Income Tax Appellate Tribunal - Mumbai
Sunil Silk Mills Ltd. vs Dy. Commissioner Of Income-Tax on 26 March, 1993
Equivalent citations: [1993]46ITD4(MUM)
ORDER
T.N.C. Rangarajan, Vice-President
1. These appeals are directed against the common order of the Commissioner of Income-tax (Appeals) upholding the disallowance made under Section 43B.
2. The admitted facts are as follows:-
The assessee is a firm. It carries on the business of processing of cloth on job work basis. It derives the income only by way of processing charges in respect of grey cloth supplied by the customers. However, because the processing of cloth is considered to be manufacture for the purpose of levy of excise duty, the assessee had obtained a licence under the Central Excise Act on behalf of the customers, who were called Merchant Manufacturers. The Proforma to Trade Notice No. 55(MP) General (13)/ 1985 issued by the Bombay Collectorate of the Central Excise states that the Merchant Manufacturer namely, the customer authorises the processor namely, the assessee to manufacture the processed cloth on their behalf and to furnish the information relating to the price at which the goods are to be assessed to excise duty. It also contains an undertaking that the Merchant Manufacturer will pay the differential duty when demanded by the Central Excise authorities in the event of the final assessment being known. The dispute arose whether the processing charges should be included in the price for the purpose of excise duty and it led to a writ petition in the Supreme Court. In the case of Empire Industries Ltd. v. Union of India [1986] 162 ITR 846, the Supreme Court held that the price of the goods would include processing charges for the purpose of levy of central excise but the processors will be given credit for the duty already paid by the manufacturer of the grey cloth. In other words, it was made clear by the Supreme Court that the assessed value of the processed fabrics would be the value of the grey cloth in the hands of the processor plus the value of the job work done plus the manufacturing profit and manufacturing expenses. However, during the pendency of that litigation before the Supreme Court, the assessee had considered itself as a collecting agent for the Government, of the excise duty payable by the Merchant Manufacturer, on whose behalf the assessee was returning the excise duty particulars. Therefore, the assessee was maintaining a separate account of the excise duty collected from the Merchant Manufacturer and the excise duty paid to the Government. During the pendency of the litigation, the Supreme Court by order dated 25-7-1984 directed the assessee to pay 50% of the dues in cash and give a bank guarantee for the balance of 50% as a condition for stay of the notice requiring payment of duty on the price inclusive of processing charges. Accordingly, the assessee had paid 50% of the dues and had also deposited the balance of 50% with the Union Bank of India for obtaining a bank guarantee. Consequently, in the balance sheet as on 30-6-1985, the assessee had shown as a liability of central excise duty at Rs. 26,70,827 and on the asset side fixed deposit with the Union Bank of India at Rs. 13,40,000. As on 30-6-1986, the figures were Central Excise duty Rs. 68,00,026 and fixed deposit of Rs. 38.31,527 with Union Bank of India. In the balance-sheet as on 30-6-1987, central excise duty payable was Rs. 1,13,47,253 and the fixed deposit was Rs. 93,41,400 with Vijaya Bank and Rs. 1,46,000 with Union Bank of India. Consequently, the assessee did not charge to Profit & Loss account any liability to pay excise duty.
3. While making the assessments, the Assessing Officer considered that the amounts received by the assessee from the customers must be taken as part of the trading receipts and brought them into the P&L account with a corresponding liability to pay excise duty to the Government for which a provision had to be made. He was of the view that if the P&L account is thus, recast, there will be a provision for payment of excise duty, which will attract the provisions of Section 43B and inasmuch as, the assessee had obtained stay of demand of taxes, the entire amounts had to be disallowed and added back to the total income of each of the assessment years. This view of the A.O. was upheld on appeal.
4. In the further appeal before us, it was contended on behalf of the assessee that firstly, the accounting followed by the assessee was correct inasmuch as, the assessee was not manufacturing any article of its own account and was deriving only processing charges. It was submitted that the excise duty collected could not therefore, form part of the trading receipts of the assessee at all. Secondly, it was submitted that even if the P&L account is recast, the assessee had virtually paid the money because as ordered by the Supreme Court, 50% of the dues had been paid and the other 50% was deposited in the Bank for obtaining a bank guarantee, which was enforceable at any time. Thirdly, it was submitted that the writ petition in the Supreme Court was disposed of on 4-11-1988 prior to the making these assessments which were on 29-3-1989 for all the three years and therefore, that subsequent event should be taken note of to hold that there was no unpaid provision required to be added back under Section 43B. On the other hand, the Revenue supported the orders of the authorities below while pointing out that the correct method of accounting was to take the excise duty collection as part of the trading receipts and as long as the stay was in force during the previous years, the provisions of Section 43B had to be applied. Reference was also made to the decision of the Tribunal in the case of Radha Dyeing & Printing Mills [IT Appeal No. 9200 (Bom.) of 1988 dated 3-6-1992] for this proposition.
5. We have considered the submissions of both the sides and perused the orders of the authorities below, as well as the decision of the Supreme Court and the Notifications of the Central Excise Department. It is clear that the actual manufacturer was only the Merchant Manufacturer and the assessee was only carrying on the process for them and receiving processing charges. No doubt in a case where the assessee manufactures the goods itself, the price of the goods would include the excise duty, sales-tax etc. and it would be difficult to say that those levies cannot form part of the trading receipt. On the other hand, in the present case, there was no liability on the part of the assessee to take out a licence as a manufacturer or collect the excise duty as part of the price of any goods manufactured by it. The assessee was only authorised to give the particulars of the goods for the purpose of levy of excise duty. The primary responsibility for payment of excise duty was on the Merchant Manufacturers, who were getting the job work done through the assessee. Hence, we find force in the contention of the assessee that what was collected by the assessee as excise duty was diverted by an over-riding title to the Government and could not form part of the processing charges, which became the subject to levy of excise duty only in the hands of the Merchant Manufacturers and not in the hands of the assessee. In other words, the assessee was only an agent of the Merchant Manufacturers for the purpose of collecting the duty and passing it to the Government. This is strengthened by the fact that in the proforma the Merchant Manufacturer assures that no other consideration flows to him from his buyers and also undertakes to pay any extra duty demanded at the time of final assessment This clearly establishes the fact that the excise duty was a levy on the merchant manufacturer and not the liability of the processor and hence the assessee was not at all required to make a provision for payment of excise duty in the Profit & Loss account.
6. Even assuming that the excise duty was to be treated as part of the trading receipt of the assessee and its P & L account is to be recast, we do not think this is a case where it could be held that the excise duty was not paid by the assessee. We cannot ignore the purpose of Section 43B which was to curb the practice of taxpayers not discharging their statutory liability for long periods of time but claiming that liability as a deduction on mercantile or accrual basis. Can it be said that the present case is one where the assessee has not discharged the liability? Under the terms of the order of the Supreme Court, the assessee had paid 50% of the amount in cash. The assessee had also deposited the balance 50% in the bank and obtained a bank guarantee, which was enforceable at any time when the Supreme Court disposed of the case. In other words, that amount also was entirely set apart from the payment of duty and was not at the disposal of the assessee. Any delay was entirely due to the pending of the case in the Supreme Court. Moreover, by the time the assessment was made, the Supreme Court had already disposed of the writ petition and the bank guarantee had been enforced by the Central Excise Department. This subsequent event also cannot be ignored. Recasting of the accounts of the assessee even after the decision of the Supreme Court becomes a penalty inflicted on the assessee even though the assessee had no benefit of the stay of the demand of the excise duty which was also not a direct liability of the assessee.
7. The decision of the Tribunal relied on by the Revenue is distinguishable on two counts. Firstly, the point that a processor has no direct liability to pay excise duty but acts only as an agent for the merchant manufacturers was not considered. Secondly, it was noted that the deduction was granted in the year in which actual payment was made and therefore, it was considered unnecessary to interfere with the disallowance made in the earlier year under Section 43B. In the present case, however, since the assessee had never made a provision for payment of excise duty or claimed a deduction, such a question of disallowing a provision in the earlier year or allowing the deduction in the year of payment did not arise. We are convinced that on the peculiar facts of the case, the disallowance made under Section 43B by recasting the Profit & Loss account was not justified. Hence, the disallowances made under Section 43B are deleted. The A.O. is directed to recompute the total income of the assessee for all the three assessment years and he is also authorised to recompute the assessments of the partners as a consequence.
8. The appeals are allowed.