1991-VIL-128-ITAT-HYD

Equivalent Citation: ITD 038, 001, TTJ 041, 089,

Income Tax Appellate Tribunal HYDERABAD

Date: 11.04.1991

INCOME-TAX OFFICER.

Vs

ANDHRA PRADESH PAPER MILLS LTD.

BENCH

Member(s)  : N. KRISHNAMURTHY., U. T. SHAH., K. S. VISHWANATHAN.

JUDGMENT

Per Shri N. Krishnamurty, Judicial Member --- This appeal filed by the Revenue relating to the assessment year 1982-83 has been heard by the Special Bench in pursuance of an order passed by the President, under section 255(3) of the Income-tax Act, 1961.

2. The questions posed for consideration of the Special Bench are as under:

"(i) Whether the liability for payment of royalty as per agreement with Government of Andhra Pradesh is contractual or statutory in nature?

(ii) If it is contractual, does it make any difference if the assessee had, before the revision of the rates, given an undertaking to pay whatever may be the new rate fixed and communicated to the assessee-company ?

(iii) Whether on the facts and in the circumstances of the case, the assessee is entitled to the deduction of the additional royalty claimed although the assessee-company had disputed it and a writ petition is pending before the High Court?"

3. The assessee M/s. A.P. Paper Mills Ltd. is a Public Limited Company engaged in the business of manufacture of paper, the basic materials for the manufacture of paper being bamboo and hardwood. The assessee entered into a lease agreement on 20-7-1977 with the Government of Andhra Pradesh for the supply of 1 lakh tonnes of bamboo annually. The agreement was for the period from 1-10-1975 to 30-9-1980. According to this agreement, the assessee was to pay royalty on bamboo at the rate of Rs. 60 per ton up to 30-9-1980. This agreement provided that the rate of royalty shall be revised by the Government at an interval of not less than 5 years. The five year period of this agreement came to an end on 30-9-1980. In pursuance of the clause contained in the agreement for revision of royalty for supply of bamboo, the Government of A.P. sent a letter on 6-2-1981 to the assessee stating that the royalty was to be revised from 1-10-1980 and that the matter was under the consideration of the Government and that a decision in this regard was likely to take some time. Pending the fixation of the revised rates, the State Govt. required the assessee to furnish an undertaking in the prescribed proforma by 20-2-1981 that it will abide by the new rates of royalty applicable to bamboos being supplied from 1-10-1980 onwards. Accordingly, the assessee furnished an undertaking dated 14-2-1981 conveying its acceptance to pay the revised rates of royalty as may be fixed by the Government for supply of bamboo, from 1-10-1980 onwards. Subsequently, the Government of Andhra Pradesh issued a G.O.M.S. No. 538 dated 4-11-81 whereby the rate of royalty has been enhanced from Rs. 60 per ton to Rs. 210 per ton for bamboos felled and collected with effect from 1-10-1980.

4. The assessee which follows the mercantile system of accounting had accordingly made a provision in its books of accounts for the liability of Rs. 95,93,706.75 towards the differential royalty payable for supply of bamboo from 1-10-1980 to 30-6-1981. In its income-tax return for the assessment year 1982-83, the assessee claimed a deduction of this amount of Rs. 95,93,706.75 on the ground that this amount represents the accrued liability of the assessee in connection with the payment of the enhanced royalty. However, the Income-tax Officer refused to allow this deduction on the primary ground that the G.O.No. 538 dated 4-11-81 by which the rates of royalty were revised fell outside the accounting year ended on 30-6-81 and, therefore, the liability to pay the differential royalty cannot be said to have accrued in the previous year relevant to the assessment year 1982-83.

5. Aggrieved by this, the assessee preferred an appeal to the Commissioner (Appeals). Before the Commissioner (Appeals) it was contended on behalf of the assessee that the revision of royalty at the end of five years, i.e., from 1-10-1980 was implicit in the original agreement itself and accordingly the rate of royalty on bamboos was revised to Rs. 210 per ton with effect from 1-10-1980. It was further submitted that the Government order dated 4-11-1981 merely quantified the liability that had already accrued once the bamboos were felled and collected during the period from 1-10-1980 to 30-6-81. It was also submitted that in view of the undertaking dated 14-2-81 given by the assessee to the Government before the end of the accounting year that it would pay the revised rates of royalty, there should be no difficulty in concluding that the liability towards the differential royalty had accrued in the year of account itself. In support of this stand namely that the liability accrued during the accounting period relevant to the assessment year 1982-83, reliance was placed on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The Commissioner of Income-tax (Appeals) reached the conclusion that the liability to pay the revised rates of royalty had accrued the moment the bamboos were felled and collected by the assessee and the assessee was well within its rights to provide for this liability as it was following the mercantile system of accounting. He accordingly allowed the appeal of the assessee and deleted the addition of Rs. 95,93,706 representing the enhanced royalty liability.

6. The present appeal by the Revenue is against the aforementioned order of the Commissioner of Income-tax (Appeals). The learned counsel for the department submitted that the Commissioner of Income-tax (Appeals) ought to have held that there was no enforceable liability to pay the enhanced amount of royalty by the assessee has accrued during the period relevant to the assessment year 1982-83. It is further submitted that the liability arising in this case is a contractual liability and not a statutory one and as such the principles relating to accrual liability laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. would not be applicable to this case. It is also submitted that the Government Order No. 538 dated 4-11-81 by which the revised rates of royalty were fixed, was, issued on 4-11-1981, i.e., a date much later than the closing of the accounting year i.e. 30-6-1981 and as such the revised rates of royalty cannot be said to have accrued as a liability during the accounting period ending on 30-6-1981, but the same remained a contingent liability. Further, it is submitted that the rates fixed by the G.O. dated 4-11-1981 were not accepted by the assessee but on the other hand the assessee challenged the same by way of a Writ Petition in the A.P. High Court and, therefore, till the, revised rates are finally determined by the Court, it cannot be said that the liability had accrued or arisen during the relevant accounting period. In support of this reliance was placed on the decision of the Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 and also the decision of the Tribunal in Vamet Industries [IT Appeal No. 249 (Hyd.) of 1987 dated 19-9-1990]. Thus, it is contended that the Commissioner of Income-tax (Appeals) had gone wrong in treating the differential royalty amount of Rs. 95,93,706 as an accrued liability and allowing the same as a deduction during the assessment year 1982-83 and thereby deleting the addition of this amount made by the assessing officer. Against this, the learned counsel for the assessee submitted that the rates of royalty were due for revision with effect from 1-10-1980 and that since the revised rates could not be fixed by the Government in time, the Government of Andhra Pradesh sought and the assessee had given an undertaking dated 14-2-81 whereby it undertook to pay the revised rates of royalty with effect from 1-10-1980. It is further submitted that in pursuance of this undertaking, the assessee was allowed to fell and collect the bamboos. Though the revised rates of royalty were notified on 4-11-1981, it should be noted that the same were to be operative with effect from 1-10-1980. It is further submitted that the mere fact that the assessee had challenged the revised rates of royalty, it cannot be said that the liability had become contingent. On the other hand, the submission is that the liability accrued the moment the assessee had felled and collected the bamboos though the quantification of the liability was made vide G.O. dated 4-11-1981 subsequent to the closing of the accounting year. In support of this, reliance was placed on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. It is also submitted that even if the liability that arose in this case is not statutory in nature, but only contractual, yet the ratio of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. would still be applicable. In other words, the contention is that the principles laid down with regard to the accrual of liability in the case of Kedarnath Jute Mfg. Co. Ltd. would be applicable to liabilities that accrue or arise out of contractual obligations also. In support of this, reliance was placed on the decisions of the Madras Bench of the Tribunal in the case of ITO v. South India Viscose Ltd. [1988] 27 ITD 501 of Calcutta Bench of the Tribunal in the case of ITO v. Asoka Foundry & Metal Works (P.) Ltd. [IT Appeal No. 778 (Cal.) of 1984 dated 12-9-1985], of the Bombay Bench in the case of Shaktighar Textiles & Industries Ltd. v. ITO [1986] 18 ITD 145 and also the decision of the Allahabad High Court in the case of CIT v. U.B.S. Publishers & Distributors [1984] 147 ITR 114. Even assuming that the principles laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. would not be applicable to the present case, yet, it is contended that giving of the undertaking dated 4-2-1981 and cutting and collecting the bamboos in pursuance of such an undertaking took place prior to the closing of the accounting year, namely 30-6-1981 and, therefore, the liability to pay the revised rate of royalty accrued before the closing of the accounting period on 30-6-1981. It is also submitted that the revised rates were notified on 4-11-1981, yet the assessee agreed to pay the revised rates of royalty with-effect from 1-10-1980 as the rates revised vide G.O. dated 4-11-1981 were operative retrospectively. Also it is submitted that though the revised rates fixed by the G.O. dated 4-11-1981 were challenged by the assessee before the High Court with regard to their reasonableness, yet, the fact remains that the writ petition was finally dismissed by a Division Bench of the Andhra Pradesh High Court in its order dated 23-11-1989. In other words, the contention that since the assessee had challenged the revised rates of royalty and till a decision by the Court in this regard was taken, the liability of the assessee to pay the revised rates remains a contingent one, no longer survives in this case. Therefore, it is submitted that the liability in terms of the contract has clearly accrued the moment the bamboos were felled and removed and the moment the undertaking was given - both these events occurring prior to 30-6-81 and consequently the Commissioner of Income-tax (Appeals) was justified in treating this liability as an accrued one and allowing the same as a deduction in the assessment year 1982-83 and his order in this regard, therefore, does not call for any interference.

7. We have considered the rival submissions. Clause VII(2) of the Agreement dated 20-7-1977 runs as under:

"Subject to item (3) below the Lessee shall pay a royalty at the rate of Rs. 60 per tonne for bamboos felled and collected from 1-10-1975 the rate of royalty being liable to be revised by the Lessor from time to time at an interval of not less than 5 years." In terms of the aforesaid Clause of the Agreement a revision in this case fell due on 1-10-1980. However, the revised rates of royalty could not be notified by the State Government by 1-10-1980. Therefore, the Government vide its letter dated 6-2-1981 informed the assessee-company that the proposed revision of rates was likely to take some time and in the meanwhile the assessee was requested to furnish an undertaking to the effect that it would abide by the new rates of royalty applicable 'to bamboo being supplied from 1-10-1980 onwards. In response to this letter, the assessee-company gave an undertaking dated 14-2-81 to the effect that it would continue to pay the old rates for the supplies made from 1-10-1980 subject to the condition that it shall pay the difference between the old rate and the new rate for all supply of bamboo from 1-10-1980 soon after the new rates are determined and communicated to it. In pursuance of this undertaking, the lessor permitted the assessee to fell and collect the bamboos during the period from 1-10-1980 to 30-6-1981. In this context, the first question that comes up for consideration is whether the liability of the assessee to pay the additional royalty in terms of the G.O. dated 4-11-81 is statutory in nature or it is only contractual. From a perusal of the G.O. No. 538 dated 4-11-81 whereby the revised rates of royalty were fixed by the Government of Andhra Pradesh, it is seen that the same has not been issued either under the provisions of the A.P. Forest Act or the Rules made thereunder or under any other provision of law. In fact, the Andhra Pradesh High Court in the case of Shri Rayalaseema Paper Mills Ltd. v. Govt. of A.P. [1990] 1 APLJ 137 while dealing with the writ appeal filed by the assessee, in para 18 of its order, had clearly observed that the determination of the right of royalty for the produce supplied to paper mills is not governed by any statute or a statutory order. From this, it follows that the G.O. No. 538 dated 4-11-1981 by which the rates of royalty have been revised for the period starting from 1-10-1980 is not statutory in nature and, therefore, the liability to pay the revised rates of royalty by the assessee cannot be said to arise under a statutory provision. On the other hand, the agreement dated 20-7-1977 itself specifically provides for the revision of the rates of royalty every five years and the revision in question has accordingly been made as per the terms of the agreement, vide G.O. No. 538 dated 14-2-81. Therefore, we are of the considered opinion that the liability to pay the revised rates of royalty arose out of the contract dated 20-7-1977 that came into existence between the assessee and the Government of Andhra Pradesh. Thus, the liability to pay the revised rates of royalty is contractual in nature.

8. The next question that arises for consideration is whether the principles laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. relating to the accrual of liability will be applicable to the present case.

9. In the case of Kedarnath Jute Mfg. Co. Ltd. , the Supreme Court has, inter alia, observed as under:

"That the moment a dealer made either purchases or sales which were subject to sales-tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales-tax which arose on sales made by it during the relevant previous year. The assessee was entitled to the deduction of the sum of Rs. 1,49,776 being the amount of sales-tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter."

From the above, it is seen that the Court has laid down the following proposition : (i) that the Sales-tax liability accrues the moment a sale or purchase takes place, (ii) the liability does not cease to be a liability merely because proceedings had been taken by the assessee before the higher authorities for getting the sales-tax liability reduced or wiped out, (iii) although the liability could not be enforced till the quantification was effected by the assessment proceedings, the liability for payment of tax was independent of the assessment, (iv) that the assessee would be entitled to a particular deduction or not will depend on the provisions of law relating thereto.

10. At the outset, it may be stated that there is nothing in this decision of the Supreme Court which indicates that the principles laid down therein with regard to the accrual of liability would be applicable only to the cases involving statutory liability and not to contractual liabilities. Though, the learned standing counsel contended that the principles laid down in the case of Kedarnath Jute Mfg. Co. Ltd. would apply only to cases involving statutory liability and not to cases of contractual liabilities, he could not produce any authority in this regard. On the other hand, this Tribunal in the case of Shaktighar Textiles & Industries Ltd. and South India Viscose Ltd. and also in the case of Ashoka Foundry & Metal Works (P.) Ltd. has clearly laid down that the principles laid down in the case of Kedarnath Jute Mfg. Co. Ltd. with regard to accrual of liability would equally be applicable to the cases involving contractual liabilities also. Therefore, following the aforementioned decisions, we hold that the present case also should be considered in the light of the principles laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. .

11. The rates of royalty were to be revised with effect from 1-10-1980. However, since these rates could not be revised by that time, the Government of Andhra Pradesh has asked the assessee to furnish an undertaking to the effect that the assessee should pay the revised rates of royalty from 1-10-1980. The assessee agreed for the same and has given an undertaking on 14-2-81 to that effect. Now let us consider as to what is the import of the undertaking dated 14-2-81 given by the assessee. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), while dealing with the effect of an undertaking given by the assessee in that case, the Supreme Court has observed as under :

"The undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the facts that time was not of the essence of the contract, meant a reasonable time) was unconditional, the appellant binding itself absolutely to carry out the same. The undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed."

12. Applying the aforesaid decision to the facts of the present case, it follows that the undertaking given by the assessee to the Government of Andhra Pradesh to abide by the revised rates of royalty imports a liability. In other words, this undertaking of the assessee results in accrual of liability with regard to the revised rates of royalty. Since this undertaking was given on 14-2-1981, it was well within the last day of the accounting year, i.e., 30-6-1981 and there cannot be any doubt that the liability towards the revised rates of royalty had accrued during the period relevant to the assessment year 1982-83.

13. Further, in pursuance of the undertaking furnished by the assessee to the effect that it would pay the revised rates of royalty from 1-10- 1980, the Andhra Pradesh Govt. permitted the assessee to fell the bamboos and collect them from 1-10-1980 onwards. In other words, on the basis of the promise made by the assessee that it would pay the revised rates of royalty from 1-10-1980, the Government, i.e., the lessor, altered its position and incurred liabilities by permitting the assessee to cut and collect the bamboos. This being so, the assessee cannot wriggle out of the contractual obligation on the principle of promissory estoppel. To put it differently, the liability to pay the revised rate of royalty was incurred by the assessee the moment it started felling and collecting the bamboos after giving the undertaking. Since the event of felling and collecting the bamboos took place during the accounting period, the accrual of the liability of the assessee is complete and irrevocable. Therefore, there cannot be any manner of doubt that the liability. to pay the revised rates of royalty accrued for the assessee during the period relevant to the assessment year 1982-83.

14. It is true that the Government order revising the rates of royalty was issued on 4-11-1981 which was subsequent to the closing of the accounting year, i.e., 30-6-1981 on the basis of which only the liability due to the revised rates of royalty could be ascertained. Since this order was issued on 4-11-1981 which was subsequent to the last day of the accounting year, 30-6-1981, whether the same would have the effect of changing the accrued liability into a contingent one. In the case of CIT v. Shri Sarvaraya Sugars Ltd. [1987] 163 ITR 429, the Andhra Pradesh High Court has laid down that mere postponement of quantification of liability did not postpone the accrual of liability. Again, the Allahabad High Court in the case of J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 has, inter alia, laid down that an assessee which follows the mercantile system of accounting, could legitimately claim deduction in respect of a business liability even if such liability has not been quantified or paid or even when such liability is being disputed. The same principle was reiterated by the Delhi High Court in the case of N.K. Textile Mills v. CIT [1985] 152 ITR 594. Applying the ratio of the aforementioned decisions, we hold that in the present case also, the accrued liability does not cease to be an accrued one merely because the quantification of such liability was deferred beyond the last date of the accounting period.

15. The next question that arises for consideration is that since the assessee had challenged the revised rate of royalty fixed by the Government vide G.O. dated 4-11-1981 before the Andhra Pradesh High Court by way of a writ petition and that since the same was pending before the Court the liability of the assessee with regard to the revised rates of royalty would remain a contingent liability as contended by the learned Standing Counsel by placing reliance on the decision of the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd.

16. In the case of Hindustan Housing & Land Development Trust Ltd. certain lands belonging to the assessee were acquired by the State Govt. and the Land Acquisition Officer awarded compensation of Rs. 24,97,249. On appeal preferred by the assessee the Arbitrator enhanced the amount of compensation to Rs. 30,10,873. The State Government preferred an appeal to the High Court challenging the award of enhanced compensation by the Arbitrator and this appeal was pending before the Court. In that context, the question came up for consideration was whether the amount of enhanced compensation accrued to the assessee as its-income during the relevant previous year ending on 31-3-1956 and was, therefore, taxable in that year. The Supreme Court has observed as under:

"that although the award was made by the arbitrator on July 29, 1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. And the dispute was regarded by the court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal were allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of Rs. 7,24,914 was not income arising or accruing to the respondent during the previous year relevant to the assessment year 1956-57."

From the facts of the above case, it may be seen that the very right of the assessee to receive enhanced compensation was in dispute and was pending a decision before the Court. The Court may allow such a right of the assessee to receive enhanced compensation or it may totally reject the same. In those circumstances, the Supreme Court while observing that the assessee had no absolute right to receive the amount At that stage, reached the conclusion that the enhanced compensation awarded by the Arbitrator has not accrued and the same cannot be added to the assessable income of the assessee. In the present case, the facts are altogether different. There is an agreement dated 20-7-1977 which provides for the revision of rates of royalty by the Government quinquennially and such a revision fell due on 1-10-1980. Since the revised rates of royalty could not be determined by 1-10-1980, the Government of Andhra Pradesh obtained an undertaking from the assessee whereunder the assessee had unconditionally agreed to abide by the revised rate of royalty to be determined by the Government. Subsequently, the revised rates of royalty were notified on 4-11-1981 and these rates were to be operative from 1-10-1980. Thus, it may be seen that there is a total agreement between the parties with regard to the payment of enhanced rates of royalty. Despite the agreement and also the undertaking given by the assessee to pay the revised rate of royalty, the assessee has chosen to challenge the reasonableness of the revised rates of royalty by filing a writ petition. It may be pertinent to note that in the writ petition filed by the assessee before the High Court, the assessee only questioned the extent of revision of the rates of royalty but not the right of the Government to revise the rates or the existing royalty. Thus, it may be seen that the challenge made in the writ petition pertains to the realm of quantification of the liability and not to the right of the Government to revise the rate of royalty. Therefore, even if the writ petition of the assessee was allowed, it would have only effected the extent of the revision and not negate the very right of revision of royalty of the Government. Therefore, with respect, we are of the view that the decision of the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. is distinguishable and the ratio laid down therein would not be applicable to the present case.

17. As already stated, the liability of the assessee to pay the revised rates of royalty with effect from 1-10-1980 had accrued on the basis of the undertaking dated 14-2-81 furnished by the assessee and also by actually felling and removing the bamboos by the assessee, both these events taking place before the last day of the accounting year, i.e., 30-6-1981. When once the liability to pay the revised rates of royalty accrues as stated above, the subsequent question that arises for consideration is whether such a liability becomes a contingent liability merely because the revised rates of royalty have been questioned by the assessee by way of writ petition in the High Court.

18. While dealing with the effect of a challenge made by the assessee against the levy of excise duty, the Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495, had, inter alia, observed as under:

"that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment viz. December 9, 1954, and that accrued liability was a proper allowance in computing the income of the accounting year 1954-55. The endeavour made by the assessee to get out of that liability by preferring appeals to the statutory authorities cannot in any way detract from or retard the efficacy of the liability imposed upon him by the competent excise authority levying the duty and making a demand for payment of that duty."

Endorsing the aforementioned view, the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. had observed that the accrual of liability remains unaffected even if the assessee had taken appeals to the higher authorities or Courts for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Following the ratio of the aforementioned decisions, we have no hesitation in reaching the conclusion that the liability to pay the enhanced rates of royalty accrued to the assessee during the assessment year 1982-83 and it remained unaffected despite the fact that the assessee has chosen to challenge the revised rate of royalty before the High Court. However, we may state that the High Court of Andhra Pradesh vide its order dated 30-11-1989 had dismissed the writ appeal filed by the assessee contesting the reasonableness of the revised rates of royalty fixed by the Government of Andhra Pradesh vide its order dated 4-11-81. This being the factual position, the question as to whether the accrued liability loses its character as accrued liability since the assessee had chosen to challenge the revised rates of royalty before the High Court, no longer survives.

19. In view of what has been stated above, we hold that the liability to pay the enhanced amount of royalty on bamboo amounting to Rs. 95,93,706.75 had accrued to the assessee during the accounting year relevant for the assessment year 1982-83 and the same, therefore, qualifies for deduction in computing the assessable income of the assessee for that year. The same view was taken by the Commissioner of Income-tax (Appeals) in 'his appellate order dated 30-8-1985 and we confirm his order on this point.

20. The assessee had entered into an agreement with the Government of Andhra Pradesh for the supply of hardwood. The agreements relating to the financial years 1980-81 and 1981-82 are at pages 45 and 50 of the paper book respectively. Condition No. 13 of this agreement provides that the assessee will have to pay royalty at the rate of Rs. 30 per stack of hardwood. As per the agreement of the parties, the rates of the hardwood are required to be revised from 1-4-1980. Since the revised rates of royalty for hardwood could not be notified, the Government of Andhra Pradesh addressed a letter dated 3-3-1980 stating therein that the proposals for revision of royalty are under the consideration of the Government and that it will not be possible for it to notify the new rates before 1-4-1980. In the circumstances, the assessee was requested to furnish an undertaking to the effect that it will abide by the new rules of royalty applicable to the hardwood to be supplied from 1-4-1980 onwards. Accordingly, the assessee furnished an undertaking dated 26-3-1983 agreeing therein to abide by the decision of the Government and to pay the revised rates of royalty as may be fixed by the Government for hardwood supplied from 1-4-1980 onwards. Finally, the rates were notified by the Government of Andhra Pradesh on 4-11-81 wherein the rate of royalty for hardwood has been enhanced from Rs. 30 per ton to Rs. 100 per ton. The assessee which follows the mercantile system of accounting had made a provision in its books of accounts for the liability of Rs. 89,07,955 towards the differential royalty payable by it for the supply of hardwood for the period from 1-4-1980 to 31-3-1981. In its income-tax return for the assessment year 1982-83, the assessee claimed a deduction of this amount of Rs. 89,07,955 on the ground that this amount represents the accrued liability in connection with the payment of the enhanced royalty. The Income-tax Officer refused to allow this deduction on the ground that the G.O. No. 538 dated 4-11-81 by which the rates of royalty were revised fell outside the accounting year ending on 31-3-81 and, therefore, the liability to pay the differential royalty cannot be said to have accrued during the assessment year 1982-83. On appeal, the Commissioner of Income-tax (Appeals) following the ratio of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. reached the conclusion that this liability accrued during the assessment year 1982-83 and the assessee was, therefore, entitled to claim a deduction of the same from the assessable income of the assessee.

21. In the present appeal, the revenue raised the same contentions as were raised in connection with the accrual of liability relating to the revised rate of royalty on bamboos and contended that the liability arising out of the revised rates of royalty on the hardwood did not accrue during the relevant assessment year 1982-83. Against this, the learned counsel for the assessee supported the order of the Commissioner of Income-tax (Appeals) and maintained that the same does not call for any interference.

22. We have considered the rival submissions.

Since the facts and circumstances of the present case are identical to the facts and circumstances of the case concerning the accrual of liability relating to the revised rates of royalty on bamboos, for the detailed reasons recorded in paras 3 to 19 of this order, we hold that the liability to pay the enhanced amount of royalty on hardwood amounting to Rs. 89,07,955 accrued during the accounting year relevant to the assessment year 1982-83, and therefore, the same qualifies for deduction in computing the assessable income of the assessee for that year. The same view was taken by the Commissioner of Income-tax (Appeals) in his appellate order dated 30-8-1985 and we confirm his order on this point also.

23. To sum up, the answers to the questions posed are as follows:

(i) The liability for payment of royalty is contractual ;

(ii) The undertaking given by the assessee coupled with its felling and collecting the bamboos would result in creating an accrued liability for the assessee with regard to the enhanced rates of royalty ; and

(iii) The assessee is, therefore, entitled to deduction of additional royalty claimed particularly when the writ appeal of the assessee has been dismissed.

24. In the result, the appeal is dismissed.

Per K.S. Viswanathan, Vice President

25. I am unable to agree with my learned Brothers. I agree that the liability is contractual. My learned Brothers have also held so. Once it is accepted that the liability is contractual then, in my opinion, it would be deductible only when the assessee was a party to the contract accepts the liability. So long as he does not accept the liability it cannot be enforced and therefore cannot be allowed as deduction. There are large number of authorities for this proposition which unfortunately have not been considered by him Brothers. Since mine is a minority judgment I do not go into details but would indicate these authorities :

(i) Nonsuch Tea Estate Ltd. v. CIT [1975] 98 ITR 189 (SC);

(ii) CIT v. Roberts Mc.Lean & Co. Ltd. [1978] 111 ITR 489 (Cal.);

(iii) National Newsprint & Paper Mill.- Ltd. v. CIT [1978] 114 ITR 172 (MP)

(iv) CIT v. Superintendence Co. of India Ltd. [1980] 125 ITR 327 (Cal.); and

(v) CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622 (Bom.).

26. Under the circumstances I am of opinion that the deduction can be allowed only when the assessee had accepted the liability.

27. However, the departmental appeal has to be dismissed in view of the majority decision on this point.

 

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