Mentha and Allied Products P. Ltd. vs Commissioner of Income Tax

We have heard learned Counsel for the assessee and learned Counsel for the Income Tax Department.

The following four questions have been referred in this case, two at the instance of the assessee and two at the instance of the Department:

At the instance of the assessee:

Whether, on the facts and in the circumstances of the case and in accordance with law, the Tribunal was justified in rejecting the assessee''s claim for deduction in respect of a sum of Rs. 7,93,793 being the compensation payable to M/s. M.W. Hardy and Co., New York?

Whether, on the facts and in the circumstances of the case and in accordance with the provisions of law, the Tribunal was right in holding that relief u/s 80HHA of the Income Tax Act, 1961, was to be computed after adjusting the loss of the ''head office set'' against the profit of the branch?

At the instance of the Revenue:

Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that cash compensatory support and profits on sale of import entitlements forms part of the eligible profits for the purpose of computation of deductions under Sections 80HHA and 80-I of the Income Tax Act, 1961?

Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in confirming the Commissioner of Income Tax (Appeals) finding that duty drawback amounting to Rs. 2,51,448 can be termed as profits derived from industrial undertaking and is accordingly required to be taken into account for the purpose of computing the deduction under Sections 80HHA and 80-I of the Income Tax Act, 1961?

So far as the first question is concerned, the answer to the same depends upon the words of Section 37, which are that expenditure "laid out or expended" will allow to be deducted in computing the income chargeable under the head "Profits and gains of business or profession". It is quite plain that the said words, which have been underlined above, mean expenditure, which has been actually incurred or spent. Learned Counsel for the assessee has placed reliance upon certain decisions, which according to him, have stretched those words to include a liability of the assessee, which liability has been incurred, even though not discharged during the relevant year.

Even assuming for the sake of argument that those decisions lay down such a proposition as suggested, it is quite clear that the liability, which is contemplated to have been incurred should not be a contingent liability, that is to say it should not be contingent upon the happening or not happening of future events.

In the case before us, the assessee under the earlier contract was alleged to be liable to make payment of a certain amount on compensation. However, that liability stood modified by a subsequent contract between the parties, which provided that compensation under the earlier contract would be paid and payable by reimbursement by the assessee to the foreign company known as Hardy and Co. of New York only if orders are placed by that foreign company with the assessee. Further, more importantly Clause 2 of the second contract in its last sentence contemplated as follows "for each ounce shipped there will be a reimbursement by Mentha (assessee) to Hardy (foreign company) at 50 cents per ounce."

Thus, the liability to pay the compensation was contingent upon shipping per ounce. That is to say that if for any reason in future the shipping was stopped, abandoned or could not take place, the liability to pay compensation to the extent of the goods not shipped would not arise.

In the circumstances, the liability, which the assessee is claiming, is not a fixed liability but is a contingent liability and, therefore, the deductions sought by the assessee were not permissible u/s 37 of the Income Tax Act.

Our answer to the first question referred at the instance of the assessee is that the Tribunal was justified in rejecting the assessee''s claim for deduction.

Question No. 2 is covered against the assessee and in favour of the Department by the decision of the Supreme Court in the case of Commissioner of Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore, inasmuch as the finding recorded by the Income Tax authorities in the present case is that one of the offices is the branch office and other is the head office and, therefore, the loss of one had to be adjusted against the profit of the other. The second question referred at the instance of the assessee is therefore, answered against the assessee and in favour of the Department.

The first question referred at the instance of the Revenue is covered in favour of the Revenue and against the assessee by the decision of the Supreme Court in the case of Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, as applied by a Division Bench of this Court in the case of CIT v. Himalaya Cutlery Works [2006] 287 ITR 505. The said question No. 1 referred at the instance of the Revenue is, therefore, decided in favour of the Department and against the assessee.

The second question referred at the instance of the Department is also covered by the same decision as stated above in favour of the Department and against the assessee and accordingly the same is also answered against the assessee and in favour of the Department.

Reference is disposed of.