineries was determined and fastened on the refineries ?''

(ii) the obligation to refund the amount of ocean loss in excess of 0.5 per cent to the Shipping Corporation of India arose in this year, i.e., as on March 31, 1981/February 5, 1981 ?

Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction for the donation of Rs. 10,000 made to the Medical Aid Society ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding the donation as part of staff welfare expenses and allowing the same as business expenditure ?"

The assessee-company carried on the business of refining crude oil. The relevant assessment years are 1981-82 and 1982-83. For the assessment year 1981-82, the assessee claimed ocean loss of Rs. 4,46,92,480 while for the assessment year 1982-83, the assessee claimed ocean loss of Rs. 1,04,24,414. Prior to the assessment years in question, in respect of crude oil which was transported for the refinery by the Shipping Corporation of India, ocean loss up to 0.5 per cent was borne by the concerned refinery and any loss over and above 0.5 per cent was to be recovered from the Shipping Corporation of India. On January 31, 1981, the Government of India issued instructions to various refineries, including the assessee herein, in respect of ocean loss on imported crude. By this letter, the refineries were directed that their cumulative ocean loss for the financial year up to 0.5 per cent would be borne by the Shipping Corporation of India while the cumulative ocean loss for the year in excess of 0.5 per cent would be borne by the refineries concerned. The letter gives various detailed instructions about the manner in which this ocean loss is to be adjusted and/or recovered. Under Clause (iv) in respect of ocean loss deductions made by the oil companies from freight payments to the Shipping Corporation of India and pool account adjustments made by oil companies for the period from January 1, 1978, to December 31, 1980, each individual voyage will be analysed by OCC/Refineries/SCI jointly for determining the ocean loss recoverable from the Shipping Corporation of India and adjustable by oil companies in pool accounts.

The Department contended that the liability of the refinery for ocean loss in excess of 0.5 per cent would arise only after calculations are made in accordance with the instructions contained in the said letter. The Tribunal, however, has held that the liability of the refinery to bear ocean loss in excess of 0.5 per cent arose by virtue of the letter of January 31, 1981, in the accounting years in question, though the quantum was to be calculated subsequently. As the assessee followed the mercantile system of accounting, the loss could be claimed in the year in which the liability arose, and not when the loss was actually calculated.

We have seen the letter of January 31, 1981, which clearly imposes a liability on the refineries to bear ocean loss in excess of 0.5 per cent. We do not see any reason to take a view different from the view taken by the Tribunal, in view of the fact that the assessee follows the mercantile system of accounting. Hence no useful purpose will be served by directing the Tribunal to frame a statement of the case and refer questions Nos. 1 and 2 referred to above to us.

The other two questions are based on findings of fact. In these circumstances, the original petitions are dismissed.