Income Tax Appellate Tribunal - Hyderabad
Central Wines vs Income-Tax Officer on 13 September, 1985
Equivalent citations: [1986]15ITD332(HYD)
ORDER
K.S. Viswanathan, Accountant Member
1. This is an appeal by the assessee for the assessment year 1979-80 claiming a deduction of Rs. 1,07,849 being the liability for payment of sales tax.
2. The assessee is a registered firm. They have the business of wholesale and retail distribution of wines and spirits. Since the matter concerned is about the sales tax liability, we may mention that the rate of sales tax applicable in respect of the sales of wines and spirits was 25 per cent. Now, these are sold in bottles and crates. In the earlier sales tax assessment years, the assessee was computing the sales tax payable on the wines and spirits separately from the bottles. In respect of the bottle sales, the rate of sales tax adopted for payment was 3 and 4 per cent. This was accepted by the Sales Tax Department.
3. It appears that the Sales Tax Department had second thoughts about the correctness of such assessments. The assessments for the accounting period 1972-73 and 1973-74 were reopened. In the reopened assessments, the bottles were taken along with the wines and spirits and subjected to levy of sales tax at 25 per cent. In this manner, an additional demand of Rs. 41,893 was raised in the sales tax assessment year 1972-73 and Rs. 65,956 for the sales tax assessment year 1973-74. Both these assessment orders are dated 7-7-1978 which fell within the accounting year ended 30-9-1978 assessable to income-tax assessment year 1979-80.
4. The assessee had filed appeals against the sales tax assessments and the Sales Tax Assistant Commissioner (Appeals) dismissed the appeals. Thereafter, the assessee filed appeals before the Sales Tax Appellate Tribunal. They passed an order on 24-1-1984 holding that the reopening of the sales tax assessments was bad in law. Thus, by their orders of the Tribunal, the additional demand raised had been wiped out.
5. Before the ITO for the assessment year 1979-80, the assessee claimed that the sales tax demand made was an allowable deduction. The ITO held that they were not allowable. The Commissioner (Appeals) agreed with the ITO. He pointed out that unlike the facts in Addl. CIT v. T. Nagireddy & Co. [1976J 105 1TR 669 (AP), the point at issue was whether the assessee could get any deduction for a sales tax demand notice pertaining to the past years. He pointed out that as per the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, sales tax is attracted at the moment when a dealer makes a purchase or sale which are subject to taxation. Although that liability cannot be enforced till the quantification is effected in the assessment proceedings, the liability for payment of sales tax is independent of the assessment. He then pointed out that the Allahabad High Court in the case of CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121 had held that the liability relating to a past year would not cease to be a liability for that year, merely because the assessee thought that the relevant transactions would not attract sales tax liability for that year. He then referred to the facts of the assessee's case and pointed out that the asses-see was under the impression in the initial stages that the liquor containers would be charged to sales tax at a lower rate and that as per reassessments made ; subsequently, the containers were taxed at a higher rate than applicable to the containers would (sic) in no way be derogatory to the legal position that the sales tax liability had arisen in the year of the sale itself. He, therefore, agreed with the order of the ITO.
6. The assessee is on further appeal. Shri Ratnakar appearing for the assessee submitted that "the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) had not stated in absolute terms that all liabilities regarding sales tax would be relating back to the year of sale. In cases where there is a disputed demand, the year of admissibility is the year in which the disputed demand was raised. For this purpose, he referred to the decision of the Delhi High Court in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1. In that case the High Court has explained the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd.'s case (supra). It has been pointed out that the principles laid down in that decision have limited application to cases where the additional demand is raised before the income-tax assessment is completed. He then referred to the decision of the Bombay High Court in the case of CIT v. [.Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734 and submitted that where a statutory demand is raised it is immaterial whether the assessee has accepted or contested the demand and in either case it will be admissible as a deduction. He then pointed out whether a liability accrues or not depends upon the commercial principles applicable in the facts of the case. A statutory liability like the additional liability for payment of sales tax becomes real and enforceable only in the year in which the demand notice is received. Therefore, it is an allowable deduction for the assessment year 1979-80. He submitted that the test to be applied is that of a commercial man--whether a commercial man would consider the additional liability as having arisen in the original assessment years or in the year in which the demand notice was received. He submitted that it will be only in the latter year. He also submitted that the distinction between original sales tax demand and the additional sales tax demand has been realised by the Allahabad High Court in the case of CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868. That authority has held that the additional demand is allowable in the year in which the demand was raised. He further submitted when it was pointed out that at the time when the Tribunal was hearing the matter, there was no demand outstanding, that although the Sales Tax Appellate Tribunal had quashed the reassessment proceedings, nevertheless, a revision petition has been filed by the State Government which is pending before the Andhra Pradesh High Court. Therefore, he submitted that there is no cessor of liability under Section 41(1) of the Income-tax Act, 1961 ('the Act') so long as the revision petition is pending before the High Court.
7. Shri P. Radhakrishnamurthy for the department pointed out that the assessee is maintaining accounts on mercantile system. No provision has been made in the books of account. Whatever may be the liability which had accrued on the sales of the bottles is a liability correctly accruing in the year of sale. A misunderstanding regarding the correct position in law by the assessee cannot postpone the accrual of liability. It might have postponed the quantification, but on the issue of deduction under Section 37 of the Act, quantification is not very relevant. He then pointed out that as on the date, there was no liability at all and, therefore, there is nothing to be deducted against the income shown for the year 1979-80. At best, he submitted, the liability has ceased during the accounting year relevant to the assessment year 1985-86 and a direction may be given that the provisions of Section 41(1) would be made applicable for that year.
8. The first issue to be decided is this. When does the additional sales tax liability arise ? Does it arise in the year of sale itself or does it arise in the year of demand raised by the Sales Tax Department ? The department's contention is that as per the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) the liability to pay sales tax arises at the point of sale itself. Now, in a matter where there are no scope for disputes or differences what the department says is the correct position. But the sales tax liability, as any other liability, is not a matter of simplicity. There are points of complexities on which the understanding of the provisions of liability by the assessee and the Sales Tax Department could be different. In such cases it will be over-simplification to say that the sales tax liability arises only in the year of sale itself.
9. We may now refer to some of the authorities on this point. We may first of all refer to the decision of the Kerala High Court which apparently supports the department's contention. In the case of L.J. Patel & Co. v. CIT [1974] 97 ITR 152 (Ker.), the assessee was following the mercantile system of accounting. The firm was liable for excise duty and the rates of excise duty were enhanced by the Finance Act, 1951. As a result of this enhancement the assessee had to pay Rs. 31,675 as additional excise duty. This should have been paid in 1952. The assessee did not pay but challenged the impost on various grounds but did not succeed. Thereafter it was paid in 1962 and claimed as deduction in the assessment year 1963-64. The High Court pointed out that where the liability of the assessee who was maintaining the mercantile system of accounting to pay excise duty arose in 1952, but as he was contesting the liability, the amount was paid only in 1962, the deduction of the amount paid could be claimed only in 1952 in accordance with Section 13 of the Indian Income-tax Act, 1922 ('the 1922 Act') and Section 145(1) of the 1961 Act. The High Court held that the assessee cannot claim the deduction in the assessment year 1963-64. As we pointed out earlier, this appears to support the department's contention.
10. We may next refer to the decision of the Madras High Court in the case of CIT v. V. Krishnan [1980] 121 ITR 859. This was a case of additional sales tax liability being raised in one year different from the year of sale. The assessee did not make any claim in respect of the year of sale. No claim was made in respect of the year in which the demand was raised. However, a claim was made in the year in which the additional sales tax was paid-off. The High Court held that in the absence of any provision to show that the existence of a demand is a condition precedent to the liability arising, the liability to pay sales tax would ordinarily relate to the year in which the transaction took place. The year in which the disputed demand was raised is not the year in which either the liability to tax arose because of the transactions having been effected during that year nor in which the assessee had paid the tax and, hence, the amount in question cannot be allowed as a deduction in the year in which the demand was made. This decision also supports the department.
11. As against these decisions, we may refer to the decision of the Allahabad High Court relied on by the assessee. In the case of Banwari Lal Madan Mohan (supra) the assessee, a firm, had taken over the business of an HUF. In respect of the sales effected when the business was owned by the HUF certain sales tax demands were made. These demands were raised when the firm was owner of the business. The HUF had made provisions for sales tax in their accounts on mercantile basis. The excess over the provisions was claimed as a deduction by the firm. The High Court held that inasmuch as the HUF had been following the mercantile system of accounting and making provision for the tax on an estimated basis, it was the year in which it was quantified that the actual liability for sales tax was finally determined. The liability for excess amount over that for which provision had been made accrued in the year in which it was quantified. It was, therefore, held as an admissible deduction in the year in which quantification was done. This decision supports the assessee.
12. Before we try to reconcile these three authorities we may refer to a decision of the Delhi High Court in the case of Rattan Chand Kapoor (supra) referred to by the assessee's counsel. The Delhi High Court has explained as to the circumstances under which the ratio of the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) would apply. According to the Delhi High Court that ratio is limited to those cases in which the demand for sales tax is raised by the Sales Tax Department before the income-tax assessment for the relevant year has actually been completed, as no revised return can be filed after the assessment is over. So the scope of this authority has a limited field. This decision had been relied on to show that the additional liability for sales tax arose much later in point of time and the assessee could not have claimed these deductions in the original assessments of 1972-73 and 1973-74.
13. We may now refer to the decision of the Calcutta High Court in the case of CIT v. Orient Supply Syndicate [1982] 134 ITR 12. That was a case of liability for contribution to employees' provident fund. This is also a statutory liability like sales tax. The assessee was under the impression that there was no liability to make this contribution. The liability was also not enforced in the earlier years. However, in the course of the accounting year relevant to the assessment year 1964-65, the Regional Provident Fund Commissioner wrote to the assessee in which he stated that the assessee was liable to make these contributions and directed it to make payment for the period from 1-11-1957 to 31-12-1960 immediately. These liabilities were claimed as a deduction for the assessment year 1964-65. The department's contention was that the liability did not arise during the accounting year. The High Court held that although the assessee was following the mercantile system of accounting and statutorily the liability arose in the year to which contributions related to. In reality the High Court held that it arose in the year when it was clarified to be applicable to the assessee and the assessee was asked to discharge that liability. They referred to the letter of the Provident Fund Commissioner dated 19-6-1962 and stated that it would be apparent from the tenure of the letter that a certain decision was pending. Then the High Court observed:
Therefore, if having regard to the reality of the situation, the Tribunal took a view that in reality the liability matured in the relevant year, it cannot be said that such a finding was improper or incorrect. . . ." (p. 15) Again they observed:
"But, here as we have mentioned, the position is not a theoretical position as to whether a statutory liability arose in the year when it became due or when it was discharged. Here the facts are that the assessee is a firm--whether it is a factory employing certain amount of employees and whether it came under the mischief--required a clarification from the Regional Povident Fund Commissioner. As a matter of fact, the letter of the Commissioner, which we have set out hereinabove, is indicative of the fact that the subject was the extension of the Employees' Provident Funds (Amendment) Act, 1960. Furthermore, the Commissioner, in the penultimate paragraph of the said letter, made it clear, pending a decision for the past period, that the demand was made for a certain year in question. Therefore, from a commercial point of view, for a commercial man, in the reality of the situation, to claim deduction in the year under question, was not unjustified. If, on that basis, the facts of which are on the records of the Tribunal, the Tribunal has allowed the deduction, we cannot say that the said decision of the Tribunal is perverse or incorrect." (p. 16) Thus as per the ratio of this decision, one has to look into the question from a commercial point of view of a commercial man and also take into account the reality of the situation. If these are taken into account then, although the sale took place in an earlier year, the liability arose only during the accounting year in which the additional demand was raised by the Sales Tax Department.
14. Now the decision of the Calcutta High Court in the case of Orient Supply Syndicate (supra) is also an authority to show that on the main principle having laid down there is no difference between the principles laid down by the Kerala High Court and the Madras High Court in V. Krishnar's case (supra). The Calcutta High Court has stated:
"... We are in respectful agreement with the views of the Madras High Court and the Kerala High Court as noted above. . . ." (p. 15)
15. In a passage appearing in the Madras High Court's decision in V. Krishnan's case (supra) similar view is expressed where the liability depended upon interpretations of difficult provisions of taxing statute. The Madras High Court observed:
"... There may be cases where the assessee is not in a position even to estimate his liability because whether the transaction is liable to sales tax at all or not may itself be in dispute. In certain other cases the question in dispute may relate to the point as to whether the tax liability arose on a single point or multi-point. There may even be cases where the Sales Tax Department would raise estimated assessments and the assessee is obliged to pay sales tax in which case the assessee may not know about the existence or quantum of liability. In all these cases, it may not be possible even for a person maintaining his accounts on the mercantile basis to provide for the liability in the year to which it could be related taking into account the transactions of sale. . . ." (p. 862) The above passage clearly is in agreement with the Calcutta High Court. The decision of the Kerala High Coutt was a decision where the claim for deduction was in the year of payment. Now since the assessee is maintaining accounts on mercantile system the claim could be made either in the year of sale or in the year in which the demand was raised. It could never be in the year in which the payment was made. Therefore, the decision of the Kerala High Court is also reconcilable.
16. In view of the above analysis, we are of the opinion that the assessee can claim the additional liability for sales tax in the year in which the said demand was raised by the Sales Tax Department. Therefore, the assessee is entitled to claim these deductions in the year 1979-80.
17. We now consider the second issue, that is, in view of the fact that on the date on which the appeals were heard the liability had ceased to exist whether the assessee can still claim the deduction. In other words, can a claim for deduction of liability be allowed when by the time the appeal is disposed of it is known that the liability has ceased to exist. We have given anxious consideration to this issue. In our opinion, we have to decide the matter on the basis of the materials available in the accounting year. What had happened subsequent to the accounting year need not be considered. If we were to hold otherwise, then the position whether a liability is to be allowed or not depends very much upon the time at which the appeal is heard. If the appeal were to have been heard when the matter was still pending before the Sales Tax Tribunal, then it should be allowed in favour of the assessee. If the appeal is to be heard after the Sales Tax Tribunal has quashed the assessments then it should be allowed in favour of the department. Thus, the decision will not depend upon the income-tax law or accounts but would depend upon the time at which the appeal is heard. In our opinion, this is not a good principle to go by.
18. The next issue is whether there is cessor of liability in view of the decision of the Sales Tax Tribunal. Shri Radhakrishnamurthy, for the department, has submitted that a direction should be given that the provision of Section 41(1) should be made applicable for the year in which the Sales Tax Tribunal had quashed the assessments. Shri Ratnakar had submitted that the Sales Tax Department had not accepted the Tribunal's order and a revision petition has been filed. We had made further enquiries as to what is the correct position of the revision petition. In their letter dated 28-8-1985, the assessee had stated that on enquiries made from the Sales Tax Department, the assessee had been informed that the Government had not accepted the order of the Tribunal and filed a tax revision case in the Andhra Pradesh High Court and papers were forwarded to the Andhra Pradesh High Court from the Sales Tax Department on 6-6-1984. The matter has not come up for hearing so far as it is still pending before the High Court. It would, therefore, appear that the High Court has not yet passed any order admitting the revision petition. Therefore, as it is, the order of the Sales Tax Tribunal stands and there is no liability from the date on which the Tribunal has passed the order. Therefore, it is clear that the provisions of Section 41(1) will be attracted for the assessment year 1985-86.
19. We must, however, note that the above position is based on the assumption that the Sales Tax Tribunal's decision has become final. If the High Court admits the revision petitions of the Government then the matter would take a different colour. It has been held by authorities that when an appeal is filed the earlier orders are no longer in operation, so long as the appeal is pending. It is well known that after the appeal is disposed of the original order merges with the appellate order. We may note that as far as the sales tax proceedings are concerned, there is no further appeal from the order of the Sales Tax Tribunal. However, the Act has provided for a revision before the High Court. If the revision petition is admitted then the position would be that the order of the Sales Tax Tribunal will not be operative. In this connection we may refer to the decision of the Punjab and Haryana High Court in the case of Salig Ram Kanhaya Lal v. CIT [1982] 133 ITR 915. That was a case where the assessee was to supply certain quantity of wheat to the Government. The Government did not lift the entire quantity during the stipulated period. Suits were filed by the assessee for losses incurred. The civil Court decreed the suit in 1969 in favour of the assessee. However, the Government filed an appeal. The department brought to tax the amount decreed in the assessment year 1970-71. The High Court held that since the Government had filed an appeal no income had accrued for the assessee on the date on which the civil Court had decided the matter in favour of the assessee. We may mention that against the decision of the Punjab and Haryana High Court the department had moved for a special leave petition before the Supreme Court and the Supreme Court had dismissed the department's petition vide [1983] 143 ITR (St.) 65.
20. The second authority for the same proposition is the decision of the Allahabad High Court i« the case of Rameshwar Prasad Kishan Gopal v. V.K. Arora, ITO [1983] 141 ITR 763. This was a case of levy of excise duty. The assessee had challenged the levy and the High Court held that the provision levying excise duty was ultra vires. However, against the High Court's order, appeals were filed before the Supreme Court and the appeals were pending. In the meanwhile, the ITO initiated reassessment proceedings for the year in which the High Court held that the levy was invalid. The amount refundable was treated as income under Section 41(1). The Allahabad High Court, disposing of the income-tax reference held that since the appeals were pending before the Supreme Court, liability was not finally extinguished so as to treat the refund receivable as income liable to tax.
21. We may also mention that the Andhra Pradesh High Court appears to be holding a similar view in these matters although it is not made explicit in their order. In the case of Addl. CIT v. T. Nagi Reddy & Co. [1976] 105 ITR 669 (AP) the assessee was maintaining accounts on mercantile basis and the sales tax collected was not paid to the Sales Tax Department pending adjudication of the dispute over liability to pay sales tax. The department brought the collection of sales tax to tax. The High Court held that since matters were pending litigation whenever such adjudication is disposed of finally, the amount determined as not payable to the department by way of sales tax can be included in the income of the assessee during that year. This observation also appears to be based on the principle that the liability does not cease so long as the appeals are pending.
22. Now as on the date on which we are passing the order we did not know whether the High Court will admit the revision petition filed by the Sales Tax Department. In case the revision petitions are admitted, then there is no cessation of liability and Section 41(1) will not be applicable for the assessment year 1985-86.
23. In this connection we have to make certain further directions. In case the High Court admits the revision petition and it is disposed of it is quite possible that the Government of Andhra Pradesh may not rest with the decision against it. The matter may go up to the Supreme Court also. Therefore, for a considerable number of months, the final decision may not be known. Ultimately, when the decision is given it is quite likely that both the department and the assessee may not be aware that for the assessment year 1979-80, the assessee has been given a deduction in respect of this additional disputed sales tax liability. In order to overcome a possible loss of revenue on this account, we direct the assessee to make an entry in the books of account regarding the liability for sales tax in case the High Court admits the revision petition in this accounting year. This is only to assure that the matter is not lost by oversight. Shri Ratnakar for the assessee had agreed that the assessee will make such a debit entry in the books. On that condition, we will direct that, (i) Section 41(1) profit will be assessable for the assessment year 1985-86, and (ii) if the High Court admits the revision petition then the assessability will depend upon the final outcome of the revision petition. If the assessee succeeds it will be brought to tax in the year in which the matter was finalised. In the meanwhile, the assessee will make necessary entries in the books of account.
24. With these observations, the appeal will be treated as allowed.