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Commissioner Of Income-Tax v. Seksaria Biswan Sugar Factory Pvt. Ltd.
Factual and Procedural Background
The Central Government fixed the levy price of D-30 grade sugar at Rs. 136.87 per quintal under the Essential Commodities Act, 1955. The assessee challenged the fixation in the Allahabad High Court and obtained an interim order dated 26 July 1972 permitting sale of 11,884 bags of sugar at Rs. 209.60 per quintal on condition of furnishing a bank guarantee for the difference until final disposal of the writ petition. The difference between the higher sale proceeds and proceeds at the levy price amounted to Rs. 8,64,323. The assessee initially credited this amount to sales, then transferred it to a “Season 71-72 sugar price difference account”; that differential included excise duty of Rs. 2,59,296. The Income-tax Officer added Rs. 6,05,027 (Rs. 8,64,323 minus Rs. 2,59,296) to the assessee's income. The Appellate Assistant Commissioner accepted the assessee's contention that the extra proceeds were contingent and did not constitute income, relying on the High Court decision in CIT v. Nadiad Electric Supply Co. Ltd. The Department appealed to the Tribunal, which, following its earlier order for assessment year 1972-73, confirmed the Appellate Assistant Commissioner and dismissed the Department's appeal. The Department referred two questions of law to this Court under section 256(1) of the Income-tax Act, 1961.
Legal Issues Presented
- Whether the sum of Rs. 8,64,323 (the difference between proceeds realised under the Allahabad High Court's interim order and the levy price fixed by the Central Government) constituted the assessee's income and was liable to be included in its total income.
- Whether the Appellate Assistant Commissioner should have enhanced the assessee's total income by Rs. 2,59,296 on the ground that the Income-tax Officer had brought only Rs. 6,05,027 to tax instead of the entire Rs. 8,64,323.
Arguments of the Parties
Revenue's Arguments
- The extra sale proceeds were received during the previous year and therefore were taxable in that year; any subsequent refund could be allowed as a deduction in the year of refund.
- The Tribunal erred in accepting the Appellate Assistant Commissioner's reliance on the Nadiad Electric Supply Co. Ltd. decision; in view of the Supreme Court decision in Chowringhee Sales Bureau (P) Ltd. v. CIT, the extra amount ought to have been taxed as income.
Assessee's Arguments
- The extra amount was received subject to conditions (bank guarantee, refund if writ petition lost) and therefore represented a contingent/inchoate receipt that did not accrue as income until finalisation of the dispute.
- The assessee ultimately had to transfer the amount to the Government under the Levy Sugar Price Equalisation Fund Act, 1976; High Court decisions in CIT v. Chodavaram Co-operative Sugars Ltd. and CIT v. Mysore Sugar Co. Ltd. supported non-accrual until finalisation; a Supreme Court SLP in a similar matter (CIT v. Nawabganj Sugar Mills Ltd.) was dismissed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Nadiad Electric Supply Co. Ltd., [1971] 80 ITR 650 | Used by the Appellate Assistant Commissioner to support that contingent/inchoate receipts do not constitute income. | The Court noted this decision was relied upon by the Appellate Assistant Commissioner in accepting that the extra proceeds were contingent and not income. |
| Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542 | Invoked by the Department to argue that extra amounts recovered as sale proceeds ought to be taxed as income. | The Department relied on this Supreme Court decision before the Tribunal; the Court considered the Department's reliance but ultimately followed authorities supporting non-accrual. |
| CIT v. Chodavaram Co-operative Sugars Ltd., [1987] 163 ITR 420 | Authority for the proposition that amounts received under similar interim arrangements do not accrue to the assessee until finalisation of the dispute. | The assessee relied on this Andhra Pradesh High Court decision; the Court treated it as supporting the view that the receipt was inchoate. |
| CIT v. Mysore Sugar Co. Ltd., [1990] 183 ITR 113 | Authority for the proposition that amounts received subject to conditions under interim orders do not accrue as income until final determination. | The Court expressed agreement with the view of the Karnataka High Court as reflected in this decision and treated it as persuasive. |
| CIT v. Nawabganj Sugar Mills Ltd., [1991] 187 ITR (St.) 74 | Noted as a Supreme Court order (dismissal of SLP) in a similar matter. | The assessee pointed to the dismissal of a special leave petition by the Supreme Court in support of the non-accrual position; the Court recorded this fact. |
| CIT v. Hindustan Housing and Land Development Trust Ltd., [1986] 161 ITR 524 | Supreme Court authority supporting that inchoate receipts under interim orders do not accrue as income until finalisation. | The Court relied on this Supreme Court decision as supporting its view that the extra proceeds were inchoate and did not accrue to the assessee until final determination. |
Court's Reasoning and Analysis
The Court examined the nature of the receipt: it arose from an interim court order permitting sales at an enhanced price subject to several conditional safeguards (bank guarantee and obligation to refund if the writ petition failed). Given those conditions, the enhanced proceeds were characterised as inchoate or contingent receipts that did not accrue to the assessee as its income until the dispute was finally resolved. The Court found this position consistent with the view taken by the Karnataka High Court and with the Supreme Court's decision in CIT v. Hindustan Housing and Land Development Trust Ltd. Consequently, the Tribunal's conclusion (and the Appellate Assistant Commissioner's reliance on precedent supporting non-accrual) was upheld for the first question.
On the second question, the Court observed that the Income-tax Officer had made an addition of Rs. 6,05,027 (not Rs. 8,64,323) and that the Department had not contended before the Appellate Assistant Commissioner or the Tribunal that an addition of Rs. 8,64,323 should have been made. Given that factual and procedural posture, the Court considered the second question to be outside the issues actually argued and declined to answer it.
Holding and Implications
Holding: The Court answered the first question in the affirmative and in favour of the assessee — the sum of Rs. 8,64,323 (the differential proceeds) did not constitute the assessee's income for the year in question. The second question was not answered by the Court.
Implications: The Tribunal's order in favour of the assessee was affirmed as to the non-accrual of the extra sale proceeds; the Court did not decide the separate question of whether the total addition should have been Rs. 8,64,323. There will be no order as to costs. The opinion does not purport to lay down a new principle beyond applying existing authorities on inchoate/contingent receipts.
T.D Sugla, J.:— In this Departmental reference relating to the assessee's assessment for the assessment year 1973-74, the Tribunal has referred to this court the following questions of law for opinion under section 256(1) of the Income-tax Act, 1961:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 8,64,323 which was the difference between the proceeds of sale of 11,884 bags of sugar sold by the assessee-company at the rate of Rs. 209.60 a quintal, which was the selling price fixed by the Allahabad High Court, and the proceeds of sale at the rate of Rs. 136.87 a quintal fixed by the Central Government, which amount was actually realised by it, did not constitute its income and hence was not liable to be included in its total income?
2. Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the Appellate Assistant Commissioner should have enhanced the assessee's total income by an amount of Rs. 2,59,296, on the ground that though the difference referred to in the first question amounted to Rs. 8,64,323, the Income-tax Officer erroneously brought to tax only Rs. 6,05,027 out of it instead of the entire sum of Rs. 8,64,323?”
2. Briefly stated, the relevant facts are that the Central Government had fixed the price of levy sugar, D-30 grade, at Rs. 136.87 per quintal under the Essential Commodities Act, 1955. The assessee had challenged the fixation of levy price by the Central Government before the Allahabad High Court, inter alia, contending that the price fixed was not remunerative and that it be allowed to sell sugar at the rate of Rs. 209.60 per, quintal. The High Court passed an interim order on July 26, 1972, allowing the assessee to sell 11,884 bags of sugar at the rate of Rs. 209.60 per quintal and to furnish a bank guarantee for the difference in the amount so realised till final orders on the writ petition. The difference between the sale price realised as per the levy price fixed by the Central Government and the price at which the assessee was allowed to sell under the orders of the High Court amounted to Rs. 8,64,323.
3. In the first instance, the assessee credited this amount also to its sales account. At the end of the year, however, this was transferred to an account styled “Season 71-72 sugar price difference account”. It appears that the aforesaid differential amount included within it payment of excise duty to the extent of Rs. 2,59,296. Rejecting the assessee's contention that the differential amount so realised did not represent the assessee's income, the Income-tax Officer made an addition of Rs. 6,05,027 (Rs. 8,64,323 minus Rs. 2,59,296) to the assessee's income. The Appellate Assistant Commissioner accepted the assessee's claim that the assessee's interest in the extra sale proceeds was only contingent and the said amount, therefore, did not constitute the assessee's income. This he did by placing reliance on our High Court decision in the case of CIT v. Nadiad Electric Supply Co. Ltd., [1971] 80 ITR 650. The dispute was carried to the Tribunal by the Department. Placing reliance on the Supreme Court decision in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542, it was argued that the reliance by the Appellate Assistant Commissioner on the decision of our court in Nadiad Electric Supply Co. Ltd.'s case, [1971] 80 ITR 650, was misplaced and that, in view of the Supreme Court decision, the extra amount recovered as sale proceeds ought to have been taxed as the assessee's income for the year. However, following its order in favour of the assessee for the assessment year 1972-73, the Tribunal confirmed the order of the Appellate Assistant Commissioner and dismissed the Department's appeal.
4. It is submitted before us by Shri Jetley, learned counsel for the Revenue, that the Tribunal had failed to appreciate that the amount by way of extra sale proceeds was received during the previous year so much so that it was required to be taxed as the assessee's income in the year of receipt. If, in any subsequent year, it was found that the assessee had to refund that amount, the amount so refunded could be so allowed as deduction as liability of that year.
5. In response to a query from the Bench, Shri Trivedi, learned counsel for the assessee, stated that, after prolonged litigation, the Central Government came down with a fresh legislation known as Levy Sugar Price Equalisation Fund Act, 1976, and that the assessee had eventually to make over this amount to the Government under that Act. Placing then reliance on the Andhra Pradesh High Court decision in the case of CIT v. Chodavaram Co-operative Sugars Ltd., [1987] 163 ITR 420, and the Karnataka High Court decision in the case of CIT v. Mysore Sugar Co. Ltd., [1990] 183 ITR 113, Shri Trivedi reiterated that the extra amount received by the assessee was subject to several conditions. The amount was made available to the assessee on a bank guarantee and was to be refunded if the assessee lost in the writ petition. It was stated that both the Andhra Pradesh and the Karnataka High Courts, in identical circumstances, took the view that the amounts so received did not accrue to the assessee as its income until the finalisation of the dispute. Shri Trivedi also invited our attention to the fact that, by its order dated December 17, 1990 (CIT v. Nawabganj Sugar Mills Ltd., [1991] 187 ITR (St.) 74), the Supreme Court dismissed a special leave petition by the Department against a similar order dated August 18, 1983, of the Delhi High Court in I.T.C No. 184 of 1983.
6. Having heard the parties and after going through the decisions relied upon, we are in agreement with the view of the Karnataka High Court. What has happened in this case is that the assessee was permitted to collect the amount in question only pursuant to an interim order made by the court which was subject to several conditions to make the right absolute. Therefore, the collection made by the assessee at an enhanced rate at that stage was an inchoate one as this extra amount did not accrue to the assessee until the finalisation of the dispute pending before the court. In fact, this is also the view taken by the Supreme Court in CIT v. Hindustan Housing and Land Development Trust Ltd., [1986] 161 ITR 524. Accordingly, we are in agreement with the Tribunal and answer the first question in the affirmative and in favour of the assessee.
7. As regards the second question, it appears to us that the Income-tax Officer had himself made an addition of Rs. 6,05,027 and not Rs. 8,64,323. It was never the case of the Department either before the Appellate Assistant Commissioner or the Tribunal that the addition should have been Rs. 8,64,323. In the circumstances, we do not understand how such a question arises out of the order of the Tribunal in the premises, we do not consider it necessary to answer the second question. Hence, the question is not answered.
8. There will be no order as to costs.
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