Deputy Commissioner Of Income Tax v. Jayant Paper Mills Ltd.

B.M Kothari, A.M:— These cross appeals relate to asst. yrs. 1982-83 and 1983-84.

2. We will first deal with the assessee's appeals. The appellant company is carrying on the business of manufacture of various types of paper. It has been receiving supply of gas from ONGC since March, 1970. The supply of gas has been made oh the basis of agreement executed between the assessee company and the ONGC; which was renewed from time to time. The duration of the last agreement expired on 31st March, 1979: Before the period covered by the last contract came to an end, the ONGC vide its letter dt. 16th Feb., 1979 informed the appellant company of its intention to review the agreement for supply of gas for a further period of 3 years upto 30th June, 1982. A draft of the amendment extending the contract upto 30th June, 1982 was sent along with the said letter dt. 16th Feb., 1979. It was indicated in the said draft agreement that ONGC would revise the price for supply of gas every year. The proposal of the ONGC for increasing the price of supply of gas and its increase every year thereafter was not acceptable to the appellant company along with the other consumers of gas. The appellant company through the Association of Natural Gas Consumers of Gujarat, represented; to the ONGC that the price should not be revised. The ONGC refused to enter into any negotiations about the price of gas. In these circumstances the consumers filed a writ petition before the Hon ble High Court of Gujarat through the Association of which the appellant company was also a party. In the said writ petition specific prayer was made that the ONGC should be directed not to discontinue the supply of gas and further that they should be restrained from revising the price. The Hon'ble High Court of Gujarat passed an interim order on 28th March, 1979 restraining ONGC from discontinuing the supply of gas on the condition that the petitioners including the appellant company continued to pay at the present rate until further orders. Pursuant to the said interim order passed by the Hon'ble High Court the appellant company continued to receive supply of gas at the old rate agreed upto 31st March, 1979, i.e, Rs. 504 per 1000 cubic mtrs. After this interim order the matter was further heard by the Hon'ble High Court and the revised interim order was passed on 29th Dec., 1982 directing that ONGC shall not discontinue supply of gas and shall continue to supply gas as hitherto and will charge the rate of Rs. 1,000 per 1000 cubic meters till November, 1983 (unless the petition is disposed of meanwhile), subject to adjustment being made in case by Court order the machinery evolved at the time of final disposal of this petition determines the price of gas at a different rate. In other words, if ultimately the price of gas is determined at a higher rate, the petitioners will be obliged to make the difference. In case a lower rate is determined than the rate of Rs. 1,000 for 1000 cubic meters, then the ONGC will be obliged to refund the amount or adjust it against future supplies as the Court may direct at the time of disposing of the matter finally. The ONGC will charge the rate of Rs. 1,000 per 1000 cubic meters w.e.f 1st Jan., 1983. The High Court vide its order dt. 30th July, 1983 laid down the principles on the basis of which correct price should be fixed between the parties. The Court further ordered that till the new price fixation is held, the price charged last from the petitioners under the respective contracts with them shall continue to operate between the parties subject to adjustments in future after prices are fixed in accordance with the policy and procedure determined in the Court's order dt. 30th July, 1983.

3. The ONGC took the matter to the Hon'ble Supreme Court who vide its interim order dt. 6th Oct., 1983 held that the interim order passed by the High Court on 29th Dec., 1982 fixing the interim price chargeable by the ONGC to the petitioner at the rate of Rs. 1,000 will continue to operate as from the date of the judgment of the High Court on the same terms as laid down in the order of the High Court.

4. The Hon'ble Supreme Court finally decided the matter vide judgment dt. 4th May, 1990 reported in AIR 1990 SC 1851. It has been held vide para 39 of the said judgment that the respondents (consumers) including the appellant company can insist on a supply only if they agree to pay the price fixed by the ONGC. They are not entitled to demand supply as of right, without contracts. But, as they have in fact had the benefit of the supplies under interim orders of the Court, this question does not survive and all that we can declare is that the prices demanded by the ONGC are not unreasonable or capricious and are binding on the respondents (including the appellant).

5. The accounting year of the appellant company ended on 30th June, 1981 and 30th June, 1982 respectively relating to years under consideration, viz., asst. yrs. 1982-83 and 1983-84. In the books of accounts the appellant company made a provision in asst. yr. 1982-83 of a sum of Rs. 2,57,825 based on the rates proposed by the ONGC in the draft agreement sent along with letter dt. 16th Feb., 1979. The details of the provision made in the books of accounts in asst. yr. 1982-83 is as under:

Period Old rate Proposed rate Increase in rate Amt. of provision 1.4.79 to 31.3.80 504.40 529.00 25.20 47,091.54 1.4.80 to 31.3.81 504.40 554.00 50.40 93,713.41 1.4.81 to 30.6.81 504.40 741.00 237.00 1,17,019.98 Total 2,57,824.93

6. The accounting period pertaining to asst. yr. 1982-83 runs from 1st July, 1980 to 30th June, 1981. Out of the aforesaid provision for Rs. 2,57,825, it is claimed that a sum of Rs. 1,88,879 represents the liability for increase in rates and royalty in relation to the gas supplied by ONGC to the appellant company during the previous year corresponding to asst. yr. 1982-83 and the balance sum of Rs. 68,946 pertains to the gas supplied by the ONGC to the appellant company during the period from 1st April, 1979 to 30th June, 1980 which relates to gas supplied in the previous-year related to asst. yrs. 1980-81 and 1981-82.

7. In asst. yr. 1983-84 a provision of Rs. 4,38,739 was made in respect of increase-in rates and royalty for supply of gas as demanded by ONGC. The assessee paid the price of gas supplied by ONGC under the interim orders of the Court at the rate of Rs. 504.40 per 1000 cubic meters during both the accounting years under consideration. The basis of provision-made in asst. yr 1982-83 for the difference in the rate demanded by the ONGC and the old rate of Rs. 504.40 paid by the assessee has been given in the aforesaid Chart. The provision in asst. yr. 1983-84 was made by calculating the difference between the rate of Rs. 741 demanded by the ONGC and the old rate of Rs. 504.40 paid by the assessee.

8. It will also be relevant to give hereunder the chart of increased rates proposed by the ONGC and the rates decided by the Hon'ble High Court in the two respective interim orders passed by the Hon'ble High Court:

Period Increased rates proposed by the ONGC Rates decided in the High Court orders 1.4.1979 to 31.3.1980 to 529.40 From 1.4.1979 to 31.12.1982 Rs. 504 1.4.1980 to 31.3.1981 to 554.80 1.4.1980 to 31.12.1981 to 741.00 From 1.1.1983 onwards till further order Rs. 1000 1.1.1982 to to-date 2095.70

9. The ITO after taking into consideration all the relevant facts and materials as it existed at the time of passing: the assessment orders came to the conclusion that the liability for payment of purchase price of gas in the years under consideration and determined by the interim orders passed by the Hon'ble High Court was Rs. 504 per 1000 cubic meters. The assessee made payment of the purchase price at the same old rate. In view of this provision of Rs. 2,57,825 and Rs. 4,38,739 made in these two years on the basis of rate proposed by the ONGC cannot be allowed as deduction…..

10. The CIT(A) in view of the reasons recorded in the appellate order passed by him confirmed the said addition.

11. The assessee preferred further appeals before the Tribunal. In the grounds. of appeal for asst. yr. 1982-83 it has been submitted that deduction of Rs. 2,57,825 being increase in rates and royalty payable to ONGC for supply of gas to the petitioner company should be allowed as a deduction. In the alternative it was claimed that a sum of Rs. 1,88,879 being the amount of such liability pertaining to the supplies received during the previous year corresponding to asst. yr. 1982-83 should be allowed as a deduction.

12. In asst. yr. 1983-84 the assessee submitted that deduction in respect of Rs. 4,38,739, representing increase in rates and royalty payable: to ONGC should be allowable as deduction.

13. Application for entertaining additional grounds for both these years were submitted on 13th May, 1991. In asst. yr. 1982-83 the additional ground relates to grant of deduction in respect of arrears for increase in rates and royalty as also interest of Rs.,2,48,939 as. demanded by the ONGC as per their letter dt. 4th Aug., 1990 claimed in view of the judgment of Hon ble Supreme Court of India dt. 4th May, 1990; In the alternative it was prayed that if the same is not allowed in asst. yr. 1982-83, the same should be directed to be allowed in asst. yr. 1991-92 being the year in which the judgment of Hon'ble Supreme Court of India was delivered.

14. In asst. yr. 1983-84 the first additional ground raised relates to grant of deduction in respect of arrears of increase in rates and royalty of Rs. 7,88,708 as also interest; of Rs. 19,86,881 as. demanded by the ONGC as per their letter dt. 4th Aug. 1990 in terms of the judgment of the Hon'ble Supreme Court of India dt. 4th May, 1990. In the alternative it was prayed that if this deduction is not allowed in asst. yr. 1983-84, the same should be directed to be allowed in asst. yr. 1991-92.

15. The learned counsel for the assessee vehemently contended that since the price fixation adopted by the ONGC has now been finally upheld by the Hon'ble Supreme Court the amount of purchase price payable by the appellant company to” ONGC in terms of aforesaid judgment of Hon ble. Supreme Court should be allowed as a deduction in the two years under consideration It was also submitted that in a similar matter in the case of Gujarat State Fertilizer Co. Ltd., Baroda ITA No. 2449.Ahd/85 the Tribunal vide its order dt. 21st July, 1987 (copies supplied) allowed the deduction in respect of such increased amount of purchase price on the Basis of demand made by ONGC. Such a contention raised on behalf of the assessee in that case was accepted by relying upon the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mills Ltd. v. CIT, (1971) 82 ITR 363 (SC). The facts are identical. He, therefore, urged that following the same view the deduction in respect of the increased price and royalty as claimed by the ONGC should be allowed as deduction. The case of the present appellant stands on a strong footing as now the liability for payment of such amount demanded by the ONGC has been finally upheld by the Hon'ble Supreme Court. It was submitted that the assessee continued to receive supply of gas. from ONGC in the years under consideration without any contract in view of the interim orders passed by the Hon ble High Court. In a matter like this the provisions of s. 70 of the Indian Contract Act would apply as such supplies would be treated as having been received under a quasi contract and the assessee at all times was under an obligation to pay a reasonable price for the supply of gas received in the years under consideration. The uncertainty about the quantum of price has now been finally settled by the Hon'ble Supreme Court and, therefore there is no justification in not granting the desired. deduction in respect of the additional purchase price payable to ONGC.

16. As regards assessee's claim for grant of deduction in respect of interest, it was pointed out by the learned counsel for the assessee that after the judgment of Hon'ble Supreme Court the ONGC vide its letter dt. 8th Aug., 1990 raised a demand for arrears the purchase price of gas as well as for interest accrued thereon. The total amount of such arrears due on account of price fixation upheld by the Hon'ble Supreme Court was demanded to the tune of Rs. 2,08,10,252 and interest accrued thereon upto 31st July 1990 was claimed by ONGC at Rs. 2,11,83,754. ‘The learned counsel was fair enough to point out that the matter relating to “payability of interest by the assessee to ONGC was not the subject-matter before the Hon'ble Supreme Court nor the said judgment contain any claim or decision in relation to interest liability. It was, however, submitted by him that once the assessee has been held to be liable to pay the arrears due to price fixation in terms of the judgment of Hon'ble Supreme Court, the assessee would automatically become liable for payment of interest on the unpaid amount of purchase price of gas. To support this contention he placed reliance on judgment’ of Hon'ble Supreme Court in the case of Abhay Singh v. Secretary, Ministry of Communications reported in AIR 1987 SC 2177. Reliance has also been placed on the judgment of Hon'ble Gauhati High Court in the case of Jwala Prasad v. CIT, (1988) 72 CTR (Gau) 22 : (1989) 175 ITR 535 (Gau) in which relying upon the above referred judgment of Hon'ble Supreme Court, it was held that a citizen is entitled to payment of interest due to delay even if there is no statutory provisions in this regard. The learned counsel for the assessee also submitted that such a claim can be raised for the first time before the Tribunal as the liability in respect, of payment of interest pertaining to the years under consideration crystallised only after the judgment of Hon'ble Supreme Court was pronounced in relation to the price fixation matter. Since the interest includes interest liability for these two years also, deduction in respect thereof should be allowed.

17. The learned Sr Departmental Representative strongly supported the orders of the learned departmental authorities. It was submitted that in the years under consideration the liability in respect of the increased amount of rate and royalty demanded by the ONGC in the draft agreement sent along with letter dt. 16th Feb., 1979 was a contingent liability. In fact so far as both these years under consideration are concerned the assessee continued to receive supplies at the same old rate of Rs. 504 per 1000 cubic mtr. under the interim orders passed by the Hon'ble High Court. Any excess amount of price demanded by the ONGC could not be treated as any liability in both the years under consideration. The Hon'ble Gujarat High Court passed the first interim order in the last week of March, 1979. The assessee did not make any provision in respect of the increased amount of price demanded by the ONGC in the accounting year ended on 30th June, 1979 and in accounting year ended on 30th June, 1980 relating to asst. yrs. 1980-81 and 1981-82. No fresh event or any fresh order of the Court was passed in the relevant accounting period commencing from 1st July, 1980 to 30th June, 1981, as the second interim order was passed by the High Court on 29th Dec., 1982. The provision made for the first time in the books of accounts pertaining to asst. yr. 1982-83 is, therefore, not valid. This proves that the assessee did not maintain any consistent method of accounting in respect of such transactions. The facts of the decision given by the Tribunal in the case of Gujarat State Fertilizers are distinguishable as in that case out of the total royalty demand raised by the ONGC amounted to Rs. 1,48,68,158 out of which that company had already paid Rs. 22,35,644. In the present case the appellant company did not make any payment in respect of the extra price and royalty demanded by the ONGC in the years under consideration. This is a contractual liability which was a subject-matter of pending litigation. The deduction in respect of such liability can be allowed only in the year when such liability has been finally determined by the Hon ble Supreme Court. It was further argued by the learned Sr. Departmental Representative that the lower authorities had no occasion to go through the judgment of Hon'ble Supreme Court which finally determines the issue relating to price fixation in, respect of gas supplied by ONGC. Therefore, the matter should be sent back to the assessing authority to once again examine the allowability of the assessee's claim in the light of judgment of the Hon'ble Supreme Court.

18. In relation to assessee's claim for grant of interest on the unpaid purchase price of gas, the learned Sr. Departmental Representative pointed out that the assessee is not liable for payment of any such interest under any contract or under any order of the Hon'ble Supreme Court. For the first time the ONGC has made a unilateral demand for payment of arrears of interest vide letter dt. 8th Aug., 1990. The allowability of such interest can be considered only in that year. Such an additional ground should not be entertained at this stage, particularly when no such claim was ever made on behalf of the assessee at any earlier stage.

19. The learned Sr. Departmental Representative also relied upon the judgments Ayodhya Prasad Parmeshwaridas v. CIT, (1985) 48 CTR (MP) 145 : (1985) 156 ITR (MP) 554; New Victoria Mills Co. Ltd. v. CIT, (1966) 61 ITR 395 (All); and CLT v. Indian Metal & Metallurgical Corporation, (1964) 51 ITR 240 (Mad) to support his contention that deduction claimed both in respect of unpaid purchase price of gas and interest thereon represent contingent liability, which cannot be allowed as deduction.

20. We have carefully considered the rival submissions made by the learned representatives and have also gone through the orders of the learned departmental authorities as well as other documents to which our attention was invited during the course of hearing. We have also gone through the various cases relied upon by the learned representatives.

21. It is an undisputed fact that the assessee continued to receive supply of gas from ONGC even after the expiry of the preceding contract in terms of interim order passed by the Hon'ble High Court. The gas so purchased by the assessee from ONGC was consumed in the process of manufacturing activities carried out by the assessee. The purchase price of gas like purchase price of any other raw material purchased during the year under consideration is obviously allowable as an expenditure for computing the amount of profits and gains liable to tax. In the absence of an existing contract for supply of gas between the assessee and ONGC in the period covered by these two years under consideration, it would be a case of quasi contract or implied contract. The claim of the ONGC for payment of purchase. price of gas supplied by them to the assessee was not on the basis of any subsisting contract but was based on a different kind of obligation which is known as a quasi contract or restitution. The High Court vide its interim order directed the ONGC to continue supply of gas to the industrial undertakings owned by the assessee and other such consumers in the interest of continued survival of their business on payment of the old rates provisionally subject to the final decision of the Court relating to such price fixation. The assessee is, therefore, entitled to grant of deduction in respect of reasonable amount of purchase price as a deduction in the respective years when such purchase of gas was made and that was utilised or consumed in the process of production. The liability for payment of purchase price of gas was obviously an accrued liability and only the quantum thereof had to be finalised in the proceedings pending before the Hon'ble Courts. The appellant company maintains books of accounts on the basis of mercantile-method of accounting as mentioned on page No. 1 of the assessment order itself. In a case where accounts are maintained according to mercantile system of accounting it would be necessary to provide for all items of purchases and expenses on the basis of accrual of liability for arriving at the correct amount of profits and gains of the business. The liability for payment of purchase price and royalty on gas received from ONGC by the assessee arose during the year under consideration as and when the supply of gas was received during the currency of the accounting periods under consideration. Thus such liability was an accrued liability. There was only an uncertainty or difficulty in the estimation of the said purchase price of gas received and consumed in the process of manufacture in the years under consideration. The uncertainty and difficulty or the pendency relating to estimation of the purchase price or fixation of purchase price would not convert the accrued liability into a contingent liability.

22. The price fixation adopted by the ONGC and the rates demanded by the ONGC in respect of gas supplied to the appellant company has now been finally upheld by the Hon'ble Supreme Court, which, in our view finally and conclusively clinches the issue. Now there remains no uncertainty or difficulty in estimation of the amount of such liability, which had already accrued in the respective years when gas was supplied by ONGC to the assessed. We are, therefore, of the considered view that deduction in respect of purchase price and royalty payable by the assessee in respect of supply of gas received from ONGC should be allowed in the respective year when such supply of gas was received on the basis of price which has now been finally determined by the Hon'ble Supreme Court vide judgment dt. 4th May, 1990. The said judgment of the Hon'ble Supreme Court confirms the reasonableness and correctness of the provision made by the appellant company in its books of accounts on the basis of rates demanded by ONGC vide their draft agreements sent to the assessee well before the commencement of the accounting periods under consideration. The ITO is, therefore, directed to allow the said deduction as per the fixation of rate adopted by the ONGC and upheld by the Hon'ble Supreme Court in both the years under consideration.

23. It will also be worthwhile to add that the allowability of such deduction in respect of increase in the price of gas supplied by the ONGC is not in dispute but only the year of its allowability can perhaps be disputed. In this regard we would like to refer to certain observations made by the Hon'ble High Court in the case of CIT v. Nagri Mills Co. Ltd., (1958) 33 ITR 681 (Bom) at page 684:

“We have often wondered why the IT authorities, in a matter such as this where the deduction is obviously a permissible deduction under the IT Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the asst. yr. 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the asst. yr. 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind, But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of the character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.”

24. The rate of tax in the case of the companies in the years under consideration was perhaps higher as compared to the rate of tax applicable in asst. yr. 1991-92, in the year when the Hon'ble Supreme Court decided the issue relating to price fixation. Even otherwise the deduction in respect of purchase price of raw material actually received and consumed in the year in the accounting periods under consideration is properly deductible in the appropriate year of its purchase, bifurcating the amount of such purchase price payable for purchase of gas and allowing only a part thereof as a deduction in the year of its purchase and allowing the balance amount of the said purchase price in the year when the Supreme Court finally decided the disputed matter relating to fixation of price would lead to incorrect determination of income in the years under consideration as well as in the year when the issue was decided by the Hon'ble Supreme Court. Since the basis on which the provision was made by the assessee in its books of accounts has now been found to be correct and reasonable in view of the judgment of Hon'ble Supreme Court the deduction of the entire amount of purchase price is properly allowable in the respective years of its purchase.

25. However, this finding necessarily implies that the assessee will not be entitled to grant of deduction in respect of increased purchase price provided for in the books of accounts for asst. yr. 1982-83, to the extent it relates to supply of gas received in prior years.

26. As regards assessee's claim for grant of deduction in respect of interest demanded by the ONGC as per their letter dt. 8th Aug., 1990, we will first consider the issue as to whether such a ground can be raised for the first time by way of an additional ground before the Tribunal. After considering the submissions made by the learned representatives, we are of the view that the appellant could raise such new or additional connected point for the first time in appeal before the Tribunal even though such ground could not have been raised either before the assessing authority or before the CIT (A) on account of the fact that the liability for payment of increased amount of purchase price difference on the basis of which interest was demanded by ONGC was finally decided by the Hon'ble Supreme Court on 4th May, 1990. The view which we are adopting for the entertainability of such additional ground for the first time before the Tribunal is clearly fortified by the judgment of Hon'ble Supreme Court in the case of Jute Corpn. of India Ltd. v. CIT, (1990) 88 CTR (SC) 66 and decision of Hon'ble Kerala High Court in the case of CIT v. Kerala State Co-operative Marketing Federation Ltd., (1991) 100 CTR (Ker) 230.

27. Coming to the merits of the aforesaid claim we are of the view that the assessee's claim for grant of deduction in respect of interest cannot be allowed in the years under consideration. The deduction for such interest claim by the assessee is neither supported by any subsisting contract nor the same is supported by the decision of the Hon'ble Supreme Court by which the issue relating to price fixation has been finally determined. The allowability of deduction in respect of any such interest can be considered on merits only in the year when such interest has been demanded for the first time by the ONGC after judgment of Hon'ble Supreme Court if the assessee has accepted such liability for payment of interest and is not disputing the said interest liability as demanded by the ONGC vide letter dt. 8th Aug., 1990. The assessee's claim for grant of deduction in respect of interest demanded by ONGC vide letter dt. 8th Aug., 1990 is, therefore, rejected.

28. Now, we will consider the Revenue's appeals. The Revenue has raised common ground contending that the CIT(A) had erred in deleting Rs. 33,791 for asst. yr. 1982-83 and Rs. 33,531 in asst. yr; 1983-84 being the amount incurred on distribution of various articles by way of gifts. The learned Sr. Departmental Representative relied on the reasons mentioned in the assessment order and urged that the CIT(A) ought to have confirmed the disallowance.

29. The learned counsel for the assessee supported the order of the CIT(A) in relation to this ground. Our attention was also invited towards the details of such sales promotion expenses incurred by the appellant company (pages 108 and 109 of the paper book). It was further submitted that the view taken by the CIT(A) is clearly supported by the judgment of Hon'ble Gujarat, High Court in the case of CIT v. Dascroi Taluka Co. op. Purchase & Sales Union Ltd., (1981) 21 CTR (Guj) 38 : (1980) 126 ITR 413 (Guj). We have carefully considered the submissions made by the learned representatives. The CIT(A) has dealt with this point in para marked as ground No. 2 in his order for asst. yr. 1982-83. He has come to the conclusion that expenses for such articles gifted to various persons who were business associates, suppliers and other persons having business dealings with the company has no advertising value in view of decision of ITAT Bombay reported in First ITO v. French Dyes & Chemical (I) (P) Ltd., (1985) 21 TTJ (Bom) 412 (SB) : (1984) 10 ITD 240 (Bom) (SB) He, therefore, held that such expenditure should not be disallowed by resort to r. 6B which exclusively deals with advertisement expenses. The Hon'ble Gujarat High Court also held that expenditure of Rs. 62,048 incurred for purchase of utensils meant for presentation on the occasion of Silver Jubilee is admissible as business expenditure: The presentation articles in the form of silver coins and other articles given to various persons having trade relations with the appellant company was meant for maintaining good relations, for generating goodwill, it cannot be regarded as advertisement expenses and the same has rightly been allowed as deduction by the CIT(A).

30. In the result the assessee's appeals are partly allowed and the Revenue's appeals are dismissed.