2019 (11) TMI 1004 - AT - Income Tax

Excess of amount which is provided in the books to the credit of GAIL disallowed u/s 37 - Assessee itself has offered the cessation of liability to tax in the year of crystallization - HELD THAT - A provision can be allowed as a deduction only if it is an ascertained liability and if it is computed on actuarial basis or on the basis of past experience and the provision is made on a scientific basis. The Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd 2009 (5) TMI 16 - SUPREME COURT has laid down 4 tests for allocating a provision. It held that as per the recognized practice when a party has the present obligation as a result of the past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of the amount of obligation is possible, then a provision made to meet such an obligation is allowable u/s 37(1) of the Act. In the case before us, we find that there is a case for the assessee to collect the charges from the customers at 5.73 per MMBTU w.e.f. 1.12.2008, because as per the intimation dated 29.10.2008 from GAIL to the assessee, Ravva Satelllite JV was likely to revise the price and that such revised price to 5.73 per MMBTU is applicable w.e.f. 1.12.2008. After such intimation, the assessee had agreed to pay at the finally agreed revised price and also received the fuel from Ravva Satellite JV thereafter. Therefore, there is an implicit obligation of the assessee to pay the revised price, subject to the maximum of 5.73 per MMBUT. Liability had accrued during the relevant A.Ys. The discussions between GAIL and Ravva JC on revision of price continued, but remained inconclusive till Feb.2017, when it was finalized that the GAIL shall charge the assessee at US 4.30 per MMBTU only, till 2014 and thereafter at 5.73 per MMBTU. Therefore, the liability of the assessee to pay at the revised price is an ascertained liability and not a contingent liability as held by the Revenue. The assessee was liable to pay the revised charges w.e.f. 1.12.2008 but the revised charges were not finalized though the maximum price which could be revised or increased was mentioned in the communication from GAIL DR s submissions that the price is fixed by the Govt. is also strictly not correct. From copy of the new domestic natural gas price 2014, dated 25.10.2014, it is seen that the cost of the price shall be determined in accordance with the formula given therein and it was also clarified that the cost of the price so determined under these guidelines was not to be applicable where prices have been fixed directly for a certain period of time, till the end of such period. Therefore, we are of the opinion that the claim of the assessee u/s 37(1) is allowable particularly since the assessee itself has offered the cessation of liability to tax in the year of crystallization. Therefore, the appeals of the assessee are allowed.

Summary

Issues Involved:
1. Disallowance of provision made for differential price of natural gas supplied by GAIL.
2. Disallowance of Employees' share of PF under Section 36(1)(va) for A.Y. 2015-16.

Issue 1: Disallowance of Provision for Differential Price of Natural Gas

The assessee company, engaged in power generation using natural gas, filed returns under normal provisions and Section 115JB of the Act for A.Ys 2011-12, 2012-13, and 2015-16. During reassessment proceedings for A.Ys 2011-12 and 2012-13, it was discovered that the assessee paid $4.30 per MMBTU for Ravva Satellite gas to GAIL but made a provision for ?15,17,68,889/- over and above this rate, based on an anticipated price of $5.73 per MMBTU. GAIL confirmed it only charged $4.30 per MMBTU. The AO disallowed the provision and taxed it in the collection years.

The assessee contended the provision was made per contractual obligations and should be allowed under the mercantile system of accounting. The CIT (A) upheld the AO's decision, leading to the appeal before the Tribunal.

The Tribunal noted that the assessee had an agreement with GAIL, which indicated a possible price revision to $5.73 per MMBTU from 1.12.2008. The assessee collected charges from customers at this rate and made a provision for the excess amount. The Tribunal found that the liability to pay the revised price had accrued during the relevant A.Ys, though the exact amount was finalized later. The provision was made on a prudent basis and was not a contingent liability. The Tribunal cited several case laws, including Calcutta Co. Ltd vs. CIT and Bharat Earth Movers v. CIT, supporting the allowance of such provisions.

The Tribunal concluded that the provision for the differential price was an ascertained liability and allowable under Section 37(1) of the Act, especially since the assessee offered the cessation of liability to tax in the year of crystallization. Therefore, the appeals for A.Ys 2011-12 and 2012-13 were allowed.

Issue 2: Disallowance of Employees' Share of PF under Section 36(1)(va) for A.Y. 2015-16

For A.Y. 2015-16, the assessee also contested the disallowance of ?2,58,244/- representing employees' share of PF paid beyond the due dates under the PF Act. The CIT (A) confirmed the disallowance, but the assessee argued that payments made before the return filing due date should be allowed, referencing the Supreme Court's decision in Alom Extrusions Ltd.

The Tribunal did not explicitly address this issue in the detailed analysis but allowed the appeal for A.Y. 2015-16, implying that the disallowance was also overturned.

Conclusion:

The Tribunal allowed the appeals for A.Ys 2011-12, 2012-13, and 2015-16, concluding that the provision for the differential price of natural gas was an ascertained liability and allowable under Section 37(1) of the Act, and implicitly overturning the disallowance of employees' share of PF for A.Y. 2015-16. The decision emphasized the importance of recognizing accrued liabilities under the mercantile system of accounting and the prudence in making provisions for anticipated expenses.