Commissioner of Income-tax v. Om Metals and Mineral P. Ltd
[Citation -2015-LL-0113]

Citation 2015-LL-0113
Appellant Name Commissioner of Income-tax
Respondent Name Om Metals and Mineral P. Ltd.
Court HIGH COURT OF RAJASTHAN
Relevant Act Income-tax
Date of Order 13/01/2015
Assessment Year 1977-78
Judgment View Judgment
Keyword Tags diminution in value of assets • public sector undertaking • ascertained liability • reference application • contingent liability • commercial practice • actual liability • capital employed • leave encashment • gratuity scheme • central excise • future date • job-work
Bot Summary: While relying upon the said judgments, he contended that the hon'ble apex court, in the cases has held that contingent liability do not constitute expenditure and thus is not allowable. 9.1 After culling out the principles, finally observed as under: So is the view taken in Calcutta Co. Ltd. v. CIT 1959 37 ITR 1 wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. Applying the above-said settled principles to the facts of the case at hand, we are satisfied that provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. In such a case it was held by this court that the provision made by the assessee-company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision 13.1 After laying down the aforesaid principles, allowed the claim made by the said company with reference to the gratuity. In view of the concurrent finding of the two appellate authorities, and in the light of the opinion of the hon'ble apex court in the case of Bharat Earth Movers and Rotork Controls India Ltd., and Calcutta Co. Ltd. v. CIT 1959 37 ITR 1 in our view, the Income-tax Appellate Tribunal was correct and justified in allowing the amount of Rs. 87,224 which was an ascertained liability on account of the allowable deduction.


JUDGMENT judgment of court was delivered by J. K. Ranka J.-This reference under section 256(1) of Income-tax Act, 1961 (for short, "the IT Act"), relating to assessment year 1977-78, is answered on following question referred to by Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short, "the ITAT") dated March 5, 1993: "Whether, on facts and in circumstances of case and in law, Tribunal was justified in holding that provision on account of contingency was allowable deduction and, consequently, erred in deleting disallowance of Rs. 87,224?" brief facts, which can be noticed, are that respondent-assessee is limited company and was in business of contract for supply of irrigation gates, job-work and transportation. assessee made provision for contingency amounting to Rs. 87,224 on total amount of Rs. 13,40,070 of work executed at 6 per cent. It was contended on behalf of assessee that work of dam at Right Bank Dam Division, Hidkal Dam had not been completed and, therefore, provision was made only on supplies. However, Assessing Officer (for short, "the AO") was of view that said amount is nothing but provision made for future contingency not ascertained and, accordingly, held that said amount, relatable to subsequent year, cannot be allowed and, thus, disallowed said amount. disallowance was assailed by assessee before Commissioner of Income-tax (Appeals), (for short, "the CIT(A)"). Commissioner of Income- tax (Appeals), who in view of order of Income-tax Appellate Tribunal in case of Instrumentation Ltd., allowed claim. Revenue preferred appeal before Income-tax Appellate Tribunal and it was argued on behalf of Revenue that facts in case of Instrumentation Ltd. vis-a-vis present assessee are entirely distinguishable and, thus, order of Income-tax Appellate Tribunal in case of Instrumentation Ltd. cannot be applied. contention of Revenue that it is only contingent liability, as it has been created on estimated basis, i.e., on certain percentage of supplies made this year and, thus, cannot be allowed, did not impress Income-tax Appellate Tribunal and it placed reliance on order of Instrumentation Ltd. which was decided on December 17, 1981. Income-tax Appellate Tribunal further observed that present matter is being decided on July 30, 1992, and despite of 11 years having been passed since date of order of Income-tax Appellate Tribunal in case of Instrumentation Ltd., Revenue was unable to bring on record whether reference was filed in case of Instrumentation Ltd. or otherwise and, thus, dismissed appeal of Revenue. It is contended by learned counsel for Revenue that Incometax Appellate Tribunal grossly erred in placing reliance on judgment of Income-tax Appellate Tribunal in case of Instrumentation Ltd. He contended that matter of Instrumentation Ltd. had come up before this court and on August 8, 1986, this court in case of CIT v. Instrumentation Ltd. (DB Income Tax Reference Application No. 170 of 1982) [1987] 167 ITR 354 (Raj) directed Income-tax Appellate Tribunal to state case and refer question on same issue for decision of this court within three months. He further contended that subsequently this court in case of CIT v. Instrumentation Limited vide order dated March 13, 2008, in DB Income Tax Reference No. 30 of 1995 and DB Income Tax Reference No. 87 of 1995, observed that respondent, namely, Instrumentation Ltd. being Government company and in light of judgment rendered by hon'ble Supreme Court in case of ONGC v. Collector of Central Excise [1995] (Supp) 4 SCC 541; [1999] 116 STC 418 (SC) held that if dispute exists between Government of India and public sector undertaking of Union of India, same may be resolved amicably by mutual consultation or through good offices of empowered agencies of Government or arbitration avoiding litigation and this court in above reference came to conclusion that matter of Instrumentation Ltd. has also been referred to committee constituted by Government of India and, thus, reference was disposed of in view of observations and directions of Supreme Court. He contended that in so far as question is concerned, it has not been answered and, thus, is pending and Income-tax Appellate Tribunal at least ought not to have allowed claim when reference was sought by this court in Reference Application No. 170 of 1982 and Income-tax Appellate Tribunal was aware of order of this court and further that in DB Income Tax Reference No. 30 of 1995 and DB Income Tax Reference No. 87 of 1995, this very question was forwarded by Income-tax Appellate Tribunal for decision of this court. Thus, he contended that question has not yet been decided. He further contended that it is merely contingent liability without any assessment or quantification of future liability and has been created only on estimated basis at 6 per cent. amounting to Rs. 87,224. He contended that by no stretch of imagination, assessee could have estimated liability at 6 per cent. and, thus, assessee was not sure of any ascertained liability. He relied upon judgment of hon'ble apex court in case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC); Indian Molasses Co. P. Ltd. v. CIT [1959] 37 ITR 66 (SC) and judgment of this court in case of Rajasthan State Mines and Minerals Ltd. v. CIT [1994] 208 ITR 1010 (Raj). While relying upon said judgments, he contended that hon'ble apex court, in cases (supra) has held that contingent liability do not constitute expenditure and thus is not allowable. No one appeared on behalf of respondent-assessee despite service. We have considered arguments advanced by counsel for Revenue and, in our view, no interference is required to be made in order passed by Income-tax Appellate Tribunal as in our humble view, Income-tax Appellate Tribunal has come to correct conclusion that liability was ascertained and it has been admitted fact that work had been completed at Dam, namely, Right Bank Dam Division, Hidkal Dam and provision was made only for supplies. Though it may be that assessee made provision at rate of 6 per cent. of supplies for possible loss due to deduction made by Government for not keeping supplies to satisfaction of department which, in fact, had been deducted by Government at 10 per cent. However, to be on safer side, assessee made provision at 6 per cent. only. It is admitted fact that provision, if any made, was to make over deficiencies, in respect of work done as per direction of Government by which 10 per cent. deduction was made. Admittedly, entire amount was included by assessee in total receipts and once entire receipt has been shown, expenditure ought to have been allowed and, therefore, this was allowable deduction. In our view, assessee has to ensure expenditure and if not paid on or before close of financial year, it certainly deserves allowance. Admittedly, system of accounting, followed by assessee, is mercantile and any expenditure, not paid by close of year, is as it is allowable and in fact, even in mercantile system of accounting, while income is also to be included, which has accrued to assessee, so also expenditure is to be allowed in similar fashion. Though learned counsel for Revenue has relied upon judgments rendered by hon'ble apex court in case of Shri Sajjan Mills Ltd. (supra); India Molasses Co. Ltd. (supra) and judgment rendered by this court in case of Rajasthan State Mines and Minerals Ltd. (supra) but hon'ble apex court, in subsequent judgments, rendered in case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) and Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC), has considered issue again and has distinguished judgments rendered in case of Shri Sajjan Mills Ltd. (supra) and India Molasses Co. Ltd. (supra). hon'ble apex court, after considering judgment rendered in case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) culled out following principles for claim like this (page 430 of 245 ITR): "(i) For assessee maintaining his accounts on mercantile system, liability already accrued, though to be discharged at future date, would be proper deduction while working out profits and gains of his business, regard being had to accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out profits and gains of business; (iii) condition subsequent, fulfilment of which may result in reduction or even extinction of liability, would not have effect of converting that liability into contingent liability; and (iv) trader computing his taxable profits for particular year may properly deduct not only payments actually made to his employees but also present value of any payments in respect of their services in that year to be made in subsequent year if it can be satisfactorily estimated." 9.1 After culling out principles, finally observed as under (page 432 of 245 ITR): "So is view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) wherein this court has held that liability on assessee having been imported, liability would be accrued liability and would not convert into conditional one merely because liability was to be discharged at future date. There may be some difficulty in estimation thereof but that would not convert accrued liability into conditional one; it was always open to tax authorities concerned to arrive at proper estimate of liability having regard to all circumstances of case. Applying above-said settled principles to facts of case at hand, we are satisfied that provision made by appellant company for meeting liability incurred by it under leave encashment scheme proportionate with entitlement earned by employees of company, inclusive of officers and staff, subject to ceiling on accumulation as applicable on relevant date, is entitled to deduction out of gross receipts for accounting year during which provision is made for liability. liability is not contingent liability. High Court was not right in taking view to contrary." hon'ble apex court in case of Rotork Controls India (P.) Ltd. (supra), again distinguished judgment rendered in case of Shri Sajjan Mills Ltd. (supra) and allowed deduction by holding (page 79 of 314 ITR): "At this stage, we once again reiterate that liability is present obligation arising from past events, settlement of which is expected to result in outflow of resources and in respect of which reliable estimate is possible of amount of obligation. As stated above, case of Indian Molasses Co. (P.) Ltd. (supra) is different from present case. As stated above, in present case we are concerned with army of items of sophisticated (specialised) goods manufactured and sold by assessee whereas case of Indian Molasses Co. Ltd. (supra) was restricted to individual retiree. On other hand, case of Metal Box Co. of India Ltd. (supra) pertained to army of employees who were due to retire in future. In that case company had estimated its liability under two gratuity schemes and amount of liability was deducted from gross receipts in profit and loss account. company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to number of years. In such case it was held by this court that provision made by assessee-company for meeting liability incurred by it under gratuity scheme would be entitled to deduction out of gross receipts for accounting year during which provision is made for liability. same principle is laid down in judgment of this court in case of Bharat Earth Movers (supra). In that case assessee-company had formulated leave encashment scheme. It was held, following judgment in Metal Box Co. of India Ltd.'s case (supra), that provision made by assessee for meeting liability incurred under leave encashment scheme proportionate with entitlement earned by employees, was entitled to deduction out of gross receipts for accounting year during which provision is made for that liability. principle which emerges from these decisions is that if historical trend indicates that large number of sophisticated goods were being manufactured in past and in past if facts established show that defects existed in some of items manufactured and sold then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from gross receipts under section 37 of 1961 Act." We may also observe that judgment rendered by this court in case of Rajasthan State Mines and Minerals Ltd. (supra), relied upon by counsel for Revenue, is distinguishable on facts. Both Commissioner of Income-tax (Appeals) as well as Income-tax Appellate Tribunal have come to definite finding of fact that liability existed and was ascertained, therefore, claim was allowable. We may also observe that this court in judgment of Rajasthan State Mines and Mineral (supra) with reference to whether claim is allowable or not, has observed in paragraph 11 that even actual liability which is not praesenti is also expenditure. only thing, which is required is that it must be actual liability and not contingent or unascertained. hon'ble apex court, in case of Metal Box Co. of India Ltd. v. Their Workman (supra), had also occasion to consider as to what is provision or reserve and after referring to settled principle, observed as under (page 67 of 73 ITR): "The next question is whether amount so provided is provision or reserve. distinction between provision and reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in profit and loss account and balance- sheet. On other hand, reserves are appropriations of profits, assets by which they are represented being retained to form part of capital employed in business. Provisions are usually shown in balance-sheet by way of deductions from assets in respect of which they are made whereas general reserves and reserve funds are shown as part of proprietor's interest (see Spicer and Pegler's Book-keeping and Accounts, 15th edition, page 42). amount set aside out of profits and other surpluses, not designed to meet liability, contingency, commitment or diminution in value of assets known to exist at date of balance-sheet is reserve but amount set aside out of profits and other surpluses to provide for any known liability of which amount cannot be determined with substantial accuracy is provision" 13.1 After laying down aforesaid principles, allowed claim made by said company with reference to gratuity. In view of concurrent finding of two appellate authorities, and in light of opinion of hon'ble apex court in case of Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), and Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) in our view, Income-tax Appellate Tribunal was correct and justified in allowing amount of Rs. 87,224 which was ascertained liability on account of allowable deduction. Accordingly, we answer question in favour of assessee and against revenue. No costs. *** Commissioner of Income-tax v. Om Metals and Mineral P. Ltd
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