2016 (7) TMI 1045 - HC - Income Tax

Addition of outstanding electricity fuel surcharge which was an ascertained liability - Whether the expenditure on account of arrear fuel surcharges levied by Bihar State Electricity for provisions was made by the appellant in its profit and loss account is an ascertained and known liability but demand of which was made after close of the accounting year is allowable as business expenditure in the relevant assessment year under Section 37 of the Act? - Held that - It appears that the CIT (Appeal) and the Assessing Officer and also the learned Tribunal laid stress on the fact that the bill was received in April, 1995. When the assessee maintains his books of accounts on mercantile basis, then he has to make provision for the liability already incurred irrespective of whether the bill was received. Nothing turns on the receipt of the bill. Supposing in a case no bill is received, can it be said that the liability has not been incurred ? Therefore, the ground assigned by the Assessing officer, CIT and the Tribunal is altogether untenable. In that view of the matter, the appeal is allowed. Both the questions are answered accordingly in favour of the assessee.

Issues:
1. Whether the addition of a certain amount as provision for outstanding electricity fuel surcharges should be allowed as business expenditure under Section 37(1) of the Act.
2. Whether the expenditure on account of arrear fuel surcharges, even though demanded after the close of the accounting year, is allowable as business expenditure in the relevant assessment year under Section 37 of the Act.

Analysis:

1. The judgment in question pertains to a challenge against a decision by the Income Tax Appellate Tribunal, where the assessee's appeal was dismissed regarding the addition of a specific amount as provision for outstanding electricity fuel surcharges in the profit and loss account. The main contention was whether this amount should be allowed as a business expenditure under Section 37(1) of the Act. The Tribunal, Assessing Officer, and CIT had disallowed the deduction, citing that the bill for the surcharges was received after the financial year. However, the High Court disagreed with this reasoning. It was noted that the quantity of units consumed and the applicable rate of surcharge were known during the financial year, leading the assessee to make a provision for the amount. The High Court emphasized that when maintaining books on a mercantile basis, provisions for liabilities incurred should be made regardless of bill receipt. The Court found the grounds for disallowance untenable and allowed the appeal in favor of the assessee.

2. The second issue addressed in the judgment concerned whether the expenditure on arrear fuel surcharges, demanded after the accounting year, could be considered a business expenditure under Section 37 of the Act. The Revenue argued that there was a dispute between the State Electricity Board and the consumer regarding the surcharges. However, the Court found this argument unconvincing. It highlighted that the Electricity Board had accepted the consumer's request to pay the arrears in installments, indicating a lack of dispute. The Court emphasized that the liability was incurred when the surcharge rate was known, irrespective of the bill receipt date. Therefore, the Court concluded that the expenditure on arrear fuel surcharges was allowable as a business expenditure, rejecting the Revenue's contentions and ruling in favor of the assessee on both issues.

In summary, the High Court's judgment overturned the decision of the lower authorities and allowed the assessee's appeal, holding that the provision for outstanding electricity fuel surcharges and expenditure on arrear fuel surcharges were allowable as business expenditures under Section 37 of the Act, despite the bill receipt timing.

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