SUHAS CHANDARA SEN, J. - (1.) THE following two questions of law have been referred to this Court by the Tribunal under S. 256(1) of the IT Act, 1961 : "(1) Whether, on the facts and in the circumstances of the case, and on a correct reading of the agreement dt. 30th Sept.,1963 entered into by the assessee with the Government of U.P., and of, in particular, cl. 13 thereof, the Tribunal was justified in law in holding that on the receipt of the bills made out by the U.P. State Electricity Board in respect of the consumption of electricity by the assessee in excess of the allotted quota, the assessee incurred neither any statutory liability nor any otherwise enforceable legal liability ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to the deduction of the sum of Rs. 18,62,580 in the computation of the profits and gains of its business for the asst. yr. 1974-75 ?"
(2.) THE year of assessment is the asst. yr. 1974-75. The facts found by the Tribunal, as stated in the Statement of Case are as under : The assessee is Kanoria chemicals & Industries Ltd. and the assessment year involved is 1974-75. The question before the Tribunal was whether the authorities below were justified in disallowing the claim for the deduction of a sum of Rs. 18,62,580 under the head 'electricity charges'. The claim was disallowed by the ITO on the ground that the assessee was following the mercantile system of accounting and as per the remarks of the auditors in the printed accounts, the liability in regard to the electricity charges in question arose in the years prior to the accounting year. The case ultimately went to the Tribunal and the Tribunal's findings are as follows: "We have carefully gone through the materials on the record in the light of the rival submissions of the parties. the position that emerges may be briefly set out. By an agreement dt. 30th Sept., 1963 the Government of U.P (hereinafter referred to as the 'Govt') agreed to supply electricity to the assessee. The initial supply was to be of 6500 KWH with a provision for an increase in the supply upto a total of 100 KWH. The rate at which the said supply was to be charged was provided in the agreement and there was also a clause (viz., cl.,19) stipulating that the Govt. shall pay a penalty at a specified rate in the event of a shortfall in the supply. Clause 13 provided for a situation where the bill or bills may be disputed by the assessee but such disputed bills shall nevertheless be paid in full within the stipulated period of grace. There was also a provision for arbitration in c.. 21 whereby all disputes and differences touching or arising out of the said agreement were to be referred to two arbitrators, one to be appointed by each party and the decisions of such arbitrators were to be final and binding on the parties." The Tribunal further found that the assessee had disputed the bills as in the bills the rates charged were found to be higher than the rates stipulated in the agreement. The assessee raised objection on the rates charged in the bills, which according to the assessee should be on the basis of the agreement. The dispute thereafter was referred to the arbitration and the sold arbitrator awarded a sum of Rs. 18,62,580 in favour of the U.P. State Electricity Board in full discharge of its claim amounting to Rs. 39,03,238. The demand was not raised by the Govt. under any fiscal law but was raised by the Board, an autonomous body, by virtue of an agreement to supply electricity in terms of an agreement. The Tribunal concluded that there was no enforceable legal liability on receipt or the bills from the Board relating to excess consumption of electricity energy. The Tribunal observed : "We have already broadly set out above the terms of the Agreement that was entered into by the assessee in this behalf. The Agreement inter alia provided that the consumption of electrical energy by the assessee would be charged for at the rate of rates specified therein and hence to the extent to which the bills of the Board were in conformity with the said Agreement the assessee undoubtedly incurred an enforceeable legal liability on receipt of the bills. The assessee duly paid up such amounts and also debited them in its books from year to year. The dispute related only to the excess bills made by the Board, which, having regard to the fact that there was no provision in the Agreement for charging at a higher rate, could conceivably be open to challenge and hence could by no means be said to constitute an enforceable legal liability until such time as the matter was settled either by mutual agreement or by arbitration." The Tribunal also took note of the fact that the assessee had prima facie good and solid ground for disputing the bills raised against it. It is true that if the assessee did not raise any dispute with regard to the bills, the assessee would have been liable to pay the entire amount demanded against the assessee and that liability came into existence as soon as the bills were presented to the assessee. But in the instant case, the assessee had raised disputes and the Tribunal found that there were good and solid grounds on which the assessee challenged the demand of the U.P. State Electricity Board. Therefore, the claim of the entire amount was in jeopardy. Settlement of a dispute arising out of the agreement to supply electricity by arbitration is provided in the agreement itself. When the arbitration proceeding came to an end, an award was made, the assessee decided to debit its account to the tune of Rs. 18,62,850, being the amount of award made against the assessee. We do not see any reason why the assessee will not be entitled to claim this liability as a deduction in the relevant year of account.
(3.) IN the case of CIT vs. Orient Supply Syndicate (1981) 22 CTR (Cal) 285 : (1982) 134 ITR 12 (Cal), it held by Sabyasachi Mukharji, J. that it was not correct in all cases to say that the statutory liability discharged in a particular year became eligible for deduction in the year in question under the mercantile system of accounting. It depended on the facts and circumstances of each case and on the statutory provisions. In that case it was observed that when the demand became real and enforceable, the assessee was entitled to debit the amount in its account.;