Kerala High Court
Abad Fisheries vs Commissioner Of Income-Tax on 3 November, 1994
JUDGMENT T.L. Viswanatha Iyer, J.
1. The assessee is an exporter of sea foods, mainly prawns. It follows the mercantile system of accounting. For the assessment year 1982-83, corresponding to the accounting year ending' August 31, 1981, the assessee claimed deduction of an amount of Rs. 26,72,002 as provision made for payment of tax under Section 5A of the Kerala General Sales Tax Act, 1963 ("the K. G. S. T. Act"), on the purchases of prawns exported by it. Though no assessment or demand had yet been made for the year concerned, the assessee apprehended such demand and therefore made provision for it, though it was disputing the liability on the ground that it was entitled to exemption in respect of the purchases by virtue of Section 5(3) of the Central Sales Tax Act, 1956 ("the C. S. T. Act"), the prawns exported being the same commodity as the prawns purchased, despite the intermediate process of cleaning and peeling performed on them. The assessing authority disallowed the claim for deduction of the provision on the ground that the assessee's apprehension of liability was "baseless", in the light of the decision of this court in Deputy CST v. Neroth Oil Mills Co. Ltd. [1982] 49 STC 249. The Commissioner of Income-tax (Appeals) refused to interfere with the disallowance, relying on an added ground that the Sales Tax Department had not made any demand on the assessee so far, and that if such demand were made at any time, the assessee could claim the deduction as and when the amount was paid. The Appellate Tribunal affirmed the view of the Commissioner on the grounds stated by him, namely, that there could be no apprehension by the assessee, of any liability for purchase tax, in the light of the decision in Neroth, Oil Mills Co. Ltd.'s case [1982] 49 STC 249 (Ker) and that no demand had yet been made for the amount. The Tribunal also noted that the Supreme Court had subsequently in Sterling Foods v. State of Karnataka [1986] 63 STC 239, held that by the cleaning, deveining and peeling, prawns do not cease to be prawns or become another distinct commodity disentitling the exporter of such goods from claiming the benefit of Section 5(3) of the Central Sales Tax Act over the purchases effected by him.
2. This was the main item of dispute between the parties before the Tribunal. But there were two other points as well, one raised by the assessee that it was entitled to deduction of a sum of Rs. 27,595 being the amount paid towards sales tax during the year, and the other, raised by the Revenue, whether the subsidy received by the assessee from the Central Government could be deducted to arrive at the cost of the machinery in computing the depreciation. The first of these points was found against the assessee on the ground that the payment did not relate to the relevant accounting year and the other, against the Revenue, having regard to the decision of this court in CIT v. Relish Foods [1989] 180 ITR 454.
3. At the instance of the parties, the following questions were raised for the opinion of this court :
"At the instance of the assessee :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is not entitled to the deduction of the provision made in the books towards purchase tax liability under the Kerala General Sales Tax Act, amounting to Rs. 26,72,002 in the income-tax assessment for 1982-83 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the appellant is not entitled to deduction of sales tax actually paid during the year amounting to Rs. 27,595 ?"
"At the instance of the Revenue :
(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the subsidy received by the assessee would not go to reduce its cost for purpose of calculating the depreciation, etc. ?"
4. So far as questions Nos. 2 and 3 are concerned, we need not exercise ourselves, for the reason that no serious arguments were addressed by the assessee on the deductibility of the amount of Rs. 27,595 ; and the other question stands concluded against the Revenue by the decision of this court referred to earlier in Relish Foods case [1989] 180 ITR 454 which has been approved by the Supreme Court recently in Civil Appeal No. 2474 of 1991 (CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830) (sic). We, therefore, answer question No. 2 against the assessee and question No. 3 against the Revenue. We shall now take up the first question for consideration, on which the dispute between the parties really centred.
5. There is no dispute that the assessee purchases prawns and then exports them, after carrying out some intermediate processing as referred to in Neroth Oil Mills Co. Ltd.'s case [1982] 49 STC 249 (Ker). The question whether this process carried out by purchasers and exporters of prawns amounted to a process of manufacture as to make the exported commodity, distinct and different from the prawns purchased, for the purpose of Section 5(3) of the Central Sales Tax Act, was considered for the first time by this court in Neroth Oil Mills Co. Ltd.'s case [1982] 49 STC 249 (Ker), the decision in which was rendered on August 20, 1981, but reported afterwards in 1982. This court took the view that prawns purchased locally, and cleaned, peeled, processed and packed as prawns for sale by export outside India, were not commercially different from the prawns purchased and, therefore, the purchases were fictionally in the course of export and exempt by virtue of Section 5(3) of the Central Sales Tax Act. In that case, there was no dispute about the existence of the other conditions prescribed in the said section, the only dispute being centred on the question whether the goods purchased continued to be the same despite the processes abovementioned being carried on, before the export. It was not in dispute before us that the State of Kerala has taken up the matter in appeal to the Supreme Court and that the appeal is pending. In the subsequent case of Sterling Foods' case [1986] 63 STC 239 (SC) relied on by the Tribunal, the Supreme Court held that processed or frozen shrimps, prawns and lobsters were commercially the same commodity as raw shrimps, prawns and lobsters. When raw shrimps, prawns and lobsters are subjected to the process of peeling, deveining, cleaning and processing, they do not cease to be shrimps, prawns, or lobsters, and become another distinct commodity. Therefore, the purchase of these commodities for the purpose of fulfilling existing contracts for export was exempt from purchase tax under the fiction provided by Section 5(3) of the Central Sales Tax Act. The Supreme Court thus reversed the decision of the Karnataka High Court in the case reported sub nom in Sterling Foods v. State of Karnataka [1986] 62 STC 238, which had taken the contrary view.
6. The accounting period of the assessee to which the assessment year relates is the year ending August 31, 1981. The decision in Neroth Oil Mills Co. Ltd.'s case [1982] 49 STC 249 (Ker) was rendered just eleven days prior to that, but was reported much later. It is evident from the facts which led to this decision, that the question whether purchase tax was leviable under Section 5A of the Kerala General Sales Tax Act on prawns subsequently exported after processing, was in a state of flux with the Kerala sales tax authorities taking the view that such purchases could not gain the benefit of the exemption under Section 5(3) of the Central Sales Tax Act, for the reason that the goods exported were commercially, different from the goods purchased because of the intermediate processes carried out by the exporter. It is also clear that the sales tax authorities elsewhere were also taking the same view as their Kerala counterparts, a view which was shared by the Karnataka High Court as well as evident from the decision in Sterling Foods' case [1986] 62 STC 238 (Kar) reversed by the Supreme Court (see [1986] 63 STC 239) later. Divergence of even judicial opinion thus existed on the point. The position of law was thus fluid and indeterminate. Even the decision in Neroth Oil Mills Co. Ltd.'s case [1982] 49 STC 249 (Ker), was the subject of appeal to the Supreme Court at the instance of the State. The assessee's provision for payment of purchase tax in its accounts has to be viewed in this background. Having regard to the controversy then raging and the view taken by the assessing authorities in Kerala and elsewhere, the assessee had every reason to apprehend that it will be made liable for payment of the purchase tax during the year in question, though no assessment and no demand had yet been made for the year.
7. It was stated before us by counsel for the assessee that a provisional assessment had been made on it in similar circumstances for the month of August, 1976, oh February 16, 1977, treating it as not entitled to the exemption under Section 5(3) of the Central Sales Tax Act in the view that the commodity exported was not the same as the prawns purchased. Counsel in fact produced a copy of the provisional assessment order for our perusal. Counsel also pointed out that assessments under the Kerala General Sales Tax Act for all the years up to 1989-90 in relation to the purchase of prawns were still pending finalisation. It was also mentioned that for the subsequent year 1983-84, the Tribunal itself had allowed such a claim, taking judicial notice of the fact that provisional assessments had been made in similar circumstances against the assessee and others. We are not however, relying on these submissions or circumstances as they do not form part of the statement of the case before us. Suffice it to say that the materials before us are sufficient to reach the conclusion arrived at by us in the preceding paragraph.
8. The question is whether the provision made for payment of purchase tax could, in such circumstances, be treated as a liability deductible as a business expenditure under Section 37(1). So far as sales tax is concerned, it has been held time and again that the liability arises when the sales are effected and, therefore, any liability for sales tax has to be claimed as a deduction in the year in which the liability arose. It was so held by a Full Bench of this court in CIT v. K.A. Karim and Sons [1982] 133 ITR 515 which related to the liability for purchase tax on cashew for the period up to March 51, 1971. The assessee claimed deduction of this amount in the assessment year 1974-75 on the ground that steps for recovery had not been taken, that a notification had been issued by the State Government on October 12, 1973, exempting the transactions in question from payment of tax, that this notification was cancelled soon thereafter on November 9, 1973, therefore, the amount became payable only after November 9, 1973, during the accounting period relevant to the assessment year 1974-75 and hence deductible in that year. The Full Bench thought otherwise and held that the liability to pay the tax arose in the year in which the transactions of purchase took place and that it had to be provided for in that year. When the exemption notification was published on October 12, 1973, the liability ceased to be operative, but when it was cancelled on November 9, 1973, the liability revived. It could not be said that the liability arose for the first time only on the cancellation of the notification on November 9, 1973, and, therefore, the amount had to be claimed as a deduction in the year in which the liability arose, that is, in the assessment year 1971-72.
9. In arriving at this decision, the Full Bench relied on an earlier Division Bench ruling in L.J. Patel and Co. v. CIT [1974] 97 ITR 152 (Ker), a case relating to a demand for central excise duty. The assessee in that case was following the mercantile system of accounting and had been made liable for payment of excise duty in the year 1952. But he was contesting the liability, and eventually paid the amount in 1962. He claimed deduction in the year in which the payment was made. The Division Bench held that the deduction could be claimed only in the year 1952, relying on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363.
10. Kedarnath's case [1971] 82 ITR 363 (SC) was a case in which the assessee who followed the mercantile system of accounting incurred a liability for tax on sales effected by it during the calendar year 1954, corresponding to the assessment year 1955-56. The amount was paid only later. The assessee claimed deduction of the amount in the assessment for 1955-56. The Income-tax Officer rejected the claim on the ground that the assessee had contested its liability in appeal, and that, it had made no provision in its books for payment of the amount. The Supreme Court, however, upheld the assessee's claim, holding that the moment a dealer made purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Though the liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of the tax was independent of the assessment. The assessee, which followed the mercantile system of accounting, was, therefore, entitled to deduct from the profits and gains of its business the liability for sales tax which arose on the sales made by it during the relevant previous year. That liability did not cease to be a liability merely because the assessee had taken proceedings for getting it reduced or wiped out, so long as the contention of the assessee did not prevail. Equally the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the same as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, The assessee was, therefore, entitled to deduct the amount of sales tax which it was liable to pay in the computation of its taxable income for the assessment year 1955-56.
11. We may now refer to a recent decision of this court in CIT v. Poyilakkada Fisheries Pvt. Ltd. [1992] 197 ITR 85, The assessee was following the mercantile system of accounting. The assessee made provision in its accounts for payment of tax on purchases of cashew effected during the accounting year relevant to the assessment year 1975-76. The claim made for allowance of this amount in the year 1975-76 was however rejected. The assessee renewed the claim in the year 1977-78 on the ground that the Income-tax Officer had agreed to allow the amount in the year in which the payment was obligatory. This court refused to accept the claim in the view that once the liability had accrued in the year 1975-76, the assessee should have pursued its claim for deduction in that year, and was not entitled to have it allowed as a liability in 1977-78. We may note here that a similar view had been taken by the Punjab and Haryana High Court in CIT v. Aggarwal Rice and General Mills [1989] 180 ITR 29, again a case relating to purchase tax.
12. There are similar pronouncements in relation to central excise liability. There is an elaborate discussion of the matter by Sabyasachi Mukharji J., speaking for the Bench, in the decision CIT v. Century Enka Ltd. [1981] 130 ITR 267 (Cal). The assessee was informed in the year 1969 by the Assistant Collector of Central Excise that it was liable to excise, duty on the production of polymer chips. The assessee disputed the liability on certain grounds, but the Assistant Collector affirmed his stand of its liability to pay the duty. The liability was not, however, quantified, and no demands raised or served. The assessee made a provision in its accounts for the excise duty arising in the years 1971-72 and 1972-73, and claimed the same as business expenditure, the assessee following the mercantile system of accounting. The claim was upheld as an accrued liability, after . an elaborate discussion of the cases on the point The decision of the Allahabad High Court in CIT v. J. K. Synthetics Ltd. [1983] 143 ITR 771 is apposite. The assessee made a provision for payment of excise duty in the assessment year 1967-68, though the dispute regarding the liability was pending in the High Court. The High Court decided in favour of the assessee, but the Central Excise Department took the matter up in appeal to the Supreme Court, and the dispute was pending before that court at the time the assessment of the assessee's income for the assessment year 1967-68 was taken up for consideration. The Income-tax Officer held that as the High Court had decided in favour of the assessee, it was not liable for payment of the excise duty and, therefore, the provision made for payment of the duty was not an allowable deduction. On a reference, it was held by H.N. Seth and R.M. Sahai JJ., that notwithstanding the decision of the High Court, the assessee was entitled to claim the deduction, inasmuch as the Excise Department had gone up in appeal to the Supreme Court and questioned the correctness of the decision of the High Court.
13. The principle emanating from the above discussion is that a provision in the accounts made by an assessee following the mercantile system of accounting, for liability to sales tax, (though disputed) is yet liable to be allowed as business expenditure, if there was a bona fide reasonable apprehension on the part of the assessee that the amount will become payable. Of course, it is not every fanciful claim, based on the ipse dixit of the assessee that could form the basis of any claim for deduction of such liability. But if the assessee had a genuine ground, or reasonable basis, for apprehending that the liability may be cast on it, having regard to the view adopted by the concerned Sales Tax Department, or having regard to the case of the assessee himself or other similar assessees or otherwise, the claim cannot be rejected merely because it is disputed. It could not then be said that the assessee had acted unreasonably or fancifully on misplaced apprehensions in making the provision. The court has to consider what a prudent businessman would have reasonably done in the state of affairs in which the assessee was placed at the time the provision was made. We do not find anything in the decision of the Supreme Court in CWT v. K.S.N. Bhatt [1984] 145 ITR 1 on which standing counsel for the Revenue relied, militating against what we have stated above.
14. So far as this case is concerned, we have already pointed out that the Sales Tax Department had taken the view that prawns processed in the manner mentioned ceased to be the same commodity, and thus the exported commodity was different from the purchased prawns, thereby disentitling the assessee to the exemption under Section 5(3) of the Central Sales Tax Act. So far as this court is concerned, the law was laid down for the first time only on August 20, 1981, a few days prior to the end of the accounting year on August 31, 1981. But the matter did not rest there as the State took up the matter in appeal to the Supreme Court where it is pending. The Karnataka High Court had evidently taken a different view, and the matter stood settled only by the decision in Sterling Foods' case [1986] 63 STC 239. In this background, it cannot for a moment, be contended that the assessee acted fancifully or unreasonably in making the provision. It had every reason to entertain a reasonable apprehension about its liability. As a prudent businessman, the assessee was bound to make such provision as failure to make the provision and claim, would have disentitled it from making the claim in any future year, if ultimately it turned out that the payment had to be made.
15. The three statutory authorities have relied on the fact that this court had in Neroth Oil Mills Co. Ltd.'s case [1982] 49 STC 249 and the Supreme Court five years later in Sterling Foods' case [1986] 63 STC 239, had rendered decisions which strike at the liability of the assessee and, therefore, the provision was unwarranted. We cannot agree. As mentioned by us earlier, one must place oneself in the position of the assessee in such circumstances. The assessee could certainly not have foreseen a particular authoritative decision having a bearing on the liability emanating from the Supreme Court a few years later. Hindsight provided by later decisions cannot form the foundation for rejecting the claim if otherwise it is justified. The question to be considered is whether on the date on which the provision was made in the accounts, the assessee could have had a reasonable apprehension of the liability being cast on it.
16. We must also note here that Section 5(3) of the Central Sales Tax Act requires more than one condition to be satisfied before the exemption is earned, and it is only on one of those aspects that the decisions in Neroth Oil Mills Co. Ltd.'s case [1982] 49 STC 249 (Ker) and Sterling Foods' case [1986] 63 STC 239 (SC) spoke. The other aspects still remained to be considered by the sales tax authorities.
17. The Department is not without its remedies in case it is ultimately found that the purchase tax was not payable. Section 41(1) enables assessment of such amounts to tax in any subsequent year in which the liability ceased to exist.
18. The Appellate Tribunal was, therefore, in error in holding that the assessee was not entitled to deduction of the amount in question in computing the taxable income of the assessee. The first question referred to us has thus to be answered in the negative, that is, in favour of the assessee, and against the Revenue.
'Accordingly, we dispose of the references by answering questions Nos. 1 and 3 against the Revenue and in favour of the assessee, and question No. 2 against the assessee, and in favour of the Revenue.
19. There will be no order as to costs.
20. Communicate a copy of this judgment under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Cochin Bench, for information.