Income Tax Appellate Tribunal - Delhi
Talbros Automotive Components Ltd. vs Assistant Commissioner Of Income-Tax on 31 October, 1995
Equivalent citations: [1996]56ITD312(DELHI)
ORDER
Moksh Mahajan Accountant Member 1-4. [These paras are not reproduced here as they involve minor issues. ]
5. The next contention pertains to addition of Rs. 13, 25, 557 sustained on account of refund of Excise Duty. The facts in brief as mentioned by the learned AR are that the assesses received a sum of Rs. 13, 25, 557 towards refund of Excise Duty which was claimed to be non-taxable. The Assessing Officer found that the aforesaid amount had been reduced from godown charges and as such was not shown towards income. As per the contention of the assessee the amount was paid through running account; and no deduction was claimed in regard to the aforesaid amount so collected from the customers. Accordingly the same was not taxable. The contention was however rejected by the Assessee Officer as well as by the CIT(A) on the ground that as it formed part of the trading receipt the refund allowed on account of the same constituted income of the assessee under Section 41 (1) of the Act. In support reliance was placed on the decisions of the Hon'ble Supreme Court in the cases of (1) 'Chowringhee Sales Bureau (P.) Ltd. v. CIT[l 973] 87 ITR 542; & (2) Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 IT 615. While holding so it was also observed by the learned CIT(A) that refund of Excise Duty remained with the assessee arid was not returned to the customers. In the circumstances, the argument that there was no cessation of liability was not correct. On the above facts k was submitted by the learned AR that since the amount was not claimed as a deduction in the Profit & Loss account, question of taxing the same in the hands of the assessee did not arise. Even otherwise the amount was an 'Amanat' with the assessee and was payable to the parties from whom it was collected. On both counts the addition is not sustainable. In the alternative reliance was placed on the order of the ITAT for assessment year 1985-86 whereby a similar issue was restored to the file of the Assessing Officer for examination afresh. The learned DR on the other hand, supported the order passed by the learned CIT(A).
6. We have considered the rival submissions. The first issue for determination is whether on the facts as stated above excise duty refund constitutes an income and if so the year in which it is taxable. By now it is a settled principle that all receipts in the hands of the assessee are not necessarily an income for income-tax purposes, Before a particular receipt can be brought to the net of tax it is essential to determine the nature of the receipt and the relevant provisions under which it can be brought to tax. Definition of income contained in Section 2(24) of the Act is inclusive one and not exhaustive. Under the Income-tax Act different types of receipts ranging from profits and gains and capital gains on the one hand to recoupment of trading liability already allowed as a deduction on the other hand, have been treated as an income for the purposes of the Act. In the case of the assessee the receipt is on account of excise duty collected from the customers which subsequently stand refunded to the assessee. Excise duty in turn is an impost levied under the relevant statute. The liability for the same occurs on the event of manufacture of excisable goods. The levy is imposed on production or manufacture of goods. This is sometimes charged as integral part of price or a separate item in the bill or invoice. Its nature is akki to sales-tax which is a compulsory levy under the relevant statute. In the case of sales-tax the amount so realised has been held to be a trading receipt in the cases of Chowringhee Sales Bureau (P.) Ltd. (supra) & Sinclair Murray & Co, (P.) Ltd. (supra) by the Hon'ble Supreme Court as also by some other High Courts in the cases of Ikrahnandi Coal Co. v. CIT. v 1968] 69 ITR 488 (Cal.), & CIT v. Saraswati Industrial Syndicate Ltd. [1973] 91 ITR 501 (Punjab). Sales-tax whether collected separately in the bill or is made a part of price is included in the consideration for the sale and accordingly forms a part of turnover of the seller. Thus while excise duty is levied on the manufacture or production of goods, sales-tax is levied on the sales of goods. Consequently when collected excise duty constitutes trading receipt which is to be reflected as such. Furthermore, it is the true nature and the quality of the receipt which is material and not the head under which it is reflected in the account books. The entries in the books do not alter or affect the nature or quality of a transaction. Being a trading receipt it is taxable in the year when received and deduction allowable as per method of accounting followed. In the case of CIT v. Motor General Finance Ltd. [ 1974] 94 ITR 582 (Delhi), it has been held by their Lordships of Delhi High Court that the nature of receipt is fixed once for all when it is received. Subsequent event do not change the character of receipt. As at its inception the excise duty so collected bears the character of trading receipt it is taxable in the year when collected. This is so for as undisputed receipt is concerned. In the case of the assessee the issue pertains to disputed amount of excise duty collected from customers and paid to the excise authorities which subsequently stood refunded to the assessee. In the case of the assessee a separate account in respect of excise duty is maintained which is credited with the amount when collected from the customers and debited when the amount is paid to the excise authorities. It is the net amount which is taken to the trading account. It so happened that in the relevant assessment year the assessee had to pay additional excise duty on account of its having effected more than 5096 of its sales of exciseable products through the authorised selling agents who were allegedly related persons within the meaning of Section 4 of the relevant Act. In an appeal the Collector (Appeals) vide his order dated 28-10-1983 accepted the assessee's claim that it is not so covered and as a result the refund accrued to the assessee. It is this amount which is in dispute. As per the assessee since the amount is refundable to the parties from whom the same is collected, it does not constitute an income of the assessee in the year when the same is received. Even otherwise it is not taxable under Section 41 (i) of the Act as the assessee has never been allowed any deduction in regard to the amount so refunded which is a pre-requisite condition to be satisfied before the provisions of Section 41(1) of the Act are made applicable. This' apart the amount has never been shown or treated as trading receipt by the Assessing Officer in the year when the same was collected.
7. As to the first contention in regard to the amount constituting refundable deposit, there is no material on record to support it. No evidence is there before us that the amount so received from the customers is identifiable and specified and that the accounts of the respective parties were credited when the amount was collected and debited when the same was paid to the excise authorities. The same has to be found as a fact.
8. Coming to the second contention ref erring to the accounting treatment given to the entries in the books of the assessee we would like to observe that as held by their Lordships of Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, the way the entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. Similar observations were made by their Lordships of Supreme Court in the case of Punjab Distilling Industries Ltd. v. OT[1990] 35 ITD 519. It was held therein that a trading receipt does not cease to be so by being written off in the books in a particular manner. Since in the case of the assessee it constituted a trading receipt when excise duty was collected from the customers, the fact that it was not shown in the account books would not prevent the Assessing Officer from treating the same as a trading receipt. For this proposition we derive the support from the decision of their Lordships of Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra). Thus despite accounting treatment as given by the assessee we would hold that the excise duty collected from the customers constituted trading receipt in the hands of the assessee when received and it was taxable as such.
9. We would now discuss the assessability of the refunded amount under Section 41 (1) of the Act. This is the section which has been invoked by the revenue authorities. As per the provisions of the aforesaid section where any allowance or deduction has been made in the assessment for any year in respect of the loss, expenditure or trading liability incurred by the assessee in case the assessee obtains in cash or in any other manner any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount so obtained is deemed to constitute an income of the assessee. The assessee's plea here is that as no deduction or allowance has been made to the assessee, the refund so received cannot be brought to charge in its hands. The words used in the aforesaid provisions are loss', 'expenditure', or 'trading liability incurred by the assessee' in respect of which deduction has been made. Thus what is to be seen is whether the deduction pertains to expenditure or trading liability or loss arid whether the same has been made in the assessment for any previous year. In the case of the assessee as the amount has been paid to the excise authorities it certainly constitutes an expenditure and as such is covered under the aforesaid expression. We therefore need not confine ourselves to the other two expressions namely loss' or 'trading liability'. What is relevant to be seen is whether any deduction has been made in this regard in any of the previous years in respect of which the assessee has either been reimbursed or benefited in any manner as per the provisions of Section 41 (1) of the Act. The interpretation of this would turn on whether Section 41(1) is a charging section arid therefore, the provisions are to be construed strictly or otherwise. For this, a controversy exists amongst various High Courts. As per their Lordships of Gujarat High Court in the case of Motilal Ambaidas v. CIT [1977] 108ITR 136 (Guj.), (sic.). "It is only Section 3 read with Section 4 of the Act of 1922 and Section 4 read with Section 5 of the Act of 1961 which are the charging sections. The remaining sections in the respective Act constitute the machinery for computation and levying of tax and should be read as to effectuate the intention of the Legislature which is to make the charge effective and further the provisions should be so read as to make the machinery of assessment workable. " In the aforesaid case the assessee effected some sales in Madhya Pradesh. M. P. Government imposed sales-tax on tobacco imported from other States. The assessee was charging sales-tax separately in respect of such tobacco sold in the Madhya Pradesh but the same was not credited to the trading account. It was taken to a separate sales-tax account and the sales-tax was paid to the State Government by debiting this account. During the relevant assessment year the assessee received refund from the Madhya Pradesh Government which was brought to tax by the department. On the facts it was held by their Lordships of Gujarat High Court that the provisions of Section 41(1) were applicable. While holding so, they observed as under: --
It seems to us on the facts of the present case that in order to make the machinery of assessment effective and in order to make the intention of the Legislature, nameiy, making the levy effective, it is necessary as in Gursahai Saigal's case [1963] 48 ITR 1 (SC). We should read the words "deduction has been made' as 'deduction ought to have been made' because, in view of the decision of the Supreme Court in Chowringhee Sales Bureau (P.) Ltd. 's case [1973] 87 ITR 542 (SC), if the amounts of sales-tax had been shown on the receipts side what the assessee-firm paid to the Government as sales-tax dues even though disputing its liability to pay tax, would have been shown as a deduction on the debit side. The assessee-firm would have been entitled to this deduction in view of the decision in Chowringhee Sales Bureau's case [1973] 87 ITR 542 (SC) and Sinclair Murray & Company's case [1974] 97 ITR 615 (SC). Under the circumstances, these amounts of sales-tax collections which the assessee's firm was bound to show on the credit side when received and was entitled to claim as deduction when sales-tax was paid must be treated as deductions which ought to have been made and thus, the principle had laid down in Gursahai Saigal's case [1963] 48 ITR 1 (SC) would clearly apply in the instant case. We, therefore, read the words at the commencement of Section 41(1) 'Where an allowance or deduction has been made in the assessment for any year' as 'Where an allowance or deduction ought to have been made in the assessment for any year' so far as the facts of this case are concerned, and so reading that provision it must be held that the provision of Section 41(1) apply to the facts of this case. It is, therefore, clear that the first condition regarding this case and the refund obtained by the assessee as a result of the decision of the Supreme Court is clearly covered as an amount obtained in cash or in any other manner as referred to in Section 41(1).
Similar view was taken by their Lordships of Kerala High Court in the case of Travancore Cement Ltd. v. C/7T_1989] 178ITR 175. In the aforesaid case also the view was taken after following the decision of the same High Court in the case of CIT v. Marikar (Motors) Ltd. [1981] 129 ITR 1 (Ker.). In the latter case the payment of sales-tax had not been debited to the profit and loss account. The sales-tax amount collected by the assessee from the customers was credited to a separate account. On the facts it was held that the refund of sales-tax received in the accounting year was income of the year in which it was received. Similar view was taken by the ITAT Delhi Bench '£' in the case of Sylvania & Laxman Ltd. v. MC[1992] 4 i ITD 192 (Delhi). At this juncture we would like to state that we are aware of the other decisions rendered by various High Courts where a contrary view has been expressed. On going through the same we find that these were rendered on the facts as we were available in those cases. Essentially the applicability of Section 41(1) of the Act in a particular case would depend on the facts as available in that case.
10. Thus in a simple analysis as made above the unrefunded arid undisputed excise duty collected as a part of price constitutes a trading receipt in the hands of the assessee. Irrespective of the accounting treatment given by the assessee it has to be shown as such. The amount of excise duty payable is to be allowed when the same is made. The deduction is also allowable in case the excise duty so collected is refundable to the parties from whom the same is made. In case the amount so collected from the parties does not constitute a trading receipt at its inception and the same is refundable to the persons from whom it is collected in the form of deposits, the same is not assessable as a trading receipt when so collected. As to the assessability of the refunded amount under Section 41 (1) of the Act we are of the considered view that the amount so refunded is taxable in the hands of the assessee in view of the decision in the case of Motilal Ambaidas (supra) and that of Delhi Bench 'E' of the ITAT in the case of Sylvania & Laxman Ltd. (supra) despite the accounting treatment so given in the account books. The deduction is allowable as and when the amount is refunded back to the depositors. The assessee's case is to be decided in the light of the above proposition. In the case of the assessee the refunded excise duty constitutes an income in the year when the same has been received. The deduction is however allowable as and when the same is refunded back to the customers who are identifiable and specified. In case the assessee renders evidence to support the aforesaid contention it is entitled to the deduction as claimed. In the circumstances, while we uphold the view of the revenue authorities that the refunded excise duty is taxable in the hands of the assessee when received, we would direct the Assessing Officer to consider the claim of the assessee in regard to the deduction of the amounts as and when they are paid back-to the parties from whom so collected. While arriving at the above conclusion we have also taken into consideration the decision rendered in the case of D.R. Desai v. 13th ITO [1993] 204 ITR (AT) 42 (Bom.).
11. The final ground of appeal pertains to rejection of the assessee's claim of deduction under Section 3SAB of the Act. The facts in brief are that the assessee entered into an agreement with Payen International Ltd., England for acquiring technical know-how and technical information from the aforesaid concern. The agreement was dated 18-4-1985. Vide this agreement royalty in lumpsum was payable @ 50, 000 pounds per annum for a period of 5 years. The assessee claimed 1 /6th of the total amount of £2, 50, 000 in the year under consideration. The Assessing Officer allowed 1 /6h of £50, 000 only. The learned CIT (Appeals) agreed with the decision of the Assessing Officer and held that it is 1 /6th of the amount as paid by the assessee which is to be allowed as a deduction. It is against this that the assessee is aggrieved. According to the learned AR since the amount was payable in lump sum it is 1 /6th of the total amount which is to be allowed as a deduction and the revenue authorities committed a mistake in allowing the same at 1 /6th of the amount as payable in each of the five years. The learned DR on the other hand heavily relied on the orders of the revenue authorities.
12. We have considered the rival contentions. As per provisions of Section 3 SAB of the Act, where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid is to be allowed as a deduction for that previous year. The balance amount is to be deducted in equal instalments for each of the five immediately succeeding previous year. The expression "paid" has been defined in Section 43(2) of the Act as under: -
(2) "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession;
Thus the claim of the assessee for consideration of the entire amount of 2, 50, 000 pounds has to be considered in the light of the method of accounting followed by it. In case of mercantile system of accounting what is to be seen is whether the liability for payment of the entire amount accrued in the year under consideration or not. For this we would turn to the terms of agreement for terms of the contract in pursuance of which the assessee was required to pay 2, 50, 000 pounds. We find that as per agreement the contract was for a period of 5 years. It was acquisition of certain secret processes formulas and information relating to the economic and efficient production and the design and manufacture of automotive gaskets including cylinder head gaskets. In addition to other-conditions as laid down as per clause 8 which regulated the payment the assessee was required to pay royalty of 50, 000 pounds for each year of the terms of the agreement which was to last for five years. As per method of payment which is specified in clause 9 of the agreement, the payment has to be remitted in pounds sterling by direct telegraphic transfer to the credit of the parties' account. The aforesaid agreement could be terminated either in default in payment of any monies payable or for breach of any terms of the agreement. The arbitration was also provided for in clause 12 of the agreement Thus on reading through the entire agreement we find that the liability to pay the entire amount accrued during the year under consideration. The payment due from the party was allowed to be made in five years which only reflected the mode of payment. Otherwise it was on the date of passing of an information and technical know-how that the liability to pay the entire amount accrued. In the circumstances, as per mercantile system of accounting the liability to pay the entire amount accrued in the year under consideration, in this context, we would like to state that there is no specific mention in regard to the method of accounting followed by the assessee in the order of the Assessing Officer. It is not known whether the method of accounting followed by the assessee is on mercantile basis or cash. In case it is the former then the entire amount of 2,50,000 pounds has to be considered in the year under consideration and 1/6th of the same is to be allowed and not that f 50, 000 pounds. In the circumstance the Assessing of Officer is directed to verify the same and in case it is so, 1/6th of 2,50,000 pounds as claimed by the assessee would stand allowed in the year under consideration and to that extent the order of the revenue authorities would stand reversed.
13. [This para is not reproduced here as it involves minor issue. ]