Calcutta High Court
Commissioner Of Income-Tax vs Berger Paints (India) Ltd. on 13 February, 1991
Equivalent citations: [1992]196ITR818(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1979-80, the following questions of law have been referred to this court :
" 1. Whether, on the facts and in the circumstances of the case and specially when the assessee itself claimed that the excise duty liability was a determined one, the Appellate Tribunal is correct in law in holding that disputing the central excise duty and sales tax liabilities would not mean that they had become ascertained liabilities ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the disputed central excise duty and sales tax liabilities were contingent liabilities, not liable to be deducted while computing the capital of the assessee under the Companies (Profits) Surtax Act, 1964 ?"
2. In our view, the questions are not happily framed. The following question, in our view, will bring out the real controversy and we reframe the questions accordingly.
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disputed central excise duty and sales tax liabilities are not liable to be deducted while computing the capital base of the assessee company under the Companies (Profits) Surtax Act, 1964?"
3. The facts leading to this reference are that, while computing the capital base for the purpose of surtax, the Assessing Officer deducted the liability arising out of the demands made by the Central Excise Department and Sales Tax Department amounting to Rs. 1,30,566 and Rs. 5,11,374, respectively. According to the Surtax Officer, these liabilities were ascertained liabilities in view of the principles laid down by the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559.
4. The assessee being aggrieved went up in appeal before the Commissioner of Income-tax (Appeals). It was submitted before him that the demands of the Excise Department and Sales Tax Department were contingent liabilities and they should not be deducted to arrive at the capital base for the purpose of the Act. The Commissioner, however, did not accept this contention and upheld the order of the Surtax Officer. The assessee took the matter to the Tribunal by way of a second appeal. It was submitted before the Tribunal that those demands were already there for the assessment year 1978-79 but the same were not taken into consideration while computing the capital base for that year. It was also contended that these liabilities were not acknowledged as a debt by the company. On the other hand, the contention of the Revenue was that these were ascertained liabilities and, accordingly, those liabilities were required to be provided for in the books of account. The Tribunal was of the view that these liabilities should not be deducted while computing the capital base of the assessee-company.
5. At the hearing before us, the contentions which were raised before the Tribunal have been reiterated. On behalf of the assessee, Mr. Bhattacharjee, learned counsel, has submitted that these liabilities were not claimed in the income-tax assessment as they were treated as contingent liabilities and unless the dispute was finally determined, the question of claiming such liabilities as deduction under the Income-tax Act did not arise. He has also submitted that these liabilities were not provided for in the books of account on the ground that the assessee-company treated the said liabilities as contingent liabilities as the liabilities were disputed and the outcome of which was not known at the relevant time. He has also placed before us the relevant balance-sheets.
6. Rule 1A of the Second Schedule to the Companies (Profits) Surtax Act, 1964, which was inserted with retrospective effect from April 1, 1975, provides that, where a company has not made any credit in any account in its books as on the 1st day of the previous year relevant to the assessment year which is in the nature of a provision for taxation or proposed dividend under the heading "Current Liabilities and Provisions" in the column relating to "Liabilities" in the "Form of balance-sheet" given in Part I of Schedule VI to the Companies Act, 1956, or where the Income-tax Officer is of the opinion that the amount credited in such account falls short of the amount which should have reasonably been credited by it, the amount of its capital as computed under Rule 1 shall be reduced by the amount which has not been so credited or, as the case may be, the amount of such shortfall. In other words, such liabilities which ought to have been provided for by the assessee in the accounts having not been so provided for should be deducted in computing the capital base for the purpose of surtax assessment. It has not been disputed that the aforesaid two amounts in respect of central excise and sales tax demands have not been provided for in the accounts. We may refer to Schedule 16 of the balance-sheet of the year 1977 which is as follows :
SCHEDULE 16 Notes to accounts 1977 (Rs.) II.
Contingent liabilities not provided for :
(a) Income-tax demand in respect of assessment year 1961-62 not acknowledged by the company as debt 40,241
(b) In respect of Central Excise Department's demand not acknowledged by the company as debt 1,30,566
(c) In respect of sales tax demands not acknowledged by the company as debt 1,88,000
7. There are, however, other items with which we are not concerned. Similarly, for the year 1978, it has been shown as follows :
SCHEDULE 13 Notes on the balance-sheet 1978 (Rs.) II.
Contingent liabilities, in respect of
(a) Income-tax demand pertaining to the assessment year 1961-62 not acknowledged by the company as debt 40,201
(b) Central Excise Department's demand not acknowledged by the company as debt 1,30,566
(c) Sales tax demands not acknowledged by the company as debt 5,11,314
8. It may be mentioned that, under the heading "Current Liabilities and Provisions", provision for taxation has been duly made but the said provision does not include the aforesaid amounts which were in dispute.
9. The assessee, a public limited company, has to provide in the books of account the current liabilities and provisions in accordance with the provisions of the Companies Act, 1956. It is nobody's case that the books of account and the balance-sheet of the assessee-company have not been drawn up in accordance with the provisions of the Companies Act, 1956. The only contention is that those amounts which, according to the assessee, were contingent liabilities, having not been provided for in the accounts, would come within the mischief of Rule 1A. Rule 1A requires that, if the company does not make any credit in the books of account for the item which is in the nature of a provision for taxation, it will be for the Surtax Officer to deduct the same as liability in ascertaining the capital base. Provision for taxation is made on the basis of the liability which becomes ascertained at the end of the previous year. So far as excise duty is concerned, it is leviable when the manufactured goods are removed from the factory. Similarly, in the case of sales tax, it is attracted as and when sale takes place. From the balance-sheets, it would appear that these impugned demands are additional demands which the assessee ail-throughout disputed. Had it not been so and had it been an ascertained liability, the assessee would have claimed them as deduction in the profit and loss account as well as in the income-tax assessment. It is not disputed that the assessee had not claimed any deduction of those liabilities in arriving at the profit as the liabilities, according to the assessee, were contingent liabilities, nor had such liability been claimed as a deduction by the assessee in the income-tax assessment. Accordingly, these liabilities although relate to sales tax and excise duty but such liabilities not being ascertained and being disputed and not having been claimed in the assessment for the purpose of income-tax, cannot be treated as liabilities at all. It is only in those cases where the assessee takes the benefit of deduction of certain liability but does not provide for them in the books of account that the same would come within the purview of Rule 1A. It is not, however, the case here as would be evident from the facts and circumstances mentioned hereinbefore and the extract from the balance-sheet.
10. For the reasons aforesaid, we answer the reframed question in the affirmative and in favour of the assessee.
11. There will be no order as to costs.
12. Let the balance-sheets and the assessment orders be kept on record as part of the record.
Shyamal Kumar Sen, J.
13. I agree.