Commissioner of Income Tax vs Essorpe Mills Ltd.

R. Jayasimha Babu, J.—The question referred to us for consideration is :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the disputed customs duty payable and

funded interest payable to the bank, which liabilities pertain to the earlier years, can be allowed as a deduction in computing the profits u/s 115J of

the Act ?

The assessment year is 1990-91.

In the profit and loss account prepared by the assessee for this assessment year, under the heading ""Notes"" were mentioned, inter alia, two

items which are relevant here. Note 5 reads thus :

Bank guarantee to the extent of Rs. 17.24 lakhs have been given to the Customs Department towards differential duty on import of staple fibre

under dispute pending before the Supreme Court and not provided for in the accounts.

Item 12 under the notes reads thus :

Funded interest term loan amounting to Rs. 43.57 lakhs being overdue, interest on L/C arrears in respect of earlier years has been granted by the

Bank of India for repayment as per agreed schedule. The balance outstanding as above amounting to Rs. 43.57 lakhs will be charged in the

company''s accounts in the year of payment.

It was thus clear that in this year the company did not pay any amount as customs duty which it was disputing and in respect of which it had

furnished a bank guarantee. It had not provided for this amount presumably as, in its perception, it would succeed in the pending litigation with

regard to the sustainability or otherwise of the demand that had been made by the Customs Department as duty payable on the imported fibre. It is

also clear that it had not made any payment to the bank towards interest of earlier years which amounts had been agreed to be funded by the bank

and in respect of which the bank did not require the company to make any payment in this year.

While computing the book profit of the assessee u/s 115J of the Act, these two amounts were not taken note of and the tax was levied by

omitting those two amounts from the profit and loss account of the assessee for this year. The assessee appealed unsuccessfully, but its further

appeal to the Tribunal resulted in success.

Section 115J(1A) reads thus :

Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in

accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956.

The other parts of that provision are not required to be set out for the present purpose.

What Section 115J(1A) contemplates is that the assessee prepares not a balance-sheet but a profit and loss account showing the transactions of

the relevant previous year and that such amount be in conformity with Parts II and III of Schedule VI to the Companies Act. The net profit, if any,

arrived at after making such computation is to be increased by the amounts set out in Sub-clauses (a) to (ha) under the Explanation to Section

115J(1A) and reduced by the amounts mentioned in Clauses (i) to (iv) in that section.

The profit and loss account on which the assessee placed reliance did not take note of the amount of customs duty levied which it was

disputing and it also did not show the amount of the funded interest as no payment had been made by the assessee towards interest which had

been funded, in this accounting year. That manner of preparing its accounts, even according to the assessee, does not violate the provisions of

Parts II and III of Schedule VI of the Companies Act. It is the case of the assessee that the account so prepared is in conformity with those

provisions.

The assessee must stand by its own proclaimed assertion that what it has placed before the Revenue are accounts which conform to Parts II

and III of Schedule VI of the Companies Act. The contention raised by the assessee, contrary to what those accounts disclosed, is on the face of it

not one which can be entertained. Even if these claims can be regarded as requiring consideration, it must be held that the assessee was not entitled

to deduct the disputed amount of duty and the funded interest which related to earlier years, as no payment was made and the assessee did not

accept the liability and that liability also had not become final by reason of the litigation that was pending.

The order of the Tribunal, therefore, cannot be sustained. The question is answered in favour of the Revenue and against the assessee.