Commissioner of Income Tax vs Rampur Distillery and Chemicals Co. Ltd.

In Income Tax Reference No. 74 of 1986, which relates to assessment year 1979-80, the Income Tax Appellate Tribunal, New Delhi, has referred the following four questions of law u/s 256(l) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act''), for opinion to this Court:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal has been justified in allowing the assessee''s claim of interest of Rs. 38,147 on the ground that it was an ascertained liability ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee''s claim for investment allowance of Rs. 2,383 on the ground that the products manufactured by the assessee were not hit by Item 1 of the 11th Schedule to the Income Tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the liability of Rs. 10,86,333 for the export duty was allowable in the year in question ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the deduction (sic) of Rs. 11,935 being the expenditure on maintenance, repairs, rent, rates and taxes on the guest house belonging to the assessee ?"

Whereas in Income Tax Reference No. 129 of 1986, which relates to assessment year 1981-82, the Income Tax Appellate Tribunal, New Delhi, has referred the following question of law u/s 256(1) of the Act for opinion to this Court:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the interest liability of Rs. 66,793 was allowable to the assessee ?"

As both the references relate to the same assessee, they have been heard together and are being decided by a common order.

Briefly stated the facts giving rise to the present References are as follows:

The respondent-assessee is a public limited company. It is engaged in the business of manufacturing rectified spirit and Indian made foreign liquor, etc. It used to purchase molasses from various sugar factories. During the assessment years in question, it had purchased molasses from M/s. Raza Buland Sugar Co. Ltd. During the accounting year 1977-78 because of the financial constraints the assessee requested the said sugar factory to supply molasses on credit and 18 per cent interest per annum on outstanding amount was decided. The Government of Uttar Pradesh passed an Ordinance in the month of April, 1971, namely, U.P. Sugar Factories (Acquisition) Ordinance, 1971. M/s. Raza Buland Sugar Co. Ltd. was also acquired under the said Ordinance. M/s. Raza Buland Sugar Co. Ltd. along with some other sugar companies challenged the acquisition proceedings and the validity of the aforementioned Ordinance before this court by means of a writ petition. Initially an interim order was granted by this court staying the enforcement of the acquisition ordinance but in November, 1979, the writ petition was dismissed, which order was also upheld by the Apex Court. In the meantime the Ordinance was replaced by an Act. After the dismissal of the writ petition and the civil appeals, the sugar undertakings were handed over by the State of UP to the U.P, State Sugar Corporation Ltd., Lucknow. In the handing over note to the Corporation, the sugar companies claimed payments against molasses sold during the pre-takeover period. In such context, M/s. Raza Buland Sugar Co. Ltd, claimed certain amounts from the respondent-assessee and filed a petition before the Company Law Board. On the other hand, U.P. Sugar Corporation also filed a petition before the Excise Commissioner, U.P., Allahabad, for payments against the purchases made by different constituents from the sugar companies taken over by it. The Corporation also gave a formal legal notice to the respondent-assessee claiming outstanding amount in respect of purchases from M/s. Raza Buland Sugar Co, Ltd. as also interest in relation to the amount. The respondent had provided for payment of interest for the period 1977-78 but credited the amount in outstanding liabilities account'' instead of crediting it in the ledger accounts of either Raza Buland Sugar Co. Ltd. or U.P. Sugar Corporation. The assessing officer found a credit balance of Rs. 3,10,555 as on 31-3-1979 and Rs. 3,71,074 as on 31-3-1981 but did not find any credit of interest in that account and there being no tax deducted at source, refused to allow the claim of interest on the ground that it could not be said to be ascertained liability, which order has been upheld by the Commissioner (Appeals).

The respondent- assessee also claimed investment allowance of Rs. 5,000 as it had complied with the condition envisaged u/s 32A(2)(b) of the Act. It also claimed deduction of Rs. 10,86,333 for the export duty and Rs. 11,935 being the expenditure on maintenance, repairs, rent, rates and taxes on the guest house belonging to it during the assessment year 1979-80. The Tribunal has allowed the claim of interest, investment allowance of Rs. 2,383, amount of export duty, expenditure on maintenance, etc.

We have heard Sri Shambhoo Chopra, learned standing counsel for the revenue and Sri Vikram Gulati, learned counsel appearing for the respondent-assessee.

Learned standing counsel submitted that the liability for payment of interest to M/s. Raza Buland Sugar Co. Ltd. was not an ascertained liability as the respondent-assessee had not made provision in the books of account for such liability nor it was clear as to who would be the recipient of the amount of interest. He submitted unless and until the respondent pays the amount of interest or makes a provision in its books of account the question of claiming as investment allowance would not arise.

Sri Vikram, Gulati, learned counsel for the respondent-assessee, however, submitted that the respondent was following the mercantile system of accounting and it was agreed between the supplier M/s. Raza Buland Sugar Co. Ltd. that the respondent would pay 18 per cent per annum interest on the amount due towards supply of molasses. There was no dispute regarding the amount which was to be paid and the only dispute was as to who would receive the same whether Raza Buland Sugar Co. Ltd. or U.P. State Sugar Corporation, Lucknow. He submitted that if the respondent had made a provision in its books of account regarding payment of liability of interest to M/s. Raza Buland Sugar Co. Ltd., then it would have created complication as M/s. Raza Buland Sugar Co. Ltd. would have made a claim for the same upon the respondent on the basis of the entries made in its books of account. He submitted that as the liability was ascertained the Tribunal has rightly allowed the same.

Having heard the learned counsel for the parties, we find that it is not in dispute that the respondent had agreed to pay the interest at the rate of 18 per cent per annum on the outstanding price of molasses. Since there was a dispute raised by the U.P. State Sugar Corporation, as a prudent businessman it had not credited the amount of interest in its books of account to the credit of M/s. Raza Buland Sugar Co. Ltd. Nonetheless the liability was ascertained and it had been incurred during the previous year relevant to the assessment year in question, therefore, the Tribunal was justified in allowing the deduction.

So far as the question regarding investment allowance, export duty, expenditure on maintenance, repairs, rent, rate and taxes on the guest house belonging to the respondent is concerned, we find that the question of export duty and investment allowance has been answered in favour of the respondent-assessee by this court in CIT v. Rampur Distillery & Chemicals & Co. Ltd. [IT Reference No. 73 of 1986, dated 17-11-2004], which is inter-parties.

So far as the expenditure on maintenance, repairs, rent, rates and taxes on the guest house is concerned, we find that this court in IT Reference No. 36 of 1982, decided on 26-3-2003 has answered similar question in favour of the assessee.

Respectfully following the aforesaid decisions, we answer all the questions referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. However, there shall be no order as to costs.