1999 (9) TMI 69 - HC - Income Tax

Court rules fuel surcharge liability recognized upon consumption, not bill receipt.

The court held that the liability for the additional fuel surcharge accrued when the electricity was consumed, not when the bill was received. Therefore, ... Business Expenditure, Accounting Issues Involved:1. Whether the liability for additional fuel surcharge arose when the electricity was consumed or when the bill was received.2. Whether the assessee was entitled to a deduction for the additional fuel surcharge in the respective assessment years (1981-82 and 1984-85).Issue-wise Detailed Analysis:1. Liability for Additional Fuel Surcharge:The primary issue was whether the liability for the additional fuel surcharge arose at the time of electricity consumption or upon receipt of the bill. The Tribunal held that the liability arose only when the assessee received the bill from the M.P. State Electricity Board, which was in September 1983, relevant to the assessment year 1984-85. The assessee argued that the liability should be recognized when the electricity was consumed, as the quantification of the liability could be done later.The court referred to several precedents, including Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), where it was held that the liability should be recognized in the year it accrued, not when it was quantified or paid. The court also considered CIT v. Swadeshi Mining and Manufacturing Co. Ltd. [1978] 112 ITR 276 (Cal), which supported the view that the liability accrues when the event (consumption of electricity) occurs, not when the bill is received.The court concluded that the liability for the additional fuel surcharge accrued when the electricity was consumed in the assessment year 1981-82, and the quantification of the liability did not affect the fact of its accrual. Thus, the liability should be allowed in the year of consumption.2. Entitlement to Deduction for Additional Fuel Surcharge:For the assessment year 1981-82, the assessee initially did not claim the deduction for the additional fuel surcharge but later claimed it during proceedings under section 144B of the Income-tax Act, 1961. The Inspecting Assistant Commissioner disallowed the claim on the ground that the bill was not received in the relevant year. The Commissioner of Income-tax (Appeals) allowed the claim, but the Tribunal reversed this decision, holding that the liability accrued only when the bill was received in September 1983.For the assessment year 1984-85, the Tribunal held that the liability arose when the bill was received, thus allowing the deduction in that year. However, the court held that since the liability accrued in the year of consumption (1981-82), it should be allowed in that year, and not in 1984-85.The court emphasized that under the mercantile system of accounting, which the assessee followed, liabilities should be recognized when they accrue, not when they are paid or billed. The court referred to the agreement between the assessee and the M.P. State Electricity Board, which indicated that the additional fuel surcharge was tied to the consumption of electricity and subject to final adjustment. The court concluded that the liability was not contingent but accrued at the time of consumption.Conclusion:The court answered both questions for the assessment years 1981-82 and 1984-85 in favor of the assessee. The additional fuel surcharge liability should be allowed in the year when the electricity was consumed (1981-82), and not when the bill was received (1984-85). Consequently, the same amount cannot be allowed twice, and thus it cannot be allowed in the assessment year 1984-85. Both applications were disposed of accordingly.