2012 (5) TMI 368 - HC - Income Tax

Accrual of expenses - whether provision for hank yarn obligation is allowable as a deduction in this assessment year when the assessee has not fulfilled its obligation and textile commissioner had extended the time for fulfilment till 31.3.95 - held that - when the liability admitted is of reasonable certainty, the mere fact that the actual quantification might take place in the next year, per se, would not stand in the way of the assessee being granted the deduction. The assessee, admittedly, is maintaining the account on mercantile basis. In that event, the decision of the Apex Court in Bharat Earth Movers Vs. C.I.T.) (2000 (8) TMI 4 (SC)), directly applies to the facts of the case. - Decided in favor of assessee.

Summary

Issues:
1. Deduction of amounts spent on purchase of overhead travelling cleaner.
2. Allowability of provision for hank yarn obligation as a deduction in the assessment year.

Issue 1: Deduction of amounts spent on purchase of overhead travelling cleaner

The Tribunal allowed the deduction based on a previous decision in favor of the assessee. The main contention was regarding the provision made for hank yarn obligation. The Apex Court's decision in Bharat Earth Movers Vs. C.I.T. highlighted that if a liability has arisen in the accounting year and can be estimated with reasonable certainty, it should be allowed as a deduction. The principles laid down included the deduction of liabilities accrued due, even if not yet paid, and the present value of future payments to be made. The facts of the case revealed that the assessee, a textile mill, had to purchase hank yarn to fulfill its obligation as per the Textile Commissioner's order. The assessee had an extended period until 31.3.1995 to discharge this obligation. The Assessing Authority rejected the deduction claim, stating that the liability did not arise in the relevant year. However, the Commissioner of Income Tax (Appeals) and the Tribunal disagreed, emphasizing that the liability had already accrued, and the postponement of performance did not negate the deduction claim.

Issue 2: Allowability of provision for hank yarn obligation as a deduction

The Tribunal's decision to allow the deduction was based on the statutory obligation imposed on the assessee to fulfill the hank yarn obligation. Despite the uncertainty of the purchase price, the shortfall would be determined at the time of entering into agreements. The Revenue appealed, arguing that the liability did not exist in the relevant year. However, the Court held that the liability had crystallized during the relevant assessment year, and the postponement of performance did not negate the claim for deduction. Following the Apex Court's decision, which emphasized granting deductions for liabilities of reasonable certainty, the Court rejected the Revenue's case and confirmed the Tribunal's order. The assessee, maintaining accounts on a mercantile basis, was entitled to the deduction for the provision made for the hank yarn obligation.

In conclusion, the High Court of Madras dismissed the Tax Case Appeal, upholding the Tribunal's decision to allow the deduction for the provision made for the hank yarn obligation, emphasizing the accrual of liability and the reasonable certainty of the obligation despite the postponed performance.