K. A. Thanikkachalam, J.@mdashIn compliance with the order of this court dated February 23, 1981, the Tribunal referred the following two questions, for the opinion of this court, u/s 256(2) of the Income Tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the sum of Rs. 6,41,942 being the amount due to the Government of Tamil Nadu and representing the excess collection made by the assessee should not be included while computing the income for the assessment year 1974-75 ?
(2) Whether, on the facts and in the circumstances of the case and having regard to rule 19A(3) of the Income Tax Rules, 1962, the Appellate Tribunal was correct in holding that ''borrowed capital'' should not be deducted from the capital for the purposes of relief u/s 80J of the Income Tax Act, 1961 ?"
2. In so far as question No. 2 is concerned, the point for consideration is whether having regard to rule 19A(3) of the Income Tax Rules, 1962, "borrowed capital" should be deducted from the capital for the purpose of relief u/s 80J of the Income Tax Act, 1961. A similar question came up for consideration before the Supreme Court in
3. In so far as question No. 1 is concerned, the assessee is a private limited company engaged in the manufacture and sale of rectified spirits and arrack. For the assessment year 1974-75, the accounting year ended on March 31, 1974. The assessee filed a return showing a loss of Rs. 4,00,067. On going through the accounts, the Income Tax Officer found that the sales were shown at net value of Rs. 2,03,01,297.62 and a sum of Rs. 6,41,962 had been credited under the head "Current liabilities" as due to the Government of Tamil Nadu. The assessee explained that though the sale price was originally fixed by the Government at Rs. 3.55 per litre, it was subject to revision and the sale price was later revised and the assessee was ordered to pay the difference to the Government. The Income Tax Officer proposed to add back the said sum of Rs. 6,41,962 in the draft assessment and referred the same u/s 144B of the Act to the Inspecting Assistant Commissioner. The proposal by the Income Tax Officer was accepted by the Inspecting Assistant Commissioner. Accordingly, the Income Tax Officer made the addition in determining the total income.
4. On appeal, the Appellate Assistant Commissioner deleted the addition on considering that the assessee had not disputed the Government''s claim for recovery of the differential cost and that part of it was, in fact, refunded in instalments. According to the Appellate Assistant Commissioner, the Government initially informed that the differential price should be refunded by the assessee, which demand falls within the accounting year, relevant to the assessment year. The Appellate Assistant Commissioner came to the conclusion that the excess collection made by the assessee and payable to the Government is allowable as deduction in the assessment year under consideration. On appeal, the Tribunal confirmed the order passed by the Appellate Assistant Commissioner.
5. Before us, learned standing counsel appearing for the Department submitted that the demand for the difference was made by the Government only in the letter dated August 12, 1974, which falls beyond the accounting year, relevant to the assessment year under consideration. Therefore, the assessee is not entitled to any deduction with regard to the differential price paid by it to the Government. Learned standing counsel for the Department submitted that the liability had not been incurred during the previous year as the correspondence between the assessee and the Government of Tamil Nadu showed that the matter was finalised only on May 21, 1977, when the assessee was allowed to remit the amount in instalments with interest. In the alternative, it was submitted that the liability could have accrued on August 12, 1974, when the demand was raised by the Government. According to the Revenue, both these dates being beyond the previous year, the liability did not arise in the previous year and could not be allowed as a deduction. It was submitted that though the price was provisionally fixed, the question of deduction arose only if and when the Government decided to reduce the issue price and until such a decision was taken, the liability was contingent and could not be allowed.
6. On the other hand, learned counsel appearing for the assessee supported the order passed by the Tribunal in deleting the addition.
7. We have heard both learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee.
8. In the present case, the liability as well as quantification was made prior to the close of the accounting year by the Government letters, dated August 2, 1973, and September 11, 1973, respectively. What the Government letter, dated August 12, 1974, did was to more precisely quantify the amount refundable by the assessee for a part of the accounting year, i.e., for the period from September 1, 1973, to March 31, 1974, fixing the issue rate at 0.57.72 paise and 0.58.13 paise and the rate of refund at 0.12.28 paise and 0.11.07 paise per litre. Therefore, when the arrack was sold the Government has informed the assessee that the price fixed at that time was only tentative and the final price could be fixed later and when such final fixation took place, if there is any excess, that should be refunded to the Government. These conditions were stated in the Government''s letters, dated August 2, 1973, and September 11, 1973. In a letter, dated August 12, 1974, the Government quantified the final price on account of which there was difference between the original price and the finally fixed price by the Government. The assessee did not dispute payment of such differential price. The assessee was permitted to pay such a differential price by way of instalments. Inasmuch as the liability was fastened on the assessee for the payment of the excess price during the assessment year under consideration and inasmuch as the assessee is following the mercantile system of accounting, it cannot be said that the Appellate Assistant Commissioner and the Tribunal were incorrect in deleting the differential price payable by the assessee by way of instalments. Accordingly, we see that there is no infirmity in the order passed by the Tribunal. In that view of the matter, we answer question No. 1 in the affirmative and against the Department. No costs.
