Income Tax Appellate Tribunal - Mumbai
Sigma Paints Ltd. vs Inspecting Assistant Commissioner on 4 November, 1986
Equivalent citations: [1987]21ITD11(MUM)
ORDER
Rajendra, Accountant Member
1. The assessee-company manufactures paints. It is relevant account year ended on 31-3-1982.
Ground No. 1 :
2. The assessee had made profit of Rs. 3,14,069 on sale of import entitlements which amount was credited to profit and loss account but the assessee subsequently claimed before the IAC (Assessment) that the said amount was capital receipt and not assessable. The ITO, however, following Metal Rolling Works (P.) Ltd. v. CIT [1983] 142 ITR 170 (Bom.), held that as the import entitlements were received by the assessee in the course of their business, the value of the same constituted profit and gains of the assessee's business within the meaning of Section 28(iv) of the Income-tax Act, 1961 ('the Act') and, therefore, the said amount was neither capital receipt nor receipt of a casual or non-recurring nature and was business receipt. The Commissioner (Appeals), vide paragraph 1 of his order, upheld the ITO's action following the aforesaid decision.
3. The Bombay High Court subsequently in Kamani Engg. Corporation Ltd. v. CIT [1984] 150 ITR 536 has followed the aforesaid decision and has held that profit on sale of import entitlements was neither capital receipt nor receipt of a casual and non-recurring nature and was assessable as the assessee's business income.
4. At the time of hearing before us, the learned counsel for the assessee urged that before the Bombay High Court the matter had not been properly argued that import entitlements were capital assets and, therefore, profit on sale of import entitlements was capital gain as had been held in K.N. Daftary v. CIT [1977] 106 ITR 998 (Gal.) and Addl. CIT v. K.S. Sheik Mohideen [1978] 115 ITR 243 (Mad.).
5. We have carefully considered the assessee's submissions but we are unable to accept them. In K.N. Daftary's case (supra), the Calcutta High Court was not called upon to examine whether the import entitlements were capital assets and profit thereon constituted a capital gain and the only controversy before the High Court on a reference by the assessee was that as there was no cost of acquisition of the import entitlements, no capital gain accrued on the said sale. Thus, the finding of the AAC in that case that import entitlements were capital assets stood accepted by the revenue as the revenue did not appeal against the order of the Tribunal who had confirmed the AAC's order.
6. However, we find that when before the Calcutta High Court this question was raised directly in Kesoram Industries & Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 then the Calcutta High Court held that the amount received under export incentive scheme by a manufacturer of textile goods is received in the course of his carrying on the business and is, therefore, liable to income-tax. The Court observed at p. 148 that in K.N. Daftary's case (supra) the High Court was not concerned with the question whether an entitlement of this nature was capital or revenue and the High Court proceeded on the basis that this was a capital receipt. Thus, K.N. Daftary's case (supra) does not help the assessee.
7. Similarly, K.S. Sheik Mohideen's case (supra) does not help the assessee because that case dealt with import entitlements on remittances under National Defence Remittance Scheme by an assessee who was not making the said remittances in the course of any business and it is in that context that the controversy before the Madras High Court was whether the profit on sale of said entitlements of remittances was liable to capital gain. However, when a direct question arose before the Madras High Court in CIT v. Wheel & Rim Co. of India Ltd. [1977] 107 ITR 168 where the assessee had received import entitlements in the course of carrying on business of exporting cycle rims abroad, it was held that the profit on the said entitlements constituted business receipts referable to or derived from export of cycle rims.
8. We find that similar opinion has been expressed by Kanga and Palkhivala in Law and Practice of Income-tax, Supplement to Seventh Edn., Vol. 1, p. 55 by adding a paragraph 342 under the head 'Export incentives and import entitlements'. The learned author opined that export incentives and sale proceeds of import entitlements are business income relying on Wheel & Rim Co. of India Ltd.'s case (supra) as also Agra Chain Mfg. Co. v. CIT [1978] 114 ITR 840 (AIL), Kesoram Industries & Cotton Mills Ltd.'s case (supra) and CIT v. Swadeshi Cotton Mills Co. Ltd. 127 [1980] ITR 747 (All.).
9. Similar view has been expressed by Sampat lyengar in Law of Income-tax, Seventh Edn., Vol. 2, p. 1115 under Section 28 under the heading "All 'trading receipts' that are realised must be taken into account".
10. Similar view has been expressed by Chaturvedi and Pithisaria in Income-tax Law, Third edn., Vol. I, pp. 820-30 under the heading 'Import entitlements'.
11. The Tribunal Special Bench, Delhi in Indo Asian Switchgears (P.) Ltd. v. I AC [1985] 12 ITD 65, has exhaustively discussed the case law on this point and has held that profit on (sic).
12. In view of the above discussion, we uphold the orders of lower authorities assessing Rs. 3,14,069 being premium on sale of import entitlements.
Ground No. 2 :
13. The IAC (Assessment) had disallowed secret commission of Rs. 11,800 out of commission of Rs. 6,28,361 on the ground that the said amount was not supported by vouchers. He followed Goodlas Nerolac Paints Ltd. v. CIT [1982] 137 ITR 58 (Bom.).
14. The Commissioner (Appeals) upheld the IAC (Assessment)'s action by relying on McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SO) where it was held that colourable devices are not part of tax planning. The Commissioner (Appeals) held that in the absence of verification, the aforesaid expenditure of Rs. 11,800 had been rightly disallowed.
15. The learned counsel for the assessee urged before us that as against sales of paints and chemicals of Rs. 7.28 crores and payment of commission of Rs. 6,28,361 only payments of Rs. 11,800 were unvouched being secret commission paid to the representatives of the customers and that the Tribunal Special Bench, Bombay in First ITO v. French Dyes & Chemicals (I) (P.) Ltd. [1984] 10 ITD 240 had held such payment to be allowable and that the assessee was one of the interveners in the said case and that the Special Bench had distinguished the decision in Goodlas Nerolac Paints Ltd.'s case (supra). Respectfully following the said decision, we delete the addition of Rs. 11,800.
Ground No. 3 :
16. Section 80J deduction was claimed by the assessee in respect of Bhiwandi unit, starting from the assessment year 1979-80. The controversy is regarding the capital employed in the said unit. The said unit does not have a separate balance sheet. In the assessment years 1979-80 and 1980-81, the share capital of Rs. 10 lakhs in respect of said unit was treated as capital employed in Bhiwandi unit. However, in the assessment year 1981-82, apart from the said share capital of Rs. 10 lakhs, the ITO further treated the profits of the said unit in the past years as capital employed in Bhiwandi unit. However, in the assessment year 1982-83 (year under consideration), the IAC (Assessment) gave up the basis adopted in the assessment year 1981-82 and determined the capital employed in Bhiwandi unit by apportioning the total capital and reserves of Rs. 60.59 lakhs in the ratio of the company's assets in the head office and Bhiwandi. He thus allowed Section 80J deduction at Rs. 98,372 on capital employed of Rs. 13,11,634. This was as against the assessee's claim of Section 80J relief at Rs. 2,72,351. The IAC (Assessment)'s reasons for departing from the earlier years' basis was that the surplus of Rs. 20,55,554, claimed to be partly made up by profit of Rs. 14,38,175 for the earlier three years of Bhiwandi unit, stood unsubstantiated because there was no way of verifying whether the said surplus was invested in the assets of Bhiwandi unit or in the head office. He had noted that the secured loans as on 31-3-1980 at Rs. 1.60 crores had increased to Rs. 1.63 crores on 31-3-1981 and there was no way of finding out whether the said loans had been invested in the Bhiwandi unit or in the head office.
17. At the hearing before us, the learned counsel for the assessee urged that though the assessee had not kept separate accounts for Bhiwandi unit, yet a balance sheet of sorts had been prepared to give a rough idea of the capital arid the surplus of the said unit according to which the capital employed in fixed assets was of Rs. 36,26,979 of the said unit (PB. 30).
18. We have carefully considered the assessee's submissions. We, however, do not find any good reason for interfering with the orders of lower authorities. The allocation of capital employed between the head office and the Bhiwandi unit by the IAC (Assessment) appears to be quite reasonable and does not need any interference, which is accordingly confirmed.
Ground No. 4 :
19. The assessee claimed excise duty of Rs. 69,15,971 out of which Rs. 15,85,279 was a provision made as per Schedule XI of balance sheet. Item 12 of the notes to balance sheet mentioned that the assessee-company had paid central excise duty on the basis of assessable values representing their manufacturing cost together with manufacturing profits, while as per Central Excise authorities, excise duty was payable on the basis of normal price and the matter was in dispute and, therefore, provision of Rs. 15.85,279 had been made. The assessee explained before the IAC (Assessment) that the controversy was whether post-manufacturing expenses should be included in the value for the purpose of levy of excise duty and that the assessee had been collecting higher excise duty on the basis of normal price from its customers but paying excise duty on manufacturing cost plus manufacturing profits on the basis of the Bombay High Court decision in CIT v. Bombay Tyres International Ltd. [1983] 141 ITR 710 which, however, was subsequently reversed by the Supreme Court decision in Union of India v. Bombay Tyres International Ltd. AIR 1984 SC 420 and that there was no assessment or demand notice from the Central Excise authorities till the Supreme Court decision because the Bombay High Court decision favoured the assessee regarding deduction of post-manufacturing expenses. However, on the basis of a letter dated 8-5-1980 from the Central Excise authorities directing the assessee to execute a bond for Rs. 30 lakhs for covering the Government revenue risk, the assessee claimed that the aforesaid provision of Rs. 15,85,279 should be allowed as a. deduction. The IAC (Assessment), however, rejected this contention on the ground that in respect of disputed excise duty, liability arises only when a demand notice is received and then only an enforceable legal liability crystallises. The IAC (Assessment) observed that the aforesaid provision represented only a contingent liability and that deduction would be allowed as and when the demand from the Central Excise authorities was received or payment was made by the assessee.
20. The Commissioner (Appeals) upheld the IAC (Assessment)'s order holding that Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITB 363 (SC) would apply only when there was a legally enforceable demand and in the present case the liability had not crystallised.
21. At the hearing before us, the learned counsel for the assessee reiterated his reliance on Kedarnath Jute Mfg. Co. Ltd.'s case (supra) where it was observed that the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted and that although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment.
22. The assessee also relied on CIT v. Century Enka Ltd. [1981] 130 ITR 267 (Gal.) where it was held that in the case of an assessee following mercantile system of accounting, provision in accounts for excise duty leviable on products manufactured and utilised by the assessee itself is allowable, though no demand notice is issued for excise duty but a letter from the Excise Department had been received stating that excise duty was payable.
23. Reliance was also placed on CIT v. V. Krishnan [1980] 121 ITR 859 (Mad.) where it was held that liability to sales tax can be allowed in the year of transaction or in the year in which it is paid but it cannot be claimed in the year in which demand is raised.
24. The assessee also relied on the Tribunal Bombay Bench B's order in Swan Mills Ltd. [IT Appeal No. 2545 (Bom.) of 1985, dated 21-3-1986] for the assessment year 1981-82 where in paragraph 61 it was held that the assessee was entitled to deduction of excise duty. The said judgment, however, went by the facts of that case.
25. Considering the aforesaid decisions in the light of the facts of the instant case, we find that the IAC (Assessment) had already allowed the assessee's claim regarding liability to payment of undisputed excise duty of about Rs. 54 lakhs and the dispute was only regarding the allowability of provision of Rs. 15,85,279 which provision was made by the assessee because of the controversy whether excise duty was chargeable on normal price (as claimed by Central Excise authorities) or on manufacturing cost plus manufacturing profit (as claimed by the assessee). The assessee was paying Central Excise Duty on the basis of the Bombay High Court decision in Bombay Tyres International Ltd.'s case (supra) which permitted the assessee to pay excise duty on manufacturing cost plus manufacturing profits. Thus, so long as the Bombay High Court decision held the field, Central Excise had no enforceable liability against the assessee for claiming that excise duty should be paid on the sale price. However, as soon as the Supreme Court's judgment in Bombay Tyre International Ltd.'s case (supra) holding that excise duty was payable on sale price charged by the assessee from the wholesale purchaser, only then an enforceable demand was raised by the Excise Department against the assessee on the basis of sale price by issuing a demand notice and the assessee started making payments with effect from 3-9-1983 (as detailed at page 54 of paper book). Thus, enforceable demand in respect of the disputed value of the manufactured articles for the purpose of excise duty arose only as a result of the Supreme Court decision (mentioned supra) and, therefore, in the account on year under consideration ending on 31-3-1982, there was no such enforceable demand, hence the provision made of Rs. 15,85,279 was not in respect of any enforceable demand and had rightly been disallowed as a contingent liability. This is in accordance with the Madras High Court's view in V. Krishnan's case (supra) and Pope the King Match Factory v. CIT [1963] 59 ITR 495 (Mad.). We accordingly confirm the orders of lower authorities on this point.
Ground No. 5 :
26. The above ground regarding interest under Section 215 of the Act is not pressed in view of the Commissioner (Appeals)'s directions to the IAC (Assessment) to give consequential effect to charging of interest under Section 215.
Addl. Ground :
27. Additional ground regarding Section 35B of the Act claim was moved before us on 26-8-1986 though the appeal was filed on 2-1-1986. This ground is regarding the claim of weighted deduction under Section 35B on commission of Rs. 2,28,500, of which details were not furnished before the IAC (Assessment). The Commissioner (Appeals) had confirmed the IAC (Assessment)'s rejection of the assessee's claim of weighted deduction of this item. Similar is the position before us. We, accordingly, reject this ground.
28. In the result, the appeal is partly allowed.