2014 (12) TMI 61 - HC - Income Tax

Addition for purchasing gas deleted - Whether the Tribunal has substantially erred in law in deleting the addition made in respect of liability for purchasing gas from ONGC Held that -Following the decision in COMMISSIONER OF INCOME TAX Versus MAHENDRA MILLS LIMITED 2009 (7) TMI 87 - GUJARAT HIGH COURT - the assessee has been following mercantile method of accounting - the Gas was supplied for the respective years - uncertainty and difficulty or the pendency of litigation relating to estimation or the pendency of litigation relating to estimation of the purchase price or fixing of purchase price would not convert the accrued liability into a contingent liability and since there remained no uncertainty or difficulty in estimation of the amount of such liability which had accrued in the respective assessment years of supply of Gas, the deduction would be allowable for the respective years - since liability of assessee was contractual which came to be crystallized by virtue of decision of Supreme Court by fixing price of gas supplied by ONGC, in such a situation the conclusion of the Tribunal that deduction in respect of purchase price was to be allowed in respective years when supply of gas was received on basis of price which had been finally determined by Supreme Court is justified thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
- Disallowance of liability for purchasing gas from ONGC as revenue expenditure.

Analysis:

The judgment by the Gujarat High Court involved the appeal of the revenue against the Income Tax Appellate Tribunal's decision to delete the addition made regarding the liability for purchasing gas from ONGC. The core issue revolved around whether this liability could be considered as an allowable revenue expenditure. The assessee maintained accounts on a mercantile basis and claimed the liability to pay fuel charges as an allowable expense for the relevant year. However, the Assessing Officer (A.O) disagreed, stating it was not a statutory liability and, therefore, not accrued during the year under consideration. The CIT (Appeals) upheld this decision, leading to the appeal before the Tribunal.

Upon appeal, the Tribunal partially allowed the appeals, directing the Assessing Officer to accept the liability claimed by the assessee. The High Court referred to a previous decision in the case of Commissioner of Income Tax vs. Mahendra Mills Ltd, where it was established that under the mercantile method of accounting, a liability is incurred when quantified and crystallized, even if there are disputes over pricing. The court emphasized that uncertainty or litigation over pricing does not convert an accrued liability into a contingent one. The liability in question was contractual and crystallized based on the Supreme Court's decision on the gas price supplied by ONGC.

The High Court concurred with the Tribunal's decision, stating that the liability of the assessee was contractual and properly incurred, as settled by the Supreme Court's price-fixing decision. The court noted that the revenue did not present any contradictory evidence or case law to dispute this position. Consequently, the High Court upheld the Tribunal's judgment, dismissing the Tax Appeals filed by the revenue. The decision was based on the principle that under the mercantile system of accounting, a liability is considered crystallized when disputes are resolved or adjudicated, especially in cases of contractual liabilities not statutory in nature.