Income Tax Appellate Tribunal - Patna
Jamshedpur Engg. And Machinery Mfg. Co. ... vs Deputy Commissioner Of Income-Tax on 16 December, 1994
Equivalent citations: [1995]53ITD227(PAT)
ORDER
V.K. Sinha, Accountant Member
1. This is an appeal filed by the assessee.
2. At the outset, the ld. counsel for the assessee submitted before us that ground Nos. 1 & 2 relating to disallowance of sales-tax and labour welfare fund under Section 43B of the Act were not being pressed. They are accordingly rejected.
3. The main dispute is contained in ground Nos. 3 to 6 and relate to an addition of Rs. 47, 83,916 on account of refund of Central Excise Duty. The original assessment was completed under Section 143(3) on 27-2-1989 on total loss of Rs. 12,76,550. Thereafter, the CIT passed an order under Section 263 of the Act on 18-3-1991 setting aside the assessment, inter alia, for the reason that unpaid statutory liabilities of Rs. 50,16,888 had not been included in the total income and, therefore, the assessment was erroneous and prejudicial to the interest of revenue. The section of the Act under which the amount should have been added was riot mentioned either in the order under Section 263 or in the show-cause notice sent earlier. Thereafter a fresh assessment order was passed in July 1991 making an addition of Rs. 47,83,916 on account of Central Excise Duty refund received by the assessee during the year.
4. The Assessing Officer observed in the fresh assessment order that according to auditor's report the assessee was following mercantile system of accounting except for certain items. The auditors noted that the company was following cash basis in respect of "these claims, refunds and duty draw backs etc." The assessee had received a refund claim of Rs. 47,83,916.45 on the basis of an order of the Customs, Excise & Gold (Control) Appellate Tribunal, New Delhi, butthe Assistant Collector of C.E.,Jamshedpur had preferred an appeal before the Supreme Court against the order. Hence the amount had not credited to the Profit and Loss Account. It was submitted before the Assessing Officer that the assessee had to pay back this amount to various customers and a list was also filed. It was submitted that after the order of the Supreme Court, the assessee may be required to refund the amount. The Assessing Officer observed that the assessee was following a system of accounting in which net amount of sales were credited to the profit and loss account. This practice was followed consistently. He took a view that the assessee had been allowed the effect of these dues in the earlier assessment years. Further as a debit has been consistently allowed to the assessee in earlier previous years, the receipt of Excise Duty refund was taxable in this year. He also observed that as and when the assessee made any payment to any party he has to be allowed to get the credit for such payments. With these remarks he added the sum of Rs. 47,83,916 to the assessee's income.
4A. The assessee's submissions before the CIT(A) have been reproduced in his order and are extracted below :
This represents the amount refunded during the accounting period 1st April, 1985 to 30th September, 1986 in terms of order No. 158-B/84 dated 14-2-1984 and order No. 161/84-B of the Customs Excise & Gold (Control) Appellate Tribunal, New Delhi and Hon'ble High Court of Judicature at Patna Ranchi Bench, Ranchi (Photocopy of these orders enclosed as per Annexure-C I, II, III). The Central Excise Department has preferred an appeal against the above orders before the Hon'ble Supreme Court and the decision of the Court is still awaited. In the event of the decision going against the company the entire amount is liable to be refunded to the Central Excise Department immediately. On the other hand, if the decision goes in favour of the company the entire amount is to be refunded to individual customers (list of such customers enclosed as per Annexure-D). The D.G.S. & D., New Delhi vide their letter No. CDN-2/18(20)/II/82, Patna Vol. II, dated 11-4-1986, CDN-2/18(20)/II/82, Patna dated 25-7-1986, CDN-2/18(2)/II/82, Patna dated 25-7-1986 and CDN-2/18(20)/II/82, Patna dated 30-9-1987 have already demanded the respective amounts of excise duty released from them in the disputed case and the company has requested them vide letter No. CE/DGSD/86/1246 dated 25-4-1986 to wait until final disposition of the case by the Hon'ble Supreme Court.
In view of the above position we submit that the disputed amount refunded to the company amounting to Rs. 43,83,916 is an existing liability of the company and the ld. Assessing Officer has erred by including it as a part of taxable income of the company.
We request your honour to consider this point in the light of the decisions of Hon'ble High Court of Allahabad in the case of Rameshwar Pd. Kishan Gopal v. ITO [1983] 12 Taxman 281 (All.) and Hon'ble High Court of Kerala in the case of K.V. Moosa Koya & Co. v. ITO.
The Hon'ble High Courts have ruled in view of the Government appeal to Supreme Court, assessee's liability to pay excise duty had not been finally extinguished and, therefore, Section 41(1) was not applicable. It will be applicable only in the year of liability finally extinguishing.
5. The CIT(A) did not find merit in the contention and held that since the assessee had received a refund claimed on the basis of an order of the Customs Central Excise Gold (Control) Appellate Tribunal, the amount was includible in the income of the assessee. The ground was rejected. The assessee is aggrieved by this decision and is now in appeal before us.
6. In ground No. 3 before us. the assessee has submitted that the provisions of Section 43B were not attracted. The ld. counsel for the assessee very fairly submitted that Section 43B had not been invoked either by the CIT in the order under Section 263 or by the Assessing Officer in the assessment order. The addition could have been made, if at all, under Section 41(1) of the Act and, therefore, the ld. counsel for the assessee stated that he would base his arguments on Section 41(1) only.
6A. The ld. counsel for the assessee submitted before us that in order to invoke Section 41(1) of the Act, it was necessary that two conditions should be fulfilled. Firstly, an allowance or deduction should have been made in an earlier year in respect of any expenditure or trading liability incurred by the assessee. Secondly, any benefit should be obtained in respect of such trading liability by way of remission or cessation thereof. According to him neither of these conditions were fulfilled.
7. Elaborating further, the ld. counsel for the assessee submitted that the assessee was following a system of accounting where a separate excise duty account was being maintained. The excise duty collected was being credited therein and the refund of Rs. 47,83,916 had been credited therein. Payments of excise duty were being debited in this account. Thus, there were no claims for deduction in the profit and loss account and consequently no deduction had been allowed in the computation of total income in earlier years. The first condition was, therefore, not satisfied.
7A. It was submitted further that the liability for Excise Duty was in dispute and, therefore, there was no cessation of liability. In fact, DGS&D, New Delhi had demanded that the amounts of Excise Duty refund should be further refunded to the individual customers, but the assessee had asked them to wait until disposal of the case by the Hon'ble Supreme Court. There was a possibility also that the Supreme Court may reverse the decision of the High Court and in that case the assessee would be obliged to pay back the amount of excise duty to the Excise Department. In this regard he relied on the following decisions :
1. J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 (All.).
2. Rameshwar Prasad Kishan Gopal v. V.K. Arora, ITO [19831 141 ITR 763 (All.) - affirming the above decision.
3. K.V. Moosa Koya & Co. v. ITO [1968] 120 ITR 175 (Ker.).
4. CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC).
The ld. counsel for the assessee took us through the relevant parts of the above judgments also.
8. In the course of hearing before us, it was pointed out by the Bench that a Delhi Bench of the Tribunal in the case of Sylvania Laxman Ltd. v. IAC [1992] 41 ITD 192 had considered the question whether sales-tax collected by an assessee is to be treated as trading receipt, even if the assessee had not treated it as such in its account books and the answer had been given in the affirmative. The nature of the assessee's entries with regard to excise duty were similar and the same decision would be applicable in the present case. No further submissions were made by the ld. counsel for the assessee in this regard.
9. It was also pointed out by the Bench that in the case cited by the ld. counsel for the assessee, the accounts were being maintained on mercantile basis and they were cases where it had to be determined whether there was cessation of liability. However, in the present case, refunds of excise duty were being shown on cash basis by the assessee and, therefore, the facts were distinguishable. The ld. counsel for the assessee submitted before us that it would make no difference if the refund of excise duty was being shown on cash basis and the same principle would apply.
10. For the above reasons, the ld. counsel submitted before us that the provisions of Section 41(1) were not applicable and the addition of Rs. 47,83,916 should be deleted.
11. The ld. DR, on the other hand, relied on the assessment order and the order of the CIT(A). He also based his arguments on the provisions of Section 41(1) of the Act. He emphasised that the collection of excise duty was nothing but trading receipts and should rightly have been shown as credits in the profit and loss account. Similarly payments of excise duty should have been debited to the profit and loss account. Simply making these entries in a separate excise duty account did not change the character of the receipts or the expenditure and, therefore, it should be taken that due deduction had been allowed in pastyears for the liability of excise duty. The first condition necessary for invoking Section 41(1) was, therefore, satisfied.
12. It was further submitted that there was cessation of liability also and, therefore, the second condition was also satisfied. Reliance was placed on a decision of Patna Bench of the Tribunal in the case of Perfect Electrical Concern (P.) Ltd. v. DCIT [IT Appeal Nos. 95,445 and 939 (Pat.) of 1992 dated 27-5-1993, Assessment years 1989-90 to 1991-92] where a similar question regarding addition of Rs. 23,29,967 on account of refund of Central Excise Duty was considered. It was held that the refund was income in the hands of the assessee, relying on the decisions of the Karnataka High Court in K.G. Subramanyam v. CIT [1992] 195 ITR 199 and B.V. Aswathiah & Bros. v. CIT [1992] 198 ITR 108. A reference had also been made to the decision of the Patna High Court in Sheikh Rahmat Ali v. CIT [1960] 39 ITR 506. The ld. DR also invited our attention to the decision of the Gujarat High Court in the case of Motilal Ambaidas v. CIT [1977] 108 ITR 136 which had been relied upon in the above decision of the Tribunal.
13. In reply, the ld. counsel for the assessee submitted that the two decisions in the cases of K.G. Sabramanyam (supra) and B.V. Aswathiah & Bros, (supra) were distinguishable on facts, since in those cases the refund of Excise Duty was final and there was no appeal pending. In the circumstances, the cessation of liability was also final. However, in the present case, the matter was subjudice before the Supreme Court and, therefore, the cessation was not final.
14. We have considered the rival submissions carefully. The Assessing Officer has not specified the provisions of Income-tax Act, 1961 under which the addition was being made by him. Thereafter in the assessee's letter submitted to the CIT(A), an extract from which has been reproduced above, it was stated that Section 41(1) of the Act was not applicable. The assessee, therefore, replied on the basis that the addition had been made under Section 41(1) of the Act. The CIT(A) has also not specified the provisions of the Act under which the addition was being confirmed. Thereafter, the submissions before us by both sides have been made on the basis that the addition was made under Section 41(1) of the Act. We agree that the addition, if at all, has to be considered under these provisions and will proceed accordingly. Consequently, the assessee's alternative contention that Section 43B of the Act cannot be invoked for the addition loses significance and becomes infructuous.
15. It will be useful to reproduce the provisions of Section 41(1) of the Act as below as they stood in the relevant year :
(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, 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 obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allow ance or deduction has been made is in existence in that year or not.
16. It is evident that the provisions can be invoked where 'an allowance or deduction has to be made in the assessment for any year'. Here we are not dealing with an allowance, but only with a deduction. The assessee's first defence is that no deduction for Excise Duty has been made in earlier years. The Excise Duty collected was being created in a separate Excise Duty account and the payments were being debited in that account. No entries were made in the profit and loss account. We have referred to the decision of the Delhi Bench of the Tribunal in the case of Sylvania Laxman Ltd. (supra) in this connection. In that case, whatever collections were made on account of sales-tax were being credited to a separate account and as and when payments were made to the Government, amounts were debited to such account. In the circumstances, it was contended that the assessee had not claimed any deduction in the profit and loss account and, therefore, provisions of Section 43B could not be invoked. The Tribunal referred to the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 where it was held that the way in which 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. The assessee may be making entries which are not in conformity with the proper principles of accounting. Reference was also made to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 where it was held that it is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the Assessing Officer from treating it as a trading receipt. In view of the above it was held that the collections would be treated as part of the trading receipts and the same would be set off by the corresponding accrued liability. A reference was also made, inter alia, to the decision of the Patna High Court in the case of Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 where it was held that sales-tax collected by the assessee but not paid to the treasury was assessable as income of the assessee.
17. We have also referred to the decision of the Gujarat High Court in the case of MotilalArnbaidas (supra) where it was held as follows at page 147:
The amount of sales tax payable in respect of sales effected by the particular assessee forms part of his trading receipts and has to be shown on the credit side. As and when he pays the sales-tax to the authorities, he can claim deduction for the sales-tax paid; in case he has to refund the sales-tax to the original purchaser who purchased the goods from him, then the amount so refunded will also be a deduction which he can claim and it must be granted to him, that being a deduction on the expenditure side. Thus, it is obvious that in the instant case the assessee-firm which was maintaining its accounts on mercantile basis was bound to show as trading receipts all the amounts which accrued due to it, or which were collected by it as sales-tax and it was bound to show on the debit side of the accounts, the amounts which it paid by way of sales-tax. The fact that no such entries showing credits and debits in respect of sales-tax collected and sales-tax paid were made by the assessee-firm, does not alter the real substance of the transaction nor does it alter the real character of what was required to be done by the assessee in this case.
18. Similar principles will apply to collections of Central Excise Duty also. Collections will form part of the trading receipts and the entries in Central Excise account will form part of the profit and loss account. We hold accordingly. Consequently it follows that the assessee claimed deductions for the payments of Excise Duty in earlier years.
19. The matter can be seen from another angle. It was held by the Gujarat High Court in the case of Motilal Ambaidas (supra) that the words 'deduction has been made' in Section 41(1) of the Act should be read as 'deduction ought to have been made' and, therefore, it must be held that the provisions of Section 41(1) apply to the facts of the case. In this connection, it was first held that Section 41 (1) is not a charging provision and, therefore, the Rule of strict construction which applies to the charging provision will not apply. Thereafter, it was held as under :
It seems to us on the faqts of the present case that in order to make the machinery of assessment effective and in order to make the intention of the Legislature, namely, 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).
20. Respectfully following the above decision we hold alternatively that deduction for Central Excise duty ought to have been made and, therefore, the first condition of Section 41(1) is fulfilled.
21. It is next seen that the deduction in question should be in respect of 'loss, expenditure or trading liability incurred by the assessee'. In the present case, we are not considering incurring of any loss. We are, therefore, only to see whether the deduction was in respect of expenditure or trading liability. If the amounts had not been paid or deposited then it could have been a case of trading liability. However, in the present case, the facts are otherwise. The Central Excise duty in question was duly paid by the assessee and debited to the Central Excise account. It was only because of this that cash refund was received later on after the decision of the Central Excise and Gold (Control) Appellate Tribunal and the High Court. Thus, it is clear that we are dealing with deduction in respect of expenditure and not trading liability. The conditions under which the deduction allowed earlier is deemed to be profits and gains of business are different in respect of deduction for expenditure and deduction for trading liability. In case of deduction for expenditure, all that is required is that the assessee should obtain, whether in cash or in any other manner whatsoever, any amount in respect of the expenditure. The question of cessation of liability does not arise, because the deduction was not in respect of a trading liability. Such a question would arise if the deduction had been allowed for trading liability.
22. We find that the cases relied upon by the ld. counsel for the assessee in support of his contention that the second limb of Section 41(1) is not applicable, related to deduction for trading liability and the consequent question regarding the stage at which cessation of liability took place. This was so in the case of J.K. Synthetics Ltd. (supra) and also in the case of Rameshwar Prasad Kishan Gopal and the two other cases [supra). The facts of these cases are, therefore, distinguishable and not applicable to the facts of the present case.
23. In this connection, it will be useful to see the facts of the case of Rameshwar Prasad Kishan Gopal (supra) in a little greater detail. The petitioner had challenged the levy of excise duty on poppy heads and the High Court held that the provisions levying excise duty were ultra vires. The amount of excise duty was deposited in the High Court in pursuance of the Court and refunded to the assessee when the writ petition was allowed in accounting year relevant to assessment year 1974-75. The State and the Central Governments filed appeals before the Supreme Court and they were pending. The reassessment proceedings were initiated for assessment year 1974-75 treating the amount of refund as income. It was held by the High Court that since appeals were pending before the Supreme Court, liability was not finally extinguished so as to treat refund receipt as income liable to tax under Section 41(1) of the Act. At a first glance it may look as if the amount of excise duty actually paid was still treated as trading liability. However, this was not so. The High Court held that the deposit of excise duty in the High Court was not by way of discharge of liability, but was only by way of security. It was not a case where an allowance had been made in respect of any expenditure incurred by the petitioner but an allowance in respect of a trading liability. Thus, it was in the peculiar circumstances that it was held that even when moneys had gone out of the coffers of the assessee, it was not an expenditure. In the present case such peculiar facts and circumstances do not exist. The payment of Central Excise duty was made directly to the Central Excise Department in discharge of liability. It must, therefore, be held that it was expenditure and not a mere liability. The distinction has further been clarified in the above judgment of the High Court at page 768 in the following manner :
The Sub-section speaks of an allowance or deduction in respect of loss, expenditure or trading liability. In the present case the allowance or deduction was not. in respect of an expenditure or a trading liability. If it was in respect of an expenditure and it is a case of reimbursement subsequently received, then certainly it would be deemed to be the income under the head 'business or profession' in the year of receipt. If it was an allowance or deduction in respect of a trading liability and subsequently the assessee has been benefited by the remission or cessation of the trading liability then the amount of the liability which is extinguished will be deemed to be the income chargeable as business profits of that previous year. If that is so, then unless the liability is finally extinguished and there is no possibility of its revival in future there will neither be a remission nor a cessation of the liability.
We have already held that the deduction was in respect of an expenditure. It, therefore, follows that it is a case of re-imbursement subsequently received when the amount was refunded to the assessee. We hold accordingly that it will be deemed to be the income under the head "business or profession" under Section 41(1) of the Act in the year of receipt, that is, assessment year 1987-88. For these reasons, the order of the CIT(A) is confirmed and the assessee's grounds of appeal are rejected.
24. The matter does not end here. There is another distinction between the facts of the present case and the facts of the cases relied upon by the ld. counsel for the assessee. In all the cases relied upon by him, the assessee was following the mercantile system of accounting completely. However, in the case before us, the assessee was following mercantile system with certain exceptions which have been duly enumerated in the assessment order. The company was following cash basis in respect of claims, refunds and duty drawbacks, etc. The implications of this system have to be seen.
25. There are two principal systems of book keeping. Firstly, there is the cash system in which a record is maintained or actual receipts and actual disbursement, entries being posted when money or moneys worth is actually received, collected or disbursed. Secondly, there is the mercantile system in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liability is incurred, irrespective of the date of payment. Apart from the two principal systems, there is a possibility of an assessee adopting a hybrid system of accounting in which certain elements and incidents of cash and mercantile systems are combined. The assessee was following such a hybrid system of accounting. The acceptability or otherwise of the hybrid system in the facts and circumstances of the case has not been questioned and, therefore, we need not go into it. The fact remains that such a hybrid system was being followed. In the above circumstances, the question of cessation of liability, even if there had been a deduction for trading liability, could not arise because the system of accounting for refunds was cash system and not mercantile system. In this view of the matter also the amount of refund will be assessable in the assessment year 1987-88. The assessee's grounds of appeal are rejected for these reasons also.
26. The next ground relates to addition on account of gratuity fund. It is stated in the assessment order that the assessee claimed that a sum of Rs. 2,89,305 was actual amount of payment made to retired employees. The Assessing Officer observed that the gratuity trust fund duly approved by the CIT had not been made any payment in the year and, therefore, the same was not deductible. It was added back to the assessee's income. Thereafter, the CIT(A) observed that the same had been allowed in subsequent years on the basis of actual payments and, therefore, no inteference was called for.
27. The ld. counsel for the assessee submitted before us that provision for gratuity had not been allowed as a deduction in earlier years in view of the provisions of Section 40A(7)(a). In the circumstances, the deduction had been claimed on actual payment basis. According to him it was not a fact that deduction had been allowed in the subsequent year, as mentioned by the CIT(A). The ld. DR relied on the order of the CIT(A).
28. We find that the facts have not been brought on record clearly. If the provision for gratuity has not been allowed in the past, then we direct that it should be allowed as a deduction on the basis of actual payments. For this purpose, the Assessing Officer will verify whether the actual payments were made in this year or in the subsequent year. The matter is restored to his file for this purpose. For statistical purposes, the ground is treated as allowed.
29. In the result, the assessee's appeal is partly allowed.