DY.C.I.T. (A) vs. NEW INDIA INDUSTRIES LTD.

Facts

The revenue (Dy. C.I.T.) is in appeal against the orders of the Income Tax Appellate Tribunal (ITAT) for assessment years 1983-84, 1985-86, 1986-87, and 1987-88. The assessee, New India Industries Ltd., maintained accounts on a mercantile basis and claimed a liability for purchasing gas from ONGC as an allowable revenue expenditure. The Assessing Officer (AO) disallowed this claim, holding it was not a statutory liability and thus had not accrued. The CIT(Appeals) upheld the AO's decision. The ITAT, however, partly allowed the assessee's appeal, directing the AO to allow the liability as claimed. The revenue is aggrieved by the ITAT's deletion of the addition made in respect of this liability.

Held

The High Court held that the issue was not res integra, referring to its own decision in Commissioner of Income Tax vs. Mahendra Mills Ltd. ([2011] 334 ITR 254 (Gujarat)). In that case, the Court had held that for an assessee following the mercantile method of accounting, a liability accrues even if there is a dispute about its price, as long as the liability itself is not in doubt. The Court reasoned that uncertainty, difficulty, or pendency of litigation regarding quantification of a price would not convert an accrued liability into a contingent one. The liability in the present case was contractual and crystallized by the Supreme Court's decision on the price of gas supplied by ONGC. Therefore, the Tribunal was justified in allowing the deduction for the respective years when the gas was supplied, based on the finally determined price. The revenue's advocate could not present any contrary decision. The High Court confirmed the ITAT's order and answered the question in the negative, in favour of the assessee.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has substantially erred in law in deleting the addition made in respect of liability for purchasing gas from ONGC? Assessee's Contention: The assessee contended that as it maintained accounts on a mercantile basis, the liability to pay fuel charges, having arisen in the year under consideration, was an allowable revenue expenditure. The liability, though disputed in price, had accrued and was eventually quantified by a Supreme Court decision. Revenue's Contention: The revenue argued that the liability was not statutory and therefore could not be said to have accrued during the year under consideration, making it not an allowable expenditure. The revenue's advocate was not in a position to dispute the High Court's decision in a similar case.