1982 (6) TMI 150 - AT - Income Tax

Tribunal allows assessee's appeal, upholds ITO's deduction of Rs. 18,84,708.

TAN INDIA WATTLE EXTRACTS CO. LTD. Versus INCOME TAX OFFICER.

TAN INDIA WATTLE EXTRACTS CO. LTD. Versus INCOME TAX OFFICER. - TTJ 015, 545, Issues Involved:1. Whether the Commissioner of Income Tax (CIT) was correct in his view that the Income Tax Officer (ITO) erred in allowing the assessee's claim for the deduction of Rs. 18,84,708 paid to the government due to an increase in the price of wattle bark.Detailed Analysis:1. Background and Agreement Details:The assessee, a limited company, had entered into an agreement with the Government of Tamil Nadu on 31st March 1969 for the supply of wattle bark at a fixed rate for the first three years, with subsequent revisions based on a cost accountant's recommendations. The assessee filed a return of income for the assessment year, including a deduction of Rs. 18,84,708 for the additional amount payable to the government for wattle bark.2. CIT's Examination and Conclusion:The CIT, exercising his powers under section 263 of the Income Tax Act, concluded that the allowance of Rs. 18,84,708 was incorrect. He argued that the liability to pay the additional amount arose when the Conservator of Forests issued a demand order on 20th September 1975, which was outside the accounting year. Therefore, the CIT deemed the allowance of the entire claim in one assessment year as erroneous.3. Assessee's Appeal and Contentions:The assessee contended that the liability arose when the Government of Tamil Nadu issued the Government Order (G.O.) on 5th June 1975, within the accounting year. The assessee relied on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. vs. CIT, arguing that under the mercantile system of accounting, the liability should be recognized when the legal obligation is incurred, not when the payment is made.4. Revenue's Opposition:The departmental representative argued that the liability arose when the Conservator of Forests issued the demand order, and thus, the liability should be spread over the years when the wattle bark was extracted. The representative also relied on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. to support this view.5. Tribunal's Analysis and Judgment:The Tribunal held that under the mercantile system of accounting, a legal liability is recognized when it is incurred, regardless of when the payment is made. Citing the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd., the Tribunal emphasized that the liability arose when the G.O. was issued on 5th June 1975, not when the Conservator of Forests issued the demand order. The Tribunal noted that the assessee had made a provision for the liability in its accounts, reinforcing the validity of the deduction.6. Conclusion:The Tribunal concluded that the CIT's view was neither tenable nor justified. The Tribunal set aside the CIT's order, holding that the assessee was entitled to the deduction of Rs. 18,84,708 in the assessment year under appeal. The Tribunal did not express an opinion on the legal contention regarding the CIT's jurisdiction under section 263 when the ITO acted on the directions of the IAC.Judgment:The Tribunal accepted the assessee's appeal, set aside the CIT's order, and upheld the ITO's allowance of the deduction of Rs. 18,84,708.