Case: Commissioner Of Income-Tax, Orissa Vs. M/S Kalinga Tubes Ltd

2. By consent of learned advocates of both the sides the appeal is finally heard and is being disposed of by this judgment. The CIT(A) has brought in challenge the judgment and order dt. 13th May, 1987 passed by the High Court of Orissa at Cuttack [reported as Kalinga Tubes Ltd. vs. CIT (Ori)] answering the referred question under s. 256(1) of the IT Act, 1961 against the Revenue and in favour of the assessee. It is the contention of the IT authorities that the question should be answered against the assessee. A few relevant facts centering round the question in controversy deserve to be noted at this stageThe relevant assessment year is. Thee is a limited company which manufactures and sells steel tubes in the State of Orissa. During the previous year relevant to asst. yr., the assessee was liable to payx under the Central ST. TheSales Tax Officer completed the assessment in respect of asst. yr.3 on 31st March, 1966 and demanded an additional amount of Rs. 11, 02,. Theassessee unsuccessfully carried the matter in appeal and then filed second appeal before the. TheTribunal by its order dt. 28th May, 1970 reduced the additional demand ofx to Rs. 2, 22, 161. On the basis of the aforesaid order of the Tribunal, thee claimed deduction of the said amount as business expenditure in respect of the assessment for the previous year1 since according to the assessee theThe ITO disallowed the said deduction in the relevant assessment year, as according to the ITO the assessee was following mercantile system of accounting and, hence, the liability to payx accrued to it prior to the said year. On appeal, the CIT(A) allowed the said deduction holding that as the said liability became determinate and known only during that assessment year, it would be allowable for that assessment yearThe Tribunal reversed the finding of the CIT(A) holding that the saidx liability was not admissible as deduction during the relevant assessment year. For that conclusion the Tribunal relied upon the decision of this Court in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT. Theassessee got the following question referred under s. 256(1) of the IT Act for the opinion of the High Court"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 2, 22, 161 towards the Salestax liability for the asst. yr.2 ?" *The High Court after hearing both the sides answered the question in the affirmative in favour of the assessee and against the Revenue, as noted earlier. It is this answer of the High Court that is challenged on behalf of the Revenue by the appellate CIT(A)

Reasoning: 4. Having given our anxious consideration to the rival contentions, we find that the decision of the High Court is not sustainable at allIn the present case, the liability to pay the centralx arose or accrued on the basis of mercantile system of accounting followed by the assessee, during the previous relevant year. It is a fact that the assessment for that year was completed by thex Officer on 31st March, 1966. However, in mercantile system of accounting, liability to pay the quantifiedx dues as per order ofx Officer can be said to have accrued to the assessee for the relevant asst. yr. 196263. It is true that the assessee challenged the same and ultimately got the liability to pay thex for the asst. yr., reduced in second appeal before thex Tribunal on 28th May, 1970 to Rs. 2, 22, 161. But that would not affect the accrual of liability to payx on the basis of mercantile system of accounting. It was submitted by the learned counsel for thee that if such entire deduction of Rs. 11, 02, 698 was sought for by the assessee during the asst. yr.3 and ultimately as held by the Tribunal the liability was reduced to Rs. 2, 22, 161 an incongruous situation would have arisen. Such a contention cannot be countenanced for the simple reason that if ultimately the tax liability is reduced and if in retrospect it was found that during the relevant assessment year the assessee had claimed a large amount of deduction by way of business expenditure the difference of the amount wrongly claimed and allowed in earlier relevant assessment year could always be added back in the assessment of the relevant subsequent assessment year. It is obvious that in no case, the assessee who was following mercantile system of accounting could have claimed deduction for payment of centralx dues for asst. yr.3 in the asst. yr.. It is difficult to appreciate how the High Court persuaded itself to come to the conclusion that because fresh demand notice was given by the Sales Tax Officer pursuant to the decision of thex Tribunal the amount covered by the demand notice could be claimed by way of deduction on accrual basis during the asst. yr.2 or that such liability could be treated to have accrued in that year. This finding of the High Court runs counter to the ratio of the decision of this Court in Kedarnath Jute Manufacturing Co. Ltd. (supra). Reliance placed by the learned counsel of the respondent on the decision of this Court in ITOAnr. vs. Seghu Buchiah Setty (supra) is also of no avail as even if it is held that the order of thex Officer had merged in the order ofx Tribunal that would not have any impact on the decision as to when the liability to payx had accrued to the assessee on mercantile system of accounting and in which relevant assessment year the claim for deduction under s. 37 of the IT Act could have been made by the assessee. Similarly, decision of this Court in State Bank of Travancore (supra) is also of no avail to theassessee.Thequestion with which we are concerned in the present case is not covered by ratio of the said decision and on the contrary it is squarely covered by ratio of the decision in Kedarnath Jute Manufacturing Co. Ltd. (supra)