2005 (3) TMI 48 - HC - Income Tax

Loss - In the circumstances the reason which weighed with the Tribunal namely that if the assessee had continued to supply goods it would have suffered more losses than the damages that the assessee may be required to pay is besides the point. Though the Tribunal has termed it as a business loss in fact no loss has been incurred during the year under consideration. A demand from a third party calling upon the assessee to make the payment would not result in a situation whereby the assessee would incur a loss if the assessee is disputing the demand so made. The Tribunal having accepted that the liability was a contractual liability and had not been discharged during the year under consideration committed an error in law in holding that it was a business loss allowable for the year under consideration.

Summary

Issues involved:
Allowability of Rs. 20,78,000 as revenue expenditure disputed by the assessee.

Analysis:

The High Court of GUJARAT addressed the issue of allowing a claim of Rs. 20,78,000 as revenue expenditure, disputed by the assessee, for the assessment year 1982-83. The assessee claimed deduction for a liability towards purchase loss payable to Army Purchase Organisation, arising from a contract to supply 4,600 MTs of Vanaspati. The dispute arose when the assessee chose not to supply 1,150 MTs due to a price increase in the market. The Army Purchase Organisation demanded Rs. 20,78,000 as compensation for cancelling the contract. The Assessing Officer disallowed the claim, treating it as a notional loss. However, the Commissioner of Income-tax (Appeals) allowed the claim, stating that if the goods were supplied, the assessee would have incurred a higher loss due to increased market rates.

The Revenue challenged the decision before the Tribunal, which upheld the Commissioner's order. The Tribunal considered the liability to have accrued during the accounting period, as the demand was raised before the end of the financial year. The Tribunal noted that the assessee avoided higher losses by not supplying the goods, terming it a business loss. The High Court observed that the liability was contractual and not discharged during the relevant year, leading to an error in considering it as a business loss. The Court cited precedents to emphasize that a liability is incurred when disputes are settled or adjudicated, especially in non-statutory liabilities.

The Court distinguished cases involving statutory liabilities cited by the Revenue, stating their inapplicability to the present dispute. The Court concluded that the claim of Rs. 20,78,000 was not allowable as revenue expenditure, as the liability remained disputed and not settled during the relevant year. The Court ruled in favor of the Revenue, holding that the Tribunal erred in allowing the claim. It directed the Tribunal to grant relief in the year when the liability is actually incurred, if requested by the assessee. The reference was disposed of with no costs awarded.

This detailed analysis of the judgment by the High Court of GUJARAT provides a comprehensive understanding of the issues involved, the arguments presented by both parties, and the legal reasoning leading to the final decision regarding the allowability of the disputed revenue expenditure claim.