2011 (8) TMI 267 - HC - Income Tax

Court rules liability accrued at decree, not contingent on BIFR/AAIFR consent. Deductible under mercantile system.

The court held that the liability accrued under an award made rule of the court does not become contingent merely due to the requirement of consent from ... Sick Industrial Companies - Contingent liability or accrued liabiltiy - Held that:- merely because proceedings could not be initiated by the PSEB against the assessee for enforcing the decree by way of execution for want of consent of the BIFR as required under Section 22 of SICA, it would not mean that the liability had not accrued when it is found that the assessee was following mercantile system of accounting - the principle fully applies. Parties have entered into agreement on transfer of technical know-how with the permission of the Government of India - Under it liability of the assessee to pay fee for technical know-how accrued - The fact that actual payment could be made only with the permission of RBI, only put him under obligation to apply to the RBI for grant of necessary permission for releasing payment of amount to a non-resident - But its enforceability is not a contingent one. Issues Involved:1. Whether the liability accrued under an award made rule of the court becomes a contingent liability due to the requirement of consent from BIFR/AAIFR for its recovery under Section 22 and Section 22-A of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).Issue-wise Detailed Analysis:1. Nature of Liability and Requirement of Consent from BIFR/AAIFR:The primary issue revolves around whether the liability, which was otherwise accrued and deductible, becomes a contingent liability merely because the consent of the Board or Appellate Authority is required for its recovery under the provisions of Section 22 and Section 22-A of SICA.The appellant/assessee, engaged in manufacturing material handling equipment, faced financial difficulties and approached the Board for Industrial and Financial Reconstruction (BIFR) for rehabilitation. During this period, an arbitration award was passed against the assessee, favoring the Punjab State Electricity Board (PSEB) for a sum of Rs. 2,29,57,583/- with interest. This award was made rule of the court on 10.10.2002. The assessee treated this decree as an accrued liability in its return for the Assessment Year 2003-04. However, the Assessing Officer (AO) rejected this, arguing that without the consent of BIFR, the liability had not accrued.2. Tribunal and CIT(A) Findings:The CIT(A) allowed the assessee's appeal, recognizing the liability. However, the Tribunal, on remand, concluded that the liability was contingent due to the requirement of BIFR's consent under Section 22 of SICA. The Tribunal's decision was based on the non-absentee clause in Section 22, which overrides other laws, including the Income Tax Act.3. Interpretation of Section 22 of SICA:Section 22 of SICA suspends legal proceedings against a sick industrial company without the consent of BIFR/AAIFR. The provision mandates that no suit for the recovery of money or enforcement of claims against such a company shall proceed without the Board's consent. The court analyzed whether this suspension of legal proceedings renders the liability contingent.4. Legal Precedents and Mercantile System of Accounting:The court referred to various judgments, including Bhai Sunder Dass & Sons Co.(P) Ltd. v. Commissioner of Income-Tax, where it was held that under the mercantile system of accounting, liability accrues when the obligation is incurred, not when it is discharged. The court emphasized that the requirement of RBI's permission for remittance does not defer the accrual of liability but only its discharge.Similarly, in CIT v. Super Scientific Clock Co., the Gujarat High Court held that the provisions of FERA, requiring RBI's permission for payment, do not affect the accrual of liability under a contract. The liability becomes enforceable independently of FERA provisions.5. Conclusion and Judgment:The court concluded that the mere requirement of BIFR's consent for enforcing the decree does not make the liability contingent. The liability had accrued on 10.10.2002 when the decree was passed, and the assessee, following the mercantile system of accounting, was entitled to deduct the liability in the relevant assessment year.The court answered the substantial question of law in favor of the assessee, allowing the appeal and holding that the liability had accrued in the year in question, making the assessee entitled to the deduction of the amount.