Appellantthrough:sh.sanjeevsabharwal,Sr.standing Counsel With Sh. Ruchir Bhatia, Jr.standing Counsel v. Dalmia Bharat Sugar And Industries Ltd

+ * IN THE HIGH COURT OF DELHI AT NEW DELHI Decided on : 04.04.2014 ITA 129/2014 THE COMMISSIONER OF INCOME TAX (LTU)..... AppellantThrough:Sh.SanjeevSabharwal,Sr.Standing Counsel with Sh. Ruchir Bhatia, Jr.Standing Counsel. versus DALMIA BHARAT SUGAR AND INDUSTRIES LTD. ..... Respondent Through : None. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % 1.In this appeal against the order of the Income TaxAppellant Tribunal (hereafter the “ITAT”) dated 27-9-2013 inappeal no. ITA no. 5257/Del/2010, the CIT argues that theITAT erred in deleting the addition by the Assessing Officer(hereafter the “AO”), of an amount claimed as a deduction inA.Y. 2005-06, even though the expenditure was allegedlyincurred in the previous year 1996-97 towards cane pricearrears, pursuant to a notification issued in 1997. 2.During the assessment proceeding in respect of returnsfiled by the assessee, the AO noted that the assessee had debiteddifferential sugar cane price amounting to ` 12,08,81,801/- relevant to previous years 1996-97, 2002-03, 2003-04. Theassessee was then asked to show cause why these amountsshould not be disallowed as deductions in the A.Y. 2005-06,since they ought to have been claimed in respect of the relevantprevious years in which the liability was incurred. The assesseeresponded that in respect of financial year 1996-97, theNotification dated 15-11-1997, issued to fix cane price waschallenged by the company and was consequently first, quashedby the High Court of Allahabad, but later upheld by theSupreme Court by its order dated 4-5-2004. Liability under thenotification consequently only arose in 2004. In respect offinancial years 2002-03 and 2003-04, it was submitted that thenotification imposing liability was only issued during thefinancial year 2004-05, thus constraining the assessee intoclaiming the deduction in the A.Y. 2005-06. The AO rejectedthe assessee’s explanation on the ground that the liability hadarisen in the financial year 1996-97 itself, since the companywas following mercantile system of accounting (by which anexpenditure has to be claimed when accrued), and in any event,liability cannot be said to have arisen in 2004 when the SupremeCourt upheld the notification. Even in respect of financial years2002-03 and 2003-04, although the notification was issued inthose years by the Government, it was only when the SupremeCourt upheld the power to fix price of sugar cane thatnotifications dated 30-6-2004 and 5-10-2004 were reissued.Consequently, the AO added ` 60,20,743/- and the deduction was reduced accordingly. The Commissioner of Income Tax-Appeals (hereafter referred to as “CIT-A”) confirmed the orderof the AO. The ITAT, however, allowed the appeal of theassessee, noting that the Allahabad High Court had quashed thenotification in 1996 itself, and, therefore, there was no occasionfor the assessee to incur liability for payment of arrears till theSupreme Court upheld the Government’s power to issue thenotification in 2004. 3.In this appeal against the ITAT’s order, the CIT onlychallenges the ITAT’s order in respect of previous year 1996-97. The CIT argues that the assessee followed the mercantilesystem of accounting and thus, it should have shown theexpenditure as having occurred when it was incurred, i.e. infinancial year 1996-97, regardless of the assessee’s challenge ofthe notification before the High Court. Moreover, since it wasan ascertained liability, the expenditure ought to have beenprovided for in the financial year 1996-97. The assessee, on theother hand, argues that the ITAT’s order ought to be confirmed. 3.In this appeal against the ITAT’s order, the CIT onlychallenges the ITAT’s order in respect of previous year 1996-97. The CIT argues that the assessee followed the mercantilesystem of accounting and thus, it should have shown theexpenditure as having occurred when it was incurred, i.e. infinancial year 1996-97, regardless of the assessee’s challenge ofthe notification before the High Court. Moreover, since it wasan ascertained liability, the expenditure ought to have beenprovided for in the financial year 1996-97. The assessee, on theother hand, argues that the ITAT’s order ought to be confirmed. 4.The law in this regard is settled that a deduction must beclaimed when an ascertained legal liability accrues to theassessee, even if the expenditure in discharge of the liability ismade much later. See Kedarnath Jute Manufacturing Co. Ltd. v.CIT, (1972) 3 SCC 252; Pope the King Match Factory v. CIT,[1963] 50 ITR 495, CIT v. Bharat Carbon and RibbonManufacturing Co. (1999) 6 SCC 434. The only exception to this principle is Section 43B of the Income Tax Act, whichdetails the limited circumstances in which deductions can beallowed, in the computation of income of the previous year inwhich the sum was actually paid.In both Kedarnath (supra) aswell as Pope the King Match Factory (supra), it was held thatsince the liability was incurred in the relevant previous year,when the demand by the tax authorities was received,and onlythe quantum of the demand was under challenge, the deductionought to have been claimed in the computation of income in therelevant previous year in which the liability was incurred. 5.Concededly, the cane price fixation notification itself wasunderchallengebeforetheAllahabadHighCourtandsubsequently, on appeal, before the Supreme Court, on theground that the State Government lacked the power to issuesuch notification. In other words, the liability to make paymentof the price differential itself was under challenge. Thus, therewas no clear and ascertained legal liability till the date that theSupreme Court upheld the notification in 4-5-2004, as theAllahabad High Court had quashed the notification on 11-12-1996.Consequently, this Court finds that this expenditure couldhave been claimed only in the A.Y. 2005-06. 6.This Court also holds that the entitlement of an assesseeto a deduction depends on the relevant provision of law and noton the manner of accounting followed by the assessee. SeeKedarnath (supra). Thus, the question of whether the assessee followed the mercantile system of accounting or the cash systemis immaterial here. 7.For the above reasons, no substantial question of lawarises for consideration. The appeal is accordingly dismissed. (S. RAVINDRA BHAT)JUDGE(NAJMI WAZIRI)JUDGEAPRIL 04,2014