SYNBIOTICS LIMITED vs. COMMISSIONER OF INCOME TAX

ITR/238/1995HC GujaratGJHC24022561199523 August 2006Author: HONOURABLE MR. JUSTICE M.R. SHAH,HONOURABLE MR. JUSTICE R.S.GARG12 pages
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What were the facts?

The assessee, Synbiotics Limited, for assessment year 1981-82, claimed a deduction of Rs.1,34,05,048/- towards a demand raised by the Government under the Drug Price Control Order (DPCO) for payment to the Drug Price Equalisation Account (DPEA). The assessee argued this was a liability for bulk drug sales. The Assessing Officer disallowed the claim as the demand was contested by the assessee through a writ petition before the Delhi High Court and not entered in the books of account. The CIT(Appeals) and the Income Tax Appellate Tribunal (ITAT) upheld the disallowance, distinguishing the Supreme Court judgment in Kedarnath Jute Manufacturing Co. The assessee filed a reference application to the High Court on three questions.

What did the High Court hold?

The High Court held that for Question 1, following the Supreme Court's decisions in Akkamamba Textiles Ltd and Sivakami Mills Ltd, guarantee commission paid to a banker and insurance company for deferred payment of machinery purchase consideration constitutes revenue expenditure. Therefore, the Tribunal was wrong, and the question is answered in favour of the assessee. For Question 2, the assessee did not press the issue, so it was not answered. For Question 3, while the Supreme Court's judgment in Kedarnath Jute Manufacturing Co. would ordinarily support the assessee's claim for deduction of a disputed but quantifiable liability, subsequent events had changed the scenario. The Delhi High Court had quashed the demand. The High Court held that once the demand is quashed, the assessee is not entitled to claim it as a deduction. The pendency of appeals by the revenue before higher courts did not nullify the effect of the High Court's judgment quashing the demand. The High Court reasoned that allowing the deduction would lead to a chaotic situation where the assessee would benefit from both the deduction and retaining the amount. Therefore, the deduction for Rs.1,34,05,048/- was disallowed. The orders of the CIT(Appeals) and ITAT on the reasoning were not upheld, but the assessee was denied relief in the changed circumstances.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs.28,646/- paid as guarantee commission was on capital account and disallowable? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that an amount of Rs.6976/- in respect of exchange loss was disallowable as capital expenditure? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the claim of assessee for Rs.1,34,05,048/- was not allowable? Assessee's contentions: For issue 1, the assessee relied on Supreme Court judgments in Additional Commissioner of Income Tax V. Akkamamba Textiles Ltd and Commissioner of Income Tax V. Sivakami Mills Ltd, arguing guarantee commission is revenue expenditure. For issue 2, the assessee did not press the issue due to the small amount. For issue 3, the assessee initially relied on Kedarnath Jute Manufacturing Co. V. CIT, arguing the liability was deductible even if disputed and unpaid. However, the assessee later submitted that the Delhi High Court had quashed the demand, but argued that since appeals were filed by the revenue, the matter was sub-judice and the deduction should still be allowed. Revenue's contentions: Not recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 256(1)

AI-generated summary — verify with the full judgment below

ITR/238/1995 1/12 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 238 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= SYNBIOTICS LIMITED - Applicant(s) Versus COMMISSIONER OF INCOME TAX - Respondent(s) ========================================================= Appearance : MR RK PATEL for Applicant(s) : 1, MR MANISH R BHATT for Respondent(s) : 1, ========================================================= CORAM :  HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 23/08/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG)

ITR/238/1995 2/12 JUDGMENT At the instance

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