2018 (6) TMI 514 - HC - Income Tax

Liability to pay the liquidated damages - accrual of liability - payment as per terms of the agreement accrued when the delivery was made within the previous year ended 30.06.1983 - Held that - As decided in assessee s own case the right to receive the extra price arose when the delivery was made, and the assessee had actually accounted for the extra price when the goods were actually delivered. - Decided in favour of the assessee Provision made for increase in wages on the basis of the Wage Board Award - assessee agreed before the Arbitrators that the award shall come into operation from an earlier date? - Held that - Section 145 was substituted in the Income-tax Act with effect from 01.04.1997, and sub-section (3C) was inserted into Section 211 of the Companies Act with effect from 31.10.1998, more than 12 years after the assessment year 1984-85 which is the relevant period with which we are concerned in the present case. As neither of these provisions were in the statute book during the relevant previous year 01.07.1982 to 30.06.1983, reliance placed on behalf of the assessee, on the judgment in Pact Securities and Financial Services Ltd.10 which had placed heavy reliance on the aforesaid two provisions to hold that Accounting Standards should be followed, is misplaced. Liability to pay tax cannot be determined relying on its possible consequences of whether or not it would make any difference if the deduction is claimed in one year or the other. The consequences of the liability being held to arise in a previous year, different from the previous year in which the liability actually arose, are many. It is wholly unnecessary for us to make a detailed analysis of such consequences as the Income-tax Act makes an assessee liable to tax on the income which accrued in his favour in the previous year; and, in determining such income, the liability/expenditure incurred in such a previous year alone should be take into consideration. - Decided against assessee Deduction towards commission payable to two agents in Sri Lanka - accrual of liability - Held that - As the assessee maintained its books of accounts, under the mercantile system of accounting, their liability to pay commission to the agents arose in the relevant previous year in which the agent secured the order; and as, in the present case, both the agents had secured orders from the clients in Sri Lanka, during the previous year relevant to the assessment year 1984-85, the Tribunal has, in our view rightly, held that the liability to pay commission accrued when the orders were secured by the agents, and not when supplies were effected by the assessee. This question is answered in the affirmative, in favour of the assessee Weighted deduction u/s 35-B with respect to payment of commission - Held that - Neither does the agreement, between the assessee and its Sri Lankan Agent, disclose fulfillment of the ingredients of Section 35-B(1)(b)(iv), nor was the payment of 500,00 U.S dollars, by the assessee to its agent, made for any expenditure incurred in the promotion of the sale outside India of the assessee s goods. In the present case, the assessee has not discharged the onus of establishing that the expenditure was wholly or exclusively incurred for the purposes mentioned in Section 35-B(1)(b)(iv) of the Act. The Tribunal fell in error in holding otherwise. This question is answered in the negative, in favour of the Revenue Deduction of insurance premium payable for a policy to cover all risks in erection of the project in Sri Lanka - Held that - It is only on the date on which the insurance premium is paid or, in terms of the facility extended by the Insurance Corporation of Sri Lanka, the first installment, of the insurance premium payable in four installments, is actually paid, can the assessee claim that the liability to pay the insurance premium had arisen. As, admittedly, no amount was paid towards insurance premium, in the previous year 01.07.1982 to 30.06.1983 (as is evident from the letter of the Insurance Corporation of Sri Lanka dated 30.06.1983), the liability towards the insurance policy did not arise in the previous year 01.07.1982 to 30.06.1983, since the basic condition, relating to actual payment of insurance premium, had not been fulfilled by the assessee by then - Decided in favour of the Revenue Liability to pay commission under the agreement - accrual of liability - Held that - The obligation to pay commission, in terms of Clause (1) of the agreement, is on the procurement of an order by the agent, and the agent had procured the order during the previous year 01.07.1982 to 30.06.1983. Notwithstanding the fact that the obligation to make payment of commission was dependent on receipt of payment from the client, the liability to pay commission arose on the date on which the order was procured by the agent. The view taken by the Tribunal, that the liability arose, on the date on which the order was procured by M/s. Annapurna Agencies, is a possible view. Even if the view taken by the revenue is presumed also to be a possible view, it cannot be overlooked that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute - Decided in favour of assessee.

Issues Involved:

1. Accrual of liability for wage increase based on the Wage Board Award.
2. Allowability of provision for payment of commission to Sri Lankan agents as an accrued liability.
3. Eligibility for weighted deduction under Section 35B(1)(b)(iv) of the Income Tax Act for expenditure incurred for maintaining an agency abroad.
4. Allowability of insurance premium as an accrued liability within the previous year.
5. Accrual of liability to pay commission under an agreement with M/s. Annapurna Agencies.
6. Accrual of liability to pay liquidated damages under the terms of an agreement.

Issue-wise Detailed Analysis:

1. Accrual of Liability for Wage Increase Based on the Wage Board Award:

The Tribunal held that the liability to pay increased wages accrued on 19.05.1983, when the assessee agreed before the arbitrators that the award would come into operation from 01.01.1982. However, the High Court disagreed, stating that the liability arose only on the date of the award (11.07.1983) or its publication (20.07.1983), which was after the end of the previous year (30.06.1983). Therefore, the liability did not accrue within the previous year relevant to the assessment year 1984-85. The Court emphasized that the liability under the mercantile system of accounting accrues only when it becomes legally enforceable. Consequently, Question No.1 was answered in the negative, against the assessee and in favor of the Revenue.

2. Allowability of Provision for Payment of Commission to Sri Lankan Agents as an Accrued Liability:

The Tribunal held that the liability to pay commission arose on securing the order, as per Clause (d) of the agreement, even though the payment was to be made based on the FOB value of the supplies. The High Court upheld this view, stating that the liability to pay commission accrued when the orders were secured by the agents during the previous year relevant to the assessment year 1984-85. Hence, Question No.2 was answered in the affirmative, in favor of the assessee and against the Revenue.

3. Eligibility for Weighted Deduction under Section 35B(1)(b)(iv) of the Income Tax Act:

The Tribunal allowed the weighted deduction for the commission paid to Sri Lankan agents, considering it as expenditure for maintaining an agency abroad. However, the High Court disagreed, stating that the payment of commission for procuring orders does not equate to maintaining an agency for promoting sales outside India. The Court emphasized that the term "maintaining an agency" implies incurring expenditure to support the agency, which was not the case here. Therefore, Question No.3 was answered in the negative, in favor of the Revenue and against the assessee.

4. Allowability of Insurance Premium as an Accrued Liability within the Previous Year:

The Tribunal allowed the deduction for the insurance premium, stating that the liability arose when the policy came into operation (14.03.1983), even though the premium was paid later. The High Court disagreed, stating that the liability arose only on payment of the premium, as per the terms of the insurance policy. Since the premium was not paid within the previous year (30.06.1983), the liability did not accrue within that year. Therefore, Question No.4 was answered in the negative, in favor of the Revenue and against the assessee.

5. Accrual of Liability to Pay Commission under an Agreement with M/s. Annapurna Agencies:

The Tribunal held that the liability to pay commission arose on the procurement of the order, even though the payment was to be made pro-rata to the payments received by the assessee. The High Court upheld this view, stating that the liability accrued when the agent procured the order during the previous year relevant to the assessment year 1984-85. Therefore, Question No.5 was answered in the affirmative, in favor of the assessee and against the Revenue.

6. Accrual of Liability to Pay Liquidated Damages under the Terms of an Agreement:

The Tribunal followed its earlier decision and held that the right to receive the extra price arose when the delivery was made, and the assessee had accounted for the extra price when the goods were delivered. The High Court upheld this view, following its earlier decision in the assessee's case for the assessment year 1982-83. Therefore, Question No.6 was answered in the affirmative, in favor of the assessee and against the Revenue.

Conclusion:

Questions Nos.1, 3, and 4 were answered in the negative, in favor of the Revenue and against the assessee, while Questions Nos.2, 5, and 6 were answered in the affirmative, in favor of the assessee and against the Revenue.

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