1992 (1) TMI 136 - AT - Income Tax

Deduction Of Interest, High Court, Interest Liability, Interest On Arrears, Mercantile System, Previous Year, Purchase Price, Supreme Court

Summary

Issues Involved:

1. Deductibility of increased rates and royalty for gas supplied by ONGC.
2. Deductibility of interest on unpaid purchase price of gas.
3. Allowability of sales promotion expenses incurred on distribution of various articles as gifts.

Issue-wise Detailed Analysis:

1. Deductibility of Increased Rates and Royalty for Gas Supplied by ONGC:

The appellant company, engaged in the manufacture of paper, received gas supplies from ONGC under an agreement that expired on 31-3-1979. ONGC proposed to revise the gas prices annually, which the appellant company and other consumers contested, leading to a writ petition before the Gujarat High Court. The High Court issued interim orders restraining ONGC from discontinuing gas supply and fixing provisional rates. The Supreme Court ultimately upheld ONGC's price fixation, deeming it reasonable and binding on the respondents.

For the assessment years 1982-83 and 1983-84, the appellant made provisions for increased rates and royalty based on ONGC's proposed rates, despite paying the old rate of Rs. 504.40 per 1,000 cubic meters under the interim orders. The Income Tax Officer (ITO) disallowed these provisions, treating the liability as contingent. The CIT(A) confirmed this disallowance.

The Tribunal, however, concluded that the liability for the increased rates and royalty was an accrued liability, not contingent, as the gas was received and consumed during the relevant accounting periods. The Tribunal directed the ITO to allow the deduction based on the rates finally determined by the Supreme Court, noting that the provision made by the appellant in its books was reasonable and aligned with the Supreme Court's judgment.

2. Deductibility of Interest on Unpaid Purchase Price of Gas:

The appellant claimed additional deductions for interest on unpaid purchase price of gas, as demanded by ONGC after the Supreme Court's judgment. The Tribunal entertained this additional ground but rejected the claim for interest deduction in the years under consideration. The Tribunal noted that the interest liability was neither supported by any subsisting contract nor by the Supreme Court's judgment. The allowability of such interest could be considered only in the year when ONGC first demanded it, provided the appellant accepted the liability.

3. Allowability of Sales Promotion Expenses Incurred on Distribution of Various Articles as Gifts:

The revenue appealed against the CIT(A)'s decision to delete disallowances for expenses on distributing various articles as gifts. The Tribunal upheld the CIT(A)'s decision, noting that these expenses were incurred for maintaining good relations and generating goodwill with business associates, suppliers, and others. The Tribunal referenced the Gujarat High Court's judgment in CIT v. Dascroi Taluka Co-op. Purchase & Sales Union Ltd., which supported the view that such expenses should not be disallowed as advertisement expenses under Rule 6B.

Conclusion:

The Tribunal partly allowed the assessee's appeals, directing the deduction of increased rates and royalty as per the Supreme Court's judgment, while rejecting the claim for interest deduction. The revenue's appeals were dismissed, upholding the allowability of sales promotion expenses incurred on distributing gifts.