COMMISSIONER OF INCOME TAX Vs. RAYEX INDIA LIMITED

JUDGEMENT

(1.) IN this reference, the Revenue is contesting certain expenditure allowed by the Tribunal in connection with the assessee's dealing with the State Trading Corporation of India ( "the STC" ). The assessee is a company and is engaged in export of silk, rayon, art silk fabric, etc. The asst. yrs. are 1972 73 and 1973 74. The relevant previous years are the corresponding financial years ended on 31st March, 1972, and 1973, respectively.

(2.) THE assessee had entered into an agreement with the State Trading Corporation of India for import from Japan against Yen credit on deferred payment basis six sets of "TSUDAKOMA" sizing and warping machines. These machines were expected to be allotted to the members of the silk and rayon textile industry and other persons in the trade. The purchasers of these machines were assured certain benefits by the State Trading Corporation of India. The machines were imported from Japan and were stored in the warehouse. As the State Trading Corporation of India was not in a position to fulfil certain benefits assured to the purchasers, the machines were lying in the warehouse. For the years under reference, the State Trading Corporation of India issued a debit note of Rs. 6,58,757 in the first year and Rs. 7,83,592 in the second year as godown rent, insurance charges, etc., on the assessee. As the assessee was following the mercantile system of accounting, it claimed deduction of these two amounts in computing its total income. The ITO disallowed the assessee's claim mainly on the ground that certain disputes had arisen between the assessee and the State Trading Corporation of India. It is not clear as to what type of disputes had arisen. However, it could be gathered from the facts mentioned above, that the State Trading Corporation of India was not in a position to fulfil certain benefits assured to the purchasers of the machinery imported from Japan. Keeping this in view, the ITO held that since the assessee has disputed the liability, it was not entitled to deduction of these two amounts.

(3.) LEARNED counsel for the Revenue placed strong reliance on the orders of the ITO and submitted that since the liability was in dispute in the years under consideration, the assessee was not entitled to deduction of these two amounts. He, however, was fair enough to invite our attention to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), which would support the action of the Tribunal accepting the assessee's claim for deduction of the two amounts involved. Learned counsel for the assessee, apart from relying on the said decision of the Supreme Court, has also relied on the decision of this Court in the case of CIT vs. Phalton Sugar Works Ltd. (1986) 162 ITR 622 (Bom), wherein this Court has approved the allowance of certain deduction which had arisen under a contract between the assessee and a Government Corporation. He, therefore, submitted that the reference should be answered in favour of the assessee.