Income Tax Appellate Tribunal - Hyderabad
Dy. Commissioner Of It, Special Range vs Cwc Wines (P) Ltd. on 14 November, 2003
Equivalent citations: [2004]268ITR23(HYD), (2004)83TTJ(HYD)1
ORDER
MVR Prasad, Accountant Member
1. This Special Bench has been constituted by the President, vide his order communicated under U.O.No. F. 12-Jd/(AT)/2002 dt. 2nd April, 2002, on a reference made by the division Bench to consider the following question arising in these appeals for the assessment years 1990-91 and 1991-92:
"Whether, on the facts and in the circumstances of the case, the excise duty paid in advance for importing liquor can be allowed as a deduction under section 43B of the Income-tax Act, 1961, irrespective of whether the goods have been received during the year under consideration or not?"
2. Facts of the case lie in a small compass, but the issue raised is somewhat ticklish. Actually, this Special Bench was constituted at the instance of the Division Bench, which heard these appeals in the first instance. The Division Bench suggested reference because of the conflicting views held by different benches of the Tribunal on the issue raised in these appeals. One view, which is against the assessee is expressed by the Hyderabad Bench "A" of the Tribunal ; in Jeypore Sugar Co. Ltd., Chagallu in ITA No. 2034/Hydd/1990, vide its order dated 11.9.1995, whereas the other view, which is in favour of the assessee is expressed by the Delhi Bench 'D' of the Tribunal in the case of Modipan Ltd. V/s. IAC in ITA No. 1134/Del/1998 reported in (1995)52 TTJ (Del) 477.
3. The assessee company is the wholesale distributors for the products manufactured by UB Limited and its group companies for a number of Districts in the coastal region of Andhra Pradesh. For importing liquor from outside the State, the assessee has to obtain necessary permit by paying what is called as 'countervailing duty' in terms of S.21 of the Andhra Pradesh Excise Act, 1968. The said section of the Excise Act reads as under-
"21. The Government may, by notification, levy an excise duty on any excisable article manufactured or produced in the State at such rates, not exceeding the rates mentioned in the schedule, as may be specified in the notification.
(2) The Government may, by notification, levy a countervailing duty on any excisable article manufactured or produced elsewhere in India and imported into the State at such rate as may be specified..."
3. Under Rule 4 of the Foreign Liquor and Indian Liquor Rules, 1970, framed under the said Act, a holder of wholesale licence for the sale of foreign or Indian liquor desiring to import from outside the State shall apply to the Collector in form No. FL-I for grant of an import permit. Under Rule 6, the Collector, after making such enquiries as he deems fit, and subject, inter-alia to the following conditions, may issue the permit -
(i) The applicant has paid and produced the challan in original in token of having credited into Government Account the entire countervailing duty leviable on the liquor to be imported at the rates in force.
(ii) The applicant has paid and produced the challan in original in token of having credited into Government Treasury import fee at the following rates...
4. It may be observed from the above rule that the payment of countervailing duty in question is a pre-condition for the grant of permits for import of the liquor. When the said countervailing duty is paid, the amounts were not debited to the purchases account. They are debited to a separate account and at the end of the year, the amounts relatable to the goods received from outside the State are transferred to the trading account. The amounts relatable to the goods which have been indented to be purchased, but not received, are reflected in the Balance Sheet under the head 'pre-paid expenses'. Such prepaid expenses on account of countervailing duty stood at Rs. 25,36,670 for assessment year 1990-91 and at Rs. 58,44,632 for assessment year 1991-92.
5. Even though these two amounts are reflected only as prepaid expenses in the Balance Sheet in the books, they were separately claimed as deduction in the respective years in the computation of income. The claim for the deduction of these amounts in the respective years was based on the provisions of S.43B of the Act. It was claimed that the amounts represented the liabilities incurred by the assessee by way of countervailing excise duty and such liability also stood discharged in the respective years, and so, the assessee was entitled for deduction in terms of S.43B of the Act. It was also claimed that, if the amount was not claimed as deduction or was not allowed as deduction in the respective years, the deduction for these two amounts could not be claimed in the subsequent years, as the said liability did not arise in the said subsequent year, nor was the payment made in those years.
6. The assessing officer negatived the above contention. He held that what was paid was not an excise duty for the purchase or manufacture, but it represented only a part of the purchase price for goods purchased. He, therefore, held that the provisions of S.43B did not apply. He also held that even if S.43B applies, the payments cannot be allowed as a deduction in these years, as the liability to pay the duty is incurred when the goods are brought into the State and so, the payments represented only advance payments, and they were not paid towards discharge of the statutory liability in the concerned year. He also held that the payments would go to increase the value of the purchases, and if not sold upto the end of the year, they would increase the value of the closing stock, independent of the fact whether relatable goods were finally received or not in the concerned previous year.
7. On appeal, the CIT (A) however held that the assessee had not received the relevant stocks during the previous years under consideration, and so, there was no question of taking it into purchases or closing stock. He further held that such payments were made towards the discharge of a statutory liability and so the deduction was allowable under S.37 of the Income-tax Act read with S.43B. The CIT(A) framed the following issues as arising for consideration in these appeals -
"(1) Whether the countervailing duty is different from the excise duty (2) Whether it is paid by the appellant itself for importing the goods or it is paid on manufactured items, by the appellant on behalf of the principal manufacturer.
(4) Is it a statutory obligation or a component of the purchase price?
(4) Whether the liability crystalises at the time of applying for the permit or only on receipt of the goods. In other words, whether the liability of payment of countervailing duty is independent of the purchase price or forms a part of it.
(5) Whether the provisions of section 43B are applicable to the present facts."
8. He answered the issues at 1 and 2 above in the following terms -
"25. The purpose of Countervailing duty is to keep the price of the products manufactured out of the State at par and competitive with the price of products manufactured inside the State. As such, the wholesaler who procures the products from the local manufacturers as well as outside-the-state manufacturers has to pay the countervailing duty so that he does not get the outside products at a cheaper rate. If this is the purpose of levy of countervailing duty, then it is the purchaser inside the State who bears it rather than the manufacturer outside the State. Thus, the first two questions are answered that countervailing duty is totally different from the excise duty and it is paid by the purchaser himself and not on behalf of the manufacturer."
On the issues at 3, 4 and 5, his observations are as follows -
26". As I have mentioned earlier, it forms a component of the purchase price. But, being a statutory obligation, it is to be allowed when it is incurred and cannot be related with the purchaser in view of the decision of the Supreme Court in the case of CIT V/s. Maharashtra Sugar Mills Limited (82 ITR 452). This answers the third and fourth questions that the liability crystallizes at the time of applying for the permit and making the payment and not at the time of receipt of goods. Being a statutory liability, though it is paid for the purchases and may form a part of the purchase consideration subsequently, is independent of the purchase price, when paid.
30. In the case of the appellant, it had not received the stock. So, there is no question of taking the goods to the closing stock. It has claimed the deduction of an amount which it was required to pay. So, the claim is to be allowed u/s. 37 of the I.T.Act. Now that S.37 is to be read with S.43B, the appellant had claimed it as a deduct6ion u/s.43B. But, in my opinion, this being a statutory obligation, and the demand having been paid during the year of account, is to be allowed. The expenditure has been incurred in respect of a business the profits of which are assessable to tax, I do not agree with the views of the assessing officer that at the time of making the order for the goods, the appellant entered into an unconditional contract with the manufacturer and the goods had passed to it at the time when the order was accepted by the producer. Because, between the period of making the order and the arrival of goods inside the boundary of the State hundred and one situations may take place. Hence, by making the order of consignment, the appellant has not entered into an unconditional contract.
31. In view of the above discussion, I am of the opinion that the claim is to be allowed as a deduction in the year in which it is paid i.e. the previous year, u/s.37 read with section 43B. I direct the assessing officer to allow the claim of Rs. 25,36,671 and Rs. 58,44,632 for the assessment years 1990-91 and 1991-92."
Revenue came up in appeal before the Tribunal questioning, inter-alia, deletion of additions of Rs. 25,36,671 for the assessment year 1990-91 and of Rs. 58,44,632 for the assessment year 1991-92.
9. Before us, the learned Commissioner of Income-tax, who represented the Department, argued that the present reference to the Special Bench itself is somewhat uncalled for because the issue is covered in favour of the Department by a decision of another Special Bench of the Tribunal. In the Department's written submissions, read as under -
"The Special Bench in above case was constituted as it came to the notice of Hon'ble Members that there were two views on the issue of allowability of excise duty paid in advance (for importing liquor from outside the state of Andhra Pradesh). One view was against the assessee taken by the Hon'ble Hyderabad Bench 'A' in the case of the Jeypore Sugar Co. Ltd., Chagallu in ITA No. 2034/Hyd/1990, order dated 11.9.1995, wherein it was held "For a payment to be allowed as deduction in the previous year, the liability for such payment must have accrued in that previous year. Mere advance payment without accrual of liability is of no avail. Invoking of sec. 43B for claiming deduction of such payment of prepaid taxes and excise duty is not correct." The other view was expressed by Hon'ble Delhi Bench 'D' of the Tribunal in the case of Modipon Ltd. V.IAC ITA No. 1134/Del/1988 reported in (1995)52 TTJ (Del)477, wherein it was held that the excise duty, whether paid in advance or otherwise, retained the character of excise duty and, therefore, covered by the provisions of sec. 43B and qualified for deduction in the year of actual payment.
In this connection it is respectfully submitted that the aforesaid earlier judgment of Hon'ble ITAT dated 11.9.95 was based upon the decision of Hon'ble Special Bench 'B' Hyderabad dt.26.3.91 in the case of M/s.KCP Ltd. V/s. ITO reported in 38 ITD at page 30. Thus, the issue should have been considered as covered by the decision of Hon'ble Special Bench of ITAT at Hyderabad in the case of KCP Ltd. which was binding on the Division Bench. Hence constitution of another Special Bench on the same issue was not required. Further, similar view has been taken by the Hon'ble A.P. High court in favour of Department in the case of Gopi Krishna Granite India Ltd. V/s. DCIT reported in 251 ITR 337, indicating that incurring of liability is a must for allowing deduction u/s. 43B.
3. In view of above, it is requested that considering the earlier decision of Hon'ble special Bench on the issue as well as the view of Hon'ble jurisdictional High Court on the similar issue, the action of the Assessing Officer in disallowing advance payments of excise duty may kindly be upheld on the facts of the case."
10. In short, the learned CIT (DR) submitted that the amount of Rs. 25,36,671 for the assessment year 1990-91 and Rs. 58,44,632 for the assessment year 1991-92 represented the part of purchase price of the stock in trade, and that it is a direct expense relatable to the stock in trade. He, however, held that though the amount is payable in the relevant previous year, no particular liability has been incurred inasmuch as the amounts represented only a part of the purchase price of the stock. He also relied upon the decision of the Apex Court in the case of British Paints (188 ITR 44) and argued that the amounts have to be either taken to the Trading Account in this year as part of the purchase price and closing stock, or they should be treated only as prepaid expenses in the relevant year, as reflected by the assessee in his books, and they should be transferred to the trading account in the year in which the related goods are received. As already mentioned, he also stressed that the question of allowing deduction for the two amounts in question does not arise because S.43B is not a permissive or enabling section for granting deduction, but a prohibitory section. It can be invoked only by the Revenue to prohibit a deduction, but the assessee cannot resort to the same for claiming a deduction which otherwise is not admissible. A deduction can be claimed by the assessee under the section only in a limited number cases where the deduction was disallowed in an earlier year on the ground that though the liability was incurred, the amount was not paid. He referred to the decision of the Apex Court in the case of British Paints(supra) and argued that if the deduction is allowed as claimed by the assessee, it would throw open floodgates of evasion as the assessee can manipulate figures of a year by obtaining permits on payment of countervailing duty and claiming deduction for the duty paid, without actual import of the goods in the year. He mentioned that matching principle is the corner stone of the mercantile system of accounting, in the sense that accrued revenues of a year whether received or not have to be matched against the accrued expenses whether paid or not. To allow the deduction for prepaid expenses would violate this principle. He also relied on the decision of the Bombay Bench decision of the Tribunal in the case of DCIT V/s. Amforge Industries Ltd (79 ITD 49).
11. In short, the plea taken is that the countervailing duty in question is a business expense, and is directly relatable to the obtaining of stock in trade, and, so, should be allowed as a deduction only in the year in which the related stock is received and is reflected in the trading account.
12. The learned counsel for the assessee, on the other hand argued that the central issue is whether a liability to pay countervailing duty has arisen in the year or not, and whether it is discharged or not by the assessee. It is claimed that the assessee satisfies both these conditions and so, in terms of S. 43B of the Act. assessee is entitled for deduction. The assessee imports liquor and beers from outside the State to carry on his normal business and when he applies for a permit he has to pay the countervailing duty. He explained that there is always a time-lag between the placement of the indent on the supplier and the receipt of the goods from the supplier. Summer is the peak season for the consumption of the beer. When the assessee places the indent in March i.e. the last month of the previous year, he gets the goods in April which falls in the succeeding year. There is no question of any manipulation of figures or permits because the time lag between the date of indent and the date of receipt of the goods is inevitable and considering the scale of operations of the assessee, the amounts left as prepaid expenses are not at all abnormal.
13. Referring to the contention of the learned assessing officer that the countervailing duty in question is paid by the assessee on behalf of the manufacturer, the learned counsel for the assessee argued that such is not the case. He explained that the countervailing duty is paid by the assessee in its capacity as wholesaler and not on behalf of the manufacturer. He referred to the decision of the Apex Court in the case of In re Sea Customs Act S.20(AIR 1968 Supreme Court 1760) and explained that in the context of excise duty, taxable event is the manufacture of goods, and in the context of customs duty, it is the import or the export that is the taxable event. So, it is explained that as the assessee is not the manufacturer, the countervailing duty is paid by the assessee on its own behalf as a precondition for the import. He further explained that the consideration for the purchase of goods does not include the countervailing duty and it does not form part of the purchase price of the goods to the assessee. In this context, he referred to the decision of the Apex Court in the case of Hindustan Sugar Mills V/s. State of Rajasthan and Others (AIR 1978 SC 1496 which does not seem to have much bearing on the issue on hand.
14. It is pleaded that the excise duty is imposed after the goods have come into existence, and so, it is not a part of the manufacturing cost. So, it is pleaded that it is more correctly debited to the Profit and Loss Account as an overhead than to the Manufacturing Account. For this proposition, he relied upon the decision of the Apex Court in the case of Saraswathi Industrial Syndicate Ltd. V/s. Union of India (AIR 1975 SC 160).
15. The learned counsel for the assessee has heavily relied upon the decision of the Delhi Bench of the Tribunal in the case of Murari Woollen Mills 79 Taxman 19 in which it was held that receipt of the goods by the assessee has no relevance in law to the accrual of the liability and its eligibility for deduction. Similarly, he relied for the same proposition, on the decision of Delhi Bench of the Tribunal in Modipan Ltd. V/s. AC(52 TTJ 477). He also relied upon the Special Bench decision of the Tribunal in ITO V/s. Food Specialities Ltd. (49 ITD 21 for the proposition that excise duty imposed does not form part of cost of manufacture or production and so, is not includible in the figure of closing stock to the extent goods remained unsold. In other words, it is an overhead item which can be debited to Profit & Loss Account, in contra-distinction to the manufacturing account. Similarly, he relied upon the decision of the Special Bench in the case of Indian Communication Net Work V/s. IAC (49 ITD 56) in which it was held that customs duty and excise duty are allowable as deduction under S.43B even when they are taken into closing stock, upon corresponding reduction of the opening stock of the subsequent year. He also relied upon the decision of the Calcutta High Court in the case of CIT V/s. Berger Paints (254 ITR 498) in which it was held that excise duty was deductible in the year of payment and that the assessee cannot add the duty paid in one year to the extent relatable to the unsold goods relating to closing stock and claim deduction in the subsequent year as opening stock, and that such a claim would be contrary to the provisions of S.43B.
16. Similarly, the learned counsel for the assessee relied on the decision of the Hon'ble Allahabad High Court in the case of CIT V/s. CL Gupta and Sons (259 ITR 513) in which it was held that customs duty paid in March, 1987 was allowable as deduction in the assessment year 1987-88 even though the relevant goods were received in the subsequent year viz. 1988-89.
17. The learned counsel for the assessee further relied on the decision of the Hon'ble Madras High Court in the case of Chemicals and Plastics Ltd. V/s. CIT (125 Taxman 648) in which it was held that even where the duty was initially included in the closing stock, it was separately allowable as deduction in terms of S.43B. In this context, he also relied on the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. (162 ITR 240).
18. The learned counsel for the assessee has also mentioned that the decision of the Special also mentioned that the decision of the Special Bench in the case of KCP Ltd. (supra) relied on by the learned Departmental Representative is clearly distinguish - able. In this context, his written submissions read as under -
"With reference to Excise Duty, the Special Bench in KCP Limited held as under :
"However, with reference to the excise duty paid in respect of raw materials which have not entered into the computation of the value of stock sold during the previous year, the apportionment made by the assessee will have to stand. This is because if such prepaid taxes are to be taken into account then valuation of closing stock has to be revised as a consequence with the result that only will it need an unnecessary recomputation but the result may not also be singnificantly different. In the circumstances, we direct the ITIO to verify the above expenditure and allow such expenditure as have been incurred in the previous year and apportioned on time basis. But prepaid taxes apportioned on the basis of stock valuation need not be considered for such deduction."
In this decision, as your Honours will appreciate, the Special Bench had no occasion to consider, in the absence of appropriate and detailed submissions by the assessee, the nature of the duty said to have been paid - whether consequent upon arisal of liability or merely an ad hoc payment made into the personal ledger account of the assessee with Central Excise Department before clearance of the goods from the Bonded Warehouse. There was no categorical submission by the assessee that the liability to excise has accrued in the previous year. Therefore, the claim was not considered by the special Bench from that angle. The reason given by them for sustaining the disallowance is that it involves adjustment to closing stock, which do not make any significant difference. The decision was rendered on balance of convenience rather than a discussion and findings on the material issue involved in the assessee's case before Your Honours.
For these reasons and basic differences pointed out, it is submitted that the Special Bench decision cannot be considered as affording a precedent of a binding nature.
However, it is worth noting that the Bench considered levies such as property tax and held that they were incurred during the previous year by virtue of the demand raised in the same year, and therefore the entire payment including what the assessee considered as prepaid in its account has to be allowed as deduction.
This finding in fact advances the claim of the assessee in the present appeal in as much as taxes, duty and cess fall in the same category viz. statutory liabilities and call for same treatment. In fact they are clubbed together for similar treatment u/s. 43B of the I.T. Act."
19. The learned Departmental Representative, in his rejoinder argued that the decisions relied upon by the learned for the assessee are all distinguishable. He pleaded that the points of distinction between the present case and that considered by the Special Bench in KCP Ltd. (supra) made out on behalf of the assessee, are not valid. In this context, the written submissions of the learned Departmental representative read as follows -
"1.2. The arguments of assessee's authorised representative about the Hon'ble Special Bench decision as above are totally incorrect because Hon'ble Special Bench has discussed the issue in detail in para 26.1 to 26.4 of the order at page No. 54 to 57 of the order. In para 26.4 it has been clearly stated that the provisions of section 43B have no relevance as the section only enables the ITO to disallow the claim for deduction of the provision made in the profit and loss account. Further, in para 26.5. Hon'ble Special Bench has clearly discussed the issue of allowance of prepaid excise duty and stated that in respect of the excise duty paid in respect of raw materials which have not entered into the computation of value of stock sold during the previous year, the apportionment will have to stand. In other words Hon'ble Special Bench has clearly held that the prepaid taxes pertaining to goods not arrived in the relevant previous year cannot be considered for allowance u/s. 43B of the IT Act.
1.3 As far as the discussion by Hon'ble Special Bench in para 26.5 pertaining to property tax is concerned the same was allowed on the basis that the demand has been raised in the relevant previous year and also paid by the assessee. However, in the case of excise duty, since no statutory demand notice was issued and assessee had paid excise duty in advance on his own without having received the goods, the same was held to be not allowable by Hon'ble Special Bench. In this connection, it is submitted that there cannot be any comparison between property tax paid consequent to demand raised by statutory authority and excise duty/countervailing duty paid in advance by the assessee, even though both may be tax/buty payable under certain statute. In the present case the controversy is regarding advance payment of excise duty and not about any amount statutorily payable under a notice of demand issued by a authority. Thus the decision of Hon'ble Special Bench in the case of KCP Limited V/s. ITO reported in 38 ITD 30 is clearly applicable in the present case, as far as advance payment of excise duty is concerned."
20. He also distinguished the other cases relied upon by the learned counsel for the assessee, and in this behalf, his written submissions read as under -
"2. The assessee's authorised representative has further relied on the decisions of Hon'ble Special Bench, Delhi reported in 49 ITD 21 and 49 ITD 56 which have also been reported in 206 ITR (AT) page 119 and 206 ITR (AT) page 96. It is submitted in this connection that both the decisions quoted by assessee's authorised representative are distinguishable as the same dealt with the issue of valuation of closing stock after the goods had entered into assessee's business and then in the income computation. In the present case there is no dispute about the valuation of the stock because the goods had not been imported by the assessee from other states and whatever amount was paid by him is only in anticipation of future transactions for purchase of goods. The duty paid cannot be considered in isolation and it is linked to the future import of goods into the State. If for any reason, the goods could not have been delivered to the appellant, the duty so paid would become refundable to the appellant and therefore before the actual delivery of goods, the duty was rightly shown as 'prepaid duty' in the Balance Sheet by the appellant. The prepaid duty is only setting apart money which might become expenditure on the happening of an event i.e. the import of goods into the State and therefore at best, it is only a contingent liability. Therefore, in the present case, as already submitted, the liability arises and accrues only in the year in which the goods are imported into the State or brought into the State and therefore, it cannot be allowed as a deduction in this year. In this connection, at the time of hearing, reference was already made to the following Authority.
"The liability to pay countervailing duty arises and accures in respect of the liquors imported, the moment they are imported into the State. 1976(1)APLJ 71"(DPB page 10) 2.1 In the present case the goods in respect of which the assessee obtained import permit by making advance payment of excise duty, have not entered into his business at all and, therefore, the liability had not accrued in any manner. The excise duty is always referable to certain goods manufactured/imported/purchased by the assessee which are in existence and this is why excise duty is treated as part of cost of goods properly debitable to the trading account.
3. As far as the decision of Hon'ble ITAT Delhi in the case of Modipon Limited V/s. IAC reported in 52 ITD 477 is concerned, Hon'ble ITAT Delhi has taken the view considering the earlier Special Bench decision of Hon'ble ITAT Delhi reported in 49 ITD 21 and 49 ITD 56 referred above (refer para 17.2 of the order). This view has been discussed in detail and distinguished on sound basis recently by Hon'ble ITAT, Mumbai in the case law recorded in 79 ITD 49 (page 11 to 18 of DPB). The main basis on which the decisions of Hon'ble ITAT, Delhi have been distinguished by Hon'ble ITAT Mumbai, is the decision of Hon'ble Andhra Pradesh High Court reported in 173 ITR 708 wherein it was held that in order to apply the provisions of section 43B not only should the liability be incurred in the accounting year, but the amount also should be statutorily payable in the accounting year. The opposite view taken by Hon'ble ITAT Delhi has been held to be incorrect as it has not considered the Special Bench, Hyderabad decision in the case of KCP Limited and also not taken into consideration the explanation 2 to section 43B inserted by Finance Act, 1989. In this connection reference may kindly be made to para 11 to 14 the order of Hon'ble Mumbai ITAT appearing at page 16 and 17 of the Departmental Paper Book filed on 10.10.2003.
4. All the other case laws quoted by assessee's authorised representative are distinguishable for the reason that in the present case, goods in respect of which advance payment is made have not arrived or entered into assessee's business activities during the relevant previous year and, therefore, the liability has not accrued in the relevant previous year in any sense and even presuming for a while for argument's sake that it is a liability of this year, it is at best a contingent liability which cannot be allowed as a deduction in this year."
21 We are of the view that the Revenue deserves to succeed. Countervailing duty has been paid in compliance which the statutory requirements as a precondition for the import of goods from outside the State. The learned counsel for the assessee has claimed it as a liability, which has crystallised during the year. A liability in its strict sense represents an amount due for payment for the economic benefit already received. When goods are purchased or other expenses directly referable to the goods are incurred, it is not, to our mind, correct to describe it as a liability incurred. Stock in trade is an asset acquired and subsequently becomes business expenditure when it is sold. If there is a credit purchase it gives rise to a liability. Any direct expense relatable to the acquisition of stock in trade also, to our mind, partakes of the same character. It may not be correct to term all statutory levies as liabilities. some of the statutory levies, whether terms as liabilities or not, are really business expenses. Income tax is a statutory liability whereas a levy like customs duty, excise duty and sales tax paid by the purchaser are, really speaking, allowable business expenditure. Whether the excise duty is a manufacturing cost or not is not really germane to the issue before us as the assessee is a trader.
22. The guidance note on accounting treatment for excise duty issued by the Institute of Chartered Accountants of India in 1979 and modified from time to time reads as under-
"NORMALLY ACCEPTED ACCOUNTING PRINCIPLES FOR INVENTORY VALUATION
4. Normally accepted accounting principles with regard to the valuation of inventories (i.e. materials or supplies to be consumed in the production process or in the rendering of services., work-in-process and finished goods), as prescribed in revised Accounting Standard (AS) 2 "Valuation of Inventories" are reproduced below:
"5. Inventories should be valued at the lower of cost and net realizable value.
6. The cost of inventories should comprise all costs of purchase, costs of conversion) and other costs incurred in bringing the inventories to their present location and condition.
7. The costs of purchase, consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase."
The same guidance note states the following in respect of excise duty as an element of cost.
"EXCISE DUTY AS AN ELEMENT OF COST
9. In considering the appropriate treatment of excise duty for the purpose of determination of cost for inventory valuation, it is necessary to consider whether excise duty should be considered differently from other expenses.
10. Admittedly, excise duty is an indirect tax but it cannot, for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use/disposal of goods thereafter, e.g. sale, destruction and captive consumption. It does not case to be levy merely because the same may be remitted by appropriate authority in case of destruction of exempted in case goods are used for further manufacture of excisable goods in the factory. Tax(other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expenditure incurred by him and it does not cease to be an expenditure merely because it is an exaction or a levy of because it is unavoidable. In fact, in a wider context, any expenditure is an imposition which a manufacturer would like to minimize.
11. Excise duty contributes to the value of the product. A "duty paid" product has a higher value than a product on which duty remains to be paid and no sale or further utilization of excisable goo's can take place unless the duty is paid. It is, therefore, a necessary expense which must be incurred if the goods are to be put in the location and condition in which they can be sold or further used in the manufacturing process.
12. Excise duty cannot, therefore, be treated differently from other expenses for the purpose of determination of cost for inventory valuation. To do so would be contrary to the basic objective of carrying forward the cost related to inventories until these are sold or consumed.
13. As stated in para-6 above, liability in excise duty arises even on excisable goods manufactured and used in further manufacturing process. In such a case, excise duty paid (if the same is not exempted) on the intermediary product becomes a manufacturing expenses. Excise duty paid on such intermediary product must, therefore, be included in the valuation of work-in-process or finished goods manufactured by the subsequent processing of such products."
23. From the above, it may be seen that excise duty, though admittedly an indirect tax, and a statutory levy, is no different from other business expenses. It arises as a consequence of manufacturing excisable goods or, as in the present case, by import of excisable goods i.e. liquor from another State, and constitutes an element in the inventory valuation. It stands on a different footing from income-tax, which is a statutory levy, but not a business expenditure. Excise duty or countervailing duty or import duties or octroi duty all stand on the same footing in the sense that they are all elements of inventory valuation.
24. However, in the case of Saraswathi Industrial syndicate (supra) the Apex Court observed as under -
"Excise duty is really imposed on goods when they have come into existence in the manufactured from. It could more properly be taken into consideration in determining net profits than in calculating cost of manufacture."
25. This decision dealt with the fixation of ex-factory sugar prices by the Central Government. It was in the context of the discussion on this issue that the Apex Court made the above remarks, and from the context, it appears to us that the above remarks are more in the nature of obiter. At any rate, even otherwise, even if excise duty is not part of the manufacturing cost, it does not, to our mind, clinch the issue in favour of the assessee. The assessee before us is not a manufacturer. He is actually a trader. Even in the case of a manufacturer, there are separate accounts maintained as under -
(1) Manufacturing Account (2) Trading Account (3) P&L Account
26. Even if a consolidated account is maintained for manufacturing and trading, profits are separately determined, and an item which is not debited to the manufacturing account can still be regarded as a trading expense. Net profit is arrived at after ascertainment of manufacturing profit and trading profit. So, when the Apex Court mentioned that the excise duty is not a manufacturing cost but falls for consideration in determining the net profit, it does not, to our mind, follow that it is not an item falling for consideration in the determination of gross profit which is the relevant item of profit for considering the issue before us.
27. In the case of ITO V/s. Food Specialities Ltd. (supra) wherein claim for deduction of excise duty relatable to the goods sold was involved, it was, as per the relevant portion of the head-note observed as under -
"Excise duty is a levy on the 'manufacture' or 'production' of goods and not related to a stage prior to the completion of the manufacturing or production process, but to a stage thereafter, viz. Post-manufacture and on coming into existence of a marketable commodity. The very basis of quantification of excise duty is related to the value to be placed on the commodity (i.e. the selling price) and if that be so, then the levy itself cannot enter into the said value but has to remain outside, although for the ultimate consumer both the value and the quantum of excise duty together with the quantum of profit and other incidental items such as packing, forwarding, freight, octroi, sales tax, etc. would constitute his cost of the commodity. In the case of Saraswati Industrial syndicate Ltd. V/s. Union of India AIR 1975 SC 460, the Supreme Court observed that excise duty is really imposed on goods when they have come into existence in the manufactured form it could more properly be taken into consideration in determining net profits than in calculating the cost of manufacture. This decision of the Apex Court was direct on the subject and was binding. Though the Supreme Court deals with one of marketable items, namely, sugar, it had to deal with 'cost of production', as to what it would mean and include, and in that context laid down unequivocally the principle that excise duty would more properly be taken into account in determining net profits and not in ascertaining the cost of manufacture. This principle is general in nature and would apply to all items manufactured. No exception can be taken to the enunciation of the principle on the ground that the Supreme Court was dealing with sugar. The point to be noted is that the Supreme Court was dealing with the meaning of the expression 'cost of manufacture' which is of universal application. Thus, the change in the method of accounting effected by the assessee in the assessment year under appeal by excluding excise duty on the unsold goods from the figure of closing stock was a bona fide one, finding support from a direct decision of the Supreme Court as aforesaid, and there being no specific prohibition laid down by the Institute of Chartered Accountants of India and its guidelines being recommendatory in nature. However, in the succeeding assessment year 1985-86, the assessee would not get the benefit of the amount in question and the same would become a part of its income in case it was claimed as a deduction in any manner."
28. It may be observed that the above decision is based upon the decision of the Hon'ble Supreme Court in the case of Saraswathi Industrial Syndicate (supra), and to our mind, it appears that the Special Bench did not consider the distinction brought out by us hereinabove between manufacturing profit and gross profit. As to our mind, the decision of the jurisdictional High Court in the case of Gopikrishna Granites (supra) is against the decision of the Special Bench of the Tribunal, we are unable, with respect, to follow the said Special Bench decision of the Tribunal. Similar is the position with the decision of the Special Bench of the Tribunal in Indian Communication Network (P) Ltd. V/s. IAC (49 ITD 56).
29. In the case of CL Gupta and Sons (supra), which is in favour of the assessee, on the scope of S.43B, Hon'ble Allahabad High Court observed as under -
"In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it is deductible only in the year in which it is actually paid, i.e. for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of the method of accounting regularly adopted by him Section 43B in clear terms provides that the deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty, etc, has no relevance and cannot be linked with the matter of giving benefit of deduction under section 43B of the Act. In this view of the matter, the appeal deserves to be allowed."
30. The above line of reasoning is also found in the decision of the Hon'ble Calcutta High Court in the case of Berger Paints (supra) and the Madras High Court in the case of Chemicals and Plastics (supra) relied on by the learned counsel for the assessee.
31. We are of the view that the ratio of these three decisions goes contrary to the decision of the jurisdictional High Court in the case of Gopikrishna Granites, wherein, dealing with the prima-facie adjustment made by the assessing officer under S.143(1) (a) in respect of interest payable to financial institutions in succeeding assessment years and not concerned assessment year, it was, as per the relevant portion of the head-note, held as under -
"Held (i) that in accordance with the terms and conditions of the agreement governing the loan between the financial institution and the assessee the interest amounts were payable in the succeeding assessment year and not in the assessment year 1996-97. When the assessee had not even incurred the liability in relation to the amounts of interest for the assessment year 1996-97, there was not basis for the assessee to claim that those interest amounts had accrued during the previous year under consideration. Therefore, the claim of the assessee for the interest payment was inadmissible on the basis of the material available on record and the unambiguous provisions of the Act and the disallowance was permissible while processing the return under section 143 (1) (a)."
32. The learned counsel for the assessee submitted that the above case is distinguishable because the above case related to a contractual liability to financial institutions and not statutory liability like excise duty. The point is not whether the liability is contractual or statutory. The question is whether a deduction for payment can be allowed in terms of S.43B even when the liability for the payment did not accrue in the relevant previous year. To our mind, the Hon'ble jurisdictional High Court has clearly held that under S.43B only a disallowance can be effected for non-payment of an accrued liability, and no deduction can be allowed simply because payment had been made when there is no liability incurred for the said payment, whether the payment is towards statutory liability or contractual liability. As the ratio laid down by the Hon'ble Allahabad High Court in the case of CL Gupta & Sons (supra) and Hon'ble Calcutta High Court in Berger Paints (supra) and Hon'ble Madras high Court in the case of Chemicals and Plastics India Ltd. (supra) is not consistent with the ratio laid down by the jurisdictional High Court in the case of Gropikrishna Granites (supra), we feel bound by the decision of the jurisdictional High Court.
33. In the case of Amforge Industries Ltd. (supra), decided by the Bombay Bench of the Tribunal, the decision of the Hon'ble Gujarat High Court in Lakhanpal National Ltd. (supra) was discussed in the following terms -
"5. In the case of Lakhanpal National Ltd. (supra) the assessee had actually imported goods on which custom duty had been paid. Excise duty had been paid on the goods which had been manufactured during the pervious year. The revenue contended that the raw material imported had not been consumed and the finished products were still part of the assessee's closing stock as at the end of the relevant previous year. On these reasonings the Assessing Officer held that there would in fact no refund due to the assessee and therefore, no provisional assessment under Section 141A for grant of refund was required to be made. On these facts the Hon'ble High Court observed at page 248 as under:
"Therefore it is clear that in the year 1983, when the goods including the raw material were imported and the finished goods lying at various deposits were manufactured in the year 1983 (including the one under the closing stock), the liability to pay import duty and excise duty on the said goods was incurred by the petitioner assessee. When that is so, it is also clear that the deduction of the said excise duty and import duty even on the closing stock was allowable in the accounting year 1983, but because of the specific language of section 43B of the Act, which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made, and therefore, it is not allowable. Therefore, the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles claimed as deduction merely because they are paid, cannot be accepted."
It is thus clear that in that judgment the Hon'ble High Court came to the conclusion that the assessee had incurred the liability to pay import duty and excise duty, that case had not proceeded on the footing that even if the liability had not been incurred on the basis of mercantile system the assessee would be entitled to deduction in view of the provisions of section 43B."
34. For the reasons recorded by the Tribunal in the above case, we also hold that the decision of the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. (supra) is distinguishable. At any rate, if the said decision has to be construed as supportive of the stand of the learned counsel for the assessee that deduction under S. 43B can be allowed on payment basis irrespective of the fact whether the liability for the same accrued or not, we have to follow the contrary view of the jurisdictional High Court in the case of Gopikrishna Granites (supra) which is the binding decision. We may also mention that we have already pointed out that excise duty, though a statutory levy, is a legitimate business expenditure.
35. We find that the Bombay Bench of the Tribunal in the case of Dy. CIT V/s. Amforge Industries ltd. (79 ITD 49) has also referred to the Special Bench decision in the case of KCP Ltd. (supra) and observed as under -
"14 On a reading of the complex provisions of section 43B as a whole, we find that it cannot be pressed into service to claim a deduction otherwise not available to the assessee. In other words, the assessee must incur liability of the nature mentioned in various clauses in the first instance. Thereafter the year of allowability would be determined on the basis of the year of actual payment. However, in the cases of such as one before us, where actual payment may precede the incurrence of liability, the harmonious reading of the provision would require the actual payment to be deemed in the year in which the amounts paid are adjusted towards liability. This is exactly what the Assessing Officer has done in the impugned assessment order. The view taken by he Assessing Officer is also supported by ITAT Special Bench decision in the case of KCP Limited(supra). We, therefore, hold that the learned CIT(A) was not justified to interfere in the order in this behalf. We, therefore set aside the order of the leaned CIT(A) and restore the assessment order in this respect. We hope that following the stand taken in the assessment order and in the appeal before us, the revenue would allow the assessee deduction of these amounts in the relevant assessment years, if not already done so."
36. We do not agree with the learned counsel for the assessee that the decision of the Special Bench in the case of KCP Ltd. (supra) is distinguishable. We are in agreement with the learned Departmental Representative on this issue, and we have already reproduced the relevant portion of is written submissions on this issue. We agree with him that the excise duty relatable to the goods purchased is not on par with other statutory levies like property tax. The so-called liability for excise duty arises because of the assessee's business operations. As already mentioned, there are different types of statutory levies or statutory liabilities. Property tax allowed by the Special Bench in the case of KCP Ltd. (supra) is the result of a statutory demand, which has nothing to do with business operations, whereas the payment of countervailing duty is only in furtherance of the intended trading operations of the assessee. It appears to us that it is an over-simplification on the part of the learned counsel for the assessee to argue that it was not made clear before the Special Bench that a liability arose for the payment of excise duty. For understanding the scope of this decision, it is necessary to read a little more than referred to by the learned counsel for the assessee in his written submissions. We extract hereunder the relevant portion in totality.
"26.2 It was claimed by the assessee that since section 43B requires taxes to be allowed in the year in which it is paid, this amount should be allowed as a deduction in this year. The Income-tax Officer was of the view that the pre-paid taxes were not payable by the assessee under any law and, therefore, disallowed the claim to be considered during the year in which the taxes were payable under the law. On appeal, the Commissioner (Appeals) was of the view that the relevant question was whether the expenditure related to the year of account and only if there was a provision for the expenditure, section 43B could be invoked. He accordingly confirmed the rejection of this claim.
26.3 Before us it was contended on behalf of the assessee that since the assessee had admittedly paid all the taxes and under section 43B taxes are to be allowed as a deduction on payment, the claim of the assessee should be accepted. On the other hand, it was contended on behalf of the revenue that since the expenditure had not been claimed as a deduction under the profit and loss account, it was not required to be considered.
26.4 On a consideration of the rival submissions, we are of the opinion that the provisions of section 43B have no relevance to the issue. That section only enables the Income tax Officer to disallow the claim for deduction of the provision made in the profit and loss account if the expenditure relates to certain taxes and other statutory levies which have not actually been paid. That is not the case here. The position in this case is that certain taxes and dues which have been paid by the assessee and which cover a period beyond the previous year have been apportioned by the assessee itself such that the amount relating to the previous year have been taken to the profit and loss account and the amount relating to the period beyond the previous year have been taken to the balance sheet as pre-paid taxes. The assessee claims that the amounts which have been taken to the balance sheet as not relating to the previous year should now be allowed on the footing that they are taxes paid as if section 43B grants the allowances of the taxes paid which is not the case.
26.5 We are, therefore, only concerned with the question whether any part of the prepaid taxes could be allowed as a deduction. Even though the taxes paid have been apportioned on time basis with reference to the previous year, the assessee would be entitled to the deduction of the entire amount without such an apportionment in certain cases. We refer back to para 18.3 of this order where we have referred to the decision of the Allahabad High Court in the case of Hindustan Commercial Bank Ltd. (supra) to hold that if the amount was laid out and expended wholly and exclusively for the purpose of a business, it has to be allowed as a deduction because for the purpose of a business, it has to be allowed as a deduction, because the Act does not recognise deferred revenue expenditure. In the list of the taxes paid above, it is seen that item such as property tax have been, incurred during the previous year and because the demand raised relates to a period of six months, part of which falls in this previous year and part falls in the next year, the assessee has apportioned it and taken the part of it to the Balance Sheet; as prepaid tax. But for income-tax purposes such an apportionment is not required. So in the case of the levies such as property tax for a period spilling beyond the previous year and for which the demand has been raised in the previous year and has been met by the assessee in the previous year, the deduction has to be allowed. However, with reference to the excise duty paid in respect of raw materials which have not entered into the computation of the value of stock sold during the previous year he apportionment made by the assessee will have to stand. This is because, if such prepaid taxes are to be taken into account then valuation of closing stock has to be revised as a consequence, with the result that only will it meet an unnecessary recomputation but the result may, not also be significantly different. In the circumstances, we direct the ITO to verify the above expenditure and allow such expenditure as have been incurred in the previous year and apportioned on time basis. But prepaid taxes apportioned on the basis of stock valuation need not be considered for such deduction. The ITO is directed to recompute the total income."
37. From the above, it is clear that what is allowed is only levies like property tax for which there is a demand. Such levies, though they represent prepaid expenses in the books, are held to be allowable. Whereas levies referable to the stock in trade like the excise duty are clearly not held allowable. It was also mentioned that, if the prepaid excise duty is allowed as an expenditure, there should be a revaluation of the closing stock, which would off-set the deduction and the net result would be the same. In other words, it has been clearly held by the Special Bench in the said decision that excise duty referable to the stock in trade is allowable only to the extent warranted by what is called matching principle in mercantile system of accounting, to which we have referred to hereinabove.
38. We are of the opinion that the view taken by the Special Bench in KCP Ltd. (supra) is clearly supported by the decision of the Apex Court in the case of British paints (188 ITR 44), wherein it was held, as per the relevant portion of the head-note, as under-
"That and system of accounting which excluded, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods-in process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system might produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively law difference between the two. In a period of rising turnover and rising price such a system as apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced therefrom. It was therefore, not only the right but the duty of the Income-tax officer to act in exercise of his statutory powers for determining what, in his opinion, would be the correct income."
39. The decision of the Apex Court in the case of Hindustan Sugar Mills V/s. State of Rajasthan and Other(supra) also seems to support the stand of the Revenue. Commenting on what is a sale price as defined in Rajasthan Sales Tax Act, 1954 and Central Sales Tax Act, 1956, the Apex Court observed in that case as under -
"The definition of 'sale price' is given in S.2(p) and according to that definition, it means: "...the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time or before the delivery thereof other than the cost of freight or delivery or the cost of installation in case where such costs is separately charged."
This definition is in two parts. The first part says that 'sale price' means the amount payable to a dealer as consideration for the sale of any goods. Here, the concept of real price or actual price retainable by the dealer is irrelevant. The test is, what is the consideration passing from the purchaser to the dealer for the sale of the goods. It is immaterial to enquire as to how the amount of consideration is made up, whether it includes excise duty or sales tax or freight. The only relevant question is as to what is the amount payable by the purchaser to the dealer as consideration for the sale and not as to what is the net consideration retainable by the dealer.
8. Take or example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily it is not shown as a separate item in the bill, but it is included in the price charged by him. The 'sale price' in such a case could be the entire price inclusive of excise duty because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But even so, it would be part of the 'sale price' because it forms a component of the consideration payable by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability statutory or otherwise under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be a part of the 'sale price'."
40. In the light of the above remarks, it is obvious that excise duty is part of the sale proceeds or turnover of the vendor irrespective of the fact whether the excise duty is separately reflected in the sale bill or included in the sale price itself. If that is so, conversely, it appears that for the purchaser like the assessee, excise duty should form part of the cost of goods sold, whether paid by the vendor and recovered from the assessee or paid by the assessee separately. If it is paid by the vendor, and is recovered by the vendor, it becomes part of the purchase price to the vendee. If on the other hand, the vendee has paid on his own behalf, it may not be part of the purchase price, but it forms part of the cost of goods sold, as a direct expenditure relatable to the purchase of the stock. On this basis, it becomes an allowable deduction only when relevant goods are reflected in the trading account.
41. In the present case, the countervailing excise duty has only been reflected as prepaid expenses. To our mind, it has correctly been so reflected. It has been so reflected correctly and does not require any adjustment in the computation of income. The adjustment claimed by way of a deduction for the prepaid taxes is out of the apprehension that it cannot be allowed in subsequent year because of the provisions of S. 43B. That apprehension, to our mind, seems to be misplaced because the scope of S. 43B is to disallow deduction for an otherwise allowable liability on the ground of non-payment, but when the payment had already been made and the payment is transferred to the trading account in the next year, it becomes allowable as part of cost of goods sold, and no separate deduction is called for. It is not for us at this stage to give any direction as to what should happen in the subsequent year. However, the amount of Rs. 25,36,671 disallowed in the first year deserves to be taken to the assessment year 1991-92 as part of the cost of the goods sold in that year. We hope that a similar treatment would be given for the amount of Rs. 58,44,632 involved in the second year, viz. assessment year 1991-92 in its succeeding year.
42. For the above reasons, we answer the question referred to us in the negative and in favour of the Revenue and hold that the excise duty paid in advance cannot be allowed as a deduction under S. 43B because the goods have not been received during the year.
43. The matter may now go before the regular Bench to dispose of the present appeals, in the light of our answer to the question referred to us by the Hon'ble President.