Income Tax Appellate Tribunal - Cochin
Geo Sea Foods vs Income-Tax Officer on 9 September, 1987
Equivalent citations: [1988]24ITD175(COCH)
ORDER
K.S. Viswanathan, Accountant Member
1. The main point in this appeal by the assessee is whether the assessee is entitled to the deduction of purchase tax in respect of the purchases of prawns made during the accounting year.
2. The assessee is a registered firm having business in export of sea food. The accounts show a debit of Rs. 15,81,628 being the provision made for purchase tax. This was allowed by the Income-tax Officer. However, he had made certain other disallowances in the assessment. The assessee had filed an appeal against those disallowances before the Commissioner (Appeals).
3. The Commissioner (Appeals) while hearing the appeal found that the assessee had been allowed a deduction for the purchase tax on the prawns and other sea food purchased by the assessee. He found that no payment has been made and it was merely a provision in the accounts. He issued a notice to the assessee as to why the assessment should not be enhanced by disallowing the provision for purchase tax. He was told that the liability towards purchase tax was a matter of dispute between the Commercial Tax Department and the assessee and since there was a dispute, provision is being made in the accounts. It was also submitted before the Commissioner (Appeals) that in similar cases such provisions had been allowed as deduction. The Commissioner (Appeals) found that the liability to purchase tax in respect of purchases made in the course of the export of these goods outside India had been the subject-matter of a decision by the Supreme Court in the case of Sterling Foods v. State of Karnataka 63 STC 239. He found that the Supreme Court has held that fishing industry is not liable for payment of purchase tax. This judgment is dated 21-7-1986. According to the Commissioner (Appeals) this judgment would be applicable to the Kerala State also and, therefore, there was no liability for the payment of purchase tax. He, therefore, held that the provision for purchase tax was wrongly allowed by the ITO. He directed the ITO to withdraw the same. Thus there was an enhancement to the income.
4. Shri Narayanan for the assessee first questioned the jurisdiction of the Commissioner (Appeals) to issue enhancement notice. According to him, the Commissioner (Appeals) did not have any such jurisdiction as this would amount to considering a matter which was never before the ITO. In support of his submission he relied on the decision of the Madras High Court in the case of CIT v. Chaganlal Kailas & Co. [1984] 148 ITR 7. In that case the Madras High Court has held that the power of the A AC to enhance an assessment can relate only to those items of income which were before the ITO and considered by him for the purpose of bringing to tax or for grant of relief to the assessee. In that case, on the facts it was found that certain receipts under the head 'Charity' were not taxed by the ITO and the AAC brought it to tax by issuing an enhancement notice. The High Court held that since this was not a matter considered by the ITO, the AAC had no jurisdiction for enhancement. Applying this ratio, Shri Narayanan submitted that the ITO, in the course of the assessment proceedings, at no time had asked for the details of the purchase tax provision. He had not applied his mind to whether this provision would be an allowable deduction or not.
5. We are unable to accept the submissions of Shri Narayanan. The powers of the first appellate authority are no doubt limited and as pointed out by the Madras High Court his powers would be only to fiche sources of income which had been the subject-matter of consideration by the ITO from the point of taxability. The expression 'consideration' does not mean incidental or collateral examination of any matter by the ITO in the process of assessment but that matter should be clear from the assessment order/ records. We have to consider whether the Commissioner (Appeals) had power to enhance within these limits. Now, the ITO was considering the income of the assesses in respect of its business in the export of sea food. The consideration of income arising from this business would necessarily imply consideration of the receipts from this business and the expenditure in this business. So, when the ITO starts his computation of income from the net profit or loss as per the profit and loss account he must necessarily have considered both the receipts and the expenditure. Now the provision made for purchase tax is one of the items of the expenditure and it is inconceivable for us that the ITO would have omitted to consider this head of expenditure. This is so especially when the amount is very large. It may be that the ITO had not asked for the details of purchase tax. But that may be under the impression that the purchase tax provision is an allowable item of expenditure. The source of income being business and business being one integral unit purchase tax provision must also be considered as component part of this unit of business. Therefore, when the Commissioner (Appeals) considers afresh the question of allowance of provision for purchase tax he was not making enquiries in respect of a new source of income. He was making enquiries only in respect of that source of income which is already considered by the ITO.
6. The decision of the Madras High Court relied on by Shri Narayanan can be easily distinguished. In that case, the appellate authority was considering a receipt which was apart from the regular receipts. In this case, we are considering an expenditure in respect of one integrated business. We, therefore, hold that the Commissioner (Appeals) had jurisdiction.
7. The next question is whether the assessee is entitled to the deduction of purchase tax. Now the assessee is purchasing prawns from the various dealers and after processing it exports the same to various countries. The assessee is primarily an exporter of sea food. The local sales are negligible. Practically all the turnover is of export trade only. Therefore, the purchases of prawns are effected in the course of the assessee's trade of export.
8. Section 5(1) of the Central Sales Tax Act specifies that a sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. Sub-section (3) or Section 5 provides that notwithstanding anything contained in Sub-section (1), the last sale :or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying: with the agreement or order for or in relation to such export. If the purchase effected by the assessee comes under Sub-section (1) or (3) of Section 5 of the Central Sales Tax Act, then the turnover of prawns purchased by the assessee would be exempt. Since the assessee's purchases are only for export there is no difficulty in holding that the assessee will be entitled to the exemption. Therefore, there is no liability to pay purchase tax.
9. However, this simple position in law is complicated by the attitude of the Commercial Tax Department and consequently by an amendment brought in the Kerala General Sales-tax Act and rules in 1978. We will consider the import of both on this issue. According to the commercial tax authorities there was no exemption available because in order to be eligible for the exemption the goods purchased and the goods exported must be one and the same. The assessee buys prawns and processes them by cutting the head and tail and defining it. According to the commercial tax authorities, by this process a new product has come into existence and, therefore, exemption is not available. On this issue, there were several writs filed in the Kerala High Court and these were disposed of and that decision is contained in the order in the case of CIT v. North Oil Mitt Co. Ltd. [1983] 140 ITR 173. The High Court held that commercial prawns which are purchased by the assessee and prawns which are exported after processing are one and the same commodity and, therefore, the assessee was eligible for the exemption from purchase tax. It would appear that the State of Kerala has filed an appeal against this decision of the Kerala High Court to the Supreme Court and that appeal is pending.
10. We may now refer to the decision of the Supreme Court in the case of Sterling Foods (supra). The Supreme Court was there considering the exemption under Section 5(3) as in this case. There also the assessee was a sea food exporter who purchased prawns and processed it before exporting it. They observed :
Processed or frozen shrimps, prawns and lobsters are commercially regarded the same commodity as raw shrimps, prawns and lobsters. When raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, defining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and become another distinct commodity. They are in common parlance known as shrimps, prawns and lobsters. There is no essential difference between raw shrimps, prawns and lobsters and processed or frozen shrimps, prawns and lobsters. The dealer and the consumer regard both as shrimps, prawns and lobsters.
Thus it will be seen that the reasoning of the Kerala High Court in North Oil Mill Co. Ltd.'s case (supra) is absolutely identical with the reasoning of the Supreme Court in this case.
11. It now remains to see whether the amendment in the Schedule to the Kerala State General Sales Tax Act would affect this situation. The amendment is given below :
(xxix) for Serial Numbers 65A and 66, and the entries relating thereto, the following shall be substituted, namely :
65A. (i) Prawns, lobsters, frogs, frog-legs, At the point of
cuttle fish and crab not falling under last purchase
(ii) below or item 25H(x) in the State by
a dealer who is
liable to tax
under Section 5 5
(ii) Prawns, lobsters, frog, frog-legs, -do-
cuttle fish and crab canned or tin-
ned or frozen or otherwise proces-
sed not falling under item 25H(x) 5
Now the point raised by Shri Narayanan is that because of this amendment to the Schedule the decision in the case of North Oil Mill Co. Ltd. (supra) and Sterling Foods (supra) will no longer be applicable. We do not think so. In fact, in Sterling Sea Foods the Supreme Court had also considered a similar amendment in the Schedule to the Sales Tax Act brought in by the Karnataka State in 1978. In Sterling Foods' case (supra) the amendments are noted in the following paragraph :
Before we proceed to consider this question it is necessary to refer to certain provisions of the Karnataka Sales Tax Act, 1957 (hereinafter referred to as the "Karnataka Act"), which came into force on 1st October, 1957. Section 5 of the Karnataka Act which enacts the charging section provides for levy of tax on sales and purchases of various commodities described in the Schedules to the Act. The Third Schedule to the Karnataka Act, as originally enacted, enumerated the commodities on which a single point tax was livable under Sub-section (3)(&) of Section 5 and there were 13 entries in this Schedule. None of these 13 entries included shrimps, prawns and lobsters with the result that the purchases of shrimps, prawns and lobsters were not eligible to purchase tax. This position continued right from the time of the original enactment until 31st March, 1978, when the Karnataka Sales Tax (Amendment) Act, 1973, introduced a new entry 13a in the Third Schedule with effect from 1st April, 1973. This entry included "shrimps, prawns and lobsters" in the Third Schedule. There was another amendment made in the Karnataka Act in 1978 by the Karnataka Sales Tax (Amendment) Act, 1978, and Section 9 of this amending Act made certain amendments in entry 13a with retrospective effect, so that from 1st April, 1973, entry 13a'included in the Third Schedule "shrimps, prawns and lobsters other than processed or .frozen shrimps, prawns and lobsters" and the explanation to entry 13a provides that "processing" shall include "all or any of the following, namely, cutting of head or tail, peeling, defining, cleaning, or freezing". But, entry 13a in this form continued only up to 31st August, 1978, and with effect from 1st September, 1978, a further amendment was made by the Karnataka Taxation and Certain Other Laws (Amendment) Act, 1982, and after this amendment which was made with retrospective effect from 1st September, 1978, entry 13a read : "Shrimps, prawns and lobsters other than frozen shrimps, prawns and lobsters." The amendment made by the 1982 Amendment Act excluded from the scope and ambit of entry 13a, frozen shrimps, prawns and lobsters and brought within the net of taxation only purchases of shrimps, prawns and lobsters other than frozen shrimps, prawns and lobsters, provided they were last purchases within the State. (p. 242) Dealing with this amendment the Supreme Court observed as under:
This conclusion on principle was not disputed by the High Court in its judgment and the High Court conceded that even after processing such as cutting of heads and tails, peeling, deveining, cleaning and freezing, shrimps, prawns and lobsters subjected to such processing continued in common parlance to be called "shrimps, prawns and lobsters". But the High Court took the view that entry 13a after the amendment effected in it with retrospective effect from 1st September, 1978 made a distinction between raw shrimps, prawns and lobsters and processed or frozen shrimps, prawns and lobsters. In view of this distinction made in entry 13a, it was not possible to hold that processed or frozen shrimps, prawns and lobsters were the same commodity as raw shrimps, prawns and lobsters. The argument was that when the State Legislature itself made a distinction between these categories of commodities by making purchases of one category amenable to sales tax under entry 13a and leaving out of the scope of taxation under entry 13a the other category, how could it be said that both these categories represent the same commodity and there is no difference in character and identity between the two. This argument, we are afraid, is not well-founded. It is based on a total misapprehension in regard to the true object and intendment of entry 13a and it erroneously seeks to project that entry in the interpretation and application of Section 5, Sub-section (3) of the Central Sales Tax Act. In fact entry 13a as amended, supports the argument that even processed or frozen shrimps, prawns and lobsters are known commercially and in the trade as "shrimps, prawns and lobsters". It is because entry 13a as it stood prior to its amendment, would have, on the plain natural meaning of the expression "shrimps, prawns and lobsters" included processed and frozen shrimps, prawns and lobsters, that it became necessary for the State Legislature to amend entry 13a with retrospective effect so as to exclude from the scope and ambit of that entry processed or frozen shrimps, prawns and cocktails. Now when the State Legislature excluded processed or frozen shrimps, prawns and cocktails from the ambit and coverage of entry 13a, its object obviously was that the last purchases of processed or frozen shrimps, prawns and cocktails in the State should not be eligible to State sales tax under entry 13a. The State Legislature was not at all concerned with the question as to whether processed or frozen shrimps, prawns and lobsters are commercially the same commodity as raw shrimps, prawns and lobsters or are a different commodity and merely because the State Legislature made a distinction between the two for the purpose of determining eligibility to State sales tax, it cannot be said that in commercial parlance or according to popular sense, processed or frozen shrimps, prawns and lobsters are recognized as different commodity distinct from raw shrimps, prawns and lobsters. The question whether raw shrimps, prawns and lobsters after suffering processing retain their original character or identity or become a new commodity has to be determined not on the basis of a distinction made by the State Legislature for the purpose of eligibility to State sales tax because even where the commodity is the same in the eyes of the persons dealing in it the State Legislature may make a classification for determining liability to sales tax. This question, for the purpose of the Central Sales Tax, has to be determined on the basis of what is commonly known or recognized in commercial parlance. If in commercial parlance and according to what is understood in the trade by the dealer and the consumer, processed or frozen shrimps, prawns and lobsters retain their original character and identity as shrimps, prawns and lobsters and do not become a new distinct commodity and are as much "shrimps, prawns and lobsters", as raw shrimps, prawns and lobsters' Sub-section (3) of Section 5 of the Central Sales Tax Act would be attracted and if with a view to fulfilling the existing contracts for export, the assessee purchases raw shrimps, prawns and lobsters and processes and freezes them, such purchases of raw shrimps, prawns and lobsters would be deemed to be in the course of export so as to be exempt from liability to State sales tax.(p. 244) Thus it will be seen from the above that on the principles laid down by the Kerala High Court and the Supreme Court there is really no liability for purchase tax. However, Shri Narayanan had submitted that this issue had been considered by this Bench in another case where they have held on identical circumstances that the provision is allowable. A copy of that decision in the case of Rejini Ice & Cold Storage [IT Appeal No. 484 (Coch.) of 1985, dated 29-5-1987] has been furnished to us. We have gone through that decision. In our opinion, some of the authorities on this point have not been placed before this Bench. Therefore, it will not be necessary for us to follow the ratio laid down by this Bench in that order.
12. We may refer to some of the decisions touching on the point of the liability to pay sales tax. In the case of Deep Chand Shyam Sunder v. CIT [1980] 125 ITR 724, the Allahabad High Court has held that before a provision could be made for a liability by making an entry in the books that liability must be an existing legal liability and not merely a hypothetical one. When there are decisions holding the levy to be unconstitutional or invalid it will not be open for the assessee to make such a claim. It can be claimed only when the appeals have reached a finality and the liability had been crystallised. That is the decision of the Madras High Court in the case of CIT v. T.S. Srinivasa Iyer [1984] 146 ITR 526. The point at issue was whether the assessee could claim urban land tax as deduction. The levy of urban land tax was a matter of dispute and the High Court had held that the levy was not valid. Subsequently the Supreme Court upheld the validity of the levy. The Madras High Court held that the assessee can claim the deduction in the year in which the Supreme Court upheld the validity. It is, therefore, clear from this decision that earlier to the point of time when the Supreme Court passed its order there was no liability for urban land tax which could be allowed as a deduction.
13. Some light will be thrown on this issue when we consider the decisions where a levy found initially invalid was validated retrospectively. The case of the CIT v. Estate of Late S. Mehboob 'Khan [1985] 153 ITR, 353 (Mad.) was one such. In that case, the motor vehicles tax rate was increased by an Amendment Act in 1959. This amendment was found to be invalid and was struck down by the High Court. The Legislature thereafter enacted an Amendment Act which had retrospective effect. This was brought into effect on 31-10-1961. The assessee made a provision towards this liability in the books for the year ended 31-3-1962. The Madras High Court accepted the assessee's contention that the assessee is entitled to the deduction in the year in which the levy was validated.
14. Another Madras High Court's decision in CIT v. East India Corporation Ltd. [1986] 159 ITR 712 also related to the same point. The assessee's case therein was that their sales were exempt under the Central Sales Tax Act. The High Court had accepted the assessee's contention and had set aside the order of the department. Thereafter the Central Sales Tax Act was amended with retrospective effect so that the transactions became liable to sales tax. This matter was also subject to litigation and the Supreme Court upheld the validity and directed the Commercial Tax Officer to determine the liability to sales tax, The CTO passed the order on 31-8-1972. This was claimed as deduction for the assessment year 1973-74. The Madras High Court held on the facts of the case that the liability arose for the first time only on the date when the CTO on the direction of the Supreme Court computed the liability to pay tax.
15. Thus it will be seen from the above that where there is a decision according to which no liability exists the assessee can claim deduction only when the statute is retrospectively, validated or when its validity is upheld by the Supreme Court. Not earlier.
16. To this line of decisions there are two exceptions. Both these exceptions are decisions of the Allahabad High Court. This Bench in the case of Rejini Ice & Cold Storage (supra) had relied mainly on these two decisions. The first of these decisions is the case of J.K. Synthetics Ltd. v. O.P. Bajpai, ITO [1976] 105 ITR 864 (All). In this case, the assessee claimed that they were not liable to pay central excise on its products called Polymer chips. The Central Excise Department, however, was of the opinion that the assessee was liable. A writ petition was filed before the Delhi High Court and this was allowed by a single Judge on 28th of August, 1970. However, the Government had filed an appeal against the order of the Delhi High Court. The assessee continued to claim before the ITO the liability towards payment of Central Excise. The ITO disallowed the claim and he pointed out that the Delhi High Court had held the levy to be invalid. Now the Allahabad High Court in this case upheld the assessee's claim for the deduction. Their reasoning was that since the Delhi High Court's decision had not become final and since the Central Excise authorities were raising demands against the assessee even in the accounting years the assessee was eligible for the deduction. The decision of the Allahabad High Court in the same assessee's case CIT v. J.K. Synthetics Ltd. [1983] 143 ITR 771 follows the same principle. This case can be distinguished. In this case, although the assessee was disputing the levy it was found as a fact that Central Excise Department had not given up the claim for levy and was still raising demands. It is on this fact that the Allahabad High Court upheld the contention. It may be remembered that a statutory liability will not cease to be a statutory liability merely because the assessee is disputing it. We may also point out that in that case perhaps the Central Excise Department in U.P. was raising the demand because they may not have been under the jurisdiction of the Delhi High Court. If the High Court having jurisdiction over the Central Excise Department was issuing the demand notice it would be in defiance of the High Court's orders. So in the same State that will not happen but in this case the decision was given by the High Court of Delhi and the Central Excise Department was situated at U.P.
17. These two decisions are easily distinguishable. In these two decisions in spite of an High Court invalidating the levy, there was a demand by the Central Excise authorities. In the case before us, there is no such demand. In fact, when the Kerala High Court has held in North Oil Mill Co. Ltd.'s case (supra) that the sales tax department cannot raise that demand it is impossible for that department to issue any demand notice.
18. We are, therefore, satisfied that there was no liability for the assessee during the accounting year. The above would dispose of the assessee's claim for deduction for purchase tax.
19. We now turn to the next ground which is a deduction claimed in respect of interest. The ITO noticed that the assessee had claimed an amount of Rs. 5,28,681 towards interest and bank charges. He further noticed that the partners of the firm had withdrawn large sums of money for investment and personal expenses in the earlier years. It is the case of the ITO that monies borrowed had been diverted from business and, therefore, part of the interest is to be disallowed. The Commissioner (Appeals), while agreeing with the ITO reduced the disallowance to Rs. 2,50,000.
20. The assessee is on further appeal before us. It was submitted at the time of hearing that an identical issue had already come before this Bench for the assessment year 1979-80 and this Bench has remitted the matter back to the ITO for a proper disposal after giving an opportunity to the assessee. It was submitted by both the sides that a similar order may be passed in this case. We, therefore, remit this issue back to the ITO for a proper disposal after hearing the assessee.
21. No other ground is pressed. The appeal is partly allowed.