Bharat Petroleum Corporation Ltd. v. Commissioner Of Income-Tax., Calcutta High Court, Judgment, Law, casemine.com

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Case Number

Income-tax Reference No. 20 of 1987

Judges

Ajit K. Sengupta
Bhagabati Prasad Banerjee, JJ.

Acts

section 256(1) of the Income-tax Act, 1961,
India) Act, 1976,

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Smart Summary

Factual and Procedural Background

This is a reference under section 256(1) of the Income‑tax Act, 1961, for the assessment year 1975–76 in which two questions of law were referred to the Court concerning the tax treatment of a claimed liability under the Crude Oil Price Equalisation Account (the "COPE" scheme).

The assessee was a non‑resident company engaged in distribution and marketing of petroleum products in India. Under the Burmah‑Shell (Acquisition of Undertaking in India) Act, 1976, Burmah‑Shell's undertaking vested in a Government company (later renamed Bharat Petroleum Corporation Ltd.). The Government introduced the COPE scheme, effective from October 16, 1973, to compensate oil companies for increases in crude oil purchase price used by the Government to determine selling prices.

Following an increase in selling prices effective November 3, 1973, the Government required oil companies to surrender adventitious gains arising on stock as at midnight November 2, 1973. The Ministry of Petroleum, by a circular dated June 24, 1974, clarified that adventitious gain calculations should include crude oil in stock purchased at lower prices prior to October 16, 1973, including crude in transit.

The assessee's closing stock on November 2/3, 1973 included 51,825 metric tonnes (m.t.) of crude oil purchased before October 16, 1973. The adventitious gain attributable to that pre‑October 16 stock was computed as Rs. 24,28,172 and the assessee claimed this amount as an ascertained liability and an allowable deduction in the assessment for 1975–76.

The Inspecting Assistant Commissioner of Income‑tax disallowed the claim; the Commissioner (Appeals) confirmed that disallowance; and on further appeal the Tribunal held the liability to be contingent (not an ascertained liability) and therefore not allowable in 1975–76. The matter was referred to this Court on the two legal questions: (1) whether the Tribunal was right in sustaining the disallowance of the liability of Rs. 24,28,172 under the COPE scheme, and (2) whether the Tribunal was right in holding that the liability was contingent and not ascertained.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of the liability in respect of adventitious gain of Rs. 24,28,172 under the COPE Scheme?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability in respect of adventitious gain of Rs. 24,28,172 under the COPE scheme was not an ascertained liability but only a contingent liability?

Arguments of the Parties

Revenue's Arguments

The assessee maintained accounts on the mercantile basis, but in the books for the year ended March 31, 1978 the sum of Rs. 68,75,654 (the aggregate of Rs. 24,28,172 and Rs. 44,47,482) was written back to the profit and loss account and credited to sundry creditors, indicating the liability was not finally determined in 1975–76.
No demand was made by the Government for payment during the assessment year 1975–76; therefore the liability was not ascertained in that year.
The COPE Scheme came into effect from October 16, 1973, and the original scheme did not, in Revenue's submission, extend to purchases before that date nor expressly provide for surrender of adventitious gain on stock held; hence the adventitious gain attributable to pre‑October 16 purchases could not be included.
The assessee had raised a dispute about the sum and the dispute was not finalised in that accounting year; accordingly the sum was only disputed and contingent and not deductible in 1975–76.
The assessee took inconsistent positions (including later writing the amount back) which, in Revenue's view, undermined the claim that the amount was an ascertained liability in 1975–76.

Assessee's Arguments (as presented by Dr. Pal)

With effect from November 3, 1973 the Government increased selling prices (and the crude price used by Government rose from $2.38 to $3.58 per barrel). The COPE Scheme provided compensation for increases in crude oil purchase price from October 16, 1973, and required surrender of adventitious gains arising on stock as at November 2/3, 1973.
The assessee contended that the adventitious gain attributable to 51,825 m.t. of crude oil purchased before October 16, 1973 should not be surrendered because, in the company's view, crude purchased prior to October 16 did not qualify for COPE compensation; the company therefore calculated Rs. 24,28,172 as the adventitious gain attributable to that pre‑October 16 stock.
Separately, and importantly for the Court's finding, the Ministry of Petroleum's circular dated June 24, 1974 expressly directed that adventitious gain calculations must include crude oil purchased at a lower price prior to October 16, 1973, in stock and in transit — a directive under which the assessee computed and accounted for the liability by debiting profit and loss and crediting sundry creditors for Rs. 24,28,172.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court's analysis proceeded principally by reference to the Ministry of Petroleum's directive dated June 24, 1974 and to the assessee's own accounting treatment:

The Court observed the directive specifically required that adventitious gain calculations include crude oil purchased at a lower price prior to October 16, 1973, whether in stock or in transit. That directive, the Court found, made it clear that adventitious gain on pre‑October 16 purchases was to be taken into account and surrendered to the Government under the COPE scheme.
The Court noted that the assessee had, consistent with the directive, debited the profit and loss account and credited sundry creditors for Rs. 24,28,172 — treating the amount as a liability in the accounting year relevant to the reference — which supported the view that the liability was accrued and ascertained in terms of the Government directive.
The Court considered the Tribunal's conclusion that the liability was contingent, and the Revenue's argument that there was no demand and that the assessee later wrote back the provision (and offered the aggregate amount for taxation in respect of assessment year 1978–79). The Court accepted that the assessee had subsequently offered the aggregate amount of Rs. 68,75,654 for taxation in 1978–79 and that the Income‑tax Officer had excluded Rs. 24,28,172 from the computation on the basis that the assessee had offered the amounts for taxation in 1978–79.
Balancing these facts, the Court concluded that, on the primary question of whether a liability existed under the COPE scheme for Rs. 24,28,172 as at the assessment year 1975–76, the Government directive and the assessee's own accounting treatment established an ascertained and accrued liability which should be allowable as a deduction for the assessment year 1975–76.
However, because the assessee had offered the entire amount for taxation in the assessment year 1978–79 and because the Income‑tax Officer had thereby excluded the amount from the computation for 1975–76, the Court required a practical remedy: the assessee gave an undertaking it would not object to inclusion of Rs. 24,28,172 in the assessment for 1978–79. Having regard to that undertaking, the Court directed the Income‑tax Officer to revise the assessment for 1978–79 to include the said sum and to take consequential steps.

The Court's reasoning focused on the effect of the Government's directive on the legal character of the liability and on the assessee's own accounting entries; it did not rely on any prior judicial precedents in its analysis as presented in the text.

Holding and Implications

Core Holding: The Court held that there was a liability in respect of the adventitious gain under the COPE Scheme and that this liability was an ascertained and accrued liability which was an allowable deduction for the assessment year 1975–76. The reference questions were therefore answered in the negative (i.e., the Tribunal was not right to treat the liability as contingent and to sustain the disallowance).

Direct Consequences and Directions:

The Court directed that, in view of the undertaking given by the assessee that it would not object to inclusion of Rs. 24,28,172 in assessment year 1978–79, the Income‑tax Officer should revise the assessment for 1978–79 to include that sum and take all consequential steps required.
The immediate effect for the parties is that the assessee's claim for deduction of Rs. 24,28,172 for assessment year 1975–76 is upheld, and administratively the amount is to be accounted for in assessment year 1978–79 as ordered by the Court.

The opinion, as provided, does not discuss or declare any broader legal precedent beyond the application of the Ministry directive to the facts of this case; thus the decision's implications are limited to the direct resolution between the parties and the directed revision of the 1978–79 assessment.

Judge concurring: Bhagabati Prasad Banerjee, J. agreed with the judgment.

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Bharat Petroleum Corporation Ltd. v. Commissioner Of Income-Tax.

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1975–76, the following questions of law have been referred to this court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of the liability in respect of adventitious gain of Rs. 24,28,172 under the COPE Scheme?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability in respect of adventitious gain of Rs. 24,28,172 under the COPE scheme was not an ascertained liability but only a contingent liability?”

2. Shortly stated, the facts are that the assessee, which is a non-resident company, derived income from the business of distribution and marketing of petroleum products in India. As per the Burmah-Shell (Acquisition of Undertaking in India) Act, 1976, the undertaking of Burmah-Shell in India vested in the fully owned Government company, Burmah-Shell Refineries Ltd. with effect from January 24, 1976. The name of the Government company was subsequently changed to Bharat Petroleum Corporation Ltd. On August 1, 1977, with effect from October 16, 1973, the Government of India introduced a scheme known as the “Crude Oil Price Equalisation Account” (hereinafter referred to as “the COPE”) to compensate oil companies for fluctuation in the price of crude oil from time to time. The idea behind the scheme was that, since the selling price of the refined products in the market was sought to be kept stable and uniform by all oil companies under the COPE scheme, the difference between the approved FOB purchase price of the crude oil of each oil company and the FOB crude cost which was taken into account by the Government for determining the selling price was recoverable/payable to the Government by each oil company through the COPE account. With effect from November 3, 1973, selling price of the refined products was increased and, therefore, the crude price with reference to which the selling prices were determined by the Government also went up. Since, under the COPE Scheme, the Government had agreed to compensate the oil companies in respect of increases in crude oil purchase price from October 16, 1973, the Government required the adventitious gain arising to the oil companies on the stock of products on November 2, 1973, on account of the increase in the selling price should be surrendered to the Government through the COPE account. In this context, the Ministry of Petroleum, vide circular dated June 24, 1974, clarified that, while calculating such adventitious gain on the stock as on the midnight of November 2, 1973, the crude oil purchased at a lower price prior to October 16, 1773, in stock as on November 2, 1973, should also be taken into account. The closing stock on November 2, 1973, included 51,825 m.t of crude oil purchased before October 16, 1973. The adventitious gain on this stock which was required to be surrendered was Rs. 24,28,172. In the assessment, the assessee claimed that the adventitious gain of Rs. 24,28,172 which was to be surrendered was an ascertained liability and, therefore, allowable. The Inspecting Assistant Commissioner of Income-tax (IAC of I.T) did not accept the argument of the assessee and he disallowed the liability of the aforesaid amount which was claimed. This was confirmed by the Commissioner of Income-tax (Appeals). The assessee filed a second appeal to the Tribunal. The Tribunal held that the liability was only in the nature of a contingent liability and it was never an ascertained liability. The Tribunal further held that the liability was not definite and, therefore, this liability which was claimed by the assessee on the basis of the various circulars of the Government of India could not be allowed. At the hearing before us, it has been contended on behalf of the Revenue that, admittedly, the assessee was maintaining its account on the mercantile basis. In the books of account of the assessee for the year ended March 31, 1978, the sum of Rs. 68,75,654 (being the sum total of the two figures Rs. 24,28,172 and Rs. 44,47,482) was written back in the profit and loss account for the year ended March 31, 1978. The assessee had credited this amount in the sundry creditors account. The profit was realised on sale to customers and there was no demand from Government for payment of the said sum at any stage during the assessment year 1975–76; as such it is not an ascertained liability. The COPE Scheme came into effect from October 16, 1973, and it cannot extend to purchases before that date, nor does the original scheme provide for surrender of adventitious gain on crude oil held in stock. The COPE Scheme, as originally framed, did not mention about adventitious gain for purchases made before October 16, 1973. Hence, purchases made before October 16, 1973, when the COPE Scheme was introduced, cannot be included. There was also no provision for surrender of the adventitious gain on stock held. The assessee raised a dispute about this sum and the said dispute was not finalised in this accounting year. So the sum of Rs. 24,28,172 was only a disputed and a contingent liability during this year and cannot be allowed as a deduction for the year 1975–76. As the Tribunal rightly held, this sum is only a contingent liability and cannot be allowed as a deduction in this year. In 1974, this sum was kept in suspense account. In the assessment year 1978–79, this amount was credited back to the profit and loss account as Government did not raise any demand for it. In this case, the assessee is trying to take inconsistent stands and in fact is following a double standard, although the assessee is following the mercantile system of accounting. So far as the assessee's liability under the COPE Scheme is concerned, if the amount of Rs. 24,28,172 is receivable but not received, then the amount payable but not paid is also not an ascertained liability and cannot be allowed as deduction.

3. Dr. Pal, appearing on behalf of the assessee has contended that with effect from November 3,.1973, the selling prices of the refined products were increased (and, therefore, crude price with reference to which the selling prices were determined by the Government went up from $ 2.38 per barrel to $ 3.58 per barrel). Since, under the COPE Scheme, the Government had agreed to compensate the oil companies in respect of increases in crude oil purchase prices from October 16, 1973, the Government required that the adventitious gain arising to the oil companies on the stock of products on November 2, 1973, on account of the increase in the selling price should be surrendered to the Government. However, the closing stock on November 2, 1973, included 51,825 m.t of crude oil purchased before October 16, 1973, i.e, the date from which the COPE Scheme was introduced. The company felt that since the crude oil purchased prior to October 16, 1973, did not qualify for the COPE claim, the adventitious gain in respect of the said 51,825 m.t of crude oil should not be surrendered to the Government. Adventitious gain on this account amounting to Rs. 24,28,172 was calculated as follows:

Crude oil in stock on November 3, 1973, out of purchases prior to October 16, 1973 X 51, 825 M.T : Crude cost taken for determining the selling price by the Government from November 3, 1973 : $ 3.58 per barrel. Approved FOB purchase price of crude oil on October 15, 1973 : $2.74 per barrel. Difference : $ 0.84 per barrel. = Rs. 46.8533 per M.T = Rs. 24,28,172.

4. This stand taken by the company was clearly contrary to and in violation of the directives issued by the Ministry of Petroleum by its letter dated June 24, 1974. In the said letter, it was specifically directed that, in calculating the adventitious gain, the following items shall be taken into account:

Crude oil (purchased at a lower price to October 16, 1973), in stock and in transit.

5. It will appear, therefore, that the said directive makes it specifically clear that, even in respect of stock purchased prior to October 16, 1973, i.e, when the COPE Scheme came into effect, the adventitious gain will have to be taken into account and is to be surrendered. The assessee-company/on the basis of the said clear directive, debited to its profit and loss account the liability in accordance with the said directive a sum of Rs. 24,28,172 being the adventitious gain and credited the said amount to the sundry creditors account as payable to the Government. It will, therefore, be clear that, in terms of the aforesaid directive, there was an ascertained and accrued liability in respect of the adventitious gain which is to be computed by taking the entire stock including the stock purchased prior to October 16, 1973. In terms of the Government directive referred to hereinbefore, the adventitious gain which is to be surrendered is to be computed by taking the entire stock including the stock purchased prior to October 16, 1973. There was no scope for any ambiguity regarding the liability of the assessee in terms of the aforesaid directive. The liability was, therefore, not a contingent one but an accrued and ascertained liability in terms of the said Government directive. The assessee also, in terms of the said directive, provided for such liability which has become an accrued and an ascertained one.

6. Having regard to the facts and circumstances of the case, we are of the view that there was a liability in respect of adventitious gain under the COPE Scheme. This is an allowable deduction for the assessment year 1975–76. Our attention has been drawn to the order of assessment included in the paper book filed before the Tribunal. In the assessment order a reference has been made to the following letter of January 30, 1981, of the assessee:

“Further to our letter of even reference dated January 29, 1981, we enclose a copy of the orders passed by the Commissioner of Income-tax (Appeals) in respect of our appeal against assessment order passed by the Inspecting Assistant Commissioner of Income-tax, Calcutta, for the assessment year 1975–76, in respect of Burmah-Shell Oil Storage and Distributing Co. of India Ltd. Out of provision of Rs. 68,75,654 disallowed by the Inspecting Assistant Commissioner of Income-tax, the Commissioner of Income-tax (Appeals) has deleted the addition of Rs. 44,47,482. He has upheld the addition of Rs. 24,28,172. We, therefore, offer for tax a sum of Rs. 44,47,482 and only a sum of Rs. 24,28,172 is not liable for tax. We request you to kindly make this correction. This is without prejudice to our contention that, if, on a later date, the sum of Rs. 44,47,482 is held to be taxable, a rectification order is to be passed for the assessment year, excluding the same from the total income.”

7. Although the assessee offered for taxation the entire amount of Rs. 68,75,654, the Income-tax Officer, for the reason recorded in the assessment order, allowed deduction of Rs. 24,28,172. He has given the reason as follows:

“Provision written back from COPE Pool Account: Rs. 68,75,654.

This amount was not allowed as a deduction in the concerned assessment year 1975–76. That is why it is being now claimed as not taxable. However, in appeal, the Commissioner of Income-tax (Appeals) has allowed a sum of Rs. 44,47,482 as a deduction out of the above amount of Rs. 68,75,654. This amount has now been offered by the assessee-company for taxation, vide its letter dated January 30, 1980. The balance sum of Rs. 24,28,172 shall, therefore, be allowed as a deduction while computing the income of the assessee-company.”

8. In computing the total income, he has excluded the sum of Rs. 24,28,172 as follows:

Rs. Total income 22,82,67,774 Less : (vii) Provision written back from COPE Pool Account 24.28.172

9. In our view, although the amount was a liability for the assessment year 1975–76, in view of the fact that the assessee offered the entire amount of Rs. 68,75,654 for taxation in the assessment year 1978–79, the Income-tax Officer was not justified in excluding the said amount from the assessment. The assessee has given an undertaking through Dr. Pal, learned counsel, that they will not object to the inclusion of the said amount of Rs. 24,28,172 in the assessment for the assessment year 1978–79, and the Income-tax Officer may take appropriate steps in this regard. For the reasons aforesaid, We answer the question in this reference in the negative, but in view of the undertaking given by the assessee, the Income-tax Officer is directed to revise the assessment for the assessment year 1978–79 including the said sum of Rs. 24,28,172 in the income of the assessee and take all consequential steps in this regard.

Bhagabati Prasad Banerjee, J.:— I agree.

Bharat Petroleum Corporation Ltd. v. Commissioner Of Income-Tax.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments (as presented by Dr. Pal)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Bharat Petroleum Corporation Ltd. v. Commissioner Of Income-Tax.

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