Judgment:
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1975-76, the following questions of law have been referred to this court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 44,47,482 representing additional claim under the COPE Scheme (realised by the assessee during the relevant previous year by way of adjustment and neverrefunded to the Government) did not accrue to the assessee during the previous year relevant to the assessment year 1975-76 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 44,47,482 was not assessable in the hands of the assessee in the assessment year 1975-76 ?'
2. Shortly stated, the facts are that the assessee who is a non-resident company, derived income from the business of distribution and marketing of petroleum products in India. As per the Burmah-Shell (Acquisition of Undertakings in India) Act, 1976, the undertaking of Burmah-Shell in India vested in the fully-owned Government company Burmah-Shell Refineries Ltd. with effect from January 24, 1976. The name of the Government company was subsequently changed to Bharat Petroleum Corporation Ltd. on August 1, 1977. The balance-sheet of the assessee-company for the calendar year 1974, disclosed an item on the liabilities side 'Balance of crude price adjustments and crude price equalisation account Rs. 68,75,654' under the main head 'sundry creditors'. The assessee gave bifurcation initially at Rs. 42,23,864 which was termed as additional claim and another amount of Rs. 26,51,792 being liability to the Government. It was explained before the Inspecting Assistant Commissioner during the course of assessment proceedings that, for the purpose of fixing the price of petroleum products, the f.o.b. cost of crude oil was determined at a weighted average price by taking into account the prices of various types of crude imported from different countries as well as the price payable on crude obtained indigenously from the oil fields within the country. But, in practice, the procurement price of crude oil in the world market kept on changing. In order to obviate the effect of such changes into the price system, the variations between the approved actual cost of crude oil and the cost assumed in the pricing scheme was allowed to be adjusted in an account styled as the 'Crude Oil Price Equalisation A/c.' Further, the assessee in its letter dated January 15, 1979, addressed to the Inspecting Assistant Commissioner explained that the above sum of Rs. 68,75,654 consisted of the following two items :
(a) Rs. 26,51,792 being gain on sale of petroleum products on or after November 3, 1973, at the increased price under the COPE Scheme (based on crude oil cost of 3.48 U.S. dollars per barrel) out of crude oil purchased prior to October 16, 1973, at 2.61.
(b) Rs. 42,23,862 being additional claim relating to 1974, representing reimbursement, through the COPE mechanism, of increases in crude f.o.b. component based on the Government approvals. These claims were computed on the basis of approved f.o.b. and related crude cost on firstin and first out basis subject to the condition that in cases where approvals were delayed and revised higher rates were effective from the prospective date/s, reimbursements were due and claimable on the basis that total production out of the stocks as well as purchases would rank for claim at the higher applicable approved f.o.b. rate.
3. These amounts (a) and (b) were kept in suspense as the Government instruction relating to adjustments under the COPE Scheme were not clear and the assessee feared that the Ministry of Petroleum (hereinafter called 'the MOP') might ask for the above amounts to be reimbursed to Industry Pool Accounts according to the order of the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner added both the items (a) and (b) on the following grounds ;
'(i) Rs. 68,75,654 was set apart by the assessee as a liability in the accounts, payable to Government under the COPE mechanism by debiting the 'Cost of sale' account. This shows that the amount has already been realised from customers.
(ii) Reasons for a suspense credit like this are not clear as no definite demand was made by the Government for this amount.
(iii) Admittedly, the above amount was credited back in the accounting period corresponding to the assessment year 1978-79.
(iv) That, in 1974, calendar year (the accounting year in question), there was no actual liability for the above sum.
(v) the amount could at best be called a contingent liability, i.e., in anticipation of what the Government might claim in future.
4. As regards Rs. 44,47,482 it was explained that this sum represented the additional claim of the assessee under the 'COPE Scheme' disregarding the first in and first out principle. This amount had been credited to sundry creditors by debiting the COPE A/c. Under the 'COPE Scheme' the assessee got the excess of the approved f.o.b. cost of crude over the cost of crude taken into account by the Government for product pricing per barrel. In para 9(1) of the MOP's Circular dated June 24, 1964, it was confirmed that f.o.b. cost of crude oil for the production of bulk refined petroleum products should be on the basis of the 'first in first out' (FIFO) principle. That is, if there was opening stock as on a particular date purchased earlier at a lower approved price, a claim under the 'COPE Scheme' could not be made on the basis of the increased approved price as on that particular date but at such lower approved price at which the stock was purchased earlier. The assessee departed from the first in and first out principle whenthe actual purchase price of crude was more but the approved f.o.b. purchase price was less for a particular period. This additional claim of Rs. 44,47,482 was a mere claim not settled and cleared by the Government during the accounting year in question, vide the MOP's letter dated April 7, 1976. It was urged that the assessee had not acquired any right to receive the above sum during the relevant accounting year and, therefore, the sum could not be treated as its income for the assessment year 1975-76. M/s. Bharat Petroleum Corporation Ltd. which took over the undertakings of Burmah-Shell wrote back Rs. 68,75,654 in question to the profit and loss account for the period ended March 31, 1978.
5. The Commissioner of Income-tax (Appeals), after considering the facts of the case, the various circulars and the claim made thereunder, and the entry in the books of account, held that the additional claim of Rs. 44,47,482 was neither admitted by the Government of India nor finalised during the relevant accounting period. The claim thus did not ripen into income receivable during the year. He, accordingly, held that the sum of Rs. 44,47,482 should not be included in the total income of the assessee.
6. The matter was taken in further appeal to the Tribunal by the Revenue. It was urged on behalf of the Department that the income of Rs. 44,47,482 had accrued to the assessee during the accounting year which ended on March 31, 1975, and was, therefore, assessable in the hands of the assessee in the assessment year 1975-76. The Tribunal, after considering the submissions of the Department as well as the assessee, the various circulars, the case law and the entries made by the assessee in the books of account, held that the sum of Rs. 44,47,482 did not accrue to the assessee and that it was not taxable.
7. The contention of the Revenue is that the income accrued to the assessee in the year although it was credited to the suspense account for the year 1975-76. On the facts of this case, we are unable to accept this contention of the Revenue.
8. At the hearing before us, Dr. Pal has submitted that the said sum of Rs. 44,47,482 was not assessable in the hands of the assessee in the assessment year 1975-76. Before the Tribunal, when the matter was argued, the assessee-company submitted a paper book containing 41 pages which contained the various circulars of the Ministry of Petroleum on which the Tribunal itself had relied and which are relevant for the decision of the present case. The Tribunal referred to the said fact in paragraphs 7, 8 and 10 of the order. Hence, in deciding the issues, reference can be made to the materials in the paper book which was filed before the Tribunal atthe time of hearing. It is now well-settled that if the documents are relied upon by the Tribunal, the court can look into such documents even though such documents have not been included in the paper book (Orient Trading Co. Ltd. v. CIT : [1963]49ITR723(Bom) ).
9. The question is whether the sum of Rs. 44,47,482 being the amount claimed by the assessee in excess of the amount which is payable to it on the basis of the scheme known as the Crude Oil Price Equalisation Account (in short to be styled as 'the COPE') Scheme is assessable for the accounting year 1975-76. The circumstances under which the said scheme was made are as follows :
The Scheme known as the COPE Scheme was introduced by the Government of India, Ministry of Petroleum, by its letter dated February 14,1974 (page 22 of the Tribunal's paper book). The said scheme came into effect from October 16, 1973. Under the Scheme, the variation between-
(1) The f.o.b. price of crude oil taken into account from time to time for the pricing of bulk refined petroleum products and bitumen (including LPG) ; and
(2) The f.o.b. prices as approved by the Government at which the oil companies have brought/are bringing crude oil to India for processing in their refineries.
will be adjusted through an account termed as the COPE account.
10. The idea behind the introduction of the said Scheme was that the selling price of the refined products in the market was sought to be kept uniform by all oil companies. Under the COPE Scheme, the difference between f.o.b. cost of crude oil which was taken into account by the Government in fixing the selling price of the refined products and the approved f.o.b. price of crude oil of oil companies was recoverable/payable from/to the Government by each oil company through the COPE account. Thus, according to the scheme which came into effect from October 16, 1973, if the cost of the crude oil taken by the Government in fixing the selling price of the refined products is lower than the approved cost at which the assessee is purchasing the said crude oil, the difference between the higher price paid by the assessee and the cost of the crude oil taken by the Government in fixing the selling price will be payable to the assessee by the Government through the COPE account. Similarly, if the cost whichis taken into account in fixing the selling price is higher than the approved purchase price of the crude oil at which the assessee is purchasing the said crude oil, the difference between the said cost and the lower purchase price of crude oil is to be surrendered by the assessee to the Government through the COPE account. Such adjustments are to be made through the COPE account as already stated above.
11. By Circular dated April 26, 1974, (pages 23 to 33 of the Tribunal's paper book), the Ministry of Petroleum prescribed various proformas in which the accounts are to be submitted for adjustment with the COPE account.
12. Thereafter, by circular dated June 24, 1974 (pages 34 to 36 of the Tribunal's paper book), the Ministry of Petroleum clarified the position at page 36 of the paper book by a directive that 'it is confirmed that the f.o.b. cost of crude oil used for the production of bulk refined petroleum products during a particular period shall be on the basis of the ' first in first out principle'. The effect of this directive is that, if the opening stock as on a particular date includes stock which was purchased earlier at a lower price, in considering the amount which is payable to or by the Government in terms of the COPE account, the approved purchase price of the earlier date when the said stock was purchased has to be taken into account and not the approved purchase price of the later date when the refined product is being sold. If the increased approved purchase price is applicable to the entire stock, i.e., the stock purchased earlier, the question of applying the first in first out method would not have arisen at all. The assessee, however, without following the clear directive of the Ministry of Petroleum contained in the Circular dated June 24, 1974, made an excess or additional claim for Rs. 44,47,482 on the footing that the approved purchase price as on the day when such crude oil was sold should be applicable to the entire stock-in-hand including even the stock which was purchased earlier at a lower price. If, however, the aforesaid directive of the Ministry of Petroleum was followed, the assessee has to take into account not the higher approved purchase price as on the date of sale, but the lower approved purchase price at which the earlier stock was purchased. Thus, the additional claim of Rs. 44,47,482 was clearly in excess of what the assessee would have been entitled to in terms of the aforesaid directive of the Ministry of Petroleum. The calculation of this additional claim for Rs. 44,47,482 is set out hereunder :
COPE claim as per Ministry's Circular following FIFO basisCOPE claim as calculated by company ignoring FIFO basisExcess claim
Rs.Rs.Rs.November, 1973 33,10,701 December, 197361,02,30630,15,2252,23,620May, 19741,41,28,6521,58,92,11617,63,464June. 197471,89,09473,26,8361,37,742July, 19741,20,29,1931,23,80,9483,51,755August, 19741,02,44,6061,02,47,6012,995September, 19741,61,84,4061,68,30,0566,45,650October. 19741,79,53,5051,83,07,1833,53,678November, 19742,73,70,2602,81,69,8557,99,595December, 19742,78,02,3662,79,71,3491,68,983
Total excess claim44,47,482
13. The aforesaid break up was also submitted before the Tribunal (see page 14 of the Tribunal's paper book). It will appear therefore that the assessee-company, in its claim before the Government of India, applied the increased approved purchase price of the crude oil in respect of its entire stock disregarding the said directive of the Ministry of Petroleum on the basis of which the opening stock should have been valued at the lesser purchase price at which it was acquired. It will also appear that this additional claim had not been accepted or settled by the Government of India during the relevant accounting year. This fact will appear from the letter dated April 7, 1976 (page 37 of the Tribunal's paper book), where the Government itself had pointed out that these pool accounts are yet to be scrutinised and cleared. It will appear that, even in April, 1976, i.e., after the close of the accounting year, the Government has not yet cleared the said account. Therefore, the claim until settled and cleared was a mere claim and does not give rise to any right to receive the said additional claim. The said claim apparently was in clear violation of the directive of the Ministry of Petroleum as pointed out earlier in this submission. It was not even open to the company to bring the said amount to its profit and loss account. Hence, the company has debited to the COPE account and shown the amount as repayable to the Government by crediting the sundry creditors account on the liabilities side of the balance-sheet.
14. As the assessee was maintaining its accounts on the mercantile basis, until and unless the assessee has acquired a right to receive the said amount which it has claimed before the Government in clear violation of the directive of the Ministry of Petroleum, the said amount cannot be said to have accrued to the assessee or to have resulted in an accrual of income. It is true that, after Burmah-Shell had been taken over by the Government, the Bharat Petroleum Corporation which took over the entire undertaking wrote the amount back in their accounts for the period ending March 30, 1978. The reason for such writing back was intimated by Bharat Petroleum Co. Ltd. (the said company is a Government of India company) which is as follows :
'Following implementation of Oil Prices Committee's Report effective from December 16, 1977, the Corporation felt that this issue which related to pricing arrangement prior to implementation of the report, stood lapsed and accordingly wrote back the amount at the earliest opportunity, i.e., the account for the period January 1, 1977, to March 31, 1978.' (see pages 16 and 17 of the Tribunal's paper book).
15. In the light of the foregoing facts, the claim made by the assessee for the additional sum of Rs. 44,47,482 is a mere claim and the said claim apparently was not in accordance with the clear directive of the Ministry of Petroleum as referred to hereinbefore and hence, the said amount cannot be said to have ripened into an income accruing to the assessee during the relevant year. The assessee maintains its accounts on the mercantile basis. The said sum cannot be treated as the assessee's income because, during the relevant year, the assessee had not acquired any legal right to receive the same. The amount can accrue or arise to the assessee, if the assessee acquires a legal right to receive the amount or, conversely, the said amount has become legally due to the assessee from the assessee's debtor. The mere raising of a claim or bill does not create any legally enforceable right to receive the same. Hence, the mere claim by the assessee, without any right to receive the amount, cannot be treated as the income of the assessee. Such a right accrues only when the other party either agrees to pay the amount or there is an adjudication by an appropriate court of law or by arbitration or the claim is settled. In the present case, neither the party, i.e., the Government of India, has accepted the said claim, nor is there any adjudication or settlement by arbitration of the said claim. Hence, it is not correct to treat the said amount as the income of the assessee.
16. Having regard to the facts and circumstances of this case, it must be held that the amount in question did not accrue and could not be included in the assessment year 1975-76. But it appears from the assessment order for the assessment year 1978-79 that the assessee, by letter dated January 30, 1981, has offered that the aforesaid sum be taxed. The said letter is as follows :
'Further to our letter of even reference dated 29th January, 1981, we enclose a copy of the orders passed by the Commissioner of Income-tax (Appeals) in respect of our appeal against assessment order passed by the Inspecting Assistant Commissioner of Income-tax, Calcutta, for the assessment year 1975-76 in respect 'of Burmah-Shell Oil Storage and Distributing Co. of India Ltd. Out of provision of Rs. 68,75,654 disallowed by the Inspecting Assistant Commissioner of Income-tax, the Commissioner of Income-tax (Appeals) has deleted the addition of Rs. 44,47,482. He has upheld the addition of Rs. 24,28,172. We, therefore, offer for tax a sum of Rs. 44,47,482 and only a sum of Rs. 24,28,172 is not liable for tax. We request you to kindly make this correction. This is without prejudice to our contention that if on a later date the sum of Rs. 44,47,482 is held to be taxable, a rectification order is to be passed for the assessment year, excluding the same from the total income.'
17. Our attention has been drawn to the assessment order of 1978-79 which was included in the paper book filed before the Tribunal. It appears that the assessee offered for taxation the sum of Rs. 68,75,654 in the assessment for the assessment year 1978-79 out of which Rs. 44,47,482 was included in the assessment. Dr. Pal, learned counsel for the assessee, has given an undertaking to this court that the assessee has not challenged nor has the assessee challenged the inclusion of the said sum in the assessment for the assessment year 1978-79.
18. For the reasons aforesaid, we hold that the sum of Rs. 44,47,482 cannot be included in the assessment year 1975-76 and, accordingly, the questions are answered in the affirmative and in favour of the assessee. We, however, record the statement of learned counsel on behalf of the assessee that the said sum has been rightly assessed for the assessment year 1978-79 and such assessment has become final so far as the inclusion of the said amount is concerned.
Bhagabati Prasad Banerjee, J.
19. I agree.