Income Tax Appellate Tribunal - Delhi
Maruti Udyog Ltd. vs Deputy Commissioner Of Income Tax on 11 October, 2004
Equivalent citations: [2005]92ITD119(DELHI), (2005)92TTJ(DELHI)987
ORDER
K.C. Singhal, J.M.
1. Various issues are involved in this appeal, However, for the sake of convenience, we shall first take up some legal issues.
2. First such issue relates to various disallowances under Section 43B aggregating Rs. 2,30,73,57,062 read with the provisions of Section 145A. The AO noted that the following amounts were not debited to P&L a/c but the assessee had claimed deduction for the same under Section 43B on the plea of actual payment :
1. PLA balances
(i) Excise duty on vehicles 3,19,41,665
(ii) R&D cess on vehicles 8,41,460
(iii) Excise duty on spare parts 6,76,075
2. Customs duty paid on imports for export purposes for 22,46,88,464 which exports has not been made
3. Custom duty paid on import of components for which 31,79,98,407 export has been made.
4. Excise duty paid and (CVD) paid on purchase of 69,93,00,428 components to be adjusted against excise duty payable on finished products, i.e., balance of RG 23-A Part-II.
5. Custom duty (CVD) paid to be adjusted against excise 8,39,13,307 duty payable on finished products
6. Custom duty paid in advance on goods in transit/under 22,08,48,421 inspection
7. Custom duty included in closing inventory with vendors 50,28,051 (imported tools)
8. Custom duty included in closing stock 69,12,41,610
9. Central sales-tax paid under protest 4,12,112
10. Excise duty paid under protest 41,26,902
11. Sales-tax recoverable 3,08,79,171 Total: 2,31,18,96,076 The AO noted that such claim was rejected in the preceding assessment year. He further expressed his view that such claim could not be allowed since such payments were not debited to P&L a/c. In view of the same, the AO rejected the claim of assessee under Section 43B for this year also.
3. On appeal, it was noted by the CIT(A) at p. 18 of her order that PLA balances were not relatable to any goods already manufactured. That meant that goods were still to be manufactured. Hence, no liability accrued under excise laws. Accordingly, the provisions of Section 43B could not be invoked. She also distinguished the judgment of Calcutta High Court in the case of CIT v. Berger Paints India Ltd. (2002) 254 ITR 498 (Cal), the decision of the Tribunal in case of Indian Communication Network (P) Ltd. v. IAC (1994) 50 ITD 411 (Del), ITO v. Food Specialities Ltd. (1994) 48 TTJ (Del)(SB) 621 : (1994) 49 ITD 56 (Del)(SB), Modipon Ltd. v. IAC (1995) 52 TTJ (Del) 477 and Honda Siel Power Products Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 97 : (2001) 77 ITD 123 (Del) relied upon by the assessee. According to her, Section 43B ignores the previous year in which liability to pay a sum is incurred in preference to the year in which such sum is paid. She further held that even presuming that PLA balances related to goods manufactured, these would have to be loaded to closing stock valuation in terms of Section 145A and, therefore, closing stock would be enhanced and corresponding deduction as P&L debit would become neutral. Hence, no relief could be allowed to assessee on this count.
4. Regarding deduction of Rs. 63,93,00,428 on account of excise duty paid on purchase of imports (component and other raw material), the CIT(A) rejected the claim of assessee by observing in para 9.16 as under :
"The arguments of the appellant are no longer valid after insertion of Section 145A of the Act. As per this section valuation of purchases, sales and inventory is to be adjusted to include all duties, taxes paid notwithstanding any right arising as a consequence of such payment. The amount of Rs. 6,99,30,042 has two components : Rs. 54,19,62,318 is in regard to closing stock inventory and Rs. 15,73,38,110 pertains to goods already consumed. Rs. 54,19,62,318 is to be added to closing stock valuation and corresponding deduction in the P&L a/c will not have any effect on the income. Similarly against the other amount of Rs. 15,73,38,110 the appellant has a right for modvat credit which has already accrued on consumption. Therefore, deduction for this amount is to be set off against credit accrued and will not affect income computation."
5. Regarding deduction of Rs. 31,79,98,407 on account of custom duty paid on import of components for which export was made, the CIT(A) held as under :
"The appellant has claimed an amount of Rs. 31,79,98,407 on account of custom duty paid on import of components for which export has been made. In respect of the above amounts, the appellant was entitled to receive duty drawback on accrual basis as sales entitling duty drawback had already been completed and vehicles exported. The AO will allow this amount of Rs. 31,79,98,407 as deduction for custom duty paid as cost of purchases but will simultaneously add the duty drawback on accrual basis at Rs. 31,79,98,407 as business income. This will effect computation of deduction under Section 80HHC in view of definition of "profits of the business" as given in Clause (baa) of the Explanation to Section 80HHC."
6. Regarding claim of Rs. 22,46,88,464 on account of custom duty paid on import of components for export purposes but export had not been made, CIT(A) held as under :
"The appellant has claimed an amount of Rs. 22,46,88,464 being custom duty paid on import of components for export purposes for which export had not been made. Out of this, a sum of Rs. 20,60,14,392 pertains to inventory. I am of the view that this amount needs to be added to the closing stock in view of Section 145A and correspondingly to be added as part of purchases. This adjustment will be income neutral. Remaining amount of Rs. 1,86,74,072 pertains to goods in transit and is not an expenditure item as. goods in transit are not routed through P&L a/c and Section 43B benefit can only be obtained for an item that is in the nature of expenditure."
7. Regarding claim of Rs. 8,39,13,307 on account of custom duty (CVD) paid on goods-in-transit, the CIT(A) rejected the claim of assessee by observing as under :
"Further, duty paid on goods in transit at Rs, 8,39,13,307 is not tax deductible as goods in transit are not the expenditure of the year and have not been routed through the P&L a/c and Section 43B deduction can only be obtained for an item that is in the nature of expenditure."
For the similar reasons, the claim of assessee of Rs. 22,08,48,421 on account of custom duty paid in advance on goods in transit/under inspection was rejected.
8. Regarding the sum of Rs. 50,28,051 and Rs. 69,12,41,610 on account of custom duty included in closing stock, the claim of assessee was rejected since these amounts were already debited to F&L a/c and, therefore, stood allowed. According to her, this amount could not be excluded from the closing stock in view of Section 145A.
9. Regarding the sum of Rs. 3,08,79,171 on account of sales tax recoverable, the CIT(A) held as under :
"This amount of Rs. 3,08,79,171 has two components : Rs. 2,74,91,197 is in regard to sales-tax pertaining to inventory and Rs. 33,87,974 is regarding finished products already sold. I am of the opinion that the amount of Rs. 2,74,91,197 is covered by Section 145A of the Act. As per the accounting procedure of the appellant this amount is not debited to the P&L a/c and correspondingly value of the closing stock is also understated. Therefore, the value of closing inventory is required to be enhanced to include the amount of sales-tax paid and deduction for purchases is to be adjusted by corresponding deduction for sales-tax. The adjustment sought by the appellant will, therefore, not affect the income computation. Similarly against the other amount of Rs, 33,87,074 the appellant has a right for credit which has already accrued on sale. Therefore, deduction for this amount is to be set off against credit accrued and will not affect income computation."
10. Regarding two items of Rs. 4,12,112 and Rs. 41,26,902 on account of Central Sales-tax and excise duty, the same were allowed by her since actual payments were made in pursuance of additional liabilities created by the concerned authorities.
Aggrieved by the order of CIT(A), the assessee has preferred this appeal on such issue.
11. The learned counsel for the assessee, Mr. C.S. Aggarwal, has vehemently assailed the order of CIT(A) by raising various submissions. At the outset, he informed the Bench about the method of accounting adopted by the assessee in respect of the disputed amounts. According to him, the assessee had adopted two methods of accounting, i.e., 'gross method' and 'net method'. According to 'gross method', the duty paid by assessee is included in the cost of purchase and, therefore, P&L a/c stands debited with the purchase price and the duty paid and the proportionate duty is correspondingly included in the closing stock not utilised for manufacturing. On the other hand, under the 'net method', the duty paid is not included in the cost of purchase but is directly debited to a separate account and not taken to P&L a/c. Consequently, such element of duty is not included in the closing stock, which remained to be utilised in the process of manufacturing by the end of the year. The amount not debited to the P&L a/c is shown in the balance sheet as loans and advances. In both the systems of accounting, it was contended that profits of the assessee remain the same. He also demonstrated the same by examples. Hence, it was pleaded that none of the methods of accounting would come in the way of assessee's claim under Section 43B.
12. Proceeding further, Mr. Aggarwal made the following submissions in support of assessee's claim under Section 43B :
(i) Section 43B, being non obstante section, overrides all other provisions of the Act and consequently, deductions in respect of taxes and duties is allowable on payment basis irrespective of the method of accounting and the year in which liability to pay is incurred. Hence, it is entitled to deduction where advance payment is made by the assessee. Heavy reliance was placed on the judgment of Allahabad High Court in the case of CIT v. C.L Gupta & Sons (2003) 259 ITR 513 (All), wherein it was held that claim under Section 43B could not be allowed in the year under consideration in which liability to pay duty/tax incurred since actual payment was made in the preceding year. According to the Hon'ble High Court, the claim could be allowed only in the preceding year when the payment was made in advance. Further, reliance was placed on two decisions of the Tribunal in the case of Modipon Ltd. (supra) and Raj & Sandeep Ltd. (ITA No. 1853/Chd/1993). Further, reliance was placed on Calcutta High Court judgment in the case of Beiger Paints Ltd (supra), judgment of Gujarat High Court in the case of Lakhanpal National Ltd. (1986) 162 ITR 240 (Guj), decisions of the Tribunal in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 49 ITD 56 (Del)(SB), Sona Steering Systems Ltd. v. Dy CIT, ITA No. 103/Del/1996 [reported at (2003) 78 TTJ (Del) 213], ITO v. Food Specialities (supra).
(ii) That assessee is entitled to deduction regarding modvat credit even though the same has not been debited to P&L a/c. According to him, the assessee is entitled to deduction under Section 43B in the year in which there is purchase of raw material (input), since payment of excise duty at the time of purchase amounts to actual payment when assessee becomes entitled to modvat credit under the excise laws. It is irrelevant when such modvat credit is utilised against the duty payable on finished goods. Reliance was placed on the decision of Tribunal in the case of Honda Siel Power Products Ltd. (supra).
(iii) That new Section 145A introduced w.e.f. 1st April, 1.999, does not affect the claim of assessee under Section 43B. According to him, Section 145A has overriding effect on the provisions of Section 145 but does not override the other provisions of the Act. Therefore, in case of conflict, the provisions of Section 43B would prevail. Hence, the earlier judgment of Gujarat High Court in the case of Lakhanpal National Ltd. (supra) and of Calcutta High Court in the case of Berger Paints Ltd. (supra) would still hold the field. Therefore, assessee would still be entitled to deduction under Section 43B where gross method is adopted by the assessee. Reliance was also placed on the decisions of the Tribunal in the case of Sona Steering System Ltd. (supra), Indian Communication Network (P) Ltd. (supra), Food Specialities (supra) and Supreme Court judgment in the case of CIT v. Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR 275 (SC).
(iv) The CIT(A), though justified in allowing the deduction of Rs. 31,79,98,407 being the custom duty paid on the input, was not justified in nullifying the same on the ground that duty drawback accrued to assessee on the export would have to be assessed on accrual basis. It was pleaded by him that by virtue of Section 28, such duty drawback is assessable on receipt basis.
(v) Alternatively, it was pleaded that even where the provisions of Section 145A are to be applied for valuing the closing stock, then valuation of opening and closing stock has to be done on consistent basis as observed by the Courts in Lakhanpal National Ltd. (supra), Ahmedabad New Cotton Mills Co. Ltd. 4 FTC 245 (PC) and Indo Nippon Chemicals Co. Ltd. (supra). Heavy reliance is placed on the judgment of Privy Council for the contention that if the closing stock is to be loaded with duty paid, then opening stock should also be loaded in similar manner.
(vi) Alternatively, it has also been contended that if advance payment is not allowed as deduction, then its claim should be allowed in the year where such payment is adjusted against the liability incurred. Hence, the advance tax paid in the preceding year should be allowed in the year under consideration since adjusted against the liability incurred. The claim of assessee should not be lost in the first year on the ground that it was advance payment and in the subsequent year on the ground that actual payment is not made.
13. On the other hand, the learned counsel for the Revenue justified the action of CIT(A) by raising following submissions :
(i) That before the insertion of Section 43B, the deduction was to be allowed on the basis of accrual of liability to pay duties and taxes where the assessee was following mercantile method of accounting even though such amount was not paid for years together because of the litigation [Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC). With a view to overcome this situation, the provisions of Section 43B were introduced and, therefore, accrued liability became allowable in the year of payment. So the liability must precede the payment. Attention of the Bench was drawn to the words "otherwise allowable" used by the legislature in Section 43B to buttress his argument that liability must precede the payment. Reliance was also placed on the provisions of Expln. 2 in support of above contention.
(ii) The liability to pay excise duty accrues on the date of manufacture and not before. The expression "any sum payable" in Section 43B has been defined in Expln. 2 which defines the same as a sum for which the assessee has incurred liability. Therefore, till the event of manufacture, there is no liability to pay excise duty. Hence, any sum paid in advance would not fall within the ambit of Section 43B.
(iii) Any payment in PLA register is in the nature of amount set apart to meet a future liability which may or may not arise. Hence, such payment cannot be said to be an expenditure since not irretrievably lost.
(iv) Similarly, liability to pay custom duty arises only when goods are brought within the country for the purpose of use, enjoyment, consumption, sale or distribution so that they are incorporated and mixed up with the mass of the products of the country. Prior to such event, no liability is incurred. Reliance was placed on Delhi High Court judgment in the case of Trilochan Singh v. Union of India 1981 ELT 667 (Del), judgment of Supreme Court in the case of Garden Silk Mills Ltd. v. Union of India 1999 (113) ELT 358 (SC). According to Supreme Court judgment, taxable event is not reached till goods reaches the custom barriers. Hence, any payment made when goods are in transit would not fall within the ambit of Section 43B.
(v) In view of the above submissions, it was submitted that advance payment cannot be allowed as deduction under Section 43B. Reliance was placed on decision of the Tribunal in the case of Dy. CIT v. Amforge Industries Ltd. (2001) 73 TTJ (Mumbai) 806 : (2001) 79 ITD 49 (Mumbai). He also drew our attention to recent decision of Special Bench of the Tribunal in the case of Dy. CIT v. CWC Wines (P) Ltd. (2004) 89 ITD 1 (Hyd)(SB) wherein it has been held that advance payment of duty without incurring the liability cannot be allowed as deduction under Section 43B. In fact, decision of the Tribunal in the case of Amforge Industries Ltd. (supra) has been approved. The decisions relied upon by assessee's counsel were distinguished. The judgment of Allahabad High Court in the case of C.L. Gupta (supra) was distinguished on the ground that their Lordships decided the issue on the basis of concession made by assessee. Further, the judgment of Supreme Court in the case of Garden Silk Mills (supra) was not brought to the notice of the Court. Even no arguments were made regarding the scope of expression "any sum payable".
(vi) With effect from 1st April, 1997, the assessee is not permitted to maintain hybrid system of accounting. The system should be either cash or mercantile but cannot be hybrid system. Since assessee is maintaining its accounts on mercantile basis, it could not offer duty drawback on cash basis. The right to duty drawback accrues to the assessee as a matter of right under the scheme and, therefore, CIT(A) was justified in setting off the deduction in respect of custom duty paid on components for export purpose against the duty drawback as export of car had been made against such import. The decisions to the contrary are no longer good law after such amendment.
(vii) Regarding the scope of Section 145A, it was submitted that originally, legislature proposed such provisions retrospectively w.e.f. 1st April, 1986, but subsequently was made effective only from 1st April, 1999. Therefore, it is wrong to contend that opening inventory should also be adjusted in the same manner in which closing stock is to be adjusted under Section 145A. Reliance was also placed on judgment of Calcutta High Court in the case of CIT v. Berger Paints India Ltd. (2002) 254 ITR 503 (Cal). He also relied on the judgment of Supreme Court in the case of Mahendra Mills Ltd. v. P.B. Desai, (1975) 99 ITR 135 (SC), where it was held that figures of closing stock of an assessment year would automatically become the opening stock of succeeding year. Hence, Section 145A and judgment of Privy Council cannot be applied to opening stock.
(viii) Section 145A would be applicable to adjust the purchase value of closing stock. Therefore, Modvat credit plus sales-tax paid on purchases would have to be adjusted in accordance with Section 145A. Hence, no separate deduction under Section 43B would be allowed since such payments stand allowed once these are taken to P&L a/c.
In the rejoinder, the learned counsel for the assessee has submitted as under:
1. Deduction under Section 43B is allowable in the year of payment irrespective of the fact whether goods are manufactured or not or the fact of incurring liabilities. The claim of assessee is fully allowable in view of recent Supreme Court judgment in the case of Berger Paints v. CIT dt. 17th Feb., 2004.
2. The words "otherwise allowable" used in Section 43B only exclude such expenditure which per se are disallowable like penalties, taxes on capital goods etc., so that assessee does not take benefit of the overriding provisions to claim deduction in respect of even such expenses which are not allowable at all under the scheme of the Act.
3. Regarding Expln. 2 to Section 43B, it was submitted that such Explanation was introduced to avoid the hardship caused to various assessees due to certain judgments of the Courts. Attention was drawn to the judgment of Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. v. Union of India; (1988) 173 ITR 708 (AP) wherein it was held that for. application of Section 43B, the liability not only should be incurred but also should be payable in the previous year as per the relevant status, like sales-tax/excise enactments. In order to avoid such hardships, the provisions of Expln. 2 were introduced. Hence, reliance placed by the learned Departmental Representative on this judgment regarding the construction of Section 43B is also misplaced. It was also pleaded that a judgment is an authority for only what is decided therein in a particular fact situation and principles laid down therein cannot be applied to different fact situation. Reliance was placed on the judgment of Supreme Court in Padma Sundra Rao v. State 2002 SCC 533. Hence, the judgment of Andhra Pradesh High Court cannot be relied on in the present case. Admittedly, it was pleaded that provisions of Expln. 2 shall not be stretched outside their intended scope of operation to limit the scope of availability of main provisions of Section 43B as held by Constitution Bench of Supreme Court in the case of Bengal Immunity Co. Ltd. v. State AIR 1955 SC 661.
4. Without prejudice to above, it was submitted that assessee would lose the claim of deduction for ever if the contention of Revenue is accepted. According to him, in such cases, deduction would be disallowed in the year of advance payment as liability not incurred and would be disallowed in the next year when liability is incurred as payment not made. Hence, such absurd situation should not be allowed to prevail. Further, the concept of deemed payment as laid down by the Tribunal in the case of Amforge Industries (supra) is not good law and contrary to the plain provisions of Section 43B. The decision of Special Bench of Tribunal in the case of KCP Ltd v. ITO (1991) 40 TTJ (Hyd)(SB) 528. was also distinguished. Lastly, it was pleaded that if advance payment is held to be disallowable, then such payment should be allowed in the year in which the same is adjusted against liability to pay excise or taxes. Consequently, the advance payment made in the preceding year may be allowed in this year as such payment was finally adjusted against the liability.
5. That decision of Tribunal in the case of Amforge Industries (supra) is not more good law on account of subsequent judgment of Supreme Court in the case of Berger Paints (supra) and judgment of Allahabad High Court in the case of C.L. Gupta (supra). The contention of the learned counsel for Revenue, that judgment of Allahabad High Court is distinguishable on the ground that Expln. 2 was not considered, was disputed by submitting that Expln. 2 was quoted in the judgment and, therefore, such contention of Revenue should not be accepted. Even otherwise, such plea cannot be allowed to raise in view of Supreme Court judgment in the case of Ambika Prasad Mishra v. State (1980) 3 SCC 719 wherein it was held that a judgment does not lose its authority merely because it was badly argued, inadequately considered and fallaciously reasoned. Further, reliance was placed upon the ejudgment of Supreme Court in the case of Kesho Ram & Co. v. Union of India (1989) 3 SCC 151 wherein it was held that binding effect of a decision does not depend upon whether a particular argument was considered or not.
6. Regarding the construction of Section 145A, it was submitted that it refers to valuation of inventory which would include opening as well as closing inventory and, therefore, principle laid down by Privy Council would still be applicable. It was, therefore, contended that words of statute being plain and unambiguous, full effect should be given to its natural meaning and, therefore, Section 145A would apply to opening and closing stock. Referring to CBDT Circular No. 772, it was submitted that intention of legislature was also not to restrict the applicability of the section to the closing stock. Such circular being binding on Revenue, it cannot contend to the contrary.
7. Regarding duty drawback, without disputing the contention of Revenue that it is taxable on accrual basis, it was submitted that right to receive the same did not accrue on the date of export but accrued only when claim to competent authority is made and approved as held by the Tribunal in the case of Pearl Polymers (P) Ltd. v. ITO (1986) 16 ITD 599 (Jab). See also ITO v. Bajaj Auto Ltd. (1984) 19 TTJ (Bom) 198 : (1984) 8 ITD 296 (Bom) and Indian Aluminium Cables Ltd. v. IAC (1985) 23 TTJ (Del) 458 : (1985) 13 ITD 907 (Del). Hence, duty drawback could not be assessed in the year under consideration.
8. Regarding goods in transit, it was submitted by him that goods had actually crossed the barrier and were in transit from port to assessee's place of business. Hence, duty paid on such inputs could not be considered as advance payment.
14. Rival submissions of the parties have been considered very carefully in the light of material placed and the case law referred to. The first question to be considered is whether payments made in advance in respect of taxes and duties without incurring any liability to pay such amounts can be allowed as deduction under Section 43B. There is divergence of opinion as noted by us in earlier paras. Special Bench of the Tribunal at Hyderabad and Mumbai Bench have held that advance payment is not allowable unless liability to pay has accrued. On the other hand, Hon'ble Allahabad High Court has held that such payment should be allowed in the year of payment irrespective of the year in which liability to pay arises. There is no judgment of jurisdictional High Court or of apex Court on this issue though it is claimed by the learned counsel for assessee that this issue stands covered by Supreme Court judgment in the case of Beiger Paints (supra).
15. Before expressing any opinion on construction of Section 43B, it would be appropriate, at this stage, to find out whether judgment of Supreme Court in the case of Berger Paints (supra) clinches the issue before us. We have gone through the said judgment very carefully. In our humble opinion, that judgment does not support the case of assessee inasmuch as the duties paid by the assessee in that case were not advance payments. The Hon'ble Supreme Court has not expressed any opinion on the correctness of the judgment of Calcutta High Court against which the Revenue was in appeal. What has been held by the apex Court is that having accepted the judgments of Gujarat High Court in the case of Lakhanpal National Ltd. (supra), of Bombay High Court in the case of CIT v. Bharat Petroleum Corporation (2001) 252 ITR 43 (Bom) and of Madras High Court in the case of Chemicals & Plastics India Ltd. v. CIT (2003) 260 ITR 193 (Mad), the Revenue now cannot be allowed to challenge the ratio laid down by such Courts. Therefore, indirectly, judgments of all the four High Courts stand upheld. So, in order to appreciate the contention of learned counsel for assessee, it would be appropriate to examine the facts on which the above three judgments were delivered.
16. In the case of Lakhanpal National Ltd. (supra), the Hon'ble Gujarat High Court noted the facts at pp. 243 of 162 ITR as under:
"The petitioner's chartered accountant, thereafter, wrote a letter to the respondent on 20th Dec, 1984. Along with the said letter, he submitted a statement showing the total customs duty actually paid as Rs. 2,78,54,262 out of which the customs duty included in the valuation of the closing stock was deduction, i.e., the amount of Rs. 1,24,94,085 was deduction and the remaining amount of Rs. 1,53,60,177 was debited to the P&L a/c. Similarly, in the statement with regard to excise duty, it was pointed out that the total excise duty that was paid was Rs. 5,25,68,931 out of which the excise duty included in the valuation of closing stock of finished goods at various depots, i.e., Rs. 29,80,439 was deducted and the remaining amount of excise duty paid, namely, Rs. 4,95,88,492 was debited to the P&L a/c. Copy of the said letter is annexed as Annex. F to the petition."
The facts mentioned above clearly show that payments of custom duty and excise duty were not by way of advance. It is clear that assessee had included the custom duty in the closing stock of inputs. That means, goods had already been imported. Hence, such duty paid was against the incurred liability. Similarly, excise duty had been included in the finished stock which itself shows that goods were already manufactured and liability had already been incurred as it is now the settled legal position that excise duty is leviable the moment goods are manufactured. Hence, it was not a case of advance payment.
17. In the case of Berger Paints (India) Ltd, (supra), the Hon'ble Calcutta High Court at p. 499 of 254 ITR noted the model advocated by assessee's counsel as under:
"Let us now examine the model advocated by Berger Paints. In the assessment year in question (i.e., in the previous year relating thereto), suppose they actually pay excise duty of Rs. 100. Suppose also, that on the last day of the previous year, there is a closing stock of goods manufactured but not until then sold. According to the assessee's model, this closing stock of goods also caused some excise liability of the assessee, resulting in some payment of excise duty, which is also contained in the said aggregate excise duty paid, i.e. in the said sum of Rs. 100. Let us suppose that this part of excise duty paid, relatable to the closing stock only, is Rs. 10."
The facts stated above clearly show that excise duty included in the stock related to manufactured stock. Therefore, it was also a case where liability to pay excise duty had already been incurred and consequently, could not be termed as advance payments.
18. Similarly, in the case of Bharat Petroleum Corporation Ltd. (supra), the assessee claimed deduction of Rs. 12,62,47,225 under the head "excise and custom duty paid" relating to closing stock as on 31st March, 1985. In the case of Chemicals & Plastics India Ltd. (supra), the facts as noted by the Court were as under:
"The assessment year is 1984-85. The assessee is engaged in the manufacture of polyvinyl chloride, rigid PVC pipes and fittings and other items. The assessee had, in the previous year corresponding to the asst. yr. 1984-85 imported materials required for the manufacture of the assessee's products. The assessee had paid import duty of Rs. 35,09,826. According to the assessee, the cost of the imported materials inclusive of duty was taken to the P&L a/c only on consumption basis. The balance of import duty of Rs. 11,58,833 paid on the raw materials held as closing stock, was taken into the balance sheet and shown as part of current assets. Schedule 15 of the balance sheet set out the current assets, loans and advances. In that Schedule under the heading 'inventories' the value of raw materials held in the stock was shown. The value of the raw materials stated therein, according to the assessee, includes this sum of Rs. 11,58,833.
Similarly, excise duty paid on finished goods held as closing stock was shown as part of the inventory under the current assets in the balance sheet."
Perusal of the above facts clearly shows that there was no advance payment without incurring liability. In fact, duty had been paid after incurring the liability on imports. In each of the three cases, duties related to either the purchases of inputs which remained to be utilised in manufacturing process and formed part of closing stock or related to manufactured goods. Even in the case of Indian Communication Network (P) Ltd. (supra), which was also referred to by Supreme Court in the case of Berger Paints (supra), the deduction was claimed in respect of excise duty and custom duty included in the closing stock.
19. In view of the above discussion, it is clear beyond doubt that in none of the cases, advance payment, before incurring the liability, was made on account of future liability under excise/custom law. Hence, the contention of assessee's counsel that issue relating to allowability of advance payment of taxes or duties as deduction under Section 43B is now settled by Supreme Court judgment in the case of Berger Paints (supra), cannot be accepted.
20. In the absence of any binding decision, let us now examine assessee's claim with reference to the provisions of Section 43B. At this stage, it would be appropriate to reproduce the relevant provisions of Section 43B as under :
"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
(a) any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called, under any law for the time being in force, or
(b)to(f)......(Not relevant) shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him :
Provided...............
Provided further.....................
Explanation 1...................
Explanation 2 : For the purposes of Clause (a), as in force at all material times, 'any sum payable means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law."
The perusal of above provisions clearly shows that before allowing any deduction under Section 43B on the basis of actual payment, the following conditions must be satisfied :
1. That deduction claimed by the assessee must be otherwise allowable under the other provisions of the Act.
2. Such deduction must relate to any sum payable by way of tax, duty, cess or fee.
3. That assessee must have incurred liability in respect of such tax, duty, etc. If the above conditions are satisfied then, the claim of assessee shall be allowed in the year in which actual payment is made notwithstanding the year in which liability is incurred. The expression "liability to pay such sum was incurred by the assessee" in the main provision of the section as well as the expression "a sum for which the assessee incurred liability" in Expln. 2 also clarifies that payment must relate to the incurred liability. Unless the assessee incurred the liability, it did not become 'any sum payable'. At this stage, it would be useful to refer to the judgment of Andhra Pradesh High Court in the case of Srikakollu Subba Rao (supra) wherein their Lordships construed the expression "any sum payable" as appearing in Clause (a) of Section 43B and at pp. 717-719 it was held that for application of Section 43B, not only the liability to pay tax or duty should be incurred but also the amount should statutorily be payable in the previous year. Some difficulty arose due to this judgment and, therefore, to remove the same, the proviso was added w.e.f. 1st April, 1984. Hence, the condition that the amount must be payable in the accounting year was removed by such amendment but the condition of incurring liability remained on the statute. Explanation 2 inserted retrospectively w.e.f. 1st April, 1984, recognises one of the conditions laid down by the Hon'ble Andhra Pradesh High Court to the effect that any sum payable would refer to only that sum in respect of which liability has been incurred. To that extent, the judgment of Andhra Pradesh High Court still holds the field. Therefore, in our humble opinion, the incurring of liability to pay taxes/duties is the condition precedent for invoking the provisions of Section 43B. Hence, we are inclined to accept the contention of learned counsel for the Revenue that liability must precede the actual payment.
21. There is another aspect that needs to be emphasised. The opening sentence of the section provides that deduction claimed must be otherwise allowable under the Act. There is no specific provision for allowing such deduction. Deduction regarding taxes/duties paid on stock-in-trade is allowable under the residuary Section 37. Section 37 refers to any expenditure, not being in the nature of capital expenditure or personal expenses of assessee, which is laid out or expended wholly and exclusively for the purpose of business. It means that deduction must relate to an expenditure which is neither capital in nature nor in the nature of personal expenses. The scope of the word 'expenditure' appearing in Section 10(2)(xv) of 1922 Act corresponding to Section 37 of 1961 Act was examined by the Hon'ble Supreme Court in the case of Indian Molasses Co. (P) Ltd. v. CIT (1959) 37 ITR 66 (SC). The apex Court defined the meaning of the word expenditure as under:
"'Spending' in the sense of paying out or away' of money is the primary meaning of 'expenditure' 'Expenditure, is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure."
In view of the above ruling, the advance payment of duty cannot be considered as expenditure since it is neither irretrievably gone as it is liable to be refunded if ultimately liability is not incurred, nor relate to existing liability. Hence, advance payment is akin to loan and cannot be considered as expenditure for the purpose of deduction under Section 37. If such sum is not deductible under Section 37, then question of allowing any deduction under Section 43B simply does not arise as allowability of deduction otherwise under the Act is the condition precedent.
22. In view of the above discussion, in our humble view, the advance payment of taxes or duties without incurring the liability to pay such taxes/duties cannot be allowed as deduction under Section 43B. The view taken by us is also fortified by the decision of the Tribunal in the case of Amforge Industries Ltd. (supra) and of Special Bench in the case of CWC Wines (P) Ltd. (supra).
23. The discussion on this issue would not be complete unless we deal with the case law relied upon by assessee's counsel. In the case of Modipon Ltd. (supra), we find that advance excise duty by way of deposit in PLA related to excisable items lying in the excise godown as is apparent from para 17 of that order. Thus, it is clear that goods were already manufactured by assessee and thus liability to pay excise had incurred. Merely because payment was to be adjusted on the date of removal of goods, it could not be said that liability was not incurred. It is the settled legal position that liability to pay excise duty accrues the moment goods are manufactured. Hence, in that case, the Tribunal was justified in allowing deduction under Section 43B. That case is, therefore, distinguishable on facts as in the present case goods were admittedly not yet manufactured.
24. In the case of Sona Steering Systems (supra) to which one of us (JM) was party, the liability to pay custom duty had already been incurred as well as paid. The custom duty paid was debited to P&L a/c and unutilised closing stock included the proportionate duty. The question was whether custom duty included in such closing stock could be allowed as deduction separately under Section 43B. It is in this connection, it was held by the Tribunal that custom duty debited in P&L a/c got cancelled to the extent included in the closing stock and, therefore, assessee was entitled to deduction under Section 43B in view of Gujarat High Court judgment in the case of Lakhanpal National Ltd. (supra). The issue relating to advance tax of duty was never before the Tribunal. Hence, that case is quite distinguishable on facts.
25. Special Bench decision in the case of Indian Communication Network (supra) has already been commented upon by us while dealing with judgment of Calcutta High Court in the case of Berger Paints (supra). For the similar reasons, the Special Bench decision in the case of Food Specialities (supra) is held to be distinguishable.
26. The only decision of the Tribunal which' remain to be considered is the unreported decision in the case of Raj & Sandeep Ltd. (supra). We have obtained the copy of the said decision from our record. The issue has been discussed in paras 17 to 21. Para 17 refers to the facts in very brief. It only states that assessee had claimed deduction of Rs. 1,68,582 on account of excise duty paid in advance. AO disallowed the claim as it advance payment as it was deductible under Section 43B. In para 18, it is stated that CIT(A) confirmed the order of AO but reduced the addition to Rs. 61,992 as sum of Rs. 1,06,390 had already been confirmed in preceding year. Para 19 contains the submissions of learned counsel for assessee which inter alia included that payment made by assessee was gone forever and assessee was not entitled to refund in any case. Reference was also made to Rule 173G under which such payment was made. In para 20, the Departmental Representative relied on order of AO. Para 21, which is the order of the Tribunal reads as under :
"We have carefully considered the submissions of the learned representatives and have also gone through Rule 173G(1) of the Central Excise Rules, 1944. The scheme appears to be that excise duty is payable as soon as the goods are manufactured and the assessee is obliged to keep sufficient amount in the account with the Collector of Customs known as 'account-current'. A debit entry has to be made in the account at the time of removal of goods. Excise duty is payable the moment any excisable goods are manufactured. The assessee has to deposit amounts as per Rule 173G. Such deposits are of irrecoverable nature and are not refundable to the assessee. Such excise duty, whether paid in advance or otherwise retains the character of excise duty and is, therefore, covered by the provisions of s, 43B. We, therefore, hold that excise duty which is deposited in the account-current by way of advance excise duty and is actually paid in the treasury qualifies for deduction under Section 43B. We, therefore, direct the AO to allow a deduction of Rs, 61,992 as claimed by the assessee in the ground of appeal."
From the perusal of the said decision, it is not clear whether the payment related to goods manufactured or not. If the payment relates to goods manufactured but not removed from godown, then such decision would not help the assessee as in such situation, the liability to pay excise duty had been incurred. From the tenor of the order passed, it appears that goods were already manufactured but not removed since Tribunal mentioned that "excise duty is payable as soon as goods are manufactured". Had the goods not manufactured, there was no need to mention such words. Further, the Tribunal was influenced by the contention of assessee's counsel that payment made by assessee was not refundable in any case. We find that Rule 173G which was referred to before the Bench contained Sub-rule (1A) effective from 12th May, 1973, which reads as under :
"Where an assessee keeping an account-current under Sub-rule (1) makes an application to the Commissioner for withdrawing an amount from such account-current, the Commissioner may, for reasons to be recorded in writing, permit such assessee to withdraw the amount in accordance with such procedure as the Commissioner may specify in this behalf."
In view of the above sub-rule, it could not be contended by the counsel for assessee that amount paid under Sub-rule (1) of Rule 173G had gone for ever and non-refundable in any case. Had this rule been brought to the notice of the Tribunal, the decision might have been different. Even according to general law, advance payment is always akin to loan/advance and can be appropriated against some liability. In the absence of such liability, the amount so advanced is liable to be refunded. There may be so many circumstances where assessee may not be in a position to manufacture. For example, for the reasons beyond control, the assessee may close down its manufacturing unit. In such cases, the advance payment has to be refunded. Besides, there may be fire or theft in the factory. The input may be destroyed due to natural calamities. In all such situations, the assessee may not be able to manufacture any goods for a considerable time and assessee may seek the permission to withdraw the amount under Sub-rule (1A) of Rule 173G and the Commissioner would be under obligation to refund the same. Since such aspect was neither argued nor considered, the said decision should be restricted to the facts of that case, cannot be applied for universal application. Further, the aspects considered by us were not argued before the Chandigarh Bench. Hence, the said case is clearly distinguishable.
27. The only judgment which is in favour of assessee is the judgment of Allahabad High Court in the case of C.L. Gupta (supra). On the other hand, contrary view has been taken by Andhra Pradesh High Court in the case of Srikakollu Subba Rao (supra). As already observed by us, there is no binding judgment on this issue before us. The Full Bench judgment of Bombay High Court in the case of CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom), rules that judgment of non-jurisdictional High Court has persuasive value and is not binding even though lone judgment of High Court is available. However, before us, we have two judgments taking contrary views. For the reasons given by us earlier, we prefer the judgment of Andhra Pradesh High Court which is in consonance with specific provisions of Expln. 2 to Section 43B.
28. In view of the above discussion, it is held that advance payment in cash of taxes or duties without incurring liability to pay such taxes or duties cannot be allowed as deduction under Section 43B. Therefore, the lower authorities were justified in disallowing the sum of Rs. 3,19,41,668 representing PLA balance of excise duty on vehicle inasmuch as there is clear finding of fact in para 9.5 of the order of CIT(A) that PLA balances are not relatable to any goods manufactured. It also refers to written submissions of assessee wherein it was stated that goods were still to be manufactured. This finding of fact remains uncontroverted before us. Hence, the disallowance of Rs. 3,19,41,668 has to be sustained.
29. However, we find force in the alternate contention of assessee's counsel that such amount should be allowed in the year in which it is adjusted against liability to pay excise duty on manufactured goods. Accordingly, it is pleaded that deduction should be allowed of the sum of Rs. 1,03,79,919 representing PLA balances on the last day of the preceding year but adjusted in this year. We are in complete agreement with such contention since such adjustment amounts to actual payment. Even the learned counsel for Revenue has no objection to such contention provided such deduction was not allowed in the preceding year since double deduction of the same amount cannot be allowed. Considering the same, the order of CIT(A) is modified and the matter is remitted to the file of AO who shall allow the alternate claim of assessee after verification if such deduction was not allowed in the preceding year. Since it has been held that advance payment did not represent the payment of excise duty, the question of including the same in the closing stock does not arise. Therefore, finding of GIT(A) to that effect is vacated.
30. The above finding of ours would apply mutatis mutandis with reference to the sum of Rs. 8,41,460 and Rs. 6,76,075 representing PLA balances of R&D cess on vehicles and excise duty on spare parts, respectively.
31. At this stage, let us also deal with the deduction of Rs. 69,30,00,248 under Section 43B which represents modvat credit of excise duty which remained unutilised by the end of the year under consideration. After giving our due consideration to the respective arguments of both the parties, we are unable to uphold the claim of assessee. Let us first understand the nature of modvat credit. Modvat Credit Scheme is contained in Rule 57A onwards of Central Excise Rules, 1944. Rule 57A allows credit of any duty of excise or the additional excise duty paid on the goods used in or in relation to the manufacture of the final products which can be utilised towards payment of duty of excise leviable on final products. For example-Suppose an assessee pays excise duty of Rs. 30 on purchase of raw material which is to be used in manufacture of goods. If the excise duty payable on manufactured goods is Rs. 50 then assessee will be entitled to adjust Rs. 30 against liability of Rs. 50. Thus, only balance Rs. 20 would be payable by assessee. As per Rule 57C, such credit is not allowed if the final product is exempt from levy of excise duty. Rule 57G prescribes the procedure to be followed by assessee. According to this rule, every manufacturer, intending to avail this benefit, is required to file a declaration giving prescribed particulars before the Asstt. Collector of Central Excise who shall issue an acknowledgement. Thereafter, assessee would be entitled to take credit of duty paid on purchase of raw material. He is also required to maintain an account in Form No. RG.23A and also to maintain an account current with the excise authorities. In view of this scheme, it appears to us that modvat credit is the notional amount which is allowed to be adjusted against the liability which is to be incurred by the assessee on the manufacture of the final products.
32. The treatment given by assessee in the books of account is like this. It debits the manufacturing account with cost of purchase of raw materials net of excise duty. The amount of excise duty on such purchases is debited to a separate account called-Modvat recoverable account. When the cars are manufactured, the amount of excise duty payable on such manufacture is credited to Modvat recoverable account. If amount credited is more than the modvat credit, then the excess amount is modvat credit at the end of the year, the same is shown in the balance sheet on the asset side as it represents unutilised modvat credit. It is this unutilised amount of modvat credit which has been claimed by the assessee as deduction under Section 43B considering the same as actual payment.
33. The claim of the assessee, thus, is based on the footing that unutilised modvat credit is nothing but advance payment of excise duty by the assessee and, therefore, should be allowed as deduction under Section 43B on the basis of actual payment. We have already adjudicated this issue at length in the earlier part of the order against the assessee by holding that advance payment of excise duty without incurring the liability in respect of such payment is not allowable as deduction under Section 43B. For the similar reasons, this claim of the assessee is also rejected,
34. Even otherwise, we are of the view that unutilised modvat credit is not even payment of excise duty by way of any liability to pay such duty much less the advance payment, The liability to pay excise duty under the excise laws accrues only on the event of the manufacture of goods and not earlier as held by the Hon'ble Supreme Court in the case of Union of India v. Delhi Cloth & General Mills Ltd. AIR 1963 SC 791. As per the scheme of excise law discussed earlier, the assessee becomes entitled to set off the amount of modvat credit against the liability to pay excise duty which accrues on the date of manufacture. The amount of modvat credit is not refundable in any circumstance. Even assessee has no right to set off if ultimate goods manufactured is exempt from excise duty. In fact, in our opinion, the element of excise duty on the purchase of raw material is part of cost of raw material as also held by the Tribunal in the case of S.H. Kelkar & Co. v. Dy. CIT (1994) 49 TTJ (Bom) 262 : (1992) 44 ITD 170 (Bom) and, therefore, cannot be considered as payment of excise duty. On the other hand, it is the vendor manufacturer who is entitled to deduction under Section 43B in respect of excise duty charged by him from the customers like the assessee. Two persons cannot claim deduction under Section 43B in respect of the same amount, i.e., once by the manufacturer who manufactured the goods and again by the purchaser of raw material from such manufacturer on the basis of entries made in RG 23A, The entries in RG 23A only entitle the assessee to set off the amount equal to the amount of excise duty forming part of cost of raw material. It assumes the character of payment only when it is adjusted against the liability on the manufacture of final product. Therefore, in our humble opinion, the assessee would be entitled to deduction in the year in which modvat credit is adjusted. Admittedly, the sum of Rs. 69,30,00,248 represents the unutilised amount of modvat credit. Hence, the same cannot be allowed as deduction under Section 43B.
35. However, we find force in the alternate contention of assessee's counsel that unutilised modvat credit of earlier year amounting to Rs. 77,55,78,738, which has been adjusted in the year under consideration, should be allowed as deduction inasmuch as such adjustment would have to be treated as actual payment of excise duty. Accordingly, the assessee is entitled to such deduction subject to verification provided the same was not allowed as deduction in the earlier year.
36. In view of the above discussion, the order of the CIT(A) upholding the disallowance of Rs. 69,30,00,248 is upheld. However, his order is modified vis-a-vis the alternate contention of assessee. The AO is, therefore, directed to allow the deduction to the extent the unutilised modvat credit of last year in terms of the preceding para.
37. Now we come to the similar disallowance of Rs. 3,08,79,171 under Section 43B under the head 'sales-tax recoverable account'. This amount is also in the nature of modvat credit under excise law. The relevant facts are that assessee pays certain amount of sales-tax on the purchase of raw materials and computers which are required to be used in the manufacture of cars. Though, the sales-tax paid is part of cost of raw material, the assessee debits the purchases net of sales-tax and the amount of sales-tax is debited to separate account 'sales-tax recoverable account'. Under the provisions of Haryana General Sales-tax Act, 1973, the assessee is entitled to set off such sales-tax against the liability of assessee on the sales of finished goods, i.e., cars. Whenever the goods are sold, the tax on such sales is credited to the aforesaid account. The balance amount is shown in balance sheet on asset side. Again, the claim of assessee is based on the ground that amount of sales-tax debited to sales-tax recoverable account was actual payment of tax in advance. We have already rejected such contention in respect of modvat credit. For the similar reason, this claim of assessee is rejected.
38. However, we find merit in the alternate contention that amount of Rs. 3,84,55,412 representing advance payment of sales-tax in preceding year should be allowed deduction in the year under consideration since the same has been adjusted against the liability incurred on sales in this year. We have already held that on the date of adjustment of liability against such credit, the assessee is deemed to have made actual payment. Therefore, the order of CIT(A) is modified and AO is directed to allow the alternate claim after verification if such claim had not been allowed in the preceding year.
39. The next question for consideration is whether sum of Rs. 22,46,88,464, representing the custom duty paid on imports of inputs for export purposes but remained unutilised by the end of the year, could be disallowed under Section 43B r/w Section 145A. In this regard, we are of the considered view that no disallowance under Section 43B could be made in view of the judgment of Gujarat High Court in the case of Lakhanpal National Ltd. (supra) and Supreme Court judgment in the case of Berger Paints (supra) as well as decisions of the Tribunal in the case of Indian Communication Network Ltd. (supra) and in the case of Sona Steering System Ltd. (supra). The objection of AO for disallowance was that such sum was not debited to P&L a/c. In our opinion, this objection is without force since deduction under Section 4.3B has to be allowed on actual payment basis irrespective of the method of accounting. The CIT(A) has rejected the claim of assessee to the extent of Rs. 20,60,14,392 on the ground that such amount was liable to be included in the purchase as well as closing stock simultaneously in view of provisions of Section 145A. The stand of the Revenue is that deduction of custom duty stands allowed by debiting the purchases of such amount in the P&L a/c under Section 145A and, therefore, no separate deduction can be allowed while computing the income. We are unable to accept such stand of the Revenue. There is no dispute that as per Section 145A, the purchases and closing stock inventory has to be adjusted with the custom duty paid. Such treatment under Section 145A, in our opinion, would not affect the claim of assessee because in such situation, claim of deduction cannot be said to be allowed inasmuch as inclusion of similar amount in closing stock nullifies the effect of debiting the duty paid in the P&L a/c. In fact, duty paid on imports forms part of cost of purchase and resultantly such element also forms part of closing stock. The Hon'ble Supreme Court in the case of Chainrup Sampat Ram (1953) 24 ITR 481 (SC) has held that closing stock, shown to the credit side of trading account, has the effect of cancelling the purchases to that extent debited to such trading account. Therefore, it cannot be said that deduction on account of purchases, to the extent included in the closing stock, stands allowed. Applying the same principle, it cannot be said that the custom duty paid and debited to P&L a/c stands allowed to the extent included in the closing stock,
40. This view of ours is also fortified by the decision of Tribunal in the case of Sona Steering System Ltd (supra) where on similar facts such claim was allowed. In that case, the assessee was debiting the purchases in trading account inclusive of custom duty and showing the closing stock inclusive of such duty. Such method of accounting was in consonance with the method now prescribed in Section 145A. The assessee had claimed deduction under Section 43B equal to the amount of custom duty included in the closing stock but such claim was disallowed by AO on the ground that such claim stood allowed by debiting the purchases in the trading account. However, the Tribunal allowed the claim of assessee by holding as under :
"According to the accounting principles whenever the raw material purchased is shown in the closing stock and carried forward to the next year in the form of opening stock, it cannot be said that the cost of purchase has been allowed. For the similar reason, the custom duty paid by the assessee has been added to the cost of raw material and the same has been shown in the closing stock and carried forward to the next year in the form of opening stock. Therefore, it cannot be said that the expenditure on account of customs duty stands allowed to the assessee in the year under consideration. Therefore, following the decision of the Special Bench, the assessee is entitled to deduction of the aforesaid amount under Section 43B in the year under consideration."
The above decision squarely applies to the facts of present case. Therefore, following the same, the claim of assessee is held to be allowable under Section 43B to the extent of Rs. 20,60,14,392. Consequently, the order of the CIT(A) is set aside and the disallowance of Rs. 20,60,24,392 is deleted.
41. However, before parting with this aspect of the issue, we would like to clarify that assessee cannot be allowed double deduction-once on the basis of cash payment in the year under consideration under Section 43B and on the basis of mercantile system in the next year. As already stated, the unutilised raw material debited to P&L a/c gets cancelled when it is included in the closing stock and the same is carried forward to next year as opening stock. When such stock is utilised in manufacturing in the next year, the deduction would stand automatically allowed in that year. That would amount to double deduction. Hence, AO will look into this aspect, while assessing the income of next year. The AO will ensure that the deduction allowed in this year under Section 43B is included in the income of next year when such opening stock is disposed of. This clarification would apply in respect of each deduction under Section 43B where the deduction is allowed on the principle laid down in the case of Lakhanpal National Ltd (supra) and in the case of Beiger Paints (supra).
42. Regarding the balance amount of Rs. 1,86,74,072, it is seen that CIT(A) has disallowed the same on the ground that it could not be considered as an expenditure as such duty pertained to goods in transit which are not routed through P&L a/c. There is no reference to any material on the basis of which it could be said that goods were in transit. It is also not clear as to what the CIT(A) meant with the words "in transit". The counsel for assessee submitted that such goods were in transit from port to the place of assessee's business while learned counsel for Revenue stated that goods had not reached the custom barrier and, therefore, payment of duty was only in the nature of advance payment which was not deductible under Section 43B inasmuch as no liability to pay custom duty had accrued. According to him, the liability to pay such duty accrues only when goods cross the custom barrier. In the absence of any material on record, it is not possible for us to record a finding whether goods were in transit between port and assessee's place of business as contended by assessee or whether goods had not crossed the custom barrier as contended by learned counsel for Revenue. Further, the legal position as contended by learned counsel for the Revenue was never considered by the CIT(A). In these circumstances, we set aside the order of CIT(A) on this aspect of the issue and restore the same to his file for fresh adjudication after considering the material or evidence which may be placed by assessee or gathered by the Department.
43. For the reasons mentioned in the above paras, it is further held that CIT(A) was not justified in upholding the disallowance of Rs. 69,12,41,610 and Rs. 50,28,051 made by AO in respect of custom duty debited to P&L a/c and included in the closing stock either with the assessee or with the vendors. The only reason given by the CIT(A) (para 9.19) is that claim of assessee under Section 43B stands allowed when P&L a/c is debited by the custom duty paid. We have already rejected such reasoning of CIT(A) by following decisions of various Courts and the Tribunal. In view of the same, the order of CIT(A) is set aside on this aspect of the issue and consequently, above two disallowances are also deleted. However, clarificatory observations made there would apply mutatis mutandis in respect of these deductions.
44. The next question for consideration relates to the disallowance of Rs. 22,08,48,421 in respect of custom duty paid in advance. This issue has already been dealt by us at length while disposing the issue regarding advance payment of excise duty. It has been held by us that payment of duty cannot be allowed as deduction under Section 43B unless liability to pay such duty has been incurred by the assessee in the year under consideration. Consequently, any payment of duty without incurring the liability to pay the same cannot be allowed as deduction under Section 43B. In the case of custom duty, taxable event is reached when the goods reach the custom barrier and bill of entry of home consumption is filed as held by the Hon'ble Supreme Court in the case of Garden Silk Mills v. Union of India (supra). The relevant observations of their Lordships contained in para 16 of the judgment are quoted below :
"It would appear to us that the import of goods into India would commence when the same cross into the territorial waters but continues and is completed when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the custom barriers and the bill of entry for home consumption is filed."
Similar observations have also been made by Hon'ble Delhi High Court in the case of Trilochan Singh v. Union of India (supra) in para 8 as under:
"Thus, it is clear that the import is not merely the bringing into but comprises something more. It is with the intention of incorporating and mixing of the goods imported with the mass of the property already beyond the customs barrier in the local area."
In view of the above judgments, liability to pay custom duty is incurred only when the goods reach the custom barrier and bill for home consumption is filed. However, in the present case, neither the necessary evidence is on record nor such aspect was considered by the lower authorities. Hence, we set aside the order of CIT(A) on this issue and restore the matter to the file of AO for fresh adjudication after verifying the necessary facts and after giving reasonable opportunity to assessee to place necessary materials. If the AO finds the assessee had incurred the liability to pay such duty in the year under consideration, he shall allow the claim of assessee.
45. Now coming to the addition of Rs. 31,79,98,407 in respect of duty drawback against exports made by assessee, we are of the view that issue has not been decided by the CIT(A) in the right perspective for the reasons given hereafter. Originally, the addition was made by AO under Section 43B which has been held to be untenable by the CIT(A). To that extent, the finding has become final in the absence of any challenge by AO. However, the CIT(A) has upheld the addition on the ground that income had accrued to the assessee by way of duty drawback on account of exports made by assessee. The CIT(A) has proceeded on the footing that such income accrued to assessee automatically the moment exports were made. In our opinion, such approach is erroneous and cannot be upheld for the reasons mentioned hereafter,
46. Initially, there was divergence of opinion on the issue whether the receipt on account of duty drawback was capital receipt or revenue receipt. However, this controversy was set at rest by amending Section 28 with retrospective effect. The legislature made retrospective amendment to Section 28 of the Act by inserting Clauses. (iiia) to (iiic) by Finance Act, 1990 w.e.f. 1st April, 1962, Thus, income by way of duty drawback became taxable income by virtue of newly inserted Clause (iiic) to Section 28 which reads as under :
"Section 28(iiic) : any duty of custom or excise re-paid or repayable as drawback to any person against export under the Customs and Central Excise Duties Drawback Rules, 1971;"
The perusal of the above clause shows that income became taxable only if duty of custom/excise repaid or becomes repayable to the assessee. At this stage, it would be appropriate to mention that income chargeable to tax has to be computed in accordance with the provisions of Section 145. This section as applicable to the year under consideration provides that income has to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The combined reading of both the sections reveals that such income would be taxable on actual receipts if cash system of accounting is adopted by assessee and would be taxable on accrual basis if mercantile method is adopted by the assessee. Since the assessee is maintaining the mercantile system of accounting, it has to be held that in the present case income on account of duty drawback would be taxable in the year in which such income accrues to the assessee.
47. Thus, the contention of the assessee that income is taxable in the year of receipt cannot be upheld. Prior to the amendment effective from 1st April, 1997, Section 145 as originally enacted permitted the assessee to compute business income in accordance with any method of accounting regularly employed by assessee. It permitted even the hybrid system of accounting meaning thereby that assessee could adopt one method of accounting for one part of income while other method of accounting for other part of income under the same head of income. So upto asst. yr. 1996-97, the assessee could offer the duty drawback income on cash basis even though income from business of manufacturing car was offered on mercantile basis. But w.e.f. asst. yr. 1997-98, such hybrid system of accounting is not permitted and the assessee has to choose either cash or mercantile system of accounting. Having chosen mercantile system of accounting, the assessee is now not permitted to compute income of duty drawback on cash system of accounting. Therefore, it has to be computed on accrual basis only.
48. However, that is not the end of the matter. The question still remains whether there was accrual of income in the year under consideration. The GIT(A) proceeded on the footing that duty drawback accrued to the assessee the moment exports were made by assessee. This view of CIT(A) is contrary to the settled legal principle. Section 28(iiic) provides the taxable event where such duty becomes repayable. An amount cannot be said to accrue unless enforceable debt is created in favour of assessee. Reference can be made to the judgment of Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. and Ors. v. CIT (1954) 26 ITR 27 (SC). Their Lordships at p. 51 observed as under:
"That the words 'arising or accruing' are general words descriptive of a right to receive profits.... If the assessee acquires a right to receive the income, the income can be said to have accrued to him. Though it may be received later on it being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody.....Unless and until there is created in favour of assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him."
In view of the above binding principle, it has to be held that duty drawback cannot be said to be repayable to assessee unless assessee acquires a right to receive. A right to receive cannot be said to be created in favour of assessee unless an order is passed by an appropriate authority for repayment of duty in favour of assessee.
49. The view taken by us is also fortified by the decision of the Tribunal in the case of Pearl Polymers (P) Ltd. (supra), relied upon by the learned counsel of assessee, wherein it was held as under:
"When the assessee makes a bill for exports, the assessee obtains or acquires eligibility to make a claim for CCS and duty drawbacks. At that stage, the assessee is only having an inchoate entitlement. The assessee actually acquires a legally enforceable right or entitlement only when the application made by the assessee is examined by the concerned authorities of the claim either as made or with variation as approved for payment. This is the stage, when the assessee in law acquires an enforceable right."
Further, in the case of Indian Aluminium Cables Ltd. (supra), the Tribunal held that no amount of duty drawback and export incentive could be said to be legally due to the assessee until the claim was accepted by the authorities.
50. In view of the above discussion, it is held that no amount of duty drawback can be said to accrue to the assessee until such claim is accepted by the concerned authorities. Therefore, conclusion of CIT(A) that duty drawback accrued to the assessee immediately on the event of export made by assessee cannot be upheld. However, there is no evidence on record to verify this factual aspect whether the claim of assessee was accepted by the concerned authorities. Therefore, the order of CIT(A) is set aside on this aspect of the issue and the matter is restored to. the file of AO for verification as to when the claim of assessee was accepted. If the AO finds that claim of assessee was not accepted in the year under consideration, then no addition shall be made by him, However, if it is found that claim of assessee was accepted in the year under consideration, then to that extent, the addition would be retained. However, in the later situation, the addition would have to be deleted in the year in which it has been offered for taxation if such claim of deduction is made before the appropriate authority. The reason is that double addition cannot be made on the same account. The assessee is also directed to place all the relevant materials before the AO to enable him to ascertain this factual aspect.
51. Now we take up the last disallowance of Rs. 8,39,13,307, we are of the view that the issue cannot be adjudicated in the absence of any relevant material on record. The CIT(A) had proceeded on the footing that goods being in transit, the said amount did not constitute even the expenditure and, therefore, the amount paid being advance payment could not be allowed as deduction. On the other hand, the stand of assessee is that goods in transit was in the sense that they were on the way from port to assessee's destination and therefore, payment was actual payment of duty and thus was allowable deduction. However, there is no material on record to resolve this factual aspect. Hence, we set aside the order of GIT(A) and restore the matter to the file of AO for fresh adjudication after ascertaining the fact whether goods had crossed the custom barrier. We have already held in our earlier part of the order that claim of assessee is allowable if the goods have crossed the custom barrier as held by Hon'ble Supreme Court in the case of Garden Silk Mills (supra), Therefore, if the AO finds that goods had crossed the custom barrier in the year under consideration, the claim of assessee would be allowed.
52. The next issue relates to disallowance of depreciation of Rs. 37,39,116 claimed on additional liability of Rs. 2,99,12,931 in respect of capital goods. Briefly stated, the facts are that assessee imported some capital goods to be used for manufacturing of cars and exemption from payment of custom duty was allowed vide order No. 207 dt. 2nd Nov., 1993 subject to the condition that assessee would export certain quantity of cars manufactured by it. According to the said order, assessee was required to export 11000 cars in the financial year commencing from 1st April, 1995, and 21500 cars for each of the next six financial years. It was further provided that in case of shortfall in export in any year, the assessee would be liable to pay to the Collector of Customs, a sum equivalent to the duty forgone which was to be computed in proportion to the shortfall in export commitment, A bond was also executed by assessee in favour of Government in this regard. During the year under consideration, the assessee could export only 17920 cars as against 21500 cars. As such, there was a shortfall which resulted in liabilities to pay custom duty in terms of the said order/bond. As per terms of the bond, the assessee was required to pay such amount within 30 days from the end of financial year. In view of such liability, assessee paid the sum of Rs. 2,99,12,931 on 28th April, 1999. The assessee had claimed depreciation in respect of this amount since value of the capital goods was enhanced by the said amount. The AO disallowed the claim of assessee by observing "By adding this amount to the plant and machinery, the assessee has altered the actual cost of assets which is not permissible under the provisions of IT Act". On appeal, the CIT(A) upheld the disallowance on different ground by observing "that liability for payment of custom duty on shortfall in export obligation only arises when the appellant agrees to pay the custom duty which the appellant did in this case on 28th April, 1999". According to CIT(A), the liability did not incur in the year under consideration and, therefore, no depreciation could be allowed in the year under consideration. Aggrieved by the same, the assessee is in appeal before the Tribunal on this issue.
53. The learned counsel for assessee has submitted (i) that liability to pay custom duty did not arise on payment of such duty but had arisen during the year under consideration on account of failure to meet its export obligation. Reliance was placed on judgment of apex Court in the case of E.D. Sasoon & Co. (supra), (ii) since expenditure related to capital goods, it was necessarily to be capitalised; (iii) that custom duty so paid is an expenditure related to acquisition of capital asset and, therefore, the same should be added to the cost as and when assessee becomes liable to pay the same. Reliance was placed on Bombay High Court decision in the case of Habib Hussain v. CIT (1963) 48 ITR 859 (Bom); (iv) that written down value has to be determined afresh every year taking into account all factors in view of the Supreme Court judgment in the case of Saharanpur Electric Supply Co. Ltd. v. CIT (1992) 194 ITR 294 (SC). On the other hand, the learned counsel for the Revenue merely submitted that liability incurred by the assessee was not statutory but merely contractual which could not be said to be crystallised in the year under consideration. According to him, the assessee had option to pay and, therefore, liability was crystallised when it decided to pay the same. Since the payment was made in next year, it was pleaded that it could not be said that liability was incurred in the year under consideration.
54. Rival submissions of the parties have been considered carefully. In our view there is merit in the appeal of assessee on this issue. The AO had disallowed the claim of assessee on the ground that assessee was not permitted in law to change the cost of assets. This plea of AO is contrary to the decision of Supreme Court in the case of Saharanpur Electric Supply Co. Ltd (supra). Even the CIT(A) has not upheld the disallowance on this ground. The disallowance was upheld on an altogether different plea that payment of duty was not made in the year under consideration. That means that allowability of depreciation was not disputed by the CIT(A). The only dispute was to the year of allowability. The CIT(A) upheld the disallowance merely on the ground that payment of custom duty was made in the next year. We are not inclined to accept such plea of CIT(A). The depreciation is allowable with reference to actual cost. The actual payment has nothing to do with the determination of actual cost particularly when mercantile method of account is adopted by the assessee. As soon as the liability is incurred to pay, it becomes the cost of assets. The claim of assessee cannot be denied merely because the payment is not made. It is also not the case of Revenue that component of custom duty does not form part of actual cost of assets. The only argument of learned counsel for Revenue is that liability being contractual did not crystallise in the year under consideration. We are unable to agree with such contention. As soon as the capital goods were imported, the statutory liability to pay custom duty was incurred. However, as per the scheme of Custom Act, exemption from payment of such duty could be allowed if certain quantity of export was made by assessee. In the present case, such exemption was allowed to assessee subject to the condition that assessee would export 11000 cars in financial year 1995-96 and 21500 cars for each of the next six years. In case of failure to export such cars, the assessee was liable to pay proportionate custom duty in terms of the exemption order. Such order was made under the law of custom and, therefore, such liability arose on account of non-compliance of such exemption order. Since the liability was statutory one, it accrued the moment there was non-compliance of such order. Even assuming that it was a contractual liability, still it arose on the failure of assessee to export cars which took place in the year under consideration. There is distinction between incurring of liability and discharge of the same. It was discharge of liability which took place in next year. In view of the above discussion, it is held that liability to pay custom duty was incurred in the year under consideration and, therefore, payment of duty formed part of the actual cost. Accordingly, the assessee was entitled to claim depreciation in respect of such amount. The order of CIT(A) is, therefore, set aside on this issue and consequently, the disallowance sustained by him is hereby deleted.
55. The next issue relates to the disallowance of interest of Rs. 4,59,08,287 under Section 14A sustained by the CIT(A). The facts of the case are in short compass. In the year under consideration, the assessee had paid total interest of Rs. 47,47,22,000, details of which are given as under :
(i) Interest on advances from dealers Rs. 26,85,83,000
(ii) Interest on initial deposit from customers Rs. 13,68,92,000
(iii)Interest on export credits Rs. 4,67,81,000
(iv) Others Rs. 2,54,66,000
Total Rs. 47,47,22,000"
The assessee had also invested the sum of Rs. 2,17,80,27,000 in shares of various companies. The dividend income arising from such investment was exempt under Section 10(33). Section 14A provides that expenditure incurred in relation to income not forming part of total income would not be allowed as deduction while computing total income of assessee. The AO, without much discussion, held that interest paid by assessee could not be allowed. He calculated interest @ 18 per cent on the total investment in shares of Rs. 2,17,80,27,000 at Rs. 39.20 crores and accordingly, the same was disallowed.
56. The matter was carried in appeal before the CIT(A) before whom it was submitted (i) the company had sufficient interest-free funds for making such investment and there was no direct nexus between the earning of tax free income and expenditure incurred; (ii) the use of term "in relation to" under Section 14A requires a direct nexus in view of Supreme Court judgment in the case of Madhav Rao Jiva Ji Rao Scindia v. Union of India (1971) 1 SCC 85 and Navin Chemicals Manufacturing & Trading Co. Ltd. v. Collector of Customs (1993) 4 SCC 320; (iii) that the investment in shares actually amounted to Rs. 1,93,80,27,000 because a sum of Rs. 24 crores was on account of investment made in debentures of Maruti Countrywide Automobiles Finance Ltd. interest on which is taxable; (iv) that the AO calculated interest @ 18 per cent for the full year while interest if any to be disallowed should have been computed on day-to-day product method with respect to cost of funds to the company. The CIT(A) distinguished the judgments of Supreme Court relied on by assessee and held that direct and approximate relationship is not necessary. However, as per C1T(A), an effort was made to link the availabilities of funds on the date of each investment resulting in tax free income. On the basis of the details furnished vide letter dt. 18th Dec, 2002, it was found by CIT(A) that source of fund in each case were primarily advances from dealers on which assessee paid interest or overdraft or loan against fixed deposits, etc. Accordingly, it was held on facts that there was direct nexus between funds borrowed and investment in shares yielding tax free income. However, she agreed with the assessee that ad hoc disallowance @ 18 per cent could not be made and disallowance should be made on day-to-day working product method. The assessee was asked to work out the cost of local funds excluding foreign currency loans. This working resulted in disallowance of Rs. 4,59,08,287. Still aggrieved, the assessee is in further appeal to the Tribunal.
57. The learned counsel for assessee has raised various submissions namely (i) that Section 14A contemplates to allow that expenditure only which are relatable to earning of taxable income and consequently disallows only those expenses which are relatable to earning of tax free income. This section was brought on statute book with retrospective effect from 1st April, 1962, to nullify the effect of Supreme Court judgment in the case of Rajasthan State Warehousing Corporation v. CIT (2000) 242 ITR 450 (SC). Reference was also made to the memorandum explaining Finance Bill, 2001 reported at (2001) 248 ITR (St) 196; (ii) that the assessee is entitled to deduction under Section 36(1)(iii) and Section 14A does not take away such right of assessee; (iii) that tax authorities have failed to establish any nexus between the borrowed funds and tax free income; (iv) that finding of CIT(A) regarding existence of the nexus is incorrect as the assessee had not borrowed any amount for the purpose of making investment resulting in tax free income; (v) that investment was made out of mixed funds and as such there was no justification for CIT(A) to sustain the disallowance. Reliance was placed on Supreme Court judgment in the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) and Bombay High Court judgment in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) for the proposition that once three conditions are satisfied, then deduction must be allowed; (vi) that the appellant-company had owned interest-free funds of the company at the beginning of the year of Rs. 2,143.35 crores and at the close of the year Rs. 2,622.37 crores and, therefore, the net own funds of the company were far in excess of the investments made by the appellant-company of Rs. 217 crores to earn the tax free income. Further, the assessee had net profit of Rs. 975 crores which alone far exceeded the investment in shares. Hence, no inference could be drawn that investment in shares was out of borrowed funds. Reliance was also placed on Calcutta High Court judgment in the case of Indian Explosives Ltd. v. CIT (1984) 147 ITR 392 (Cal) as well as Madras High Court judgment in the case of CIT v. Savera Hotel Ltd. (1999) 239 ITR 795 (Mad); (vii) that merely the fact that on the date of investment, the bank account had borrowed funds, it could not be said that borrowed money had been used for making investment in shares; (viii) that provisions of Section 14A could not be applied to the year under consideration since it was inserted by Finance Act, 2001, w.e.f 11th May, 2001; (ix) alternatively, it was also pleaded that the learned CIT(A) has failed to appreciate that interest has been computed on day- to-day product method by adopting the period equivalent to number of days from the date of investment till the end of the financial year whereas it should be limited to the average number of days for which advances of dealers are retained by the assessee-company. It is submitted that, on an average, interest is paid to the dealer on the advance taken for a very short period of time and as such, the assessee-company has to pay interest for this short time gap only. It is thus contended that, without prejudice, even if any disallowance has to be made, it has to be made with reference to number of days for which the appellant-company had paid the interest to the dealer. The average number of days as computed on the basis of average days required to convert the advances received from dealers into sales proceeds is 23 days, the basis of which is placed at p. 4105 of the paper book J and therefore, at best such disallowance should be restricted to Rs. 65,73,417.
58. On the other hand, the learned counsel for the Revenue has relied on the findings of CIT(A), who on facts, had calculated the disallowance by pointing out that borrowed money was used for making investment in shares, Coming to Section 14A, it was submitted that the words "in relation to" would include not only direct nexus but also indirect nexus. He also distinguished the Supreme Court judgment relied on by assessee, i.e., (1971) 1 SCC 85 (supra) by submitting that it was delivered with reference to a particular Article of the Constitution of India which is not relevant for deciding the issue before us. In support of his contention, he relied on the judgment of Patna High Court in the case, of Telco 1994 (72) ELT 525 (Pat), copy of which is placed at p. 74 of paper book of Department. Proceeding further, it was submitted that Section 36(1)(iii) refers to the words 'in respect of in contrast to the words 'in relation to' in Section 14A. Hence, the case laws relevant to Section 36(1)(iii) are not relevant for deciding the issue under Section 14A. It was also submitted that if claim of assessee is to be accepted only under Section 36(1)(iii), then the provisions of Section 14A would become redundant. He also submitted that in the case of mixed account, theory of apportionment can be applied. Reliance was placed on judgment of Supreme Court in the case of Continental Construction Ltd v. CIT (1992) 195 ITR 81 (SC). Reference was also made to Rule 7 of IT Rules, 1962.
59. Rival submissions of the parties have been considered carefully in the light of case law referred to and the material placed before us. The first aspect of the issue relates to the scope of Section 14A, Prior to insertion of Section 14A, the legal position regarding allowability of expenditure was like this : "Where an assessee is carrying on one indivisible business and a part of income is either excluded or is exempt under any provision of the income-tax law, it is not permissible to disallow the proportionate part of the expenditure attributable to such exempted or excluded income". Reference can be made to the judgments of Supreme Court-CIT v. Maharashtra Sugar Mills Ltd. (1971) 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT (supra). However, where different activities do not constitute one and the same business and income from some activity is not taxable, the composite business expenditure has to be apportioned to each one of the activities. Reference can be made to judgment of Supreme Court in the case of Waterfall Estates Ltd. v. CIT (1996) 219 ITR 563 (SC). Perhaps, the legislature never intended to allow the deduction in respect of expenditure attributable to exempted income. Hence, in order to overcome the difficulty arising because of Supreme Court judgments mentioned above, the legislature brought on statute book Section 14A with retrospective effect from 1st April, 1962. However, in our opinion, the language used by the legislature is of widest amplitude. It includes every expenditure within its ambit irrespective of the head under which it is claimed which relates to the income not forming part of total income. So this section would disallow the expenditure not only falling under head of business income but also falling under other heads. For example, if dividend income is exempt under Section 10(33), the expenditure incurred for earning of such income would be disallowable. So, we are not inclined to accept the contention of assessee's counsel that Section 14A does not override the provisions of Section 36(1)(iii). Section 14A has to be construed harmoniously so as to achieve its object and not in the manner which may frustrate the object. Therefore, even if money is borrowed for the purpose of business, it can be disallowed if it is shown that such money was utilised for earning of income not forming part of total income. Hence, the purpose for which money is received or borrowed, in our opinion, would be irrelevant if such money is found to be utilised for earning income not forming part of total income.
60. Regarding burden of proof, it is the settled legal position that burden is on the person who alleges the existence of a fact. If the question of genuineness of expenditure is raised, the burden would be on assessee to prove the same. Hence, where assessee claims deduction in respect of any expenditure, then onus would be on the assessee to prove that conditions for its allowability are satisfied. Reference can be made to Supreme Court judgment in the case of CIT v. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC), On the other hand, if the Revenue wants to disallow an expenditure under a particular provision, then the onus would be on the Department to prove that conditions for disallowance are satisfied. Reference can be made to judgment of Punjab & Haryana High Court in the case of Saraswati Industrial Syndicate Ltd. v. CIT (1982) 136 ITR 361 (P&H). In the present case, it is the Revenue, who wants to disallow the expenditure under Section 14A. Hence the onus is on the Revenue to prove that interest paid by assessee on borrowed funds related to acquisition of shares yielding tax free income.
61. Another aspect of the matter relates to the meaning of the words "in relation to" used by the legislature in Section 14A. In our humble opinion, the meaning of any expression or words should be construed in the light of the context and the purpose intended to be achieved by the legislature. The purpose of the legislature is to disallow the expenditure which has been incurred by the assessee for earning tax free income. Therefore, the words "in relation to" would include any expenditure which is proved to have nexus directly or indirectly with the utilisation of funds for earning tax free income. However, as already stated, the burden is heavy on the Revenue to prove the same.
62. In the light of the above legal position, let us examine the facts of the case. We have examined the material placed before us. The AO had disallowed the interest without reference to any material. However, CIT(A) has observed that an effort was made to link the availability of funds on the date of each investment yielding tax free income. It was further observed that sources of funds in each case were primarily advances from dealers, overdrafts, loan against FDRs, etc. The working of CIT(A) appears at pp. 3682 to 3686. We have examined the details appearing on these papers. Page 3683 provides the details of investment in shares by the assessee. Pages 3684-3685 provide the details regarding particulars of shares purchased, name of the bank from which payments were made, date of investment, availability of funds and sources of funds. Page 3686 provides the working of interest with reference to number of days for which interest was calculated. Page 3682 provides the working of cost of funding at 7.87 per cent. The perusal of the details at pp. 3684-85 shows that CIT(A) had merely picked up the sources on which interest was paid by assessee and had completely ignored the other sources of assessee. This approach of the CIT(A) appears to be totally erroneous. Admittedly, this is a case of mixed accounts wherein all kinds of receipts are deposited. Assessee's counsel has specifically raised the plea at p. 94 of the written submissions that at the beginning of the year, there were interest-free funds of Rs. 2,143.35 crores while at the end of the year at Rs. 2,622.37 crores. Thus, there was increase in the interest-free funds to the extent of Rs. 479 crores. Besides this, profits of the year amounting to Rs. 975 crores were also pumped in such accounts. Thus, interest-free funds of Rs. 1,454 crores were available to assessee for making investment which far exceeded investment in shares of Rs, 217 crores. This fact stated by assessee remains uncontroverted. The CIT(A) could not ignore such facts. The nexus between borrowed funds and investment can be said to be established only where it is shown that interest- free funds were not available with the assessee. The failure to take this into account has completely vitiated the working made by CIT(A). We are not concerned with the disallowance under Section 36(1)(iii) as no such disallowance was made. The disallowance was sought to be made under Section 14A. Hence, it was for the Revenue to discharge the onus which the Revenue has miserably failed to discharge. Accordingly, the order of CIT(A) is set aside on this issue and consequently, the addition of Rs. 4,59,08,287 sustained by her is hereby deleted.
63. The next issue relates to the disallowance of Rs. 14,74,78,000 in respect of warranty expenditure. This issue has been disallowed by AO in para 5.9 of his order. It is observed that above claim was made on accrual basis while upto asst. yr. 1993-94 it was being claimed on the basis of actual expenditure. This change had not been accepted in part by his predecessor. It was also observed that CIT(A) had allowed the change but the said order was not accepted and appeal is pending before the Tribunal. Accordingly, he did not accept the claim of assessee on accrual basis. Since the assessee did not file the details of actual expenditure, the entire claim was disallowed.
64. On appeal, it was contended before CIT(A) that as per technical evaluation and based on past experience, the assessee was scientifically able to estimate the warranty claims. Reliance was placed on Supreme Court judgment in the case of Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) as well as judgment of Privy Council in the case of IRC v. Mitsubishi Motors New Zealand Ltd. (1996) 222 ITR 697 (PC). Alternatively, it was claimed that expenditure of Rs. 10,73,21,503 be allowed on actual basis. The CIT(A), considering various judgments of Supreme Court and High Courts, held that liability being contingent could not be allowed on accrual basis. However, the AO was directed to allow the alternate claim after verification. Aggrieved by the same, the assessee is in appeal before the Tribunal.
65. Both the parties have been heard. It is not necessary for us to narrate the arguments of the learned counsel for assessee since it has been agreed by the learned counsel for Revenue that if the claim of assessee is based on scientific method then, the claim of assessee cannot be rejected on the ground that it was contingent in view of the Supreme Court judgment in the case of Bharat Earth Movers (supra) and in the case of Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC), However, neither the AO nor the CIT(A) has examined the aspect as to whether the claim of assessee is based on scientific method. Accordingly, the order of CIT(A) is set aside on this issue and AO is directed to examine the details which may be filed by the assessee. If he finds that claim of assessee is based on scientific basis then, he shall allow the claim of assessee on accrual basis. Otherwise, the claim shall have to be allowed on actual basis.
66. The next issue relates to the disallowance of Rs. 1,39,91,022 in respect of software expenses. The assessee had claimed expenditure of Rs. 1,65,78,277 in respect of software expenses which was disallowed by AO observing that it was capital in nature. However, depreciation was held to be allowable.
67. Before the CIT(A), it was contended that in the era of advance technology, the software becomes rapidly obsolete and constantly had to be upgraded. Hence, application software should be allowed as revenue expenditure. Reliance was placed on various decisions mentioned in para 17.5 of the order of CIT(A). At the direction of CIT(A), the assessee classified the expenses as under;
Rs.
(a) Expenditure incurred on purchase of new software 1,39,91,022
(b) Expenditure incurred on upgradation of software 7,23,229
(c) Expenditure incurred on maintenance of software 18,64,026
------------
1,65,78,227
------------
The CIT(A) allowed the deduction in respect of expenses incurred for upgradation of software and for maintenance of software,
68. Regarding the balance amount of Rs. 13,99,91,022, it was seen that this amount was spent on acquisition of the following software:
Rs.
1. ERP Application Software 91,36,496
2. Enterprise management Application software 38,67,322
3. Application Software for creation and management parts 8,25,000
4. Director Multimedia Software 48,000
5. Software for Civil Engineering 45,000
6. Software for sales incentive monitoring 30,600
7. Software for designing tiles for captive consumption 13,650
8. Software for keeping records of development spare in 12,954 production division
9. Software for bills of entry processing 12,000
------------
1,39,91,022
------------
Regarding ERP application software, it was found that it was purchased in financial year 1996-97 for Rs. 58,56,396 and further sum of Rs. 32,80,100 was paid to M/s Arthur Andersons & Associates, whose services were obtained for implementation of such software. This payment was made in financial year 1997-98. The said firm reported a gap of some essential parameters between the ERP software and business process of the assessee. Hence, it was recommended in January, 1998, that implementation of the software be deferred for a period of six months as the current version was not conducive to the business of assessee. Ultimately, it was not found feasible to implement. Accordingly, the entitlement of Rs. 91,36,496 was written off in the books in the year under consideration. The CIT(A) rejected the claim of assessee on the ground (i) that expenditure did not relate to this year as the expenditure was incurred in earlier years; and (ii) that expenditure was capital in nature.
69. Regarding the other softwares, it was held that expenditure was on acquisition of assets and benefit attained was enduring one as same were functioning even in the 4th year and, therefore, expenditure was capital one. Hence, she disallowed the claim of assessee. Aggrieved by the same, the assessee is in appeal before the Tribunal.
70. The learned counsel for assessee has vehemently submitted that expenditure incurred on the purchase of software was expenditure incurred for the purpose of business and, therefore, allowable as revenue expenditure. Further, the company did not derive enduring benefit by incurring such expenditure. Even the test of enduring benefit may break down in certain cases. Reliance was placed on judgment of Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC). Further, reliance was placed on judgment of Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC). Proceeding further, it was submitted that rules effective from 1st April, 2003, provide depreciation at the rate of 60 per cent in respect of softwares forming part of block of assets. According to him, the legislature provided only from 1st April, 2003, that expenditure on acquisition of software would be capital expenditure and prior to that it was considered only as revenue expenditure. He also referred to AS-26 issued by Institute of Chartered Accountants effective from 1st April, 2003. He also relied on the following decisions for the proposition that expenditure on software was revenue expenditure :
(1) Bank of Punjab Ltd. v. Jt. CIT (2004) 91 TTJ (Chd) 422 : (2002) 122 Taxman 235 (Chd)(Mag) (2) Media Video Ltd. v. Jt. CIT (2002) 122 Taxman 28 (Chd)(Mag) (3) Business Information Processing Services v. Asstt. CIT (2000) 67 TTJ (Jp) 131 : (1999) 106 Taxman 116 (Jp)(Mag) (4) Gurudev Engineers (P) Ltd. v. ITO (1990) 34 ITD 297 (Mad) (5) TTC Classic Finance Ltd. v. Dy. CIT (2000) 112 Taxman 155 (Cal)(Mag) (6) CIT v. K & Co.
(7) Dy. CIT v. TCIL Bellsouth Ltd. (2004) 89 TTJ (Del) 851 : (2003) 130 Taxman 37(Del)(Mag) Proceeding further, it was also submitted that expenditure in respect of ERP application software be allowed as a business since it was not found to be feasible to implement in the instant year.
71. On the other hand, the learned counsel for Revenue has reiterated the reasonings given by the CIT(A) and also relied on the judgment of Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P) Ltd. (2003) 259 ITR 30 (Raj) for the proposition that expenditure on acquisition of software is capital expenditure.
72. Rival submissions of the parties have been considered carefully. In our opinion, there is no merit in the submission of learned counsel for assessee There is no dispute that expenditure of Rs. 1,39,91,022 was incurred on acquisition of softwares by way of purchase. The expenditure on upgradation and maintenance of software have been classified separately and also allowed by CIT(A) as revenue expenditure. So the only and limited issue for our consideration is whether expenditure on acquisition of software is revenue or capital expenditure. This issue is no more res Integra as it is well settled that expenditure incurred on acquisition of an asset (other than trading asset) is always capital expenditure. Reference can be made to the leading judgment of Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC). At p. 45, their Lordships observed as under:
"If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence, it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence."
There is no judgment contrary to what has been stated above as far as acquisition of capital asset is concerned.
73. Now the only question is whether purchase of software is a capital asset. There is no dispute that software is a capital asset. There is no dispute that software is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know-how as held by the Hon'ble Rajasthan High Court in the case of Arawali Constructions Co. (P) Ltd. (supra). In this judgment, it has been clearly held that expenditure on purchase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The IT Rules, 1962, as amended w.e.f. 1st April, 2003, rather helps the Revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent. By providing higher depreciation, it cannot be said that prior to 1st April, 2003, it was revenue expenditure. It was always a capital asset. Prior to 1st April, 2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 per cent by the amendment considering the rapid wear and tear. The judgment of Supreme Court in the case of Scientific Engg. House (P) Ltd. v. CIT (1986) 157 ITR 86 (SC) also supports the view taken by us inasmuch as their Lordships held that know-how is part of plant and machinery and, assessee is entitled to depreciation thereon. Before concluding this issue, we would like to refer to one more judgment of Supreme Court in the case of Arvind Mills Ltd. v. CIT (1992) 197 ITR 422 (SC) for the proposition "The expenditure incurred on capital asset does not lose the character of capital expenditure and does not become a revenue expenditure on the score that the said capital expenditure also ultimately enures to the effective running of the business". In view of the above discussion, it is held that expenditure was incurred on acquisition of capital assets and thus, it was a capital expenditure. Resultantly, the same could not be allowed as revenue expenditure.
74. The judgment relied on by the learned counsel for assessee are all distinguishable on facts inasmuch as none of the case related to acquisition of capital asset. In the case of Alembic Chemical Works Co. Ltd. (supra), the Hon'ble Supreme Court was dealing with case where lump sum payment was made for use of know-how. Even in that case their Lordships made a distinction between use of know-how and its exclusive acquisition. At p. 390, it was observed as under:
"The circumstance that the agreement insofar as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition."
In the case of Empire Jute Co. Ltd. (supra), the assessee had obtained an advantage connected with day-to-day business activity of manufacture which is quite different from acquisition of capital asset. In the case of K & Co. (supra), Delhi High Court was concerned with the expenditure regarding upgradation and maintenance of software. Such expenses have already been allowed to assessee in the present case. In cases of TOIL Bellsouth Ltd. (supra) and Business Information Processing Services (supra), the Tribunal was concerned with cases where the assessee was engaged in the business of software itself and expenses were directly related to business activity which is not the case before us. In FTC Classic Finance Ltd.'s case (supra), the payment was made for use of software and not acquisition of software. In other cases also, the expenditure was not incurred for acquisition of software as capital asset. Hence, all the cases relied on by the learned counsel for assessee are held to be distinguishable on facts.
75. Before parting with this issue, we would also deal with the disallowance of Rs. 91,36,496 in respect of ERP Application Software. We are in agreement with the reasoning given by the CIT(A). The expenditure was admittedly not incurred in the year under consideration. It has been merely written off in this year as it was not found feasible. Even assuming, for the sake of argument, that expenditure was of revenue character, it could be allowed only in the earlier years where actual payments were made. Hence, question of allowing as business loss in this year does not arise. Business loss can be allowed only with regard to trading asset which is not the case before us. We have already held that expenditure related to capital asset. Hence, loss, if any, was capital loss and could not be allowed as deduction.
76. In view of the above discussion, it is held that disallowance was rightly made by AO and sustained by CIT(A). The order of CIT(A) is, therefore, upheld on this issue.
77. The next issue relates to the disallowance of Rs. 32,41,870 in respect of litigation expenses. It was found by CIT(A) that expenditure was made in connection with CBI cases against its employees-Pramod Kumar Minocha and Ambuj Jain. Hence, following Supreme Court judgment in the case of CIT v. H. Hirjee (1953) 23 ITR 427 (SC), she confirmed the disallowance.
78. The factual background as stated by the assessee in its paper book is that in December, 1994, CBI had filed a charge-sheet before the Special Court at Bombay in which both the employees were named as accused in respect of transactions in securities done by the assessee in 1991. It was alleged in the charge-sheet that both these employees had conspired with the affairs of two banks and a private individual to cause pecuniary benefits to an outside party by abusing their official position and as such committed criminal breach of trust. The company decided to defend the allegation raised against these employees and accordingly incurred expenditure of Rs. 32,41,870.
79. In view of the above factual background, the learned counsel for assessee submitted that expenditure had been incurred to protect the goodwill and image of the company as well as to promote the sense of security and well being among the employees of the company. According to him, there was no allegation to have caused any loss or damage to assessee-company. In fact, one of the employees - Mr. Jain had been acquitted. It was also argued that the Supreme Court judgment relied on by CIT(A) was distinguishable on facts. On the other hand, he relied on the following judgments for the proposition that expenditure incurred to defend its employees in criminal proceedings is allowable as deduction under Section 37 :
1. Gujarat Agro Oil Enterprises Ltd v. CIT (2002) 256 ITR 230 (Guj)
2. Lakshmiji Sugar Mills Co. (P) Ltd. v. CIT (1975) 98 ITR 568 (Del)
3. Rohtas Industries Ltd. v. CIT (1968) 67 ITR 361 (Pat)
4. CIT v. Ahmedabad Controlled Iron & Steel Reg. Stockholders Association (P) Ltd. (1975) 99 ITR 567 (Guj)
5. Swadeshi Cotton Mills Co. Ltd. v. CIT (1975) 100 ITR 59 (A11)(FB)
6. CIT v. National Rayon Corporation Ltd. (1985) 155 ITR 413 (Bom)
7. CIT v. Indian Copper Corporation Ltd. (1986) 162 ITR 905 (Pat)
8. Aggarwal Hotels (P) Ltd. v. ITO (1989) 32 TTJ (Del) 187
9. Atlas Cycle Industries Ltd. v. CIT (1989) 47 Taxman 244 (P&H) Alternatively, it was submitted that proportionate expenses be allowed as Ambuj Jain stood discharged by the Supreme Court.
80. On the other hand, the learned counsel for Revenue supported the order of CIT(A) and also submitted that such expenses were connected with criminal activity of employees, i.e., misappropriation of funds of assessee-company. Such criminal activity was an offence for which one of the two employees was convicted and sentenced to imprisonment for 5 yea Rs. It was also submitted that criminal proceedings were not against company and, therefore, it could not be said that expenses was incurred for protecting the goodwill and image of the company. Hence, it was submitted that expenses was disallowable in view of Supreme Court judgment relied on by CIT(A).
81. Rival submissions of the parties have been considered carefully in the light of material placed before us and the case law referred to. The disallowance has been made by the AO and sustained by the CIT(A) on the footing that expenditure in respect of litigation in the criminal proceedings is not allowable in view of the Supreme Court judgment in the case of H. Hirjee (supra). In our opinion, the said judgment was delivered on the facts of that case and that judgment is not an authority for the proposition that litigation expenses in connection with the criminal proceedings are per se disallowable. This position has been clarified by the Hon'ble Supreme Court itself in a subsequent judgment in the case of CIT v. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC) wherein their Lordships observed as under :
"It is not correct to say that expenditure incurred in connection with a criminal case cannot be deducted as business expenditure under Section 10(2)(xv) : that provision does not make any distinction between civil litigation and criminal litigation. It makes no difference whether the proceedings are civil or criminal. All that the Court has to see are whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessee's business and whether the expenditure was bona fide incurred wholly and exclusively for the purpose of the business."
In view of the above legal position, the expenditure in respect of criminal litigation is allowable if it can be shown that the transactions in respect of which criminal proceedings were initiated arose out of the assessee's business or was incidental to such business and further, it is shown that expenditure was bona fide incurred for the purpose of business. Way back in 1973, the Hon'ble Delhi High Court in the case of Lakshmiji Sugar Mills Co. (P) Ltd. (supra), held that such expenditure was allowable as revenue expenditure if it was incurred to protect the goodwill of the business. Similar view has been taken by the Hon'ble Gujarat High Court in the case of Gujarat Agro Oil Enterprises Ltd. (supra). It is not necessary for us to represent other judgments relied upon by the learned counsel for the assessee since in those judgments also the Courts have held that if the expenditure is incurred in a criminal litigation to protect the goodwill and image of the company by defending the employees of the company, then such expenditure has to be allowed as deduction.
82. In the present case, the criminal proceedings were initiated against two employees of the assessee-company, namely, Ambuj Jain and Praraod Kumar. Mr. Ambuj Jain has pleaded that he was appointed as a junior officer in 1989 and, thereafter, he was sent for training. Hence, the case of the prosecution that he was present in the alleged meeting in April/May, 1989, was false. In the case of Pramod Kumar, his stand was that he acted in good faith all along keeping the interest of assessee-company. Further, all the transactions were directly between assessee-company and UCO Bank which was duly approved by the various resolutions. In our opinion, if the employees had acted in good faith, then it is the duty of the employer to defend them against any proceedings initiated against such employees, otherwise the goodwill and image of the company would be spoiled in the commercial world and no person in future would join such company. Further, there may be unrest among the employees if the employer does not defend the case of employees who had acted in good faith on behalf of the employer. It is not the case of misappropriation of funds by the employees. It is a case where the transactions were effected between the assessee-company and UCO Bank through a broker Harshad Mehta. In fact, the company had appreciated the work of Pramod Kumar by giving him promotion. As far as Ambuj Jain is concerned, he has gone on training and, therefore, had no involvement in such transactions. In fact, he was acquitted on this ground. Considering the facts of the case, we are of the view that the company had incurred the expenditure to safeguard its goodwill and image by defending its employees and, therefore, such expenditure can be said to have been incurred for the purpose of business. Consequently, such expenses were allowable as revenue expenditure. The order of the CIT(A) is, therefore, set aside on this issue and the addition sustained by her is hereby deleted.
83. The next issue is whether lower authorities were justified in assessing the sum of Rs. 1,78,92,70,145 as income from other sources as against the claim of assessee that it should have been assessed as business income. The facts as per the orders of AO and CIT(A) are in a short compass. There is no discussion in the order of AO in this regard except computing the sum of Rs. 5,54,17,01,000 under the head 'Income from other sources'. The above figure was taken by AO as per Sch. 17. When this was brought to the notice of CIT(A), she sought the remand report from AO who supported his action by relying on the judgment of Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC). However, the assessee pleaded various infirmities in the conclusion of AO. In the meantime, the AO rectified its order by reducing the income from other sources by Rs. 18,62,88,488 as the same represented tax free interest. The CIT(A) also noted certain mistakes. After giving due opportunity to the assessee, she finally determined the amount assessable as income from other sources at Rs. 2,46,09,51,145. Still aggrieved, the assessee is in further appeal before the Tribunal.
84. The assessee in its ground of appeal has restricted its claim to the extent of Rs. 1,78,92,70,145 which comprises of the following items :
(a) Interest income from inter-corporate deposit Rs. 38,72,82,058
(b) Interest on fixed deposits from banks Rs. 46,90,87,491
(c) Interest on securities Rs. 48,20,19,750
Add : Interest due Rs, 6,61,62,266
-----------------
Rs. 54,81,82,016
Less : Tax-free interest Rs. 19,22,97,530
-----------------
Rs. 35,58,84,486
(d) Interest on other deposits Rs. 28,37,39,548
(e) Misc. receipts Rs. 29,32,76,087
-------------------
Rs. 1,78,92,69,670
------------------
85. Both the parties have been heard on this issue. The interest on others represents interest on tooling advance to vendors, interest received from dealers for late payment, interest on advances to employees and interest on investment in its joint venture, namely, M/s Sona Koyo Steering Systems Ltd. and M/s J.J. Impex (Delhi) Ltd. The learned counsel for Revenue has fairly agreed that such interest should have been assessed as business income. Accordingly, the order of CIT(A) to that extent is set aside and the AO is directed to treat such interest as business income.
86. Regarding miscellaneous income, it is stated that it represents cash discount received against timely payment in respect of raw materials, royalty from joint ventures, royalty on trade marks, sale of sales promotion materials, shortage recovered from dealers, income from job work, rent from land; late fee on library books, documentation charges. The learned counsel for Revenue could not seriously argue in respect of such income and simply relied on the order of CIT(A). In our opinion, such income, except rent from land, is assessable as business income. Accordingly, the order of CIT(A) is set aside to that extent and AO is directed to treat the same as business income.
87. Regarding interest on inter-corporate deposits, interest on securities and interest on bank deposits, we are of the view that matter should go back for fresh adjudication. The AO as well as CIT(A) had not discussed anything regarding such interest. Whether such interest should be assessable as business income or income from other sources would depend on the facts of each case. Since, no query had been made by AO in this regard, there was no question of furnishing any material in this regard. In the interest of justice, we set aside the order of CIT(A) in respect of such income and remit the matter to the file of AO for fresh adjudication in the light of material which may be placed before him by the assessee.
88. The next issue relates to the addition of Rs. 643.34 crores on account of excess consumption of raw materials and inputs.
89. Briefly stated, the facts are that the assessee is engaged in the business of manufacture and sale of motor cars of various models. Since the process of manufacture is subject to the excise law, the assessee was required to maintain statutory registers, i.e., RG-23A Part I & II for claiming modvat credit. According to the scheme of excise law, the assessee is entitled to claim modvat credit equal to the amount of excise duty paid on the purchase of raw materials and inputs to be used in the process of manufacturing. This credit can be set off against the liability to pay excise duty on the manufacture of final products, i.e., cars. In view of such scheme, all the purchases of raw material are required to be entered in such register and whenever the material is issued for consumption in the process of manufacture, the same is also entered in such register. Therefore, this register is also normally considered as stock register in respect of excisable raw materials purchased. Accordingly, such registers were maintained by the assessee. However, closing stock was taken by the assessee in its books of account on the basis of physical verification every year. Further, all the purchases and sales were fully vouched and duly entered in the regular books of account whether purchased or sold in India or outside India. As far as consumption of raw material is concerned, the same was taken by the assessee in its P&L a/c on the basis of balancing method, i.e., opening stock plus purchases minus closing stock.
90. An enquiry was made by the Central excise authorities in the case of the assessee in order to find out whether the assessee had rightly claimed the modvat credit in various years. Such enquiry revealed that the closing stock as on 28th Feb., 1999, was more in the statutory register RG-23A, Part I by Rs. 1,754.83 crores as compared to the stock inventory prepared physically by the assessee on such date. An exercise was made by the assessee to reconcile this huge difference. On such reconciliation, it was found that there were various errors, which were committed by the assessee including posting errors. Ultimately, the unexplained difference remained at Rs. 643.34 crores which the assessee could not explain. Accordingly, a show-cause notice was issued by the Central exoise authorities to the assessee to explain as to why difference of Rs. 108.39 crores be not recovered in respect of such difference. This show- cause notice contained all the lapses on the part of the assessee. The copy of such notice is placed at p. 380 of paper book C-7. On receipt of such notice, the assessee sought the legal opinion of a leading solicitor firm M/s Lakshmikumaran & Sreedharan. The said firm vide their opinion dt. 30th March, 1999, intimated the assessee that the stand of the Central excise department was correct. In view of the same, the assessee accepted the said liability amounting to Rs. 108.39 crores and paid the same. It also filed a petition before the Settlement Commission of Central excise and Customs regarding waiver of interest/penalty for such default and immunity from prosecution. The Settlement Commission, vide order dt. 6th May, 2002, admitted the petition and ordered that it deserved immunity from prosecution for offences relating to this case. It also granted full immunity from the levy of penalty, interest and fine under the Central excise Act and Rules made thereunder in relation to the case covered by the petition.
91. During the course of income-tax assessment proceedings; the AO took note of these facts. When he questioned the appellant about the charges levied by the Central excise department regarding excess consumption to the extent of Rs. 643,34 crores, the appellant moved a petition under Section 144A of the IT Act, 1961, to the Addl. CIT to intervene and for necessary directions. The Addl. CIT, vide his direction dt. 28th March, 2002, observed that from the facts of the case including the report of the assessee's own auditors and the admission made in the petition filed before the Settlement Commission, the position was clear that the consumption account of raw material and components had been overstated by Rs. 643.34 crores thereby reducing the taxable profits by corresponding amount. The Addl. CIT, therefore, observed that the AO is perfectly justified in adding the above amount in the computation of taxable income for the year under consideration. The AO, therefore made the addition of Rs. 643,34,23,524.
92. The matter was carried in appeal before the CIT(A) before whom detailed arguments were made on behalf of the assessee as well as the AO which are discussed at pp. 2 to 13 in the order of CIT(A) and need not be narrated at this stage since we would be narrating such arguments of the parties at later stage. However, the CIT(A) upheld the addition made by the AO by observing as under :
"5.2 I have considered the arguments of the appellant as also the contentions raised in the assessment order which have been elaborated and supplemented by the counsel for the AO. I am of the view that the importance of RG-23A register cannot be underplayed. The appellant's maintenance of stock records of purchases of raw material and components without recording the issue of raw material and components is not a reliable basis for working out the consumption. It is also to be noted that in the computerized stock record, inputs on receipt basis and issues on the basis of bill of material prevalent on that day are recorded and the balance of inputs after both the entries carried over to the next day but the previous days entries are not saved and accordingly this record is not open to verification. It is also not clear as to how bill of material system makes entries for work in progress. Therefore, the nature and character of RG-23A register has been appropriately highlighted in the arguments of the counsel of the Department. The register is expected to be day-to-day record of consumption and is essentially in the nature of a stock register. The only trustworthy basis for ascertaining the consumption is the RG- 23A register statutorily required to be maintained under the Central Excise Rules. The financial records are not the primary records and as admitted by the representative of M/s Price Water House Cooper in the statement recorded by the excise authorities and extracted in paras 22 and 23 of the show-cause notice of the CCE dt. 14th Sept., 2001, the auditors have relied on the physical verification conducted by MUL and the observation of the same done by them to record consumption of raw material and components in the books of account. It was admitted on behalf of the auditors that as per the guidance note on the inventories issued by Institute of Chartered Accountants of India (ICAI) the responsibility for properly determining the quantity and value of inventories vested with the management and they had only carried out a verification on a test basis. The fact that the accounts were audited is, therefore, not sufficient to explain the discrepancy in view of the very nature of audit which was confined to the financial accounts. Further, Delhi High Court in the case of Goodyear India Ltd. v. CIT (2000) 246 ITR 116 (Del) affirmed that 'merely because an audit report is available, there is no fetter on the power of the ITO to require the assessee to justify its claim with reference to the records, materials and evidence. Such a power is inherent in an AO in the scheme of the Act'.
5.3 It is also to be emphasized that the appellant had initially been confronted with the discrepancy of Rs. 1,754.83 crores and the excise authorities gave the appellant sufficient opportunity to identify the specific errors and adjustment to the extent of entries explained by the appellant, was allowed. The excise authorities finally concluded that discrepancies in inputs/raw material stock valued at Rs. 6,43,34,23,524 were failed to be explained. The show-cause notice also records in para 55 that 'by deliberately suppressing and misrepresenting the facts, MUL appears to have removed/cleared the inputs were Rs. 6,43,23,524.40 involving central excise duty/modvat credit of Rs. 1,08,39,25,925.09 ...' This discrepancy remained unexplained despite the verification and reconciliation attempted by the appellant while interacting with the excise authorities. Wherever the company was able to provide proper explanation with the support of the documents, the excise authorities gave credit for consumption and finally in its application before the Settlement Commission in para 42, the company admitted a total duty liability of Rs. 108,39,25,925.09 towards the unreconciled discrepancy between RG-23A Part I stock and the physical stock. In the issue to be settled before the Settlement Commission, the company had itself listed 'liability of the applicant towards the credit taken by them on the use of the inputs not satisfactorily accounted/ explained'. Therefore, the stand of the company that the consumption can be explained with reference to certain theoretical models is not acceptable, Theoretical models cannot explain the discrepancies identified with reference to RG-23A which was the statutorily maintained consumption record of the appellant. And these remained unexplained even during the income-tax proceedings and the fact that the appellant agreed to pay excise liability of more than Rs, 108 crore proves the charge of overstating of consumption. RG- 23 register maintained by the assessee in the course of business can be validly relied upon for determining the consumption of items covered by this register. In fact, such a register constitutes good evidence is implicitly approved by the Kerala High Court in the case of CIT v. Katikoth Kunchi Timbers (2000) 246 ITR 202 (Ker). In that case, the assessee, which carried on business in timber logs, was found in possession of a register wherein certain stock of timber and poles was recorded. The claim of the assessee was that the register was only the property mark register maintained for the purpose of obtaining transport permits from the Forest Department and that the quantity as shown in the register was only an approximate quantity and all the purchases and sales were not entered in the register. The Tribunal concluded that the property mark register could not be considered as a stock register. The High Court, however, took note of the fact that forest authorities had verified the stock as per this register. The High Court was of the view that this was a quantity stock register maintained by the assessee in the course of its business and undervaluation of closing stock could be determined with reference to this register. On similar reasoning RG-23A register could be considered as a contemporaneous record of consumption in the case of the appellant.
5.4 It is relevant to note that the physical inventory with reference to book inventory based on bill of material consumption also revealed discrepancies in certain instances of inventory being less than book inventory aggregating to Rs. 37.33 crores and physical inventory being less than book inventory at Rs. 41,17 crores. Similarly summary of theoretical consumption of components and consumables, filed by the appellant on 13th Feb., 2003, which is admitted as additional evidence as appellant was prevented by sufficient cause from producing this evidence before the AO because of lack of time, showed total estimated value of consumption of components at Rs. 3,729.47 crores against net consumption of components as per P&L a/c of Rs. 37,143.80 crores revealing unreconciled difference of Rs. 15.09 crores. This further proves the unreliability of the stock records on which the appellant is placing reliance.
5.5 The claim that the discrepancy pertained partly to earlier years has not been substantiated and yearwise break up has not been provided by the appellant.
5.6 I also find merit in the stand of the Department that the AO was not bound by the figure of profits shown in the accounts and the failure of the ITO to make an explicit statement that from the method of accounting employed by the assessee profits made could not be properly deduced is not of much significance as the order clearly suggests such a finding because the account version of the assessee has been rejected and correct profits of the business computed by disallowing consumption of Rs. 643.34 crores. Provisions of Section 145(3) still provide the authority for rejection of account version of the appellant. Acceptance of accounts in earlier years is not of any significance as principles of res judicata are not applicable to income-tax proceedings as held by Supreme Court in the cases reported in ITO v. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC), M.M. Ipoh and Ors. v. CIT (1968) 67 ITR 106 (SC) and CIT v. Brij Lal Lohia & Mahabir Prasad Khemka (1972) 84 ITR 273 (SC). The acceptance of closing stock does not mean that consumption cannot be questioned.
5.7 In view of the factual and legal position discussed in preceding paragraphs, I confirm the addition of Rs. 6,43,34,23,524 made by the AO."
Aggrieved by the same, the assessee is in appeal before the Tribunal.
93. The learned counsel for the assessee has assailed the order of CIT(A) by raising various submissions. Firstly, it is submitted that the consumption shown by the assessee in the books of account is in accordance with the practice prevalent in the industry, i.e., opening stock plus purchases minus closing stock. It was emphasized by him that none of the figures has been disputed by any of the authorities in any proceedings either under the Central Excise Act or under IT Act. It was also submitted by him that the stock at the end of the year is taken and arrived at on the basis of physical verification. The purchases are also totally vouched. Therefore, where all these figures are accepted as correct then the question of rejecting consumption of raw material as shown by the assessee does not arise since such consumption is based on these figures. According to him, consumption of raw material shown by the assessee can be rejected only if it is shown that assessee has made sales of such raw material outside the books of account. However, there is no such allegation by any of the authorities. Hence, the accounts of the assessee could not be rejected.
94. Secondly, it was submitted that assessee was maintaining the record of components by way of computerized system of accounting. However, in view of the large number of components used by the assessee (being 12,000 approximately), it was not practicable for the assessee to save and retain the day-to-day record of the stock of the component which was maintained by it and accordingly, the figure of the closing stock for a particular day was only carried forward and the transactions of the previous day were purged. It was also submitted that inability on the part of the assessee to retain the date of the stock register on day-to-day basis could not be a reason for the rejection of the books of account in the absence of any adverse material on record. Proceeding further, it was submitted that as per the computerized stock, difference in the stock was only Rs. 4 crores approximately which was due to usage of raw material and components in excess of norms or due to clerical or minor recording errors. Such difference was merely 0.097 per cent of the value of the total consumption of raw material which was also within the permissible limits as per the letter of the Government of India, copy of which is placed at p. 1621 of the paper book C-3. In view of the same, it was pleaded that CIT(A) should not have rejected the authenticity of the financial records of the assessee. To support his submissions, he relied on the following decisions :
1. ITO v. Oswal Emporium (1989) 35 TTJ (Del) 225 : (1989) 30 ITD 241 (Del)
2. Pandit Bros. v. CIT (1954) 26 ITR 159 (Punj)
3. M. Durai Raj v. CIT (1972) 83 ITR 484 (Ker)
4. Jhandu Mal Tara Chand Rice Mills v. CIT (1969) 73 ITR 192 (P&H)
5. CIT v. Padamchand Ram Gopal (1970) 76 ITR 719 (SC)
6. Axia Engg. Co. v. ITO 56 ITD 335 (Chd)
7. Ganesh Foundry v. ITO (2000) 67 TTJ (Jd) 434
8. 67 TTJ(Id) 722
9. Orissa Ceramic Industries Ltd. v. CIT (1977) 107 ITR 345 (Ori)
10. St. Teresa's Oil Mills v. State of Kerala (1970) 76 ITR 365 (Ker)
11. R.B. Bansilal Abirchand Spg. & Wvg Mills Ltd. v. CIT (1970) 75 ITR 260 (Bom)
12. Siddheswari Cotton Mills (P) Ltd. v. CIT (1979) 117 ITR 953 (Cal).
95. Thirdly, it was submitted by him that the CIT(A) was not justified in giving precedence to RG-23A register over the financial record of the assessee, It was argued by him that the purpose of this register is very limited, i.e., to ascertain the fact whether the modvat credit has been correctly availed of by the assessee or not. To substantiate the same, he took us through the relevant provisions of excise law. On the other hand, it was submitted that the financial records are maintained under the provisions of Companies Act, which are important for determining the profits of the company. Hence, such records could not be ignored by the CIT(A) inasmuch as the excise record can never be a substitute of the financial record. Proceeding further, it was submitted that the CIT(A) failed to appreciate the reasons for discrepancies pointed out by the assessee to the excise authorities, i.e., posting errors, pilferage, obsolescence, transfer of O.E parts to spare part division, etc. and also the errors creeping into the software for maintaining RG-23A register. Attention was also invited to p. 4032 of paper book J where reasons for discrepancies are mentioned. It was, therefore, submitted that RG-23A register could not be relied upon for determining the consumption of raw material and rejection of the trading result. If this evidence is discarded then there is no adverse material to disapprove the consumption shown by the assessee. Hence, no addition was justified.
96. Fourthly, it was submitted that the CIT(A) failed to consider the engineering estimate of consumption of raw material required to manufacture 3,33,198 cars during the year under consideration as per the report of the Price Water House Cooper (page Nos. 2195 to 2531 of paper book C-4). According to him, such cars could not have been manufactured for the consumption of raw materials and components shown by the assessee. It was pointed out that based on technical evaluation, the total consumption would have been of Rs. 3,729.47 crores as against Rs. 3,714.80 crores shown by the assessee in the books of account. The difference was only 0.4 per cent which was within the permissible limit as per the Government of India letter (supra). Hence, the addition was not justified.
97. Fifthly, it was submitted that the proceeding under the excise laws merely has a persuasive value and could not have been held as conclusive of the proposition that there had been overstatement of consumption by the assessee, Reliance was placed on the decision of the Tribunal in the case of Abdulla Gani v. Asstt. CIT (1992) 43 ITD 180 (Bom).
98. Sixthly, it was submitted that the duty of excise became payable due to technical breach of not properly maintaining RG-23A in the manner required and, therefore, benefit of deduction under the IT Act could not be lost on that account. Therefore, the charge under the excise law could not be equated with the excessive consumption as alleged by the AO. Proceeding further, it was submitted that there was no admission on the part of the assessee regarding the consumption as stated by the lower authorities, According to him, the reason for making application before the Settlement Commission was to buy peace. It was also submitted that further reconciliation was not only not feasible on account of time and cost involved but also was difficult due to the absence of the basic documents pertaining to the preceding years also. In addition, it was submitted that assuming that the books of account were incomplete then the lower authorities should have acted reasonably and determined the income of the assessee after estimating the true figure of consumption of material in the relevant financial year.
99. Seventhly, it was submitted that entire shortage did not pertain to the year under consideration as is evident from the statement of variation between the stock as per RG-23A and the books of account as on 31st March, 1996, 31st March, 1997 and 31st March, 1998 (page No. 1966 of paper book C-3). Hence, the CIT(A) should have restricted to the discrepancy pertaining to this year.
100. Eighthly, it was submitted that if the IT authorities chose to adopt RG- 23A register as only reliable stock record of the assessee, then in such case, they should have also debited the opening stock of the raw material and components as per stock register which amounted to Rs. 1,362 crores approximately as is evident from p. 1966 of paper book C-3. According to him, a uniform basis was required to be adopted by the lower authorities. Reliance was placed on the judgment of Privy Council in the case of Ahmedabad New Cotton Mills Co. Ltd. (supra), judgment of Gujarat High Court in the case of Lakhanpal National Ltd. (supra) and the judgment of Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. (supra).
101. Lastly, it was submitted that excessive consumption, if any, was allowable as deduction under Section 37. According to him, the assessee may be inefficient in carrying on his business but on that account if there is any excessive consumption, then it has to be allowed as deduction.
102. In reply, the learned counsel for Revenue, Mr. Kapila, has strongly supported the order of CIT(A) by meeting each point canvassed by Mr. Aggarwal. Firstly, he stoutly opposed the contention of learned counsel for assessee that any computerized stock was ever maintained. According to him, there is no contemporary evidence to support the same. Further, such plea was never raised either before the excise authorities or before the AO. The only record maintained by the assessee was RG-23A register. For the first time, such plea was raised before CIT(A). According to him, this is mere self-serving statement. He also took us through show-cause notice issued by excise authority, Assessee's application before Settlement Commission and order of such Commission, written submissions before AO, etc. etc. to point out that assessee never referred to such computerized record of stock of raw material. It was pleaded by him that had the assessee maintained such record then all the errors would have been known in the first year itself and could have been reconciled and corrected and errors would not have been accumulated. He also drew our attention to the annual report which also contained auditors' report to the effect that closing stock balances were not made available to them and, therefore, it was not possible to make any comparison with the physical stock at the end of the year.
103. Proceeding further, it was submitted that assessee had never been able to reconcile the balance difference of Rs. 643 crores either before excise authorities or before IT authorities or even before the Tribunal. If computerized records are maintained then it should have come forward with the reconciliation regarding the balance difference. The only explanation given by the assessee is that such difference is because of computer error, non-posting of diversions by way of pilferages, rejections and transfer to spare division. Such explanation is general one. Whatever assessee could explain was accepted by the excise authorities. No further reconciliation was made before the IT authorities. Hence, question of accepting the assessee's contention does not arise.
104. In the absence of plausible reconciliation, it was submitted, the assessee cannot take shelter behind the arithmetical formula for explaining the requisite consumption, The onus is on the assessee which it has miserably failed to discharge.
105. In order to prove the importance of RG-23A register, he took us through the relevant provisions of Excise Rules and certain case laws. Accordingly, it has been pleaded that such register essentially is a stock register and failure to reconcile the difference would lead to only conclusion that assessee has failed to prove consumption as shown in the books of account and accordingly, addition made was justified.
106. In rejoinder, the assessee's counsel has filed written submissions running into 218 pages. Most of the submissions are repetition of what has already been submitted in main reply. In fact, it is amplification of earlier submissions. So we will not narrate the same again. However, we would narrate briefly only those submissions which are made for the first time. The same may be narrated as under :
(i) That assessee purchases about 12,000 items but reconciliation could be made only for 600 items. The difference of Rs. 1,100 crores could be explained on this account after devoting a long period of 2 years. Rest of the items could not be reconciled as it was not practical considering the man hours to be employed. Therefore, on that account, no adverse inference could be drawn against assessee.
(ii) That proper opportunity was not given by AO to adduce relevant evidences and, therefore, it applied for admission of additional evidence before CIT(A) who had permitted the same. Hence, that finding has become final in the absence of any appeal by Revenue on this account.
(iii) That assessee has discharged its onus by establishing through contemporaneous evidence that difference was on account of errors and omissions in the maintenance of RG-23A. Hence, onus is shifted to Revenue to prove otherwise.
(iv) That there was only difference of Rs. 4 crores as maintained in original submissions. Such difference was on account of the fact that in the computerized register, the issue of raw material is based on normative consumption per vehicle. Hence, such minor difference was bound to be there.
(v) That written submissions of assessee has been misquoted or quoted out of context by the learned counsel for Revenue by extracting only part of submissions and, therefore, it is prayed that his submissions be read as a whole.
(vi) The learned counsel for assessee also tried to explain the entire procedure of accounting and process of manufacture to point out that consumption shown in books of account was correct.
(vii) The fact that reconciliation of Rs. 1,100 crores approximately pertained only to 600 items out of 12000 components is evident from the summary chart appearing at p. 4503 of paper book 'L'
(viii) That maintenance of stock register is not the sine qua non for determination of profits. Mere non-maintenance of the same cannot be the basis for rejection of books of account. Reliance is placed on following decisions :
1. Pandit Bros.' case (supra)
2. M. Durai Raj's case (supra)
3. Axia Engg. Co.'s case (supra)
4. Ganesh Foundry's case (supra)
5. 67 TTJ 722.
6. State of Orissa v. Maharaja Shri B.P. Singh Deo (1970) 76 ITR 690 (SC)
(ix) That the method of derivation of consumption adopted by assessee is in accordance with the practice in industry. Reliance was placed on some annual accounts of leading companies,
(x) Reliance was placed on judgment of Supreme Court in the case of Charandass Haridas and Anr. v. CIT (1960) 39 ITR 202 (SC) for the proposition that for the determination of profits under IT Act, regard should be had to provisions of IT Act and not the provisions of other laws.
107. At this stage, before adjudicating the issue, we would like to mention that both the parties had argued this issue at length for various days. The written submissions have also been filed in detail. It is not possible to narrate the entire submissions, and, therefore, we have tried to narrate the gist of submissions of both the parties. But that should not be understood to mean that any of such submissions have been ignored. We have kept in mind the written submissions from both sides while adjudicating the issue.
108. At this stage, we may mention that after the hearing was concluded, the learned counsel for the assessee vide letter dt, 23rd Aug., 2004, furnished a copy of the order of the Custom, Excise and Service Tax Tribunal, New Delhi, dt. 29th June, 2004, in assessee's own case for the year 2001-02 and submitted that this may be considered while disposing the issue regarding addition of Rs. 643.34 crores. The copy of the same was forwarded to the learned counsel for Revenue for comments. In response to the same, he objected to the admission of such evidence at such a later stage. Further, it has been submitted that such decision is distinguishable on facts of the case.
109. Rival submissions of the parties have been considered carefully in the light of materials placed before us and the case law referred to. The question to be considered is whether the assessee has shown excess consumption of raw material of Rs. 643.34 crores in its P&L a/c for reducing its profits by the corresponding amount. In our opinion, this issue has not been appreciated and adjudicated in the right perspective and rather has been blown out of proportion.
110. At this stage, we would like to mention that in a manufacturing concern, maintenance of stock register is of great importance since it plays a vital role in determining the consumption of raw material, which is one of the elements of computing profits of the business. If such stock register is not maintained then there is no means to verify the correctness of the consumption of raw material or the closing stock. In the absence of stock register, both the consumption as well as the closing stock can be varied to suit the interest of assessee. Therefore, it can be said that in the absence of stock register, the true and correct profits cannot be deduced from the method of accounting followed by the assessee as held by the Hon'ble Supreme Court in the case of S.N. Namasivayam Chettiar v. CIT (1960) 38 JTR 579 (SC). Their Lordships observed as under :
"That in cases such as the instant case, the keeping of a stock register was of great importance because that was a means of verifying the assessee's accounts by having a 'quantitative tally'. If, after taking into account all the materials including the want of a stock register, it was found that from the method of accounting the correct profits of the business were not deducible, the operation of the proviso to Section 13 of the IT Act would be attracted. The ITO, even if he accepted the assessee's method of accounting, was not bound by the figure of profits shown in the accounts. It was for the IT authorities to consider the material placed before them and, if in any case, after taking into account the absence of a stock register coupled with other materials, they were of the opinion that the correct profits and gains could not be deduced, then they would be justified in applying the proviso of Section 13."
From the above observations, it is clear that trading results can be rejected in the absence of stock register even though the method of accounting is accepted by the AO. Accordingly, it has to be held that if the consumption of raw material is not supported by the stock register, then the trading result shown by the assessee can be rejected. Hence, the contention of assessee's counsel that maintenance of stock register is not sine qua non for determining true and correct profits of a manufacturing concern has to be rejected.
111. There is no dispute that assessee had maintained RG-23A register which is akin to stock register. However, this register cannot be considered as reliable evidence to support the consumption shown by the assessee in the P&L a/c for various reasons : Firstly, it has been found by the excise authorities that it was not properly maintained. It was found that the stock of the raw material was more by Rs. 1,754 crores in comparison to stock as per physical inventory as on 28th Feb., 1999. Even, assessee itself admitted that there were so many errors in the maintenance of such register and on reconciliation, the above difference was reduced to Rs. 643 crores which remained unexplained. Secondly, it is a register containing details of excisable raw materials and did not contain the particulars of imported raw materials.
112. Coming to the computerized stock register, there has been a great debate about its existence. However, in our opinion, such debate is meaningless inasmuch as the consumption shown by the assessee in its P&L a/c is not based on such consumption. It has been repeatedly admitted by the assessee's counsel in his submissions that consumption had been shown on the basis of derivated figures, i.e., opening stock plus purchases minus closing stock. If the assessee was maintaining such record, then why the consumption was not debited to P&L a/c on the basis of such record. This question remains unanswered. Further, such register does not record day-to-day stock register as, according to the assesses, the balance of the previous day is purged as soon as entries of the next day are entered. In such situation, such stock remains uriverifiable at any point of time. Be that as it may, such record cannot be considered as reliable evidence since consumption shown in the P&L a/c is not based on such register and rather based on derivated figures.
113. Now the crucial question is whether derivated figures of consumption of raw material, i.e., opening stock plus purchases minus closing stock can be considered as correct formula for determining the true and correct profits of the business. In our opinion, the answer is in negative. Firstly, this formula can be applied only where there is no dispute to the correctness of the closing stock. In the absence of stock register, the authenticity of closing stock is always unverifiable unless the stock is physically verified, However, in the present case, the stock was physically verified by assessee as on 28th Feb., 1999, and closing stock was then prepared after making adjustment of entries in the month of March. Even the AO has accepted closing stock. Hence, this difficulty would not arise in the present case. So we will proceed on the footing that closing stock shown by the assessee is correct. Still, in our opinion, the derivated figure need not be correct. Such figures can never be a substitute of actual consumption which can only be arrived at by maintaining day-to-day consumption record (stock register). We would explain the incorrectness of the derivated figures by following example :
"Suppose 20 components are required for manufacturing a machine and 100 machines are manufactured in the year. If the assessee had opening stock of 500 components, purchases of 2500 components and closing stock on physical verification at 800 components then derivated figure, as per assessee's formula would come to 2200' components (500 + 2500 - 800) as against actual consumption of 2000 components (20 x 100). This difference of 200 components, unless explained by the assessee in a satisfactory manner, would definitely reduce the profits of assessee by the value of 200 components."
In view of the above example, it cannot be said that derivated figures of consumption are sacrosanct. Hence, the provisions of Section 145(3) can be invoked in the absence of satisfactory explanation.
114. On the other hand, the approach of the lower authorities, in our opinion, is also erroneous and entire addition cannot be upheld. There is no dispute that in RG-23A register, the huge difference of Rs. 1,754 crores pointed out by the excise authorities pertained to various years. The errors pointed out by the assessee and accepted by excise authorities also related to various years. Hence, by no stretch of imagination, it can be said that entire difference of Rs. 643 crores pertained to this year only. In such a situation, the AO/CIT(A) should have adopted the opening stock as per RG-23A register and restricted the difference pertaining to this year alone. However, this exercise was not made by any of the above authorities which had resulted in unnecessary financial harassment to the assessee.
115. It has been contended by assessee's counsel that reconciliation made by assessee was restricted to 600 items only out of 12,000 items used in the manufacturing. No doubt, the possibility of errors in respect of other items cannot be ruled out but the onus is on the assessee itself to prove that its claim of consumption is correct. All the facts are within special knowledge of assessee and, therefore, it should come forward to explain properly. Reference can be made to the judgment of Hon'ble Supreme Court in the case of Calcutta Agency Ltd (supra) for the proposition that onus is upon assessee to prove the genuineness of the expenditure. Hence, in the absence of satisfactory explanation, adverse inference can be drawn against the assessee. In the present case, the assessee has not been able to give any explanation for the difference of Rs. 643 crores and odd.
116. Coming to the decision of the Excise Tribunal referred to by the learned counsel, we are of the view that the same is distinguishable on the facts of the case. In that case, it was found as a fact that there was not only shortage of Rs. 27.67 crores but also excess of Rs. 17 crores. Considering the errors on both sides, the Tribunal was of the view that error was only 0.24 per cent, which was within tolerance limits. However, in the present case, there is no admission of excess variation and shortage is very huge of Rs. 643 crores which is not within the tolerance limits. Hence, that judgment cannot be applied to the present case.
117. In view of the above discussion, we are of the view that neither the entire addition can be upheld nor deleted in the absence of any reliable evidence. Now the question which arises for our consideration is how to compute the profits. Section 145(3) provides that AO may proceed to assess in the manner provided in Section 144. Section 144 provides the assessment on best judgment basis. No doubt, such assessment cannot be arbitrary and-must be based on-relevant materials and that too after giving opportunity to the assessee. In our opinion, it would be appropriate to adopt the consumption on actual basis which can be reasonably determined by taking the quantity of components and other inputs required to manufacture a car (modelwise) and multiplying the same by number of cars manufactured. It has been stated that each component is allotted a code and the exact number of components used in the manufacture of a vehicle are identifiable. Hence, there would be no difficulty in determining the consumption of components and other raw materials. However, such consumption would be subject to variance to the extent assessee can satisfy the AO in respect of loss of such inputs on account of breakage, damage, rejections, thefts, fire, etc. Accordingly, we set aside the order of CIT(A) on this issue and restore the matter to the file of AO for fresh adjudication in the manner stated above.
118. The last issue relates to the levy of interest under Section 234B. Though written submissions were made by assessee but assessee's counsel did not seriously argue this issue for the time being. However, it was stated by him that he intends to keep this issue alive. In view of the same, learned counsel for Revenue also did not advance his arguments. Accordingly, the issue is treated as consequential, subject to the rider that it would be open to assessee to challenge its legality in the second inning.
119. The following additional ground has also been raised by the learned counsel for assessee :
"That the learned CIT(A) has further erred both on facts and in law in not directing the learned AO to recompute the deduction allowable under Section 80HHC of the Act also on business income declared by the assessee-company but assessed as income from other sources."
120. The above ground is misconceived since deduction under Section 80HHC is allowable only in respect of income assessed under the head 'Profit and gains of business' and not with regard to business income declared. If such income has been considered as income from other sources, then question of allowing deduction under Section 80HHC does not arise. Hence, such ground is dismissed.
121. In the result, appeal of the assessee is partly allowed.