Income Tax Appellate Tribunal - Delhi
Jay Engg. Works Ltd. vs Inspecting Assistant Commissioner on 12 August, 1992
Equivalent citations: [1992]43ITD594(DELHI)
ORDER
M.A. Bakshi
1. These cross appeals, one by the assessee and one by the Revenue, are disposed of by this consolidated order. The impugned order is that of CIT (Appeals)-13, New Delhi dated 9-2-1988. Assessee is a limited company. During the previous year relevant to assessment year 1982-83 assessee had changed the previous year from ending 31 st March to ending 30th September. The change in the previous year had been allowed by the Assessing Officer subject to the condition that the previous year for assessment year 1982-83 will consist of six months ie., from 1-4-1981 to 30-9-1981 and that the depreciation for this period would be allowed on a proportionate basis for a period of six months only. Thus the assessment has been made for a period of six months only. Assessee had declared a loss in its return filed on 8-6-1982 in pursuance to which assessment was made at an income of Rs. 1,05,90,510. Assessee appealed to CIT (Appeals)-13, New Delhi and succeeded in part. Whereas assessee is in appeal against the additions sustained. Revenue is aggrieved by the relief allowed by the CIT (Appeals).
2. to 11. [These paras are not reproduced here, as they involve minor issues.].
12. The next giound of appeal is relating to the disallowance of investment allowance on the cost of plant and machinery amounting to Rs. 28,92,595. The Assessing Officer disallowed the claim of the assessee on the ground that the appropriate amount of reserve was not created in the year under appeal. It was further held that assessee was not entitled to an opportunity contemplated by Explanation to Section 32A(4). The claim of the assessee was to the tune of Rs. 7,23,149. The CIT (Appeals) has confirmed the disallowance by holding that Explanation to Section 32A(4) is applicable in such cases where a reserve had been created and it is found on assessment that such a reserve was inadequate. According to the CIT (Appeals) the benefit of the explanation was not available in such cases where no reserve at all had been created in the year of loss.
13. The learned counsel for the assessee contended that since assessee's case was that of loss, no reserve had been created for the year under appeal. However, in the subsequent assessment year, according to Shri Vaish, assessee having created a reserve the condition for creation of the reserve was thus satisfied. It was further contended by Shri Vaish that Explanation to Section 32A(4) was also applicable in every case, where a reserve had not been created because of non-availability of profits on the basis of assessee's own computation. Our attention was drawn to the explanatory notes to the Finance Act of 1976 issued by the Central Board of Direct Taxes in support of the contention that in the case of a loss, it would not be necessary for an assessee to create investment allowance reserve and that it would be sufficient compliance of the law if a reserve is created in the year when there is income. It was further contended that the decision of the Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. v.Addl CIT[1989] 177ITR193 is inapplicable in this case for two reasons. Firstly, the decision is in respect of development rebate in respect of which there was no provision corresponding to Explanation to Section 32A(4). Secondly, Sub-section (9) of Section 32A which was akin to Explanation to Section 34(3)(a) has been omitted by the Finance Act of 1990 w.e.f. 1-4-1976. It was accordingly pleaded that the deduction which is justifiably permissible to the assessee in accordance with law, may be allowed.
14. The learned departmental representative on the other hand relied upon the orders of the revenue authorities. Relying upon the decision of the Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. (supra), the learned departmental representative contended that in the absence of a reserve having been created in the year under appeal, deduction under Section 32A could not be allowed to the assessee. According to the learned departmental representative Explanation to Section 32A(4) presupposes a reserve having been created by the assessee as it speaks of adjustment of the reserve but not creation of the reserve as such. It was accordingly pleaded that the appeal of the assessee on this account may be dismissed.
15. We have given our careful consideration to the rival contentions. It is admitted position in this case that deduction under Section 32A would be permissible to the assessee but for non-creation of the reserve in accordance with Sub-section (4) of Section 32A. Assessee had filed a return declaring loss of Rs. 1,43,10,940 on 26-6-1982. No reserve had been created in accordance with Section 32A(4) as there were no profits available for absorption of the deduction. The Assessing Officer, however, has computed the income at a positive figure of Rs. 1,05,90,510. It is not disputed that Assessing Officer did not give any opportunity to the assessee for creating the reserve in accordance with Explanation to Section 32A(4). The issue before us is whether creation of investment reserve is necessary for claiming the deduction under Section 32A and if so, whether an opportunity is to be allowed to the assessee for creating a reserve before finalising an assessment and denying the benefit of Section 32A on the ground that no reserve had been created. The Hon'ble Supreme Court in Shri Shubhlaxmi Mills Ltd. 's case (supra) had the occasion to consider the issue regarding the creation of the reserve in respect of deduction permissible on account of development rebate under Section 33 of the IT Act, 1961 read with Section 34. Their Lordships held that for securing the benefit of development rebate, it was necessary for the assessee to create a reserve in the relevant previous year in which the machinery or plant was installed or first put to use. Their Lordships decided the issue in favour of the revenue keeping in view the explanation added with retrospective effect to Clause (a) of Section 34(3) of the IT Act, 1961.
16. On perusal of the decision of the Supreme Court, it is observed that the decision is based on Explanation to Section 34 (3) (a) which has been omitted by the Finance Act, 1990 w.e.f. 1-4-1962. A similar provision like that of Explanation to Section 34(3)(a) was available in respect of the investment allowance by way of Sub-section (9) to Section 32A. Subsection (9) to Section 32A also stands omitted by the Finance Act of 1990 w.e.f. 1-4-1976. Whether these two omissions by the Finance Act of 1990 supersede the decision of the Hon'ble Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. (supra) is a question which in the circumstances of this case is not necessary for us to consider. In this case we have to consider as to whether Explanation to Section 32A(4) is applicable. If it is found that Explanation to Section 32A(4) is applicable then the controversy as to whether decision of the Supreme Court in Shri Shubhlaxmi Mills Ltd. 's case (supra) is applicable or not, will be of no consequences.
17. Explanation to Section 32A(4) enables the assessee to adjust the investment allowance reserve account, on being given an opportunity by the Assessing Officer on the basis of higher income proposed to be computed on assessment. In the explanatory notes to the Finance Act of 1976, the Central Board of Direct Taxes vide Circular No. 202, dated 5-7-1976 in para 23.5 have clarified that there is no obligation to create a statutory reserve in the year of loss. It has been pointed out that there was a doubt regarding the correct legal position in this regard in respect of development rebate. As per the Board, the doubt has been clarified in relation to investment allowance in Sub-section (4) of Section 32A. The Board has in the abovementioned circular also clarified that an assessee would not be required to create investment allowance reserve during the year of installation of machinery or plant if there is no income in that year and such reserve should be created in the year when there is income.
18. In this case, assessee having filed a return declaring loss, would not ordinarily be entitled to deduction under Section 32A. Accordingly assessee has not created a reserve in respect of investment allowance in this year. However, since huge additions have been made and assessment made at a positive figure, it was imperative on the part of Assessing Officer to give an opportunity to the assessee for creating the reserve in accordance with Explanation to Section 32A(4). The contention raised on behalf of the revenue that Explanation to Section 32A(4) presupposes creation of the reserve and permits only adjustment of such creation, in our view, is not well founded. Considering the provisions of Section 32A(4) read with its Explanation as well as the clarificatory circular issued by the Central Board of Direct Taxes we are of the view that it is not necessary for an assessee to create a reserve in the event of their being no assessable profits in the year of installation of the machinery or in the year the machinery or plant is put to use. Since deduction under Section 32A would not be permissible in the event of there being a loss. The Legislature in its wisdom has incorporated Explanation to Sub-section (4) of Section 32A taking care of a situation where on an assessment the loss return is turned into a positive figure. The question of deduction under Section 32A would arise when there are assessable profits. The creation of reserve would thus be a necessary condition in a case where there are assessable profits. If the assessee fails to create a reserve despite there being assessable profits, the claim under Section 32A would not be permissible. However, where there is a loss according to the assessee and deduction under Section 32A is not permissible, it would be sufficient compliance of the Act if a reserve is created in the year when there are profits assessable to tax. In this case, assessee had filed a loss return. Assessing Officer converted the loss into a profit. In our view, opportunity under Explanation to Subsection (4) of Section 32A was warranted. The Explanation to Sub-section (4) of Section 32A is reproduced hereunder:
Explanation: Where the amount debited to the profit and loss account and credited to the Investment Allowance Reserve Account under this Sub-section is not less than the amount required to be so credited on the basis of the amount of deduction in respect of investment allowance claimed in the return made by the assessee under Section 139, but a higher deduction in respect of the investment allowance is admissible on the basis of the total income as proposed to be computed by the Assessing Officer under Section 143, the Assessing Officer shall, by notice in writing in this behalf, allow the assessee an opportunity to credit within. The time specified in the notice of within such further time as the Assessing Officer may allow, a further amount to the Investment Allowance Reserve Account of the profits and gains of the previous year in which such notice is served on the assessee or of the immediately preceding previous year, if the accounts for that year have not been made up and if the assessee credits any further amount to such account within the time aforesaid, the amount so credited shall be deemed to have been credited to the Investment Allowance Reserve Account of the previous year in which the deduction is admissible and such amount shall not be taken into account in determining the adequacy of the reserve required to be created by the assessee in respect of the previous year in which such further credit is made.
19. This explanation requires the Assessing Officer to give the assessee an opportunity to adjust the Reserve in a case where the amount debited to the profit and loss account and credited to the Investment Allowance Reserve Account under this sub-section is not less than the amount required to be so credited on the basis of the amount of deduction in respect of investment allowance. The view of the learned CIT (Appeals) that the Explanation to Section 32A(4) presupposes creation of investment allowance reserve is, in our view, not warranted. It does not sound logically correct that where there are small profits available to the assessee and a reserve is created to that extent, the adjustment under Explanation to Section 32A(4) would be permissible whereas in a case where there are no profits, the benefit of the explanation would not be permissible. The intention of the Legislature does not seern to deprive the assessee from a legitimate deduction in the event of the loss disclosed by the assessee is turned into a profit by the Assessing Officer for non-creation of a Reserve in the year of loss. Considering the omission of Subsection (9) of Section 32A and omission of Explanation to Clause (a) of Section 34(3) with retrospective effect and the existence of Explanation in Sub-section (4) of Section 32A and the clarificatory circular issued by the Central Board of Direct Taxes, we are firm in our view that the decision of the Hon'ble Supreme Court in Shri Shubhlaxmi Mills Ltd. 's case (supra) does not come in the way of assessee in getting a deduction under Section 32A subject to other conditions being satisfied. The only condition which according to revenue was not satisfied in this case is the non-creation of Reserve in the year of installation of the machinery/plant. Since no opportunity as contemplated under Explanation to Section 32A(4) was allowed to the assessee for creation of the reserve, we remit the issue to the file of the Assessing Officer and direct him to allow an opportunity to the assessee for creating the necessary reserve enabling them to qualify for deduction under Section 32A. We may further add that the condition for creation of the reserve as required under Section 32A(4) would thus be satisfied and there would thus be no reason for the revenue to deny a deduction to the assessee, if other conditions are satisfied.
20. The next ground of appeal is relating to disallowance of the provision of Rs. 43,87,416 made by the assessee on account of excise duty. The relevant facts for disposal of this ground are that the assessee manufactures fans in three factories, one each at Calcutta, Hyderabad and Agra. The manufacturer is liable for payment of excise duty. Excise Duty is payable on the assessable value to be computed as per Section 4 of the Central Excise & Salt Act, 1944. Assessee deducted post-manufacturing expenses from the normal price for determination of the assessable value for purposes of payment of Excise Duty. A dispute arose between the assessee and the Excise Department. Excise Department issued orders under the provisions of the Act directing the assessee to pay Excise Duty on the assessable value. Assessee approached the respective High Courts and obtained stay subject to furnishing of bonds/bank guarantee for differential amount of duty. Assessee accordingly made a provision of Rs. 43.87 lakhs (Rs. 14.48 lakhs in the books of Agra Factory; Rs. 10.93 lakhs in the Calcutta Factory; and Rs. 18.46 lakhs in the books of Hyderabad Factory) on account of differential amount. We may point out that the assessment year involved in this appeal is 1982-83 and provisions of section 43B are, therefore, inapplicable.
21. The Assessing Officer disallowed the claim of the assessee on the ground that assessee had not received any demand from the Excise Department in respect of the provision made. It was also pointed out that assessee had disputed the claims made by the Excise Department before various High Courts and the orders of the Excise Department had been stayed. The CIT (Appeals) has also confirmed the disallowance.
22. Learned counsel for the assessee contended that the Excise Duty liability accrued in this case on the event of manufacture made by the assessee. The dispute before the authorities was only with regard to quantification. The claim of the assessee that the post-manufacturing expenses are to be deducted from the price has not been accepted by the Excise Department and in fact in respect of one of the Units, namely Hyderabad Unit, the High Court has already rejected the claim of the assessee. According to Shri Vaish, the liability of the assessee towards Excise Department had accrued and that is the only reason that the assessee has executed a bond/bank guarantee in respect of the disputed liability. Shri Vaish heavily relied upon the decision of the Calcutta High Court in the case of CIT v. Century Enka Ltd. [1981] 130 ITR 267' in support of the contention that deduction on account of Excise Duty was permissible even though no demand notice had been issued. Our attention was drawn to Rule 9B of the Central Excise Rules, 1944 which permits the assessee to clear the goods on the basis of their own assessment subject to furnishing of bonds/bank guarantee in respect of the differential amount.
23. Learned counsel has drawn our attention to the fact that the single Judge, as early as on 13-7-1976, has decided the issue in favour of the Excise Department and the orders relating to Hyderabad Unit confirmed. Though admittedly appeal has been filed by the assessee before the Division Bench against the decision of the single Judge, the same has not been decided in favour of the assessee so far. It was accordingly contended that the CIT (Appeals) was Justified in allowing the claim of the assessee on account of accrued liability of Excise Duty notwithstanding the fact that such duty had not been paid by the assessee so far.
24. The learned departmental representative on the other hand contended that the Hon'ble High Court in this case has not only stayed the disputed demand but has also directed the Excise Department not to impose any levy upon the assessee. He accordingly pleaded that deduction claimed by the assessee on the basis of a provision made was not permissible.
25. We have given our careful consideration to the rival contentions. The issue for our consideration is as to whether the assessee was Justified in claiming a deduction in respect of a sum of Rs. 43.87 lakhs on account of Excise Duty which had admittedly not been paid and in respect of which no demand notice had been served upon the assessee.
26. In all fiscal statutes a charge is created by declaration of liability. In other words, the charging section indicates as to what would be liable to taxation. This is commonly known as taxable event. In other words, taxable event is an event on the happening of which liability to tax gets attracted. We have to consider as to when assessee can claim deduction on account of tax liability. The question that arises is whether deduction on account of taxes is solely dependent on the happening of a taxable event. In our view, though happening of the taxable event is one of the important considerations for allowance of claim it is basically the system of accounting followed by the assessee which is decisive as to the admissibility of the deduction.
27. Let us take an example in the case of sales tax. Taxable event takes place as and when sale is effected. In a case where system of accounting maintained by the assessee is cash system, deduction would be permissible only as and when assessee makes the payment. Similarly, in the case of mercantile system of accounting, deduction would be permissible on the basis of accrual of liability and not solely on the happening of the taxable event. If one were to hold that the liability of tax is allowable on the happening of taxable event alone, then deduction in respect of extra demand created by the Assessing Officer under the relevant statute would not be permissible as a deduction in any year other than the year in which the taxable event has taken place. This is not so. As already stated, where the assessee maintains books of account on cash basis, deduction is permissible as and when assessee discharges the liability by making the payment. Similarly, in the case of mercantile system of accounting, assessee would be entitled to deduction if it is established that there was an enforceable liability against the assessee in respect of such taxes, It is cnicial in our view to ascertain as to whether enforceable liability had accrued In a given case for allowance of a liability of taxes under any statute. The taxable event and accrual of liability have got to be distinguished. There are three stages in the matter of taxation under several statutes. One is that the taxable event has taken place. Second stage is accrual of assessee's liability. Third stage is quantification and demand. In the case of mercantile system of accounting for allowance of deduction, two stages have got to be established. One is that the taxable event has taken place in the accounting year. Secondly, it has to be established that the enforceable liability of tax had accrued. It is immaterial whether the third stage ie., quantification and demand had been reached or not for purposes of allowance of deduction under the mercantile system of accounting. This becomes abundantly clear when we peep deep in the decision of the Hon'ble Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. v. CJT[1971] 82ITR363. In this case, two decisions, one of Madras High Court in the case of Pope The King Match Factory v. CIT [ 1963] 50ITR 495 and another of Calcutta High Court in the case of CITv. Royal Boot House [1970] 75 ITR 507, were approved by their Lordships of the Supreme Court. In the case of Pope The King Match Factory (supra) assessee had received a demand from Excise Department which was disputed by way of appeal. Assessee however claimed deduction on the basis of demand created by the excise authorities which was rejected by the Revenue. Their Lordships of the Madras High Court held that the assessee had incurred an enforceable legal liability on and from the date on. which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not, in any way, detract from or retard the efficiency of the liability which had been imposed upon by the competent Excise Authority. This decision was approved by the Supreme Court in Kedarnath Jute MF'g. Co, Ltd. 's case (supra). The following principle gets established. That in the event of their being an enforceable legal liability on account of any tax, assessee maintaining books of account on mercantile basis would be entitled to deduction notwithstanding the fact that the demand had been disputed and that the liability had not been paid.
28. Another decision that has been approved by the Supreme Court in Kedamath Jute Mfg. Co. Ltd. 's case (supra) is that of Calcutta High Court in the case of Royal Boot House (supra). In this case it was found by the High Court that under the provisions of the Sales Tax Act, assessee had an obligation to pay sales-tax Voluntarily and accordingly it was held that a deduction could not be denied to an assessee maintaining books of account on mercantile basis merely because the Assessing Officer had not quantified the tax payable by the assessee. In this case one has to remember that event of tax as well as the accrual of liability in the case of assessee had accrued during the previous year and it was found as a matter of fact that under the relevant provisions of the Act assessee's obligation to pay the tax was not dependent on quantification. This principle was also approved by the Supreme Court in KedarnathJute Mfg. Co. Ltd. 's case (supra).
29. We may point out that the observation of their Lordships of the Supreme Court in the case of KedarnathJute Mfg. Co. Ltd. (supra) that the accrual of liability does not depend on quantification, was in the light of the finding recorded by their Lordships of the Calcutta High Court that under the relevant provisions of the Sales Tax Law assessee had an obligation to pay sales tax voluntarily.
30. In our view, the principle that emerges from the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) and the decision of Calcutta High Court in the case of Royal Boot House (supra), Madras High Court in the case of Pope The King Match Factory (supra), is that in the case of mercantile system of accounting deduction on account of taxes is permissible on the basis of accrual of liability. The mere fact that the liability has not been quantified is not crucial if assessee is able to show with reference to the provisions of the relevant statute .that he had acquired enforceable liability. Notwithstanding the lack of quantification of the demand, deduction would be permissible.
31. If under the relevant provisions of the statute there is an obligation upon the assessee to pay taxes voluntarily, it can be said that assessee has an accrued liability in the event of happening of the taxable event to the extent of liability to be discharged voluntarily under the relevant statute. It would be a different matter that statute may permit the assessee to postpone the payment to a later date. In the mercantile system of accounting, as already pointed out, making of the payment is not crucial. It is the accrual of liability. Under the statute it is commonly seen that process of assessment is also provided which may result in creation of extra demand. The extra demand may be created subsequently. What will happen to such a demand created subsequent to the previous year in the event of an assessee maintaining books of account on mercantile basis? Assessee may dispute the liability before appellate authorities or in a court of law. Well, that is not decisive for allowance of deduction. In so far as the demand is created by the Assessing Officer under the statute which is enforceable it can be said that the liability has accrued in the year the demand is received. Pope The King Match Factory's case (supra) approved by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). There are provisions for reassessment under the relevant Tax statutes. Assessing Officer may initiate proceedings by issuing notice for reopening of assessment and threafter create a demand. Mere initiation of proceedings for assessment would not enable the assessee to claim a deduction in anticipation of demand. This is so because initiation of proceedings is not sufficient to create enforceable demand. Assess following mercantile system of accounting would be entitled to claim deduction only as and when the demand in respect of the reassessment is created. Though from the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) it is clear that assessee can claim deduction in the year the demand is created, it has been held in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR I 18 Taxman 491. (Delhi), that where the assessment to which the demand relates is open before any authority, deduction can be claimed in that year as it pertains to it. Otherwise, deduction is permissible in the year the demand is created. In respect of additional demand of tax several High Courts have ruled that deduction would be permissible in the year of demand. In the case of CITv. Nathmal Tolaram [1973] 88 ITR 234 (Gauhati) assessee had claimed a deduction on account of sales tax in the year of assessment and demand. Revenue disallowed the claim of the assessee. The Division Bench of the Assam High Court held that, the demand for sales tax which was made during the relevant assessment year was an enforceable liability and therefore assessee was entitled to claim the deduction in the year of demand.
32. In the case of CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868 it was held by the Division Bench of the Allahabad High Coxirt that where the assessee had been following the mercantile system of accounting and had made provision for payment of sales tax on an estimate basis, the year in which the demand for sales tax was quantified would be the year in which the actual liability for sales tax was finally determined. The liability for the amount in excess of what had been provided for earlier year would accrue in the year for which the liability was quantified and would therefore be admissible deduction in computing the assessable income in the relevant assessment year.
33. In the case of CITv. Orient Supply Syndicate [1982] 134 ITR 12 (Cal.) assessee had claimed deduction of an amount contributed as Provident Fund under the Employees Provident Fund Act, 1952. The claim of the assessee was rejected by the Assessing Officer on the ground that such contributions related to earlier years. Appellate Assistant Commissioner rejected the appeal of the assessee. On further appeal, the claim of the assessee was allowed by the Tribunal by holding that there was a statutory liability of the assessee to pay its contributions under the EPF Act and that no demand was enforced under the said Act against the assessee in any earlier year. The Tribunal further held that since original Provident Fund Commissioner had, for the first time, called upon the assessee to make contributions0 for the entire period, deduction was permissible to the assessee on account of the demand even pertaining to earlier years.
34. In the case of Kalinga Tubes Ltd. v. CIT [1988] 169 ITR 374 (Ori.) the assessee maintained its accounts on mercantile basis. In respect of sales made in the assessment year 1962-63 Sales-tax Officer completed the assessment on 31-3-1966 and raised the demand of over Rs. 11 lakhs against the assessee. The assessee contested the assessment and ultimately by an order made on 28-5-1970 the Sales-tax Officer reduced the demand to Rs. 2,22,161. Assessee claimed deduction of this amount as business expenditure in the assessment year 1971-72. This was disallowed by the Assessing Officer. The Tribunal also rejected the claim of the assessee. On a reference, a Divisional Bench of the Orissa High Court held that though the assessee maintained its accounts on mercantile basis, it was entitled to claim deduction of its liability towards sales-tax in the year when such liability was finally determined by the Sales Tax Tribunal.
35. From the analysis of the case referred to above it is abundantly clear that in the cases where the system of accounting is mercantile deduction on account of statutory liability is permissible on the basis of accrual of liability and not on mere happening of a taxable event.
36. In this case the question to be determined is as to whether the liability of the assessee in regard to the provision of Rs. 43.87 lakhs on account of Excise Duty had accrued in the year or not. It is admitted that the duty in dispute was neither quantified by the Excise Department nor was any demand notice issued to the assessee. In these circumstances, can it be said that there was an accrued liability for the payment of Central Excise Duty. This will depend on the consequence of the relevant provisions of the statute for which the liability has been provided. Since the liability has been provided under the Central Excise & Salt Act, 1944 we will have to refer to certain provisions of the Act. Section 3 of the Act provides for the levy of Excise Duty on all excisable goods other than salt which are produced or manufactured in India etc. at the rate set forth in the First Schedule. Under the relevant provisions, rules have been framed for the levy and collection of the duty. Rule 7 of the Central Excise Rules, 1944 provides that every person who produces, cures or manufactures any excisable goods or who stores such goods in a Ware House shall pay the duty or duties leviable on such goods at such time and place and to such person as may be designated in or under the authority of the Rules, where the payment of such duty or duties is secured by bond or otherwise. Normally under the scheme of the Central Excise, the goods are removed under the self-removal scheme where an account is maintained and all goods are entered on manufacture and removal. If there is any deficit, the payment is made thereafter.
37. Rule 9 of the said Rules deals with the time and the manner of payment of duty. It is stipulated that no excisable goods shall be removed from any place where they are produced, cured or manufactured. Rule 9A deals with the provision of data for determination of duty and tariff valuation.
38. Rule 9B provides for provisional assessment to duty. It permits provisional assessment of duty pending further enquiry subject to furnishing of security and imposition of conditions as may be deemed proper for the differences between the amount of duty as provisionally assessed and finally assessed. Sub-rule (5)of Rule 9B provides for final assessment of duty and adjustment of duty paid provisionally against the duty finally assessed and the payment of deficiency or refund to assessee, as the case may be. The purpose of reference to the provisions of the Central Excise & Salt Act, 1944 is to emphasise that the accrual of liability under the statute is not dependent on quantification. Assessee has to discharge the liability voluntarily. There is a distinction between accrual of liability and the obligation to pay.
39. Now let us trace the history of the case on the basis of which deduction has been claimed. In respect of Hyderabad Unit, assessee had furnished a price list before Excise Department claiming inter alia deductions for post-manufacturing expenses. On 21-5-1969, Superintendent of Central Excise (Technical) decided against the assessee by holding inter alia that post-manufacturing expenses were not to be deducted in computing the tariff on- the basis of which tax is payable by the assessee. As provided under the statute, assessee filed an appeal before Deputy Collector against the decision dated 21st May, 1969 of the Superintendent. The Deputy Collector Excise rejected the appeal of the assessee vide order dated 3rd February, 1971. Assessee filed a revision petition against Dy. Collector's order before Government of India. The revision petition was also rejected by the Government vide order dated 21st November, 1973. Assessee filed a writ petition against the order of the Government of India dated 21st November, 1973 before Andhra Pradesh High Court vide writ petition No. 4251 of 1974. Vide judgment dated 13-7-1976, the Single Judge of the Andhra Pradesh High Court confirmed the orders of the Excise Authorities. Assessee filed appeal before Division Bench of the High Court being No. 65 of 1977 which is stated to be pending disposal before the Hon'ble High Court.
40. In respect of Calcutta Factory, assessee had filed price list on 5th October, 1975. On 8th January, 1976, Assistant Collector decided the issue against the assessee by holding that deduction on account of post-manufacturing expenses was not permissible. Another order in this regard was issued on 7th April, 1976. Assessee filed writ petition before Calcutta High Court on 31st August, 1976. Calcutta High Court directed the assessee to execute a bond to the satisfaction of the Collector as provided in Rule 9B of the Central Excise Rules. The payment of Excise Duty was, however, stayed. The writ petition is stated to be pending before the High Court.
41. In respect of Agra Unit, assessee furnished the price list on 7th of October, 1975. The Assistant Collector issued an order on 31st July, 1979 by holding that post-manufacturing expenses are not allowable to be deducted in computing the price list for purposes of taxation. On 10th August, 1979, assessee filed a writ petition bearing No. 1518 of 1979. Delhi High Court has directed the Assessing Officer to examine the claim of deductibility of the post-manufacturing expenses in the light of its earlier Judgment in Hindustan Food Manufactures' case. Department has not accepted the decision of the High Court as SLP has been filed on 5-5-1981 before the Supreme Court which is still pending.
42. As has been observed elsewhere in this order, the liability of the assessee for payment of excise duty is not dependent on receipt of demand notice. Under the Excise Law, assessee's obligation is voluntary and the Excise Authorities have the power to determine the price list. Once that power has been exercised in accordance with law, assessee is bound to pay the duty in accordance with the directions of the Excise Authorities. It is a different matter that assessee may seek postponement of payment of duty either in accordance with the provisions of the statute or by way of seeking orders from Courts.
43. As is clear from the facts stated above in this case, authorities have ruled that Excise Duty is payable by the assessee on a higher value than determined by the assessee. Though assessee has disputed the finding of the Excise Department, the dispute has not finally been settled in favour of the assessee. So long as the dispute is not finally settled in favour of the assessee, it would be permissible for them to make a provision in the books of account and creating a charge against the profits on the basis of the finding of the Excise Authorities. In this case assessee has been asked to furnish bond/bank guarantee in respect of the differential amount of Excise Duty. This also supports assessee's case that the liability of the assessee had accrued. If the liability of the Excise Duty had not accrued to the assessee, they would not be required to furnish a bond or bank guarantee in respect of the differential amount. The furnishing of bond or bank guarantee has enabled the assessee to postpone the payment of Excise Duty but fact remains that the accrued liability has not ceased to exist.
44. At this stage it may be mentioned that assessee's claim for assessment years 1980-81 and 1981-82 In similar circumstances had been allowed by the Income Tax Authorities on the basis of provision made in the books of account.
45. Considering the facts and circumstances of this case we are satisfied that the liability of the assessee towards Excise Duty amounting to Rs. 43.87 lakhs had accrued during this year and that assessee is entitled to deduction in respect of this accrued liability on account, of the Excise Duty notwithstanding the fact that no demand notice had been received by the assessee in regard to the disputed amount. As mentioned earlier the provisions of Section 43B are not applicable for this year, the claim of the assessee in this regard is allowable. We direct: accordingly.
46. The next ground of appeal is relating to proportionate disallowance of depreciation. The previous year for the year under appeal comprises of six months only. This is because of the change of the previous year made by the appellate company with the permission of the Assessing Officer. It is not disputed before us that Assessing Officer had imposed a condition for granting permission for change in the accounting year from the year ending March to ending September. The condition imposed by the Assessing Officer was that depreciation would be allowed proportionately. Assessee filed a return and claimed depreciation in full in accordance with law. Assessing Officer on the basis of the condition imposed for change of the accounting year disallowed depreciation proportionately. Assessee appealed to the CIT(A) and claimed that since the condition imposed by the Assessing Officer was invalid, the disallowance on account of depreciation was not warranted. CIT(A) was not Impressed and accordingly confirmed the disallowance,
47. The learned counsel for the assessee contended that the Assessing Officer was not justified in imposing a condition contrary to law. According to Shri Vaish, depreciation is permissible in accordance with the rules at the specified rates irrespective of the period of user of machinery or plant. According to him depreciation is permissible for each year irrespective of the period for which the asset has been used. He accordingly contended that the condition imposed by the Assessing Officer was not to be acted upon as the same was contrary to law. In this connection our attention was drawn to the decision of the Tribunal in the case of IAC v. Cosmopolitan Trading Corpn, [19851 14 ITD 327 (Jp.) (SB) and another decision in the case of Dy. CITv. Stvananda Steels Ltd. [1992] 40 ITD 442 (Mad.). It was accordingly contended that depreciation for full year may be directed to be allowed in accordance with law.
48. The learned D.R. on the other hand supported the orders of the revenue authorities.
49. We have given our careful consideration to the rival contentions. In this case, it is not disputed that assessee had .sought permission for the change in the previous year. Under section 3 of the IT Act, 1961, the Assessing Officer is empowered to allow a change with or without any condition. In this case, the Assessing Officer has imposed a condition subject to which permission has been granted for the change of the previous year. The question before us is as to whether in a case where the Assessing Officer has power to impose a condition, the assessee can seek redress in an appeal against the assessment on the ground that such a condition was contrary to law. We shall first consider as to whether the condition imposed by the Assessing Officer was in accordance with law or contrary to it. Section 32 of the IT Act, 1961 permits allowance of depreciation to the assessee at the prescribed rates irrespective of the period of user of the asset. The assessee is entitled to deduction subject to fulfilment of other conditions, at full rates irrespective of the fact that the asset was not used for the entire year. Thus it is seen that the condition imposed by the Assessing Officer was contrary to Section 32 of the Act. In the case of ITO v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. [1975] 101 ITR 457 their Lordships of the Supreme Court have held that the parties could not be allowed to contract out of the statute. In other words, any agreement or contract which goes against the provisions of the statute is not permissible. That being the position of law, we have no hesitation to hold that the condition imposed by the Assessing Officer for restricting the allowance of depreciation proportionately was not warranted. We find support from the decision of the Gujarat High Court in the case of VXL India Ltd. v. ITO [1987] 168ITR 805(1988) 36 Taxman 174.. In this case the assessee had applied for change in the previous year which was permitted by the Assessing Officer subject to the condition that the assessee should not claim excess depreciation, investment allowance and other statutory deductions in respect of excess period of three months comprised in the previous year. By allowing the change, the accounting period of the assessee comprised of 15 months in the year the change was allowed. The Hon'ble High Court held that the condition imposed by the Assessing Officer was arbitrary and against the spirit of IT Act itself. The condition so imposed was thus quashed.
50. In the case of Sivananda Steels Ltd. (supra) the Madras Bench of the Tribunal has also held that the Assessing Officer is not entitled to impose arbitrary conditions and the assessee has a right to challenge the same on such condition being implemented. In the case before us the condition imposed and given effect to, in our view, Is unwarranted, arbitrary and contrary to the spirit of the Income-tax Act, 1961. The revenue was not justified in restricting the depreciation proportionately on the basis of the permission granted for change of the previous year. We hold that such a condition was not enforceable in law and that the assessee is entitled to depreciation in full in accordance with law.
51. Ground No. 9C relating to additional depreciation on motor cars is dismissed as not pressed.
52. The appeal of the assessee is partly allowed.
53. to 57, [These paras are not reproduced here as they involve minor issues.].