Gujarat High Court
Industrial Machinery Manufacturers ... vs Commissioner Of Income-Tax (No. 2) on 16 February, 1993
Equivalent citations: [1993]203ITR442(GUJ)
JUDGMENT G.T. Nanavati, J.
1. The questions referred to this court by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, are as under :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant was not entitled to the benefit under section 80-I of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the contention of the appellant that the assessee-company does not manufacture textile machinery or accessories and, therefore, is not qualified for deduction or relief under section 80-I ?
3. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Rs. 3,596 being education cess for the earlier years is not deductible ?"
2. The assessee manufacturers humidifiers which are used in textile mills. During the assessment proceedings pertaining to the assessment year 1972-73, the assessee claimed a deduction under section 80-I in respect of humidifiers manufactured by it on the ground that they are textile machinery or textile accessories. The assessee, during the accounting year pertaining to the said assessment year, received a bill for Rs. 6,723 from the Ahmedabad Municipal Corporation being education cess payable by the assessee for the years 1966-67 to 1971-72. The assessee, therefore, made a provision for that amount and claimed deduction thereof.
3. The Income-tax Officer rejected both the claims. The claim for deduction under section 80-I was rejected on the ground that the humidifiers manufactured by the assessee cannot be said to be textile machinery or textile accessories. The claim for education cess was rejected on the ground that it did not pertain to the accounting year relevant to the assessment year 1972-73.
4. The Appellate Assistant Commissioner in appeal confirmed the view taken by the Income-tax Officer. The Appellate Assistant Commissioner, however, found that out of the amount of Rs. 6,723 claimed, Rs. 3,127 represented the liability for the assessment year 1972-73. Accordingly, the Income-tax Officer was directed to allow a sum of Rs. 3,127.
5. The Tribunal confirmed the order passed by the Appellate Assistant Commissioner as regards both the claims. The assessee, therefore, moved the Tribunal for referring the above stated questions to this court.
6. Income-tax Reference No. 190 of 1980 (Industrial Machinery Manufacturers Pvt. Ltd. v. CIT (No. 1) [1993] 203 ITR 430 (Guj)), decided on February 1, 1993, this court, in the case of the assessee itself, has held that humidifiers manufactured by it are either textile machinery or textile accessories. For the reasons recorded in the said judgment, we hold that the assessee was entitled to the benefit of section 80-I in respect of the humidifiers manufactured by it.
7. The Tribunal has rejected the claim of the assessee for deduction of Rs. 3,596 being the amount of education cess payable for the financial years 1966-67 to 1970-71 on the ground that the assessee had not placed necessary facts for consideration of the authorities, and that it was not possible to know what was decided by the Gujarat High Court and the Supreme Court and what was the agreement between the assessee and the Municipal Corporation. Thus, it was not known under what circumstances the assessee had made a lower provision of Rs. 1,350 only for that period. Another reason given by the Tribunal is that it was not made clear by the assessee as to how the arrears of the earlier years were paid. The Tribunal gave one more reason for rejecting the claim and that is that as the assessee followed the mercantile system of accounting, it should have provided for this expenditure in the relevant year. Thus, the Tribunal ejected the claim on three grounds.
8. What is contended by learned counsel for the assessee is that payment of education cess is a statutory liability. Some provision was made earlier for meeting that liability but the assessee was thereafter of the opinion that education cess was not payable by it. However, as a result of an agreement between the Ahmedabad Municipal Corporation and the industrial units, the industrial units had agreed to pay education cess. It was under these circumstances that the Municipal Corporation issued a bill during the accounting year 1971-72. He further submitted that it is now well-settled that, under the mercantile system of accounting, a fiscal liability under a statute should be allowed as a deduction in the year in which the relevant transactions take place although (i) the precise quantification of the liability in the form of an assessment and demand may come later, (ii) the assessee may contest the liability in appeal or other proceedings, and (ii) the assessee may have made no provision for the liability in his books. alternatively, the assessee may claim a deduction in a subsequent year in which the tax is assessed and the demand is made, although the transactions may pertain to earlier years, or he may even postpone his claim to deduction to the year in which he loses in appellate proceedings and the levy becomes final. It is not in dispute that the assessee did receive a bill for payment of education cess. The amount payable is also now not in dispute. It is also not in dispute that education cess is payable by the assessee. The dispute between the Ahmedabad Municipal Corporation and the industrial units having been resolved by an agreement and the industrial units having accepted the liability to pay education cess, it was not open to the Revenue, nor was it competent for the Tribunal to question the liability of the assessee in this behalf. It clearly appears to us that the assessee referred to the Gujarat High Court and the Supreme Court judgments only with a view to explain that, because the judgments were in its favour, the assessee had not made any provision in its account books for the education cess payable during the accounting years 1966-67 to 1970-71. In our opinion, the Tribunal has failed to appreciate this explanation of the assessee and, therefor, erroneously held that as the assessee had failed to produce the decisions of the Gujarat High Court and the Supreme Court and the agreement, it was not entitled to claim the deduction. Again, the Tribunal failed to appreciate the explanation a given by the assessee that all the arrears were paid. The said statement was made at the time of hearing of the appeal before the Tribunal and it clearly appears that the said statement was made with a view to show that, pursuant to the said bill, which was received by the assessee the arrears were in fact paid to the Corporation. The arrears for the earlier years were paid by the assessee because the liability under the Act had not ceased and the assessee had accepted the liability even though it had succeeded in the Gujarat High Court and the Supreme Court. The assessee having received a bill for the education cess from an authority like the Ahmedabad Municipal Corporation, doubt in that behalf should not have been raised by the Department and if the Tribunal entertained any doubt on this point, then it should have called upon the assessee to produce the judgment of the Supreme Court before it. The Tribunal failed to appreciate that the liability to pay education cess did exist under the Gujarat Education Cess Act, 1962, though, payability thereof was dependent upon proper procedure being followed in that behalf.
9. The third reason given by the Tribunal also does not appear to be sound. The correct position in this behalf is not seriously disputed by learned counsel appearing for the Revenue. Merely because the assessee has been following the mercantile system of accounting and merely because it did not provide for the expenditure in the accounts of that year, the claim of the assessee on the basis of the bill could not have been denied.
10. For the reasons stated above, questions Nos. 1 and 2 are answered in the negative, that is, in favour of the assessee and against the Revenue. Question No. 3 also is answered in the negative, that is, in favour of the assessee and against the Revenue. No order as to costs.