NARENDRA NATH TIWARI, J. - (1.) THIS batch of appeals was admitted for hearing on the following substantial questions of law : "(i) Whether under the mercantile system of accounting deduction has to be allowed in respect of a business liability in the year in which the same arises, even if not actually quantified, on the basis of a reasonable estimate ? (ii) Whether the Tribunal was justified in law in proceeding on the basis that it was required to examine the nature of the payments made by the appellant to the sub-contractor and in failing to address itself to the real question viz. as to whether the appellant was entitled to deduction in respect of the liability reasonably estimated to be due to the sub-contractor in the asst. yrs. 1991-92 to 1995-96 notwithstanding its actual quantification in a subsequent year ? (iii) Whether the Tribunal misdirected itself in law in holding that the additional liability due to the sub- contractor was in suspense or was agreed to/accepted by the appellant or became a liability only in July, 1997, when it was actually quantified and its purported findings in this behalf are based on any material and/or have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and/or extraneous materials and/or are otherwise arbitrary, unreasonable and perverse ? (iv) Whether under the provisions of S. 194C of the IT Act, 1961 tax has to be deducted at source from all payments made to contractors even if they be on capital account ? (v) Whether under the mercantile system of accounting the expenditure incurred for earning the income should be considered for deduction in the year of accrual of the income so as to arrive at the true profits and postponement of deduction of such expenditure would result in distortion of profits ? (vi) Whether the Tribunal misdirected itself in law in holding that the appellant was not entitled to deduction of Rs. 15,39,181, Rs. 34,27,202, Rs. 19,98,021, Rs. 10,00,305 and Rs. 92,082 in the asst. yrs. 1991-92, 1992-93, 1993-94, 1994-95 and 1995-96, respectively, towards liability for expenditure incurred for fulfilling its contract with Rourkela Steel Plant and its purported findings in this behalf are arbitrary, unreasonable and perverse ?"
(2.) THE appellant has preferred these appeals against the common order dt. 26th July, 2001 passed by the Income-tax Appellate Tribunal (in short 'Tribunal') in ITA Nos. 22 to 26/Pat/2000, denying the deductions claimed by the appellant regarding additional payment made to its sub-contractor, namely, M/s Pioneer Engineering Company (for short PECO) in the asst. yrs. 1991-92 to 1995-96 and dismissing the said appeals. It is pertinent to mention that the appellant made the said claim of deduction on accrual or mercantile basis of accounting, whereas the respondent Revenue seems to have refused the said deduction on cash basis of accounting.
(3.) THE fact giving rise to the controversy is common in all the appeals and goes as under : 4.1 The appellant, a public limited company, is in the business inter alia of manufacturing and sale of material handling and processing, plant equipments and machineries. 4.2 The appellant was awarded a contract by the Rourkela Steel Plant of the Steel Authority of India Ltd. for modernization of the coal handling plant, the work related to structural fabrication, erection, dismantling and modification. 4.3 The appellant had given works to two sub-contractors, M/s PECO and one other. After commencement of the work, PECO and the other sub-contractor found that sub-contracts were not profitable and there was likelihood of increasing heavy losses. The other sub-contractor expressed inability and abandoned the work. PECO was also contemplating to do so. The project which was to be completed within 12 months was getting delayed for various reasons. It ultimately took 36 months, resulting into cost escalation. 4.4 In order to retain PECO to complete the work, the appellant agreed to enhance the stipulated rates and assured to extend all possible assistance. The quantum of enhancement of rates was in absolute terms. 4.5 The appellant agreed to provide the following additional facilities to the PECO : (a) Labour payment; (b) Supply of consumables like gas and electrodes; and (c) Repairing of machines. 4.6 The value of the said facilities was to be adjusted against the revised rates. 4.7 It was agreed that the said facilities would be provided on recoverable basis. 4.8 Accordingly, the appellant from time to time made payments towards the aforesaid facilities on actual basis of the work completed. 4.9 Out of such payments, the appellant deducted tax at source in accordance with the provisions of s. 194C of the IT Act, 1961 (hereinafter to be referred to as 'the Act'). 4.10 PECO had provided security of about Rs. 15 lacs in respect of the initial advance paid by the appellant. No further security was stipulated in respect of the payments for the aforesaid facilities. 4.11 The appellant, following the mercantile system of accounting, raised bill on Rourkela Steel Plant for the work done during each year, the value of which was duly credited to the P&L a/c of that year. Since the appellant in principle had agreed to enhance PECO's rates and had incurred the liability to pay PECO additional amount over and above the rates agreed to at the time of placement of the order, the appellant, in accordance with the mercantile system of accounting, made a provision in each year for such additional liability based on the extra payments made to PECO at actual for the work done. 4.12 The appellant, accordingly, claimed deduction for such additional liability for the previous years relevant to the asst. yrs. 1991-92 to 1995-96, the aggregate of which amounted to Rs. 80,56,791. The deduction claimed for the asst. yr. 1994-95 was Rs. 10,00,305. True income from the contract with Rourkela Steel Plant was correctly arrived at in each of the said years. 4.13 The appellant had been carrying the said additional payment made to PECO in its books of account, pending quantification of the enhancement. In or about July, 1997, it was formally agreed between the parties that the additional amounts paid by the appellant from time to time would be taken as towards discharge of the enhanced rates demanded by PECO and nothing further was due to or payable by either of the parties. 4.14 According to the appellant, in the original assessments made in its case for the asst. yrs. 1991-92 to 1994-95, the AO duly allowed the deduction in respect of the said additional liability. Subsequently, in course of completing the income-tax assessment of PECO for the asst. yr. 1995-96, the AO found that the PECO had not treated the additional amount paid by the appellant, as its income in the relevant assessment year, but had claimed that the same accrued as its income in July, 1994 when the appellant agreed that the additional payments should be treated as the enhanced rates and no further amount was due to or payable by either party. The AO accepted the stand taken by the PECO and sought to reopen the appellant's assessment for the asst. yrs. 1991-92 to 1994-95 taking the view that the additional liability could not have been claimed by the appellant as deduction in the said assessment years. 4.15 In the reopened assessments for the asst. yrs. 1991-92 to 1994-95 and in the assessment for the asst. yr. 1995-96, the AO disallowed the deduction of additional liability aggregating to Rs. 80,56,791 claimed by the appellant. The AO assumed that the appellant was not liable to pay the PECO any amount over and above the rates stipulated in the original purchase orders. 4.16 Aggrieved by the refusal of claim of the deduction of the additional liability in the asst. yrs. 1991-92 to 1995-96, the appellant preferred appeals before the CIT(A) against refusal of deduction for each of the aforesaid assessment years. The CIT(A) dismissed the appeals. The appellant then preferred appeal before the Tribunal. Learned Tribunal dismissed all the appeals of the appellant by the impugned common order dt. 26th July, 2001. ;