9911796707
TMI Blog1994 (11) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying on the manufacturing operations in two factories - one at Kakinada and the other at Vizianagaram. It was drawing its HT power requirements from the APSEB. It is a matter of record that for the said purpose it had entered into agreements with the APSEB. By an agreement dated 20-8-1982, the APSEB contracted to supply and the assessee had contracted to ' lift ' 1500 KVA for the Kakinada Unit. By another agreement dated 15-7-1985 the contracted demand for the Vizianagaram Unit was 1200 KVA. It may here be highlighted that the said agreements were in the proforma prescribed by the APSEB. 4. By BPMs No. 671 (Commercial) of 10-6-1987 the APSEB revised the HT tariff upward w.e.f. 15-7-1987. This was the signal for the assessee to file writ petition bearing No. 19893 of 1987 before the Andhra Pradesh High Court challenging the upward revision. The assessee also filed Writ Petition, Miscellaneous Petition No. 26402 of 1987, seeking stay of collection of the incremental demand occasioned by the said upward revision of HT tariff, and by their order dated 30-12-1987 (in the said WPMP) the High Court, inter alia, ordered : " . . that on condition the petitioner company herein pays 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this aspect of the matter need not detain us here. Suffice it to note that the assessee filed W.P.M.P. No. 11609 of 1989, seeking stay of collection of the incremental charges occasioned by the 1989 revision; and that by their order dated 5-7-1989 the High Court ordered : " That on condition that the petitioner herein pays the difference to make 50% of the increased rate, the collection of electricity charges from the petitioner company herein at the increased rate as per B.P.Ms. No. 353 (Commercial) dated 15-4-1989 by the first respondent herein as brought into force from June 1989 be and hereby is stayed, pending further orders in this writ petition. " 8. The assessee paid the unstayed portion of the 1989 revision and recorded the payments in its books of account. As for the 50% incremental charges stayed by the High Court, it made necessary provision in its books of account relating to the year of account ending on 31-3-1990. 9. To make the picture complete; the High Court of Andhra Pradesh by their order dated 2-4-1990 dismissed all the writ petitions and writ appeals relating to both the 1987 and the 1989 tariff revisions. And it is common ground that the assessee paid a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts the unstayed portion of the demand arising out of the aforesaid two revisions and attributable to the period 1-4-1989 to 31-3-1990, the assessee could not have validly made a provision in its accounts relating to the accounting year ended on 31-3-1990, because the A.P. High Court decided the matter against the Writ Petitioners and in favour of APSEB only on 2-4-1990, that is to say, after the close of relevant previous year. (e) One of the points made by the assessee was that it came to make a provision in relation to the additional charges attributable to the period from 1-4-1989 to 31-3-1990 in its accounts relating to the year of account ending on 31-3-1990, because by the time it closed its accounts for the said year of account, the decision of Andhra Pradesh High Court was available. The Assessing Officer rejected the contention on the ground that there was no material to substantiate it. The obligation to pay HT power tariff in general and the incremental charges in particular was contractual in nature. Therefore, the liability to pay the incremental sums arose only on 2-4-1990 when the Andhra Pradesh High Court handed down its judgment rejecting all the Writ Petitions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction in respect of the provision of Rs. 28,47,369 made by the assessee in its books of account relating to the year of account ended on 31-3-1990. By BPMs No. 671 of 10-6-1987, the APSEB had enhanced the power tariff. The enhancement was subject-matter of writ petition before the High Court. And by order dated 30-12-1987 in W.P. Misc. No. 26402 of 1987 in W.P. No. 90893 of 1987, the High Court of Judicature at Hyderabad directed the writ petitioners to pay 50% of the enhanced charges and stayed the collection of the rest. The assessee accordingly paid 50% of the enhanced charges. As for the balance of 50% , as the enhancement itself was the subject-matter of litigation before the High Court, the assessee did not consider it necessary to make any provision therefore in its accounts relating to the years of account ending on 31-3-1988 and 31-3-1989. This fact was duly incorporated as item No. 8 of Schedule B - Notes on Balance-sheet as at and Profit and Loss A/c for the year ended 31-3-1988 annexed to and forming part thereof (Page 32 of the 32nd Annual Report of the assessee-company relating to the year of account ended on 31-3-1988). A note to the similar effect was given in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foregoing, contended Shri Prasad, the assessee is entitled to succeed. 16. On his part Shri K. Vasanth Kumar, the learned Departmental Representative, strongly supported the impugned order of the Assessing Officer on this issue relating to prior period expenditure. He first contended that the case before us was one of contractual payment. Since the assessee had disputed its liability to pay the incremental sum arising out of the contract in question, to the extent of the stayed portion of the incremental sum, the liability accrued or arose only on 2-4-1990 when the Andhra Pradesh High Court handed down its judgment, and not at any earlier point of time. Secondly, and without prejudice to the foregoing, Shri Vasanth Kumar drew our attention to the fact that in the case of Andhra Sugar.Ltd. , the Income-tax Appellate Tribunal, Hyderabad Bench 'A' had held that electricity charges are statutory liability and that, therefore, the liability to pay the charges accrued or arose the moment electricity was consumed. According to him, it should, therefore, follow that the assessee should have made provision in respect of the stayed portion of the incremental charges arising out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication and decision. He invited us to follow suit. 17. We have looked into the facts of the case and considered the rival submissions. The facts necessary for the resolution of the issue before us lie in a short compass. The assessee draws its HT power requirements from the APSEB. The APSEB hiked the power tariff on two occasions, namely, w.e.f. 15-7-1987 and w.e.f. 10-6-1989. The said hikes were the subject matter of litigation before the High Court. Pending final decision, the Andhra Pradesh High Court stayed the collection of 50% of the additional sums payable by the assessee as a result of the said two hikes. In respect of the 1987 hike, the assessee paid 50% of the incremental sum as directed by the High Court. It did not make any provision in respect of the stayed portion of the incremental sum in the relevant previous years. It made a provision in that regard only in its books of account relating to the year of account ending on 31-3-1990 and, on that basis, claimed revenue deduction. In respect of the 1989 hike also, it paid 50% of the incremental sum as directed by the High Court. This time however as respects the stayed portion of the incremental sum, it made a prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a person means the ' personal legal condition, only so far as his personal rights and burdens are concerned, to the exclusion of his proprietary relation '. In Salmond on Jurisprudence the position is summarised thus : " The term status is used in a variety of senses. It is used to refer to a man's legal condition of any kind, whether personal or proprietary. A man's status in this sense includes his whole position in the law - the sum total of his legal rights, duties, liabilities or other legal relations, whether proprietary or personal, or any particular group of them separately considered. Thus we may speak of the status of a landowner, of a trustee, of an executor, of a solicitor and so on. More commonly it is used to denote his personal legal condition in so far as concerns his personal rights and burdens, to the exclusion of his proprietary relations. A person's status, in this sense, is made up of smaller groups of personal rights and their correlative burdens, and each of these constituent groups is itself also called a status. Thus the same person may have at the same time the status of a free man, of a citizen, of a husband, of a father and so on. So we speak o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom status, it proceeds to declare that the members of a Hindu undivided family carrying on a family business as such are not partners in such business. The reason is not far to seek. While partnership is a matter of contract, a Hindu undivided family is a matter of status. (b) The relationship between the State and its servants is another typical example. Supreme Court in the case of Roshan Lal Tandon v. Union of India AIR 1967 SC 1889 at 1894 observed : " It is true that the origin of Government service is contractual. There is an offer and acceptance in every case. But once appointed to his post or office, the Government servant acquires a status and his rights and obligations are no longer determined by the consent of both the parties but by statute or statutory rules which may be framed and altered unilaterally by the Government. In other words, the legal position of a Government servant is more one of status than of contract. The hallmark of status is the attachment to a legal relationship of rights and duties imposed by public law and not by mere agreement of the parties. The emoluments of the Government servant and his terms of service are governed by statutes or statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting up of Electricity Boards. Section 49 contains provisions for the sale of electricity by the Board to persons other than licensees. Section 59 of the Act deals with the general principles for Board's finance. Section 78 of the Act enables the respective State Governments to issue necessary directions to the Electricity Boards, which the latter are bound to follow. Under the scheme of the Act, power tariff is to be fixed in accordance with the provisions of section 49 read wit 24. We also have the consumers of electricity. When a consumer, such as the assessee before us, requires, say, HT power, it approaches the APSEB for supply of power, stating its requirements of power. If APSEB is in a position to supply power, it enters into a proforma contract with the consumer. As regards the quantum of power to be supplied, we have a compact simpliciter. This means that, in the event of its failure to supply the contracted quantity of power, the APSEB may render itself liable to liquidated damages and the like. Conversely, if the consumer fails to ' lift ' the contracted demand, it may render itself liable to similar consequences. 25. But as respects the rate(s) at which the power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectricity without their consent. It may here be mentioned that since the liability is imposed by virtue of the relevant provisions of the statute, viz. the Electricity (Supply) Act, 1948, the liability may well be given the short-hand name of ' statutory liability '. And this is what the Income-tax Appellate Tribunal, Hyderabad Bench-A has done in the case of Andhra Sugars Ltd. 26. The legal principles governing a claim for revenue deduction in respect of statutory imposts is well-settled. The accrual or arising of the liability to pay statutory imposts is coeval with the taxable event. Consequently, once the taxable event occurs, the statutory liability accrues or arises simultaneously. And an assessee following mercantile system of accounting is entitled to take into account, on accrual basis, the said liability, even though the assessee might dispute the liability. 27. In the case of Pope The King Match Factory v. CIT [1963] 50 ITR 495 the Madras High Court observed : " The liability to pay excise duty on the part of the assessee arose out of the levy of the duty and the demand made against him for payment of such duty. Any dissatifaction on his part regarding the quantu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. " 30. We may now deal first with the stayed portion of the incremental amount payable by the assessee as a result of the 1989 hike. As pointed out earlier,the said hike was ordered by B.P.Ms.No.353 of 15-4-1989 w.e.f. 10-6-1989; that is to say, the hike took place in the course of the previous year relevant to the assessment year which is now before us. We have already demonstrated, the tariff payable by the assessee to the APSEB, is not a matter of contract but of-status. In essence, it is a statutory levy. It should, therefore, follow that the assessee was justified in making a provision in respect of the stayed portion of the incremental amount attributable to the 1989 hike. 31. Yet Shri Vasanth Kumar, it may be recalled, argued that the HT power tariff itself is a "fee" within the meaning of section 43B(a). According to him, the Finance Act, 1988 substituted w.e.f. 1-4-1989 anew clause (a) for the old one and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate with the benefit enjoyed. Paraphrased differently, while there is no element of quid pro quo (between the taxpayer and the State) in the case of a tax, there is a necessary correlation between fee collected by the State and the services to be rendered by it. Again, when one talks of quid pro quo, one does not envisage an absolute, arithmetical relationship. What one has in mind is a broad relationship between the fees charged and the cost of the service rendered by the State to the payers of the fees taken as a class. Therefore, where it is shown that a sum levied as and by way of a fee is considerably higher than the expenses incurred by the State for rendering the service in question, it will have to be held that the levy is not a fee but tax. The said view was taken in the case of Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt AIR 1954 SC 282 and Sudhindra Thirtha Swamiar v. Commissioner for Hindu (Religious Charitable Endowments AIR 1963 SC 966. The levy was held ultra vires in the former case because the levy was made to depend upon the capacity of the payer and not the quantum of the benefit received by the payer. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the APSEB for the HT power requirements drawn by it from the said Board. True, the fixation of the price is status-based and statutorily regulated. True again, there is total quid pro quo. Even so, the HT power charges paid by the assessee cannot be treated as a fee having the aforesaid special signification. 37. In view of the foregoing, therefore, we reject the contentions of the learned Departmental Representative on this point. 38. That leaves for consideration the assessee's claim for revenue deduction, on provision basis, in respect of (a) the prior period expenditure, and (b) the current year's liability both relating to the 1987 hike. The entirety of the prior period expenditure under the head 'Power and fuel expenses' relates to the stayed portion of the 1987 hike, in respect of which the assessee did not make any provision in the relevant years of account, but made a provision in the accounts for the year of account ending on 31-3-1990 being the previous year relevant to the assessment year 1990-91 which is now before us. Provision was also made in the said accounts in respect of the current year's liability relating to the 1987 hike. The assessee's case is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcuit (P.) Ltd [1984] 146 ITR 540, the above passages reflect the "general legal position ", the particular application of which win depend upon the facts and circumstances of the case. 41.Again,in the case of CIT v. East India Corpn. Ltd [1986] 159 ITR 712 the Madras High Court observed that the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd's case cannot be taken as laying down that a liability by way of sales-tax can be claimed as a deduction only in the year in which the sales take place. Ordinarily that may be the earliest period during which such a deduction can be made. But the question as to the year in which the liability should be allowed to be deducted cannot be decided on the basis of the said general proposition of law. There may be exceptions to the said rule. Thus, even though a liability statutorily arose in the year in which the sales were made, factually the liability never existed in law but crystallised as a real and enforceable liability in a subsequent year. 42. The above line has been taken by the High Courts in a number of cases. Thus, in the Madras case of CIT v. V. Krishnan [1980] 121 ITR 859, after noticing the decision of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court held, the entire amount paid in that year was an allowable deduction. The liability relating to the earlier years became real and enforceable only during the relevant previous year. " Therefore, from a commercial point of view, for a commercial man, in the reality of situation, to claim deduction in the year in question was not unjustified. " The High Court went on to observe : " We would, however, say that it is not in all cases correct to say that a statutory liability discharged in a particular year becomes eligible for deduction in the year in question in the mercantile system of accounting. It depends on the facts and circumstances of the case and on the statutory provisions." 43. The concept of "real and enforceable liability" was applied by the Calcutta High Court in the case of (a) Shalimar Chemical Works (P.) Ltd. v. CIT [1987] 167 ITR 13 and (b) CIT v. Padmavati Raje Cotton Mills Ltd [1993] 203 ITR 375. 44. In the case of CIT v. T.S. Srinivasa Iyer [1984] 146 ITR 526 Madras High Court was concerned with the question of revenue deductibility of urban land tax relating to the period 1963-64 to 1969-70 in the assessment for the assessment year 1970-71. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the deduction on the basis of the mercantile method of accounting followed by the assessee regularly for its business. However, the assessee did not, in point of fact, make any such provision in its accounts. This book-keeping omission, however, is not material for the claim of deduction. The fact that the assessee had not made any provision in its accounts would not militate against the allowance being granted. The principle would seem to be that it was enough if the system of accounting usually followed by the assessee was such as to allow a provision being made in this regard. The Supreme Court in Kedarnath Jute Mfg. Co. Ltd v. CIT [ 1971] 82 ITR 363, had clearly held that even if an actual provision had not been made, the deduction has to be given as if the accounts contained such a provision. All that is required is a mercantile system of account which allows for accrued liabilities of a kind which accrue before actual payment. " 45. The Delhi case of Addl CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 may be noticed next. The assessee was a dealer in knitted wool. There was some doubt as to whether sales-tax was payable or not on knitted wool. It was only on February 25, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 363, would also not be applicable because the demand was raised in 1964, whereas the assessment years were 1953-54 to 1958-59. So, there was no occasion or possibility of filing a revised return." According to the High Court, the decision in Kedarnath Jute Mfg. Co. Ltd's case " is limited to those cases in which the demand is raised by the sales-tax department before the assessment has actually been completed as no revised return can be filed after the assessment is over ". 46. In the Madras case of East India Corpn. Ltd. also a similar situation arose. There the issue was whether in the assessment for the assessment year 1973-74 the assessee-company can validly claim revenue deduction in respect of central sales-tax liability on the sales that had taken place during the accounting year 1957-58. There the Assistant Commercial Taxes Officer did not charge central sales-tax on cotton sold by the assessee to mills inside the State of Madras. According to the Board of Revenue, central sales-tax was exigible on such sales inasmuch as the sales fell under section 3(b) of the Central Sales-tax Act, 1956. The Board, therefore, passed an order in revision. When the matter reached th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales-tax payable by the assessee but also decided the exigibility issue against the assessee. Thereupon, the matter reached the Madras High Court as and by way of reference at the instance of the Department. On an examination of the facts and circumstances of the case and on a consideration of the reported cases including the Supreme Court case of Kedarnath Jute Mfg. Co. Ltd, the Madras High Court held that the liability to pay the amount in question arose for the first time on August 31, 1972; and that, therefore, the claim by the assessee for revenue deduction in respect of the said sum in the assessment for the assessment year 1973-74 was justified. 47. The principles emerging from the foregoing analysis may be abstracted as follows: (i) The decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd is the authority for the general proposition that the accrual or arising of the liability to pay a statutory impost is coeval with the taxable event and that the assessee, who follows the mercantile system of accounting, is entitled to deduct from the profits and gains of the business such liability which has accrued during the period for which the profits and gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to statutory imposts are equally applicable to the status-based, statutorily regulated power tariffs. We have also held that the provisions of section 43B are not applicable to power tariffs, because they cannot be regarded as 'fee' within the meaning of that section. 49. The short question that we have to ask and answer in the light of the foregoing analysis is this : Can it be said that the liability to pay the stayed portion of the 1987 hike in tariffs arose during the previous year relevant to the assessment year 1990-91? The answer to this question will depend upon the answer to the further question : Did any event occur during the relevant previous year on the basis of which it could be said that the liability relating to the unstayed portion of the 1987 hike in power tariff became 'real and enforceable' during the relevant previous year ? The answer to the second question is clearly that no event took place during the relevant previous year, which would even remotely suggest that the liability relating to the stayed portion of the 1987 hike became real and enforceable during the said year. It should, therefore, follow that the assessee's claim in that regard is not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim as respects prior period adjustment which relates to the stayed portion of the 1987 hike. Thirdly, we hold that the CIT(A) was not justified in allowing the assessee's claim in relation to the current year's liability attributable to the 1987 hike. 54. Departmental appeal (Other issues) : Issue No. 1 - Consignment expenses : In the course of its business the assessee had appointed consignment agents at different places under separate written agreements to sell the goods manufactured by it within the territory allotted to each of them. The essence of the agreement was that these agents would be selling the goods in question on behalf of the assessee. In the course of the assessment proceedings the Assessing Officer found that the assessee had incurred an aggregate expenditure of Rs. 75,26,707 in relation to the consignment/sale transactions. He further found that such aggregate expenditure was inclusive of the following amounts paid by the assessee towards bank commission and interest : Bank commission Interest 1. Kakinada Unit Rs. 9,32,283 Rs. 6,73,021 2. Vizianagram Unit Rs. 5,51,740 Rs. 4,92,064 Rs. 14,84,023 Rs. 11,65,085 On being called upon by the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the interest to be borne by the depot-keepers. On the contrary, the agreement with the depot-keepers do envisage that the depot-keepers will incur expenditure on behalf of the appellant and that the account of such expenditure is to be periodically submitted to the appellant. Excepting for the expenses specifically provided to be borne by the consignees all other expenses have to be on the consigner's account. That is particularly so because retirement of hundi by the consignee is merely an alternate mode of provision of security. That security is provided by the consignee at the time of taking delivery of the goods and is subsequently adjusted in the periodic statements of accounts. For the sums enjoyed by the appellant against the hundies negotiated by it with the banks, the consignees would not have any liability for payment of interest; particularly when there is no provision therefor in the consignment agreements. 43. The appellant having negotiated the "hundies" during the course of, and for the purposes of, its business and interest having been paid by it for the sums raised through the 'hundies', such interest constitutes bona fide business expenditure in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installed in the office premises where such atmosphere could be created in the existing circumstances. (3) Hence it is submitted that WIPRO Computer being part of the plant and machinery is eligible for investment allowance. " 60. Now, one of the tests to ascertain whether a particular article or thing is 'plant' for the purpose of investment allowance is to see whether the article or thing is really a tool of the assessee's trade, or is merely the setting in which the assessee's trade is being carried on, or even whether the article or thing was just a labour-saving device. If a particular article or thing is the tool of the assessee's trade and if you remove the tool, the trade comes to a grinding halt. If the article or thing is not plant within the said meaning, then it is not entitled to investment allowance because it fails the functional test. In the case before us the computer in question was nothing but a labour saving device. The accounting and other such operations which before the computer was installed were being done manually (of course this is prior to the short period when the assessee had purchased computer time), came to be done with the aid of the compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dues. The assessee defaulted. Further litigation ensued. Finally, the matter was settled out of court through a Memorandum of Compromise dated 5-9-1988, the salient features of which were : (a) SSC and the assessee were to withdraw the cases filed against each other; (b) The Memorandum of Agreement dated 3-8-1986 was to be cancelled and ignored; (c) SSC was to keep the assessee full indemnified against any claim against it by the agents/associates of SSC.; (d) The assessee was to pay a sum of Rs. 25 lakhs to SSC in accordance with the following schedule of payments: (i) A sum of Rs. 6.2 lakhs already paid by the assessee through a DD dated 23-8-1988 was acknowledged by SSC as the first instalment of payment. (ii) A further sum of Rs. 6.2 lakhs was to be paid on or before 30-9-1988. (iii) The balance of Rs. 12,50,000 was to be paid on or before 31-12-1988, subject to the rider first that SSC withdrew all the cases instituted by it against the assessee, and secondly that SSC furnished confirmation from its agents/associates that the assessee did not owe them any money. 64. Pursuant to the said MOC, the assessee, it would appear, paid the said SSC and its agents/as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s through the facts and circumstances of the case and contended that the assessee was entitled to succeed. According to him, the transaction before us was one that was entered into by the parties concerned at arm's length. Secondly, the fact that the Memorandum of Compromise dated 5-9-1988 quantified the sum payable by the assessee at Rs. 25 lakhs cannot per se lead to the conclusion that the assessee's liability to pay the said sum accrued on the said date. The reason is that the said Memorandum itself contemplated the payment of the said aggregate sum of Rs. 25 lakhs in three instalments. The payment of the said instalments was conditional in one way or the other. The first instalment was conditional on the other parties'agreeing to subscribe to the said Memorandum of Compromise. The third and final instalment was also conditional upon the other parties withdrawing all the suits filed by them against the assessee. The intervening second instalment also was conditional in the sense that the assessee could justifiably withhold the payment of the said instalment if it found that the other parties to the compromise were not serious about discharging their part of the agreement. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on 5-9-1988, being the date of the MOC? Or did it arise on subsequent dates ? 71. The details of the payments made by the assessee under the MOC dated 5-9-1988 may be extracted as follows : Name of the payee Date Amount (i) Sri Sambasiva Cotton (P.) Ltd. 23-8-1988 Rs. 6,25,000 (ii) Sri Sambasiva Cotton between 18-4-1989 Rs. 16,98,676 (P.) Ltd. and others and 27-4-1989 ------------------------- Rs. 23,23,676 ------------------------- Note : (i) The payment at Sl. No. (i) above represents the first instalment paid by the assessee. The sum was paid through DD No. 86/DD/653457 of 23-8-1988 purchased from Indian Bank, C-in-C Road, Madras and payable at Guntur. The draft was handed over by the assessee to SSC on the date of' execution of the MOC namely 5-9-1988. (ii) The balance of Rs. 1,76,324 (Rs. 25 lakhs minus Rs. 23,23,676) remained unpaid as on 31-3-1990. And the assessee has not claimed any revenue deduction in respect of the said sum. 72. As we see it, the case before us is essentially one of breach of contract. The law in this regard is well-settled. " A party in breach of contract does not incur eo instanti a pecuniary liability : nor does the injured pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the liability accrued not on 5-9-1988 but in April 1989 (which falls in the previous year relevant to the assessment year 1990-91, which is now before us). According to the assessee, this was so because the payment of all the three instalments were subject to and conditional upon SSC and its associates performing their part of the contract. We may now examine the validity of the said contention taking the three instalments one at a time. 76. The first instalment, it is common ground, was paid by the assessee on 5-9-1988. For this purpose the assessee had obtained on 23-8-1988 a DD. Simultaneously, the assessee has also debited the account of SSC with a like sum. Now, when the assessee actually made the payment during the previous year ending on 31-3-1989 relevant to the assessment year 1989-90, we fail to see how the assessee could make a claim for revenue deduction in the assessment for the assessment year 1990-91, and that too on accrual basis. The assessee ought to have debited the first instalment of Rs. 6,25,000 to the P L A/c relating to the year of account ending on 31-3-1989. Clearly the assessee failed to do so. What is more, the assessee now seeks to make a clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, to the fulfilment of their obligations by SSC and its associates. This means that, as respects the assessee, it was under an obligation to pay the said sum on (but not earlier than)31-12-1988, but had the option of discharging it at any earlier time selected by it. Similarly, the other parties to the compromise were under an obligation to perform their part of the agreement on (but not earlier than) 31-12-1988, but had the option of discharging it at any earlier time selected by them. 81. As we see it, read as a whole, clause 3(c) of the MOC makes it clear that the chronology of the conditions contemplated therein would be that the other parties to the compromise will have to perform their obligations first, and it is only thereafter that the assessee becomes obligated to pay the sum of Rs. 12,50,000. If the former event does not take place by 31-12-1988, the latter event (which is contingent on the occurrence of the former) cannot also take place. In other words, when the assessee found that the other parties to the compromise did not perform their part of the obligations, the assessee would have been justified in refusing to pay the last instalment of Rs. 12,50,000. 82. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before him by the assessee, the CIT (Appeals) held that it would be reasonable to limit the disallowance to Rs. 13,772. In this regard he observed : " A part of the business capital having not been utilised by the appellant for its business purposes the interest paid by it on borrowed capital cannot be deducted in its entirety. But it would be unreasonable to assume that the deposit of Rs. 2 lakhs was made only from out of borrowed capital and not from out of shareholders' capital and accumulated reserve. It would therefore be desirable to take into consideration the average business capital of all type. That average has to be weighted average. Disallowance from out of the interest payment has to be made in the same proportion which the said sum of Rs. 2 lakhs bears to the average business capital." 87. It is in these circumstances that the assessee is now before us. 88. On hearing both the sides, we consider it reasonable to allow the assessee's appeal on this issue. When the CIT (Appeals) went on to sustain the addition of Rs. 13,772, he clearly proceeded on the footing that the assessee's own capital funds were available for making the interest-:free advance. Having take ..... X X X X Extracts X X X X X X X X Extracts X X X X
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