Income Tax Appellate Tribunal - Cochin
Rejini Ice And Cold Storage vs Income-Tax Officer on 29 May, 1987
Equivalent citations: [1987]23ITD147(COCH)
ORDER
A. Satyanarayana, Accountant Member
1. This appeal filed by the assessee is against the order of the Commissioner of Income-tax, Cochin dated 4-7-1985 Under Section 263 of the IT Act, 1961.
2. The assessee-firm is engaged in the business of processing and export of sea foods. The assessment for the assessment year 1980-81 (for which the previous year ended on 31-3-1980) was originally completed on 6-7-1983. While finalising the said assessment the Income-tax Officer allowed deduction of Rs. 5,12,536 claimed by the assessee as provision for payment of purchase tax. The CIT considered the said assessment order as erroneous and prejudicial to the interests of revenue and issued notice dated 11-6-1985 containing his proposal to revise the said assessment. In the said notice the following is mentioned as basis for issuing the notice :
In the assessment for 1980-81 completed on 6-7-1983, the assessee's claim for purchase tax liabilities to the extent of Us. 5,12,536 was allowed to be deducted while computing the total income. It is noticed that the assessee did not receive any demand notice from the Sales tax department. In this connection as per the ratio of the Kerala High Court decision in By. CST v. Neroth Oil Mills Co. Ltd. [1982] 49 STC 249, the assessee is not liable for any purchase tax at all. In view of this position, the claim allowed by the Income-tax Officer is not in order. Having called for and examined the records, I noticed that the order passed by the Income-tax Officer for the assessment year is erroneous and prejudicial to the interest of revenue. Therefore I propose to revise the above order by giving suitable instructions to the Income-tax Officer to enhance the assessment to the extent noted above.
Before the CIT the assessee's counsel argued that purchase tax was not payable only if the items purchased were exported without any manufacturing operations being carried out, that the freezing of the fish involved manufacture and that the amount should be allowed as deduction. Rejecting the arguments advanced by the assessee's counsel, the CIT directed the ITO to modify the assessment by disallowing the claim of Rs. 5,12,536 by his order dated 4-7-1985 observing as under :
I have examined the assessee's arguments. The assessee is trying to bring a decision given by the Income-tax Appellate Tribunal in deciding whether the assessee had liability to pay sales tax. It is also ascertained that the Hon'ble High Court of Kerala had in the case of Dy. CST v. Neroth Oil Mills Co. Ltd. [1982] 49 STC 249 decided that this did not involve any manufacturing operation and that the assessees are not liable to pay purchase tax. Therefore, what is 'manufacturing' under the Income-tax Act need not exactly be 'manufacturing' within the meaning of the Sales Tax Act. As per decisions now available the operations carried out by the assessee did not involve manufacturing within the meaning of Sales Tax Act and they were not liable to pay purchase tax.
3. Against the order of the CIT the assessee filed the present appeal. At the time of hearing the assessee's counsel filed a paper book of 20 pages containing notes of arguments, copy of notice dated 5-2-1987 from the Sales-tax Officer, Mattancherry to the assessee for production of books of account for the years 1975-76 to 1985-86 on 23-2-1983 for finalising the assessee' s liability or otherwise to sales-tax and copies of the appellate orders dated 21-2-86 for the assessment year 1983-84 in the case of Baby Marine Exports, Quilon and dated 27-1-1987 for the assessment year 1983-84 in the case of Poyilakada Fisheries, Quilon passed by the CIT (Appeals), Trivandrum. His arguments were to the following effect: Prawns, Lobsters, Frogs and Frog-legs were liable to be taxed at 5% at the point of last purchase in the State by a dealer as item No. 65A of the First Schedule to the Kerala General Sales-tax Act, 1963 (hereinafter referred to as the KGST Act). This was amended with effect from 1-4-1978. After the amendment item No. 65A reads as under:
SI. No. Description of Goods Point of levy Rate of tax
(i) Prawns, Lobsters, At the point of 5%
Frogs, Frog-legs, last purchase in
Cuttle fish and Crab the State by a
not falling under dealer who is lia-
(ii) below or item ble to tax
25 H(viii) Under Section 5.
(ii) Prawns, Lobsters,
Frogs, Frog-legs,
Cuttle fish and Crab
canned or tinned
or frozen or other- -do- 5%
wise processed not
falling under item
25 H(viii)
The judgment of the Kerala High Court in the case of Dy. CST v. Neroth Oils Mills Co. Ltd. [1982] 49 STC 249 referred to by the CIT refers the position as it stood before the amendment. The case of Neroth Oil Mills Co. Ltd. (supra) is now pending before the Supreme Court on appeal by the Kerala State. Purchase tax is even now in dispute. It is a disputed liability. In order to bring the assessee's case within the ambit of Section 5(3) of the Central Sales-tax Act, 1956 (hereinafter referred to as the CST Act) the following conditions have to be fulfilled :
(a) the assessee should be an exporter ;
(b) the transaction should be in the course of import or export so as to bring it within Article 286(1)(b) of the Constitution of India ;
(c) the exporter should have been the owner of the goods before the goods crossed the custom barriers of India or the purchase of goods for export should be supported by anterior purchase orders.
The claim of the assessee before the sales-tax authorities was that they did not carry on any manufacturing activity. It was only one of the arguments for exemption. The assessee claimed before the sales-tax authorities that what they purchased was in the course of export by virtue of Section 5(3) of the CST Act read with Article 286(1)(b) of the Constitution of India. For getting exemption under the said Section 5(3) of the CST Act many other conditions have to be satisfied as described above. The Sales-tax Officer has to satisfy himself that the assessee had fulfilled the said conditions to grant exemptions Under Section 5(1) or 5(3) of the CST Act. For this purpose the Sales-tax Officer has to scrutinise the accounts and other related documents of the assessee. The satisfaction of the STO is a sine qua non for allowing exemption. Even as on today the sales-tax assessment relevant to the income-tax assessment year 1980-81 has not been completed. The dispute in respect of exemption is not settled. This is evident from the notice dated 5-2-87 from the Sales-tax Officer, Mattan-cherry for production of accounts, documents, etc. for the finalisation determination of the" assessee's liability or otherwise to sales-tax for the sales-tax assessment years 1975-76 to 1985-86 on 23-2-1987 (filed as item No. 12 in the paper book). In the case of Sterling Foods v. State of Karnataka [1986] 63 STC 239 (SO) the assessee had proved that they had anterior contracts for exports before the purchases were effected. Such a situation had not been proved in the assessee's case to the satisfaction of the STO. The said decision of the Supreme Court does not lay down that the exporter is completely relieved from the purchase tax liability Under Section 5(3) of the CST Act. As already mentioned the stipulations Under Section 5(3) of the CST Act have to be fulfilled completely for obtaining exemption which can be ascertained and finalised only in the final assessment. Until then the liability exists. The Kerala Government is also of the view that the exporter who channelises his exports through Export Houses are not eligible for the exemption Under Section 5(3) of the CST Act. The Madras Government had also taken this stand and reopened many assessments already completed. In the case of the assessee also exports are done mainly through Export Houses and this question also remains finally to be settled at the time of assessment by the STO. After the Neroth Oil Mills Co. Ltd.'s case (supra), the Kerala Government amended the First Schedule of the KGST Act with effect from 1-4-1978 and specifically provided that processing, freezing and canning are manufacturing activity and thus set the situation favourable to them [nullifying the judgment in Neroth Oil Mills Co. Ltd.'s case (supra)] to hold that processed including frozen sea foods are said to be manufacture for the purpose of assessment under sales-tax. It is a fact that purchase tax had not been demanded. The reason for this is that the assessment has not been completed. Since the matter is under dispute the assessee is correct in making the provision. Reference is made to the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and the decision of the Allahabad High Court in the case of Poonam Chand Trilok Chand v. CIT [1982] 136 ITR 537. Disputed liability such as purchase tax etc. is allowable up to the assessment year 1983-84 because Section 43B applies only to assessment years 1984-85 onwards. For the sales-tax assessment years 1977-78 and 1978-79 the situation was the same. The Government of Kerala by notification dated 29-3-1979 waived purchase tax in respect of all exporters of sea foods like the assessee for the period from 1-4-77 to 31-3-79. If the Government had no right to levy the purchase tax the question of waiver of the same did not arise. This itself showed that purchase tax is payable according to the Government though it is disputed by the assessee. See the case of S. Ratnam Pillai v. ITO [1984] 9 ITD 376 (Coch.). The assessee is following the mercantile system of accounting for the purpose of sales-tax and purchase tax. It had provided in its books of account in respect of the liability to purchase tax. A disputed liability is also an admissible deduction under the mercantile system of accounting. The judgment of the Supreme Court in the case of Sterling Foods (supra) is applicable only from the assessment year 1987-88 and not earlier. In the case of disputed tax liability it is only just under the law as it stood then to claim it (in the year in which the liability has arisen) and if at a later date the liability ceases it should be included in the income of that year. Section 41(1) of the IT Act, 1961 is always available to the ITO. See the decision of the Bombay Bench of the Tribunal in India Coffee & Tea Distributing Co. Ltd. v. IAC [1986] 18 ITD 120. In L.J. Patel & Co. v. CIT [1974] 97 ITR 152 the Kerala High Court has held that the liability of the assessee following mercantile system of accounting to pay excise duty arose in 1952 in which year the goods were manufactured although the assessee was contesting that liability and the amount was actually paid in 1962. As the assessee was following the mercantile system of accounting it is entitled to claim deduction in respect of accrued liability on the basis of the provision made in the books of account even though no demand notice in respect thereof had been served on the assessee. Please see the decision in CIT v. Century Enka Ltd, [1981] 130 ITR 267 (Cal.). Reference may also be made to the following decisions :
J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 (All.) Pope The King Match Factory v. CIT [1963] 50 ITR 495 (Mad.) Shrikant Textiles v. CIT [1971] 81 ITR 222 (Bom.), ITO v. Radiant Cables (P.) Ltd. [1986] 18 ITD 79 (Hyd.) CIT v. J.K. Synthetics Ltd. [1983] 143 ITR 771 (All.) CIT v. Tata Chemicals Ltd. [1986] 162 ITR 556 (Bom.) Kalekhan Mohammed Hanif v. CIT [1987] 163 ITR 769 (MP)
4. The arguments of the departmental representative were to the following effect: The assessee is not at all liable for purchase tax in view of the decisions of the Kerala High Court and Supreme Court in Neroth Oil Mills Co. Ltd.'s case (supra) and Sterling Foods' case (supra) respectively. Reliance is placed on the order of the CIT.
5. We have considered the rival submissions. The assessee-firm purchases shrimps, prawns, etc., cuts the heads and tails of the same, peels, deveins and "cleans them and after freezing and packing them in cartons exports them to foreign countries.
Section 5A(1) of the KGST Act reads as under :
5A. Levy of purchase tax.-(1) Every dealer who, in the course of his business, purchases from a registered dealer or from any other person any goods, the sale or purchase of which is liable to tax under this Act, in circumstances in which no tax is payable Under Section 5 and either-
(a) consumes such goods in the manufacture of other goods for sale or otherwise ; or
(b) disposes of such goods in any manner other than by way of sale in the State ; or
(c) despatches them to any place outside the State except as a direct result of sale or purchase in the course of inter-state trade or commerce, shall, whatever be the quantum of the turnover relating to such purchase for a year, pay tax on the taxable turnover relating to such purchases for the year at the rates mentioned in Section 5.
The assessee is exigible to purchase tax even when the goods purchased by him are consumed in the manufacture of other goods for sale. The assessee can claim exemption from the purchase tax only if he is able to show that the purchase of goods by him is in the course of export. Taxable turnover as defined in Section 2(xxv) of the KGST Act excludes purchases in the course of export. This exclusion is as per Article 286(1)(b) of the Constitution of India which exempts from the purview of sales tax of any State sales or purchases in the course of export. The CST Act, which was intended to tax the inter-state sales or purchases of goods, formulated principles for determining when a sale or purchase of goods takes place in the course of import or export. Sub-sections (1) and (3) of Section 5 of the CST Act define as to when a sale or purchase shall be deemed to take place in the course of export of goods outside the territory of India as under :
5. Where is a sale or purchase of goods said to take place in the course of import or export.-(1) A sale or purchase of goods shall be deemed to take place in the course of the export of goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India."
** ** ** (3) Notwithstanding "anything contained in Sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of these goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after and was for the purpose of complying with, the agreement or order for or in relation to such export.
To put Section 5(3) in simple terms, the purchase of goods, after having received export orders, is exempt from purchase tax of the State i.e. the export order should precede the purchase of goods. In the case of Neroth Oil Mills Co. Ltd. (supra) prawns were purchased by the assessee locally and they were cleaned, peeled, processed and packed as prawns for sale by export outside India. The assessee in that case claimed that they were purchases preceding the sale occasioning the export of the goods and claimed exemption from purchase tax of the State Under Section 5(3) of the CST Act. The sales-tax authorities rejected the claim of the assessee. The contention of the revenue was that the identity of the goods was lost by reason of the process to which the goods were subjected to. The Sales-tax Appellate Tribunal, following the decision of the Supreme Court in Dy. CST v. Pio Food Packers [1980] 46 STC 63 negatived the contention raised on behalf of the sales-tax department and held that "though prawns were subjected to processing, namely, peeling, cleaning, grading, cooking, freezing, etc. they are only exported as prawns and that, after curing". The sales-tax department went before the High Court in revision Under Section 41 of the KGST Act. The Kerala High Court held that commercially prawns which were purchased by the assessee and prawns exported after processing for the purpose of such export were one and the same commodity as rightly held by the Sales-tax Appellate Tribunal. Accordingly the High Court dismissed the revision sought by the sales-tax department. In the case of Sterling Foods (supra) the dealer therein claimed exemption from purchase tax of the Karnataka State relying on Section 5(3) of the CST Act. The Supreme Court held as under ;
Processed or frozen shrimps, prawns and lobsters are commercially regarded the same commodity as raw shrimps, prawns and lobsters. When raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and become another distinct commodity. They are in common parlance known as shrimps, prawns and lobsters. There is no essential difference between raw shrimps, prawns and lobsters and processed or frozen shrimps, prawns and lobsters. The dealer as the consumer regard both as shrimps, prawns and lobsters.
It also held :
. . .the purchase of raw shrimps, prawns and lobsters by the appellant for the purpose of fulfilling existing contracts for export were exempt from purchase tax under the deeming provision of Section 5(3) of the Central Sales-tax Act, 1956, even though after making such purchase the appellant subjected them to the process of cutting heads and tails, peeling, deveining, cleaning and freezing before export because they remained the same goods in commercial parlance after such processing and freezing.
Simply by using the ratio decidendi laid down by the Kerala High Court in Neroth Oil Mills Co. Ltd.'s case (supra) the CIT is not correct in holding that the assessee was not liable to purchase tax. The assessee will be entitled to exemption from purchase tax by virtue of Section 5(3) of CST Act only when it is able to show that the assessee had purchased the goods for the purpose of fulfilling existing contracts for export. Until then it cannot be said that the assessee is not liable to pay purchase tax. Here in the present case the sales-tax assessment relevant to the IT assessment for 1980-81 is not yet completed by the sales-tax department. If and only when the sales-tax department verifies the assessee's records, documents, account books etc. and holds that the assessee is not liable for purchase tax under the KGST Act, in view of Section 5(3) of the CST Act, the assessee's liability to pay purchase tax is wiped out. Till then it subsists. In these circumstances of the case, we hold that the CIT is not justified in holding that the assessee is not liable to pay purchase tax and directing the ITO to modify the assessment by disallowing the claim of Rs. 5,12,536. We, therefore, set aside the order of the CIT and restore that of the Income-tax Officer.
6. In the result, the appeal is allowed.