General Electric Co. of India Ltd. Vs. Commissioner of Income-tax - Court Judgment

Suhas Chandra Sen, J.

1. The Tribunal has referred the following questions of law to this court under Section 256(2) of the Income-tax Act, 1961 ('the Act'), for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 14,53,340 being 'advance written off' by the applicant on account of debit balances in the suppliers' accounts was not admissible as a deduction in the year under appeal ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 9,73,384 being'adjustment relating to earlier years' on account of purchases made by the applicant was not admissible as a deduction in the year under appeal ?

3. Whether the finding of the Tribunal that as the applicant was following the mercantile system of accounting it could claim adjustment of the amounts of Rs. 14,53,340 and Rs. 9,73,384 (mentioned in questions Nos. 1 and 2 above) only in the year in which the purchases were made was justified in law in the facts and circumstances of the case ?

4. Whether the finding of the Tribunal was perverse as it did not consider the legal position that the final adjustments relating to the purchases made by the applicant during the period of closure of its Paharpur Works in 1970 being made in the year ended March 31, 1973, the amounts referred to in questions Nos. 1 and 2 above represented the business liability on the applicant definitely arising in the year ended March 31, 1973, and were accordingly deductible in the relevant year although the liability might pertain to earlier years ?'

The assessment year involved is 1973-74, for which the relevant year of account is the year ending March 31, 1973. The statement of case was forwarded by the Tribunal on January 2, 1984. Thereafter, at the direction of this court, they sent another statement on April 2, 1984. The dispute is about the right of the assessee to adjust payment of a sum of Rs. 14,53,340 as advance written off in the relevant year of account, i.e., accounting year from April 1, 1972, to March 31, 1973. The facts found by the Tribunal are as under :

The assessee is a company and the reference relates to the assessment year 1973-74, for which the previous year ended on March 31, 1973. The assessee claimed deduction of Rs. 14,53,340 and Rs. 9,73,304. The assessee's case before the Income-tax Officer was that a sum of Rs. 14,53,350 was included in Rs. 17,43,669 which represented adjustments in accounts of sundry suppliers of Paharpur Works. It was submitted that due to closure of the Paharpur Works during March to June, 1970, the accounts of sundry suppliers were corrected during this year and necessary adjustments were made. The assessee-company maintained accounts on the mercantile system. If the advances were made against purchases, they could be adjusted only in the year in which the purchases were made. For the failure of the assessee to adjust the amount in the appropriate year, the assessee could not claim deduction of this amount in the computation of total income of this year. The assessee had also contested before the Income-tax Officer the disallowance of Rs. 23,22,303 being adjustments in respect of earlier years, which consisted of the following amounts :

Rs.(i)Purchase15,40,127(ii)Salaries, wages and bonus 5,11,324(iii)Miscellaneous 2,70,852

23,22,303

As regards the purchase account, the assessee's case was that due to labour trouble in its Paharpur Works in the year 1970, it had no access to the books of account and so the accounts of the suppliers in respect of purchases made from them could not be settled within the previous year and whatever amounts were paid to them were recorded as advances towards purchases. It was claimed that the final adjustments of these amounts were made during the previous year relevant to the year under reference by writing off the advances of the aforesaid amounts. The Income-tax Officer negatived this claim of the assessee.

2. On appeal, the Appellate Assistant Commissioner confirmed the disallowances by the Income-tax Officer. At the time of hearing before the Appellate Assistant Commissioner, it was submitted on behalf of the assessee that out of Rs. 15,40,127 an amount of Rs. 5,66,745 has already been allowed as adjustment in the assessment year 1971-72 and, therefore, the assessee was restricting its claim to the balance amount of Rs. 9,75,584. The Appellate Assistant Commissioner further added that when the parties from whom purchases were made submitted their bills, they would have adjusted the advances made. Therefore, the assessee could have adjusted the advances when the bills were passed. No evidence had been produced to prove that the assessee was prevented by sufficient cause from making the necessary adjustments in the appropriate years and, therefore, the assessee could not claim deduction of the above amounts in the year under appeal, since these adjustments related to earlier years.

3. It was specially emphasised by the Appellate Assistant Commissioner in his order as follows :

'The Paharpur Works was closed only for about four months from March, 1970, to June, 1970. The appellant's accounting year is the financial year. Therefore, the Paharpur Works was closed in the beginning of the financial year 1970-71. The appellant did not have access to the books of account kept in the Paharpur Works for about four months only in the beginning of the financial year 1970-71. Therefore, the appellant could have made the adjustments after July, 1970, up to March 51, 1971, inpespect of the transactions made during the period Paharpur Works was closed. The appellant maintained its accounts on the mercantile system. If the advances were made against the purchases, they could be adjusted only in the years in which the purchases were made. When the parties from whom purchases were made submitted their bills, they would have deducted the advances made and, therefore, the appellant could have adjusted the advances when the bills were passed. When the bills from the parties were received, the appellant did not debit the purchase account with the gross bill amount but only the net amount, i.e. the gross amount as reduced by the amount of advance. No evidence has been produced to prove that the appellant was prevented by sufficient cause from making the necessary adjustment in the appropriate years,'

The Tribunal further, on appeal, came to the conclusion that there was no dispute that the amounts in question represented unpaid prices of the purchases made by the assessee in the earlier years and that the assessee had followed the mercantile system of accounting. That being the position, the unpaid prices could only be adjusted in the year for which the purchases were made. The Tribunal, therefore, upheld the order of the Appellate Assistant Commissioner.

4. It has been contended by Mr. Pal that the Tribunal failed to appreciate that the assessee, even though it followed the mercantile system of accounting, was unable to maintain regular accounts because of the closure of the Paharpur Works. The factory was under lockout. The books of account were not accessible to the company. Therefore, it was not possible to maintain accounts and make necessary adjustments in the accounts on the basis of the mercantile system of accounting.

5. This argument of Mr. Pal cannot be accepted. The company must have had some accounts of goods despatched and of advances of money made. The business of the company did not come to an end because of the lockout at the Paharpur Works. The business of the company was going on and it is difficult to believe that no accounts were being maintained for despatches of goods being made or advances being received or payments being made by the company.

6. Moreover, the lockout was admittedly only during the period of four months from March to June, 1970. After June, 1970, there could not have been any difficulty in adjusting the accounts. March, 1970, fell within the accounting year ending on March 31, 1970, and April to June, 1970, fell within the accounting year ending on March 31, 1971. There is no plausible explanation why the adjustments were not made immediately after June,1970, i.e., within the accounting year ending on March 31, 1971. It was not even made during the year 1971-72. There is no reasonable explanation why the assessee chose to make these adjustments only in the accounting year 1972-73.

7. The Tribunal does not appear to have committed any error of law. The explanation of practical difficulty has not been accepted by the Tribunal for good reason. The findings of fact cannot be said to be vitiated and erroneous in law in any way.

8. In the circumstances, the questions are answered in the following manner : Questions Nos. 1 and 2 are answered in the affirmative and in favour of the Revenue. Question No. 3 is also answered in the affirmative and in favour of the Revenue. Question No. 4 is answered in the negative and in favour of the Revenue.

9. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.

10. I agree.