M/S KARNATAKA VIDYUTH KHARKANE LTD. vs. DCIT,

O R D E R

Per Shri A.K. Garodia, Accountant Member

by the assessee are as under. “1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance of the provision for loss on account of Negative Price Variation to the tune of Rs.2,22,26,884/-.

2. On the facts the learned Commissioner (A) erred in holding that the loss as claimed by making provision was a notional, contingent and unascertained one and consequently not liable for allowance.

3. On the facts the learned Commissioner (A) ought to have appreciated that the appellant having followed the mercantile system of accounting, the loss quantified on account of the agreement between the parties towards price variation and accordingly it was an ascertained liability and a real loss on the last date of the accounting year for the relevant assessment year and thus liable to be allowed as deduction as claimed by the appellant in full.

4. The judicial precedence cited by the learned Commissioner (A) were distinguishable whereas the decisions cited by the appellant were fully support the claim of the appellant and thus the learned Commissioner (A) ought to have allowed the claim of the appellant in full.

5. The learned Commissioner (A) ought to have appreciated that the loss had been quantified strictly in accordance with the agreement as agreed to between the parties and accordingly the resultant loss was real and accrued in the relevant year and thus liable to be allowed in full.

6. Without prejudice, the disallowance is excessive, arbitrary and unreasonable and ought to be reduced substantially.

7. The learned Commissioner (A) erred in confirming the interest levied u/s.234B and 234C of the Act.

8. For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed.”

Amount Sl.No. Consumer Name (in Rs.) i BESCOM, Banglaore 1,14,11,575 ii HESCOM, Hubli 27,80,386 iii GESCOM, Gulbarga 33,18,943 iv CESCOM, Mysore 22,58,942 v MESCOM, Mangalore 1,90,154 vi TOTAL 1,99,60,000 7.1 Out of the above provision amount claimed to have been allowed to GESCOM, Gulbarga, based on notification as under :-

SEE(P) EEE(MM)/AEE-2/11-12 A 6,58,698 14613-24-dated 15/07/2011 SEE(P)EEE(MM)AEE-2/11-12 B 6,68,590 14588-99 dated 15/07/2011 SEE(P)EEE(MM)/AEE-2/11-12 C 6,21,359 14625-36 dated 15/07/2011 SEE(P)EEE(MM)/AEE-2/11-12 D 13,316 14849-60 dated 15/07/2011 Total 19,61,963 7.2 The appellant has furnished ledger extract of the aforesaid consumers same is summarised as under:- Consumer Total Sale Amt. Received Balance S1. No. Remarks Name (in Rs.) (in Rs.) (in Rs.) Opening debit BESCOM- 1 49,64,06,055 50,26,97,467 7,44,53,648 balance Bangalore Rs.8,07,45,060 Opening debit HESCOM- 2 12,93,09,849 8,08,88,384 6,09,51,561 balance Hubli Rs.1,25,30,096

Opening debit balance GESCOM- Rs.7,90,27,575 3 14,25,50,935 20,78,08,173 1,37,70,334 Gulbarga Credited on amount of Rs.48,25,288

Opening credit CESCOM- balance credit 4 9,24,99,841 8,23,54,265 92,68,290 Mysore Rs.8,77,285/- not Rs.1,00,286/-

Opening debit MESCOM- 5 51,33,199 50,45,778 52,21,267 balance Mangalore Rs.51,33,846 7.3 A close scrutiny of materials available on record, facts emerged as under :- (i)Goods supplied to the consumer on prevailing market rate not as per the price determined/notified by IEEMA. During the previous year relevant to year under consideration no credit entries were made in the ledger account of respective consumer nor refunded any amount collected in excess of price index notified by IEEMA.

(ii) Credit entry made in the ledger account of GESCOM-Gulbarga for Rs. 48 25 288/- based on the credit issued by the appellant dated 22/07/2010 after the lapse of the relevant previous year.

(iii) In view of this matter no actual liability existed during the period and merely putting aside of money which may become expenditure in future is not expeditiously for income tax purposes.

(iv) The appellant placed reliance on the case laws in support of its claim as below :- (a) M/s Bharat Earth Movers Vs CIT (2000) 245 ITR 428 (SC) (b) OIL & Natural Gas Corpn. Ltd. Vs. CIT (2010) 322 ITR 180(SC) (c) CIT Vs Dinesh Kumar Goel (2011) 331 ITR 10 (Delhi) (d) CIT Vs Triveni Engg. & Industries Ltd (2011) 336 ITR 374 (Delhi) (e) CIT Vs. Ansal Properties & Industries Ltd.(2013 352 ITR 637 (Delhi) (f) Prakash Leasing Ltd Vs. Dy. CIT (2012)

Contents of the decisions are discussed in succeeding para.

8.0 The facts narrated above it is implicitly clear that, no amount was credited in the ledger accounts of the consumers towards negative price variation except Rs.48,25,288/- and that also on the basis of notification issued on 15/07/2011. Thus liability was not crystallised during the previous year relevant to the assessment year 2010-11. Therefore based on the notional loss is not allowable as deduction against the income for the year.

9.0 In this context, I placed reliance on the case laws as follows:- i Bharat Stores Ltd. Vs. CIT (1968) 70 ITR 651(A11)

In the sale deeds which the assessee had executed in favour of the various purchasers who purchased plots from the assessee no undertaking had been given that roads would be constructed, All that was done in the instant case was that the sum was shown to have been reserved for the purpose of construction of the roads. It was not a case where a definite liability had been incurred. It was a case where the amount had been provisionally kept in reserve for the purpose of construction or roads. The assessee was free not to spend that amount or at any rate to postpone the expenditure over construction of roads to a long period. In the mercantile system of accounts it was not necessary that the expenditure should really have been incurred in the year of assessment but the liability must have been ascertained and must be one which could be enforced in a court of law. It is well settled that the expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time and merely putting aside of money which may become expenditure in future is not expenditure.

Thus, the assessee had not incurred any enforceable liability in respect of the said sum. ii CIT Vs Rajkumar Mills Ltd. (1971) 80 ITR 244 (Bom) The assessee company, following mercantile system of accounting, made a debit entry in respect of the leave wages in the books of accounts for the accounting year 1949, payable in the next ensuing year to its employees under section 79 and 80 of the Factories Act, 1948. The claim for deduction of this amount was held not sustainable by the Tribunal in the relevant assessment year.

On reference:

Following the decision in the case of chhaganlal Textile mills (P.) Ltd. v. CIT [1966] 62 ITR 274 (MP), it could be said that the assessee had not incurred the liability to pay leave wages in the accounting year under reference and the claim for deduction was rightly rejected by the Tribunal. iii Calcutta State Transport Corporation Vs. CIT (1977) 108 ITR 922 (Cal) It has been found as a fact that the funds were not constituted by any irrevocable trust but some money was set apart by investing the same in Government securities. The Tribunal concluded that only by reason of the fact the money was so invested it could not be said that the assessee lost all proprietary rights upon the funds. In that view it cannot be said that there was any irrevocable expenditure within the meaning of section 10(2)(xv) of the Act. No other ground was canvassed nor any other question was raised before the Tribunal. on such facts as found, this question must be answered in favour of the revenue. iv CIT Vs J.K. Bankers (1979) 120 ITR 924 (All) The fact that an agreement took place on 30.09.1958, and was retrospective it is operation, was not in doubt. The genuineness of this agreement could not also be assailed as the AAC, relying on this deed, allowed relief in respect of the second amount in the assessment year in question. The assessee was acting as the collecting agent for bills for the company and charging a commission of 1 per cent under an agreement executed earlier. The assessee 's case in respect of the subsequent agreement was that it agreed to a reduction of its rate of commission with retrospective effect in order to continue the business relationship with the company. The agreement as such, was entered into by the assessee on grounds of business expediency. As the assessee-firm credited the first amount to the company in keeping with the term of the agreement, the adjustment made was clearly dictated by reasons of commercial expediency, as the assessee was bound under the term of the agreement to make the adjustment, as it had agreed to charge lesser rate of interest for the earlier year. No doubt the agreement was entered into on 30.09.1958, and was retrospective in its operation, but the occasion for making the adjustment arose only when the assessee-firm received the debit notes from the company. It was only when this claim for the specific amount in question was made by the company that liability to make the adjustment arose. Thus, it did not arise in the accounting period relevant for the assessment year 1958-59.

Therefore, the Tribunal was right in allowing deduction of commission pertaining to the assessment year 1958-59 under section 10(2)(Xv) of 1922 Act in arriving at the total income for the assessment year 1959-60. v CIT Vs Lachhaman Das Mathura Das (1980) 124 ITR 41(A11) Before allowing a claim for damages even in cases where the assessee followed the mercantile system, the liability must be on actual liability and not one which arose in future. Contingent liability, which may or may not arise, could not be allowed as a deduction. There was no merit in the assessee 's contention that the agreement created on ascertained liability. Before a deduction could be made by the Board, the latter had to find out the contract value of that portion of the plant which as a result of the delay could not be commercially and efficiently used during each week between the appointed time and the actual time of acceptance. Further, half per cent deduction to be made under the agreement had to be scaled down if it exceeded 10 per cent of the contract value of such portion of the plant. Thus, the said agreement did not straightaway create any actual liability. The liability was created only after the period for which the Board could not work the plant commercially and efficiently. There would be a time lag before such ascertainment was possible. Further, the liability under the agreement arose only in case of non-working of the plant efficiently and commercially and not otherwise. Thus, mere breach of contract did not in all cases create a liability. That apart, as the assessee had pressed for waiver of Rs. 69,383 which was ultimately allowed, the liability under the agreement could not be said to have crystallized till the waiver issue was disposed of by the Board.

The Tribunal was, therefore, wrong in holding that the liability of Rs. 69,383 had crystallized and that it was an allowable deduction in the accounting year relevant to the assessment year 1974-75. vi Shree Sajjan Mills Ltd Vs CIT(1985) 156 ITR 585 (SC) Section 40A is with the marginal note under the heading `Expenses or payments not deductible in certain circumstances'. If the marginal note or heading is any indication, and it certainly is a relevant factor to be taken into consideration in construing the ambit of the section, then those payments mentioned therein are not deductible according to the statue in certain circumstances. Therefore, the heading of this section is a clear indication that certain payments and expenses which would be otherwise deductible would not be deductible except in certain circumstances indicated in the section. This is abundantly made clear by the non obstante expression used in sub-section (1) of section 40A. The provisions of section 40 A shall have effect notwithstanding anything to the contrary contained in any other provisions of the Act. Payments for deductions or provision for deduction could have been eligible for deduction or could have been deducted either under section 28 or under section 37. But the use of the non obstante expression makes it clear that if there is any legislative base dealing with the provision for gratuity then the same would be applicable in spite of and notwithstanding any other provision of the Act. Read with the marginal notes of section 40A, the non obstante clause of section 40.4(1) has an overriding effect over the provisions of any other section by providing that the provisions of the section will have effect notwithstanding anything to the contrary contained in any other provisions relating to the computation of income under the head 'profit and gains of business or profession. Expenditure or allowances which are deductible under any other provisions relating to the head `profits and gains of business or profession' will be disallowed in cases to which these provisions of the section apply. Therefore, if the submission of the assessee in the instant case that if no provision was made by the assessee for gratuity, still the same would be deductible and section 40A(7) would have no application, was accepted, the same would defeat the very purpose and object of section 40A(7) and render it nugatory. The interpretation as suggested by the assessee would allow the assessee who made no provision to claim deduction whereas an assessee who made a provision would not get deduction unless the requirements laid down in the sub-section are fulfilled. vii Standard Tea Export Vs CIT (1992) 198 ITR 573(Ker)

The claim to the extent of Rs. 3,40,000 was only a mere provision on account of interest which the assessee may become liable to pay on the outstanding amounts to the bank in future. Further, the sum of Rs. 3,40,000 was only the expected loss on account of interest for the period after 31-12-1979 on the amounts payable to the bank on account of discounting of export sale bills. The amount in question was not even an accrued interest as on 31-12-1979 and even though the assessee kept the mercantile method of accounting, there was no ground for deduction of the amount from the profits of the year. The amount of RS. 3,40,000 sought to be deducted by the assessee was a contingent liability of a year other than the year of account. Further, no interest to the bank was outstanding as on 31/12/1979 and interest if, at all, would be only for future years. Thus, there was no justification for the claim of deduction of Rs. 3,40,000, being a provision made for future interest. viii CIT Vs Ashok Iron & Steel Rolling mill (1993), 199 ITR 815 (A11) The supreme Court in the case of CIT V. A. Gajapathy Naidu [1964} 53 ITR 114 has held that in mercantile system deduction can be made only in the year in which the liability to pay accrues and it accrues only when the liability crystallizes or becomes ascertained. Applying the dictum of the supreme Court in the present case it was apparent that it was only when the Assistant Labour Commissioner passed an order on 31-12-1973 determining the dispute as to the categories in which the various employees should befitted and classified, that the liability to pay accrued. Before this the liability was uncertain, vague and inchoate. The assessee, therefore, rightly deducted the amount in question in the year in question, which was the year in which the liability to pay materialised and was actually paid. ix CIT Vs Pallavan Transport Corpn. Ltd (1997) 091 Taxnab 132 (Mad) In the instant case the amount appropriated to the contingent reserve which was set apart to meet possible exigencies was not a provision for known existing liabilities and, therefore, was not deductible as business expenditure. x Colaba Central Co-op. Consumer's wholesale & Retail Stores Ltd Vs CIT (1998) 229 ITR 209(Bom) As to the alternate submission of the assessee to treat the amount so set apart as a business expenditure, evidently the assessee had not incurred any expenditure at all. The Supreme Court in Indian molasses co. (P.) Ltd. v. CIT [1959] 37 ITR 66 has defined 'expenditure' as what is 'paid out or away' and something which is gone irretrievably. That was not so in case of appropriation of profits to the Share Capital Redemption Fund. By such appropriation nothing had been paid out to anybody nor anything had gone from the assessee even for a while not to speak of `irretrievably'. That being so, question of deduction of the same as an expenditure under section 37(1) could not arise.

Therefore, the Tribunal was right in holding that the assessee could not claim deduction either under section 37 or section 28 of the amount set apart for the capital Contribution Redemption Fund. 10.0 A reading of the decisions cited above, indicate that as per provision of the Income Tax Act makes distinction between an existing liability and contingent liability. Under the present scheme of the Act anticipated loss cannot be deducted, though loss is certain. In other words a loss which is neither suffered nor incurred in the accounting year is not deductible against the actual receipt of the year -Edward Collins & SMS Ltd. Vs IRC (1924) 12 TC 773.

In view of the discussion made I do not find infirmity in the Assessing Officer's findings and the same is upheld. While submitting written submission, the appellant relied upon certain case laws in its support, therefore need to discuss the same :-

A. M/s Bharat Earth Movers Vs CIT (2000) 245 ITR 428 (5C)

The law is settled : If a business liability has definitely arisen In the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date.

What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under:

(i) For an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid ; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business ; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated.

So, is the view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) wherein this court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not con- vert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one ; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. B. OIL & Natural Gas Corpn. Ltd. Vs. CIT (2010) 322 ITR 180(SC)

In CIT v. Woodward Governor India (P.) Ltd. [2009} 312 IIR 254/ 179 Taxman 326, the Supreme Court, dealing with the said issues extensively, summarized the following factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates, when the assessee is following mercantile system of accounting, is deductible:

(I)whether the system of accounting followed by the assessee is the mercantile system which brings in the debits of the amount of expenditure for which a legal liability has been incurred even before it is actually disbursed and credits, what is due, immediately it becomes due even before it is actually received; (ii)whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii)whether the assessee had given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv)whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v)whether the method adopted by the assessee for making entries in the books, both in respect of losses and gains is as per nationally accepted accounting standards; (vi)whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reduce the incidence of taxation.

Applying these factors to the facts of the instant case, it was clear that loss claimed by the assessee on account of fluctuation in rate of foreign exchange as on date of balance-sheet was allowable as an expenditure under section 37(1). [Paras 10 and 11] So far as adjustment in the actual cost of imported assets acquired in foreign currency was concerned, under the unamended section 43A, 'actual payment' was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency but under the amended section 43A, with effect from 1-4- 2003, such payment of the decreased/enhanced liability on account of fluctuation in foreign exchange rate has been made a condition precedent for making adjustment in the carrying amount of the fixed asset. [Para 12] In the instant case, all the assessment years in question being prior to the amendment to section 43A with effect from 1-4-2003, the assessee would be entitled to adjust the actual cost of the imported capital assets acquired in foreign currency, on account of fluctuation in rate of exchange of each of the relevant balance sheet dates, pending actual payment of varied liability. [Para 13] C. CIT Vs Dinesh Kumar Goel (2011) 331 ITR 10 (Delhi) A conjoint reading of section 145 of the Income-tax Act and section 211 of the Companies Act shows that those assessees, which are companies and are showing income, inter alia, under the head 'Income from profit and gains of business or profession' have to follow the accounting standards prescribed. The Government of India has notified the accounting standards dated 29-5-1996 in exercise of its power under section 145(2). Accounting Standard-I relates to the disclosure of accounting policy and puts an obligation on the assessee to disclose all significant accounting policies adopted in the preparation and presentation of financial stages. Para 6 thereof defines certain expression which occurred in paras 1 to 5. Clause (b) thereof spells out the definition of 'accrual: From that definition, it appears that the term 'accrual' relates to revenues earned or cost incurred. Two things follow from this, viz., unless the revenue is earned, it is not accrued Likewise, unless the expenses are incurred, cost in respect thereof cannot be treated as accrued. Secondly, it recognizes the matching concept, viz., receipts are to be matched with income to arrive at the net income, which would then be exigible to tax [Para 22] Reading of the accounting standard makes it clear that the revenue is recognized only when the services are actually rendered If the services are rendered partially, revenue is to be shown proportionate to the degree of completion of the services. This really clinches the issue in favour of the assessee. [Para 25] In the instant case, the receipts relating to the unexecuted packages, which were not shown in the relevant year, would be shown in the succeeding year. Rate of tax in respect of companies remained the same in all those years. Therefore, the revenue did not lose anything as it would receive the tax on that income in the succeeding year. [Para 26] D. CIT Vs Triveni Engg. & Industries Ltd (2011) 336 ITR 374 (Delhi) No doubt, unless the expenditure is actually incurred or it is accrued in the relevant year, it would not be allowed as deduction. Such a liability has to be in praesenti. However, at the same time, in the given scenario where in relation to the project works undertaken by the assessee, completed contract method of accounting was followed, which was consistent with the accounting standards and these accounting standards also lay down the norms indicating the particular point of time when the provisions for all known liabilities and losses have to be made, the making of such a provision by the assessee appeared to be justified more so when the assessee had recognized gain as well on such project during the relevant year itself. That appeared to be in consonance with principle of matching cost and revenue as well However, in the projected scenario of the instant case, the entire exercise was revenue neutral. It was a matter of record that against the provision of Rs. 139 lakhs, the assessee had to actually incur expenditure of Rs. 218.03 lakhs, i.e., more than the provision made. It was undisputed that the expenditure incurred by the assessee on the project was admissible deduction. The only dispute that the revenue sought to raise was regarding the year of allowability of expenditure. Considering that the assessee was a company assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure would, in any case, be revenue neutral [Para 11]. E. CIT vs. Ansal Properties & Industries Ltd.(2013 352 ITR 637 (Delhi) "13. The AO was of the opinion that once, the project is completed in the books of accounts and the question of expenditure is accounted for, the entries made subsequently would acquire the character of contingent liabilities. The AO was agreed by the fact that the assessee had admitted that the actual expenditure debited as against the provision made can be or cannot be the same and therefore concluded that such provision therefore was a contingent liability by virtue of uncertainty of the quantum involved.

Yet another reason given by the authorities for not accepting the claim of the assessee is that the accounting practice cannot be justified by any provisions of the statute or is contrary to it. The income-tax law does not march step by step in the divergent footprints of the accountancy provisions. The question is whether the receipt of money is taxable or not and whether certain deductions from that receipt are permissible in law or not. The question has to be decided according to the principles of law and not in accordance with the accounting practice. The accounting practice cannot override the statutory provision of the Act. In support of the said contention reliance is placed on the judgment of the Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997} 227 1TR 172/ 93 Taxman 502. There cannot be any dispute as far as the said proposition of law is concerned. However, when the law, as amended subsequent to the aforesaid judgment of the Apex Court, expressly provided that the Central Government may notify in the Official Gazette from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income, the assessment orders to be passed under the Act by the authorities have to be in conformity with the Accounting Standards notified by the Central Government. In terms of the aforesaid provisions, the Central Government has notified in the Official Gazette the Accounting Standards, which explain the meaning of what is accrual for the purpose of the Act. The accrual refers to the assumption that revenues and costs are accrued that is, recognized, as they are earned and incurred (and not as money is received or paid) and recorded in the financial statements to which period they are related Admittedly, insofar as the lease equalization charges are concerned, it is not provided in the notified Accounting Standards by the department. It is also not in dispute that in the Act what the lease equalization charges is not explained In the absence of any specific provision in the Act dealing on the subject, when the Accounting Standard is now made the basis of maintaining the accounts for the purpose of income-tax, even if the Central Government has not notified in the Official Gazette the Accounting Standards, certainly the Accounting Standards prescribed by the Institute of Chartered Accountants have to be followed Therefore, the reasoning of the authorities, though the claim of the assessee is based on such Accounting Standards of the ICAI while deciding whether receipt of money is taxable or not, that it has to be decided in accordance with the provisions of law and not in accordance with the accounting practice, has no substance as there is no inconsistency between the said accounting practice and any provisions of the Act. [Para 12]." The case laws cited above, the facts are distinguishable than that the facts of the appellant's case, hence not applicable.”