1971 (2) TMI 20 - HC - Income Tax

Sugar Industry - extra price debited in assessee s accounts additional price is paid for purchase of sugarcane from co-operative society - whether such amount can be claimed as deduction for computing the assessee-firm s income of the previous year

Summary

Issues:
1. Deduction of additional price payable for computing the assessee-firm's income.
2. Interpretation of liability for payment in connection with sugar-cane purchased.
3. Requirement of an order by the Cane Commissioner for the liability to pay additional price to arise.
4. Application of principles of the mercantile system of accounting in determining liabilities for deductions.

Detailed Analysis:
1. The primary issue in this case was whether a sum of Rs. 2,05,787 should be deducted for computing the assessee-firm's income of the previous year. The assessee, a sugar mill company, debited this amount as additional price payable under a government order related to purchasing sugar-cane from growers' co-operative societies. The Income-tax Officer initially rejected the deduction claim, stating that the liability was undetermined as no order for payment had been issued by the Government. However, the Tribunal allowed the deduction, emphasizing that the liability was fixed and quantifiable based on the provisions of the government order.

2. The interpretation of the liability for payment in connection with the sugar-cane purchased was crucial in this case. The Appellate Assistant Commissioner had opined that the liability did not arise until an order was issued by the Cane Commissioner mandating the additional payment. In contrast, the Tribunal held that the liability arose immediately upon purchasing the sugar-cane and was not contingent on any further orders. The Tribunal's decision was based on the clear provisions of the Sugar-cane Control Order, which imposed a personal liability on the producer to pay the additional amount without the need for additional orders.

3. The question of whether an order by the Cane Commissioner was necessary for the liability to pay the additional price to arise was a significant point of contention. The Income-tax Officer and the Appellate Assistant Commissioner believed that such an order was required, while the Tribunal disagreed. The High Court concurred with the Tribunal's interpretation, stating that the liability arose as soon as the sugar-cane was purchased and the minimum price was fixed, without any dependency on external orders or authorities.

4. The application of principles of the mercantile system of accounting played a crucial role in determining the deductibility of the liability in question. The High Court emphasized that under the mercantile system, a clearly ascertained liability that arose during the previous year was eligible for deduction against the profits earned in that year. The court highlighted the confusion in the lower authorities' understanding regarding the necessity of an order by the Cane Commissioner, ultimately affirming the assessee's right to claim the deduction based on established accounting principles.

In conclusion, the High Court answered the referred question in the affirmative and in favor of the assessee, allowing the deduction of the additional price payable for computing the firm's income. The judgment underscored the clear and quantifiable nature of the liability, independent of external orders, and upheld the application of mercantile accounting principles in determining deductible liabilities.