TaxTMI 
TaxTMI 
1982 (6) TMI 150
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....r renewal for a further period of ten years. The rate at which the bark of the wattle trees will be supplied to the assessee for the first three years of the lease period was fixed at Rs. 80 per metric tonne of green bark. The government reserved to themselves the right to have the costing of the assessee company checked by a Cost Accountant. This check is to be enforced at the end of every three years. After the end of the first three years, the agreement provided that the rate of the wattle bark would be such amount as might be fixed by the government form time to time. Then it provided for the mode and method of payment of the sale price by the assessee-company. It also provided for the method of extracting the bark, the penalties to be imposed for contravention. Since the rate at which the bark was agreed to be supplied to the assessee-company was at concessional rate, the assessee-company agreed to pay to the government 15 per cent of the profit and for that purpose, the profit also has been defined. Then there are several other clauses referring to the security deposit and such like matters with which we are not directly concerned in the present appeal. 3. For the assessment....
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....sessee made a provision of the payment of the sum in the year under appeal the assessee had been following the mercantile system of accounting and that this was a statutory liability imposed upon to assessee by an order passed by the Government of Tamil Nadu on 5th June, 1975, which was before the end of the accounting year, and since the liability arose with the issue of the G.O. which was before the accounting year ended, the assessee incurred a liability to pay this sum and, therefore, is allowable as a deduction even thought the assessee had disputed the liability. Pursuant to the direction given by the IAC to allow the sum as a deduction the ITO allowed the same as a deduction and completed the assessment. This allowance by the ITO was considered prejudicial and erroneous to the interests of the Revenue by the CIT when he happened to examine the record of the assessee in exercise of his powers under s. 263. He appears to have been guided by the fact that when the order of Conservator of forests calling upon the assessee to pay additional cost was issued on 20th Sept., 1975, the liability arose at that point of time and since that date happened to fall outside the accounting ye....
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....ews, he submitted that the order passed by the CIT was correct and should be upheld. 6. But in our opinion, none of the contentions advanced on behalf of the Revenue is either tenable or justified. It is now a trite law that if an assessee maintains accounts according to the mercantile systems of accounting, the expenditure of which a legal liability has been uncured or immediately debited even before the amounts in question arose for distribution, those amounts are liable to be a deducted in computing the income as soon as the legal liability has been incurred. This was stated repreately by the Supreme Court and we do not have to referee to the various decisions of the Supreme Court on the subject. In the case of Kedarnath jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), on which reliance has been placed by both the parties before us, the question was whether the assessee company which followed the mercantile system of accounting incurred a liability of Rs. 1,49,776 on account of sales-tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the asst. yr. 1955-56. The sales-tax demand was rais....
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....e the Madras High Court held that the assessee had incurred an enforceable legal liability on and from the date on which the demand from the Collector, Central Excise, was received for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. 8. Now, in this case, the assessee had been following mercantile system of accounting. The liability to pay the additional amount consequent on the revision of the rates by appointing a Cost Accountant, a right reserved by the Government of Tamil Nadu under the agreement it entered with the assessee, arose when the Government of Tamil Nadu passed the G.O. on 5th June 1975. No doubt, it is true that the amount of additional rate payable was for the period from 1st April, 1972 onwards. But, that does not in any manner mean that the liability related to those years. Even in respect of those years, the liability to pay additional amount on the wattle bark extracted even during those years was incurred by the assessee when the G.O. was passed by the Government of Tamil Nadu on 5th June....