Deduction

Business liability — If a business liability is definite, the deduction should be allowed, although the liability may be quantified and discharged at a future date, as held by GujHC in CIT v Alembic Glass Industries Limited — In favour of: The assessee; Tax Appeal No 729 of 2011.

CIT v Alembic Glass Industries Limited

High Court of Gujarat

Tax Appeal No. 729 of 2011

Akil Kureshi and Sonia Kogani, JJ

Decided on: 2 May 2011

Counsel appeared:

Mr K M Parikh for the appellant

None for respondent

Judgment

Per : Akil Kureshi, J:

1. Revenue is in appeal against the judgment of the Tribunal dated 31.10.2010 raising the following

question for our consideration

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing

deduction of claim of ONGC liability, disregarding the fact that during the year assessee has not paid

any amount towards this liability. It was a contingent liability and the real character of payment was

that the advance or deposit and not of an expenditure under the mercantile system of accounting

followed by the assessee?"

2. For the assessment year 2005-2006, the assessee had claimed deduction of Rs.8,11,99,503/- being amount of interest payable to ONGC. The Assessing Officer, during the course of assessment,

disallowed the claim of the assessee believing that the liability had not accrued in the assessment year in question. The issue was carried in appeal by the assessee in appeals. The CIT (Appeals) disallowed the appeal. The issue was carried before the Tribunal by the assessee. Its appeal was allowed.Thereupon, the Revenue has approached this Court in the present appeal.

3. The case of the assessee was that by virtue of the decision of the Supreme Court dated 12.4.2004,

the assessee had to pay amount towards liability and interest to ONGC. Since this issue was decided

by the Supreme Court, the liability was crystallized. Thereupon, only the issue of computation of the

actual amount to be paid was yet to be made. The assessee thereupon set apart a sum of

Rs.8,11,99,503/- towards such liability, which according to the assessee would be a minimum amount payable to ONGC.

4. On the other hand, Revenue's stand was that the liability had not crystallized and the same was

settled only in the year 2007. The assessee and the ONGC settled the entire claim for a sum of

Rs.33,00,00,000/-.

5. The Tribunal, however, ruled in favour of the assessee relying on the decision of the Apex Court in

the case of Bharat Earth Movers v. CIT reported in (2000) 245 ITR 428.

6. Before us the counsel for the Revenue strenuously urged that the liability had not yet crystallized.

No provision could have been made towards the said liability during the year in question. Reliance

was placed on the decision of Division Bench of this Court in the case of Alembic Chemical Works

Ltd. v. Deputy Commissioner of Income-Tax reported in [2004] 266 ITR 47, wherein the Bench

observed that in the case of the assessee following the mercantile system of accounting, liability is

said to be properly incurred when the dispute between the parties is amicably settled or finally

adjudicated, where the liability in question is not a statutory liability. It has been further held as

under:-

" Thus, the settled position in law is that in the case of an assessee following the mercantile system of accounting a liability is said to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability. In the case of the appellant it is apparent that the liability is pending adjudication by way of appeal in the Supreme Court and till the point of time the same is finally adjudicated, the liability in question would remain a contingent liability. It is pertinent to note that despite the earlier view declared by the Supreme Court between the same parties, the present appeal has been admitted and is pending. Hence, it is not possible to accept the contention on behalf of the appellant that the conclusion in the pending appeal is a foregone conclusion. In the result, there being no infirmity in the impugned order of the Tribunal in relation to this ground of appeal it is not necessary to interfere."

7. From the above, it can be seen that decision in the case of Alembic Chemical Works Ltd. vs. Deputy Commissioner of Income-Tax (supra) was rendered in the background of facts where the disputes between the parties was pending before the Supreme Court. It was in this background that the Bench found that no liability was crystallized as dispute was yet not settled.

8. In the present case, however, we find that the assessee's liability to pay interest to the ONGC was finally decided by the Supreme Court in its judgment dated 12.4.2004. The Supreme Court directed the assessee to pay simple interest to ONGC for a certain period. Based on the directions of Supreme Court, the assessee estimated its liability and made provision for discharging such a liability, which according to the assessee, had crystallized with the decision of the Supreme Court. The assessee's liability to pay interest and other charges to the ONGC, clearly achieved finality. The said liability, therefore, the Tribunal found to have arising. In our view, rightly so, it is in this background that the decision in the case of Bharat Earth Movers vs. CIT (supra) can be appreciated. In the said case, the Apex Court observed as under:-

"The law is settled: if a business liability has definitely arisen in the accounting year, the deduction

should be allowed although the liability may have to be quantified and discharged at a future date.

What should be certain is the incurring of the liability. It should be capable of being estimated with

reasonable certainty though the actual quantification may not be possible. If these requirements are

satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged

at a future date. It does not make any difference if the future date on which the liability shall have to

be discharged is not certain."

9. The Tribunal relying on the decision in the case of Bharat Earth Movers (supra) and applying the

facts of the case held that the liability had arisen during the year in question.

10. We find that there is no error in the view of the Tribunal. No question of law is arising. Tax

Appeal is, therefore, dismissed.