1. This appeal, by the assessee is directed against the order of the CIT(A) dated 29.01.1999 for AY 1995-96.
2. The assessee is a public limited company engaged in the business of manufacture and sale of sugar and industrial and potable alcohol. The return for AY 1995-96 was filed on 30.11.1995 showing total income of Rs. 6,74,05,020 which was processed Under Section 143(1)(a) of the Act on 25.07.1996. The case was later picked up for detailed scrutiny by issue of notice Under Section 142(1) of the Act on 09.01.1998. In the assessment order passed by the AO Under Section 143(3) of the Act on 27.03 1998 the total income was assessed at Rs. 9,75,35,767. In this order, the AO interalia made additions of Rs. 1,47,34,417, Rs. 58,61,651, Rs. 1,57,51,180 (Rs. 2,08,98,653-Rs. 51,47,473) on account of excess collection of levy sugar price and interest there on Under Section 41(1) of the Act.
3. The CIT(A) confirmed the AO's action and his order has challenged by the assessee in the present appeal.
4. The grounds of appeal filed with Form No. 36 were subsequently revised/concised.
The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 3,07,072/- made by the learned Assessing Officer (A.O) on account of expenditure of food and beverages, treating the same as expenditure on maintenance of Guest House.
5. We find that this ground is covered in favour of the assessee by the decision of the ITAT Pune, in the assesses's own case in ITA No.786-A/PN/2000 for AY 1996-97 dated 10.12.2004. We follow the precedent and allow this ground.
2. The Learned CIT (Appeals) erred in holding the expenditure on presentation articles not intended for advertisement as expenditure in the nature of advertisement, and confirming the disallowance of Rs. 46,825/- made under Rule 6B.6. We find that this ground is covered in favour of the assessee by the decision of Bombay High Court in the case of CIT v. Allana Sons Pvt.
Ltd. 216 ITR 690 (Bom). We respectfully follow the precedent and allow this ground.
In this ground the assessee has contended that the CIT(A) erred in confirming the addition of Rs. 3,61,78,204 on account of excess realization on sale levied sugar and interest thereon relating to earlier years.
7. During the assessment proceeding, it was noticed by the A.O that in the schedule - L of the Balance Sheet under the head 'Current Liabilities' two amounts of Rs. 58,61,651 and Rs. 2,88,30,624 were shown. It was submitted on behalf of the assessee before the A.O that the aforesaid amounts represented the excess levy sugar price collected as per the interim order of the Karnataka High Court for the sugar season 1974-75 to 1978-79 and the interest payable thereon. It was explained that the revised notified price was less than the amount collected as per the interim order, that the liability had not ceased as on 31.03.1995 (A.Y 1995-96) and therefore, it was not offered for tax by writing it back in the books of account.
8. The A.O. noted in paragraph 7.1 of his order that the excess collection in respect of the levy sugar price was made by the assessee in respect of the sugar seasons from 1974-75 to 1979-80, in terms of the interim order of the Karnataka High Court, that the matter was finally settled by the Supreme Court on 22.09.1993, that finally the notifications were issued by the Government of India, (Ministry of Food) on 22.02.1995 re-fixing the price for the levy of sugar, that as a result of the re-fixation of the price by the government, based on the decision of the Supreme Court, the additional levy price accrued to the assessee as its income during the accounting year ending 31.03.1995. The A.O accordingly added Rs. 3,61,78,204 as income in the assessment order for AY 1995-96. The A.O's action was upheld by the CIT(A) and his order has been challenged by the assessee in the present appeal.
9. Shri. S.N. Inamdar, the learned A.R reiterated the submissions which were put forward on behalf of the assessee before the A.O and the CIT(A). The submissions made by him are summarized below: that the judgment of the Supreme Court dated 22.09.1993 and the notifications dated 22.02.1995 only created inchoate right.
that the government issued circular dated 14.06.1995 to all the sugar factories informing them the procedure to claim the differential levy sugar price.
that the assessee prepared vide letter dated 14.06.1995 giving full particulars.
that the claim was approved by the government vide letter dated 29.08.1996.
that, without prejudice to the above submissions, in the alternative, the position be not disturbed.P. Mariappa Gounder v. CIT 10. The ld D.R supported the orders of the A.O and the CIT(A). He vehemently argued saying that the order of the CIT(A) needed to be upheld.11. We have considered the rival submissions in the light of material on record and the precedent cited. The additions made by the AO are shown in the chart below:Sugar season 1977-78 58,15,392Sugar season 1978-79 46,259 58,61,651Interest relating to additional levy 1,47,34,417 ___________Less : Interest not allowed in earlier 53,16,517 94,17,900 __________ _________Sugar season 1974-75 27,07,993Sugar season 1975-76 1,11,20,554Sugar season 1976-77 60,48,248Sugar season 1979-80 10,21,858 2,08,98,653 _________ ___________ 12. The assessee had collected excess levy sugar price in terms of the interim order of the Karnataka High Court, which was shown, along with interest payable thereon, as a liability, in the balance sheet. The short question for adjudication in this appeal is as to the date when the excess levy sugar price, which was finally determined vide notifications issued by the Government of India, Ministry of Food dated 22.02.1995, in compliance with the judgment of the Supreme Court dated 22.09.1993, accrued as income in the case of the assessee.
13. Before proceeding to examine the facts of the case for deciding the issue involved, we consider it necessary to enunciate the legal position in this regard in the following paragraphs.
14. The Section 5, of the Act brings within the fold of chargeable total income, all income which is 'received' or is deemed to be received or which 'accrues' or 'arises' or is deemed to accrue or arise to the assessee in a particular previous year. Except in the case where specific provisions in that regard exist, the taxability normally depends upon the system of accounting observed by the assessee. Where the assessee adopts merchantile system of accounting, the taxability is to be ascertained on accrual basis and not on receipt basis. Even in the case of assesses following merchantile system of accounting a mere claim by the assessee in respect of an amount without the right to claim cannot form the basis of taxability. On the other hand, where the assessee follows cash system of accounting, the taxability is to be based on receipt basis and not on accrual basis.
15. The three expressions 'accrues', 'arises' and 'is received' are three distinct terms. The words 'accrue' and 'arise' are not defined in the Act. The two words - 'accrue' and 'arise' are used to contradistinguish the word 'received'. The income is said to be received when it reaches the assessee. But it is said to 'accrue' or 'arise' when the right to receive the income becomes vested in the assessee. It is clear that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed: debitum in praesenti, solvendum in futuro. [69 ITR 675, 681].
16. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens.
But if it is a debt the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount: debitum in praesenti, solvendum in futuro. The postponement of the date of payment does not affect the accrual of the income. The fact that the amount is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may, in appropriate cases, be a valid ground for claiming deduction. [82 ITR 835) 17. The controversy about the accrual of interest Under Section 28 of the Land Acquisition Act 1894 was set at rest by the Supreme Court in the case of 181 Fashatunnissa Begum v. CIT , where the court ruled that interest payable Under Section 28 cannot, in the case of an assessee following merchantile system of accounting, be taken to have accrued on the date of the order of the court granting enhanced compensation but has to be taken as having accrued year after year from the date of delivery of possession till the date of last order. (Read 183 ITR 113 and 188 ITR 787 -page 538 Vol.1) 18. In the case of CIT v. Highway Construction Company Pvt. Ltd. [1997] 223 ITR 32, the assessee undertook contract work for the Military Engineering Service and maintained its accounts on mercantile system.
In terms of this contract certain goods were to be supplied to the assessee by the Military Department and on failure of the Military Department the assessee-company had to get them incurring certain expenditure. When the amount was claimed by the assessee-company it was disputed by the department and this lead to a reference to arbitration in terms of the contract. The arbitration-award was confirmed by the the Delhi High Court and the decree was given by the Court on 30.03.1979. The assessee contended that the amount accrued to it on 30.03.1979 due to the decree given by the High Court and therefore, the said amount was not liable to be assessed in AY 1980-81. The A.O was of the view that the awarded amount accrued to the assessee-company not on 30.03.79 i.e the date on which the Delhi High Court gave the decision, confirming the arbitration award but on 14.09.79, when the actual compensation money along with interest was received by the assessee company. The Gwahati High Court held that in order to determine the date of accrual of income under the mercantile system of accounting, the receipt of payment was not the guiding factor; but the date when the amount becomes due. In that case the amount became due on the final decision of the High Court. The Gwahati High Court, while taking the above view placed reliance on the judgment of Supreme Court in the case of Morvi Industries Ltd., v. CIT .
19. In the case of BPR Construction v. CIT , it was held by the Orissa High Court that the claim made before the arbitrator ripened into a right for the first time when the award was made. In that case the arbitrator gave his award on 05.11.76 and therefore, the High Court held that the compensation payable to the assessee had to be recorded as income for the accounting year ending 31.03.77 and taxed in A. Y 1977-78.
20. In the case of P. V. Jacob v. CWT , it was held by the Kerala High Court that in the case of compulsory acquisition of land, the right to enhanced compensation, being an inchoate right, remains in a flux till the enhanced, compensation is judicially determined by the final court, and it accrues when the court finally accepts the claim.CIT v. Hindustan Housing and Land Development Trust Ltd. , it was held by the Apex Court that it was on the final determination of the amount of compensation that the right to such income in the nature of compensation would arise or accrue and till then there was no liability (sic) 22. In the case of E.D Sassoon and Com. v. CIT , the apex court explanted that the words 'arising' for according describe right (sic) 23. The legal position with regard to the accrual of income as laid down by the courts in the above cases can be summarized as under.
i) that in order to determine the date of accrual of income under the mercantile system of accounting, the guiding factor is the date when the amount becomes due and not its receipt.
ii) that the words 'arising' or 'accruing' describe the right to receive profits and that there must be a debt owed by somebody.
iii) that the additional compensation awarded by a court in respect of acquisition of land, etc., accrues when such order is passed by the court. The postponement of the date of payment does not affect the accrual of the income.
iv) that in the case of compulsory acquisition of land, the right to enhanced compensation, being an inchoate right, remains in a flux till the enhanced compensation is finally determined by the court, and it accrues when the court finally accepts the claim.
v) that the income is said to be received when it reaches the assessee, but it is said to 'accrue' or 'arise' when the right to receive the income becomes vested in the assessee.
vi) that a liability depending upon a contingency is not a debt in praesenti or in futuro tillthe contingency happens. But if it is a debt, the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount: debitum in praesenti, solvendum in futuro. (69 ITR 675, 681).
24. In all the cases relied upon by Shri Inamdar, the ld. A.R, the courts have taken similar view as mentioned above. For instances, in the case of CIT v. Dhampur Sugar Mills Ltd. [2005] 274 ITR 341 (All), the assessee company had collected during the accounting year relevant to A.Y 1974-75, Rs. 12,66,429 as excess levy sugar price under an interim order of the Court. The Tribunal held that the amount collected under the interim order of the court, which was hedged with certain conditions, was not taxable in A.Y 1974-75 as the final order was still awaited. In the present case the facts are entirely different in as much as the matter was finally decided by the Supreme Court on 22.09.1993, and consequently the notifications were issued by the Government of India, (Ministry of Food) on 22.02.1995 re-fixing the price for the levy of sugar. Therefore, it cannot be accepted that even after the issue of the notification by the government, in compliance with the judgment of the Apex Court, the assessee acquired only inchoate right.
25. Now we proceed to examine the facts of this case in the light of the legal position enunciated above. It is an admitted fact that, in the present case, the matter was finally settled by the Supreme Court, and consequently the notifications were issued by the Ministry of Food, Government of India, on 22.02.1995 re-fixing the price for the levy of sugar. The circular issued by the Ministry of Food, Government of India vide letter dated 22.02.1995 reads as under: I am directed to say that the ex-factory prices of levy sugar for 1974-75 to 1979-80 sugar seasons have been re-fixed by the Government of India in compliance with the directions passed by the Hon'ble Supreme Court in its judgment dt. 22.09.1993 in CA Nos.
122-123 of 1981 etc. in Shri Malaprabha Co-operative Sugar Factory Ltd. etc. v. Union of India and Anr. and forward herewith a copy each of this Ministry's Notifications.
26. The excess levy sugar price, finally determined vide notifications issued by the Government of India, Ministry of Food, dated 22.02.1995, in compliance with the judgment of the Supreme Court, accrued as income during the accounting year ending 31.03.1995 and was taxable in AY 1995-96. The assessee had collected excess levy sugar price in respect of some sugar seasons, in terms of the interim order of the Karnataka High Court, which was shown, along with interest payable thereon, as a liability, in the balance sheet. Therefore, in view of the facts of the case and the legal position discussed in the above paragraphs we are satisfied that as a result of the notification issued by the Government dated 22.02.1995, in compliance with the judgment of the Supreme Court, there was cessation of the aforesaid liability and that impugned sums became taxable in AY 1995-96. The ground No. 3 is accordingly rejected.