Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Mahendra Electricals Ltd. on 22 March, 1991
Equivalent citations: [1991]37ITD529(AHD)
ORDER
B.M. Kothari, Accountant Member
1. All these appeals relate to assessment year 1983-84. Hence we find it convenient to dispose of all these appeals by this common order.
2. We will first deal with the assessee's appeals relating to assessment order passed under Section 143(3). The appellant company is a company in which public are substantially interested. It carries on the business of manufacture of P.V.C. wires and cables and equipments. It also carries on business of manufacture of XIPE cables in its Unit No. 2 during the course of assessment proceedings the Income-tax Officer found that the assessee has debited a sum of Rs. 27,25,559 in the profit and loss account under the head "sales tax provision". The said provision was made on account of possible liability for sales-tax which may be credited in respect of supplies of cables made to M/s. Western India Erectors Ltd. (for short W1) during the accounting years 1980-81 and 1981-82. The company had not charged any sales-tax on the supplies of cables to the aforesaid customer as they had submitted Form No. 17-A prescribed under Gujarat Sales-tax laws. It was contended on behalf of the assessee before the assessing authority that the matter relating to levy of sales-tax on the transaction of sale was doubtful and therefore, they obtained opinion from the legal expert Shri S.L. Modi, who opined that sales-tax would be leviable on such transactions. Shri Modi in his letter dated 24-7-1980 addressed to the appellant company stated that as W1 have not obtained any licence under the Gujarat Sales-tax Act, it is not possible to accept Form No. 17-A from them and their request of not charging sales-tax cannot be accepted. He further observed that since the contract of sale executed with them occasioned movement of goods from the State of Gujarat to various other States, such a transaction will be regarded as an inter-State sale which will attract Central sales-tax at the rate of 10% if no C-Form is submitted and CST at the rate of 4% will be leviable if C-Form is submitted by the customer. The matter relating to sales-tax liability was discussed by the representatives of the assessee with the representatives of the customer company. Since the position as at the end of relevant year ended on 30-6-1982 was uncertain with regard to leviability of sales-tax on the aforesaid transactions, the appellant company made the aforesaid provision and claimed deduction in respect thereof. The Income-tax Officer observed that the assessee made the aforesaid provision merely on the basis of doubt and as a measure of abundant precaution. The doubt entertained by the assessee in this regard never came to be true and eventually the entries about sales tax provision were reversed in subsequent years. A sum of Rs. 15,40,615 was written back in the accounting year relating to assessment year 1984-85 and Rs. 11,84,944 in accounting period relevant to assessment year 1985-86. This shows that the liability for payment of sales-tax, in fact never accrued and therefore, he disallowed the aforesaid sales-tax provision amounting to Rs. 27,25,770.
3. The assessee had also claimed deduction in respect of additional depreciation and investment allowance in respect of foreign exchange rate difference relating to machinery installed both in respect of such plant and machinery installed in the previous year as well as such plant and machinery installed in earlier years. The Income-tax Officer denied this deduction on the ground that amount paid on account of exchange rate difference is not required to be taken into account in computing the actual cost of assets for the purposes of grant of investment allowance and additional depreciation, as such exchange rate difference payments made by the assessee relates to plant and machinery which were installed and put to use in the last year.
4. The CIT (Appeals) confirmed the disallowance of Rs. 27,25,770 made for sales-tax liability on the sales made to W1. He has discussed this point at considerable length in paras 27 to 31 of his order.
5. As regards assessee's claim for grant of additional depreciation and investment allowance on the amount of exchange rate difference, he directed the Income-tax Officer to verify the exchange rate difference relatable to the machinery installed during the year under consideration and allowed additional depreciation under Section 32(1)(iia) and investment allowance only in respect of additions to those items of machinery which were installed during the year under consideration, provided other conditions for grant of such deductions are fulfilled.
6. Before us, the learned counsel for the assessee submitted that the provision of sales-tax payable amounting to Rs. 27,25,770 made in respect of sales made to W1 relates two years and the bifurcation of the figures was as under :-
(a) Rs. 15,40,615 relates to accounting year ended on 30-6-1981.
(b) Rs. 11,84,944 relates to year ending on 30-6-1982.
It was pointed out by him that till the end of accounting year ended on 30-6-1982 the assessee was under a bona fide belief that it may have to pay sales-tax in respect of such sales made to W1. Such bona fide belief was based on opinion obtained from sales-tax expert Shri S.L. Modi. He invited our attention to letters dated 24-7-1980 and 20-8-1980 sent by Shri S.L. Modi, Advocate of the assessee in which he has indicated that the terms of existing contract executed with M/s. W1 will attract sales-tax liability. Thereafter, the matter was discussed in joint meetings. Copies of note dated 25-3-1982, letter dated 5-5-1982 sent by the assessee to M/s. W1 and note dated 21-6-1982 were also brought to our notice. All these documents were relied upon by the learned counsel for the assessee to show that the matter relating to such sales-tax liability was thoroughly examined and discussed and there was a reasonable apprehension that such sales would attract sales-tax liability. The assessee is maintaining accounts on mercantile basis and it was therefore considered necessary to make suitable provision for such sales-tax liability in the books of accounts. The provision of Rs. 27,25,770 was based on such legal opinion and deliberations and discussions made between the assessee and M/s. W1. He placed reliance on the judgment of Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and contended that liability for payment of sales-tax arose in the year in which the sales were made, on the strength of the said judgment the contended that at least a sum of Rs. 11,84,944 pertaining to the year under consideration ought to have been allowed as a deduction. The provision for earlier year's sales-tax liability amounting to Rs. 15,40,615 was made during the year under consideration, as the assessee after such deliberations and opinion arrived at the conclusion in this year that it may have to pay sales-tax in respect of supplies made to M/s. W1 in the preceding year as well as in the year under consideration. It was further submitted that such bona fide belief of the management was further fortified by the fact that the Sales-tax Officer in fact created a demand of Rs. 89,227 vide order dated 21-3-1983 for accounting year relevant for assessment year 1981-82. It was further pointed out that as soon as the Sales-tax Officer accepted the assessee's contention that no tax is leviable in respect of the sales made to M/s. W1, the provision was written back in assessment year 1984-85 amounting to Rs. 15,40,615 pertaining to the accounting year ended on 30-6-1981 as sales-tax assessment order for that year had already been received on 16-5-1983, before the close of the accounting year relevant for assessment year 1984-85 which ended on 30-6-1983. Similarly, the provision relating to accounting year ended on 30th June, 1982 was written back and shown on the credit side of the profit and loss account in the accounting year relating to assessment year 1985-86. In assessment year 1984-85 the provision written back amounting to Rs. 15,40,615 had been included in the taxable income and the assessee went in appeal before the CIT(A). The CIT(A) had disposed of that appeal on 22-6-1989 but in advertently omitted to give his decision in relation to this item of addition, for which, the assessee submitted a miscellaneous application. The same was heard in January, 1991 and the order of the CIT(A) is awaited. In assessment year 1985-86 the amount of Rs. 11,34,682 written back and credited in the profit and loss account has been allowed as deduction on the ground that it has been disallowed in the year under consideration. The learned counsel of the assessee strongly urged that deduction inrespect of the sales-tax provision amounting to Rs. 27,25,700 should be allowed as a deduction in the year under consideration.
7. The learned Departmental Representative supported the orders of the departmental authorities. It was pointed out that the sales-tax liability created by the Sales-tax Officer for the accounting year 1980-81 was based on the fact that the customer company did not have licence under the provisions of Gujarat Sales-tax Act in the year ended on 30-6-1980. However, in the year under consideration M/s. W1 had obtained licence and was entitled to issue Form No. 17-A. In view of this, the assessee's doubt about the possible sales-tax liability in respect of supplies made to M/s. WI in the said accounting year was baseless and no sales-tax was leviable. This view is further clarified by the orders of the sales-tax authorities who in fact did not levy any sales-tax, as is evident from the reversal entries made by the assessee itself in the accounting years relevant to assessment years 1984-85 and 1985-86. He further pointed out that the assessee had obtained opinion from Shri S.L. Modi vide letters dated 24-7-1980 and 20-8-1980 which fall in the assessment year 1982-83. The assessee did not make any provision for sales-tax liability in assessment year 1982-83. This shows that the assessee could not entertain any bona fide belief about the existence of such sales-tax liability. Even under mercantile system of accounting, a liability can be said to have accrued only if there is a clear provision under which the assessee is liable to pay such amount of sales-tax. The judgment of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) is therefore, clearly inapplicable to the facts and circumstances of this case. He further pointed out that the last note dated 21-6-1982 clearly reveals that the parties had executed a revised order to overcome the difficulties and uncertainty in the matter relating to sales-tax leviable on the supplies made to M/s. WI. After the execution of the revised order the possibility of any such liability admittedly came to an end. Hence, the provision made by the assessee in the year under consideration could not be validly taken into consideration for granting the desired deduction. He also placed reliance on judgment of Hon'ble Gujarat High Court in Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT [1982] 135 ITR 91 to support his contention that if the facts become clear and apparent even before the income-tax assessment is made, the Income-tax Officer is entitled to take into account the actual figures and actual events for the purpose of determining the taxable income. In the present case, the assessment order was finalised by the Income-tax Officer on 20-3-1986. Well before this date, the sales-tax assessments for the year under consideration had already been made by the Sales-tax Officer in which it was held that the assessee is not liable to pay any sales-tax in respect of the sales in question. On this ground also, the learned CIT(A) was fully justified in confirming the disallowance.
8. We have carefully considered the rival submissions made by the learned representatives and have also gone through the orders of the Departmental authorities as well as other documents to which our attention was drawn during the course of hearing. The assessee received an order for supply of cables worth Rs. 251 lakhs form WI by an order dated 20-2-1980 and the first consignment was due on 8-10-1980. It appears that WI insisted that no sales-tax should be charged as they proposed to deliver Form No. 17-A prescribed under the provisions of Gujarat State Sales-tax laws. The assessee obtained legal opinion from Shri S.L. Modi who as stated above indicated that the assessee may be liable for payment of sales-tax on the supplies to M/s. W.T. under the said contract of sale. The assessee company wrote letter dated 5-5-1982 to WI saying that all the sales-tax liability including penalty and interest will be payable by WI and they also required the said customer company to provide bank guarantee, as requested by the assessee in their various earlier letters sent to WI. It is also an undisputed fact that both the companies had executed a revised order with a view to ensure that no sales-tax is charged in respect of t(sic) made by the assessee to WI. This revised order had been given by the customs company to the assessee company before 21-6-1982, as indicated in the note dated 21-6-1982. In the sales-tax assessments also, which were made some time after the end of the relevant accounting year, the contention of the assessee that no sales-tax is leviable appears to have been accepted by the sales-tax authorities. In view of these facts, it is apparent that the sales-tax provision was made on account of mere doubt and as a measure of abundant caution, although, in fact, no such liability really accrued in respect of the aforesaid sales. Deduction in respect of statutory liabilities can be allowed in the year of accrual only if such liability definitely and actually existed. Such deduction cannot be allowed in respect of a provision made on the basis of apprehension or doubt that there is an off-chance or a slight possibility of such a demand which may be created by the sales-tax authorities on a future date. If no sales-tax is leviable on the sales made by the assessee to WI on furnishing of Form No. 17A, how can it be considered that the liability accrued or had arisen in the accounting year under consideration? Such a doubt entertained on behalf of the assessee is proved to be incorrect by the decisions of the sales-tax authorities themselves, wherein no such liability has been fastened on the assessee on the aforesaid transaction. Even otherwise, the assessee company was not liable for payment of any such sales-tax, as they had indicated to the customer company that in case any sales-tax liability or interest or penalty are levied upon the assessee, the same will have to be reimbursed by the customer company. The assessee in fact has also demanded a bank guarantee from WI in respect of the said possible liability based on doubts as to the interpretation of the relevant contract of sale. This clearly shows that even if it is assumed that the assessee had serious doubt about the sales-tax liability, there is no basis whatsoever for debiting the same in the profit and loss account, as the same was recoverable from the customer company. We are, therefore, of the considered view that the CIT(A) has rightly confirmed the aforesaid disallowance.
9. The second ground raised by the assessee relates to denial of grant of additional depreciation and investment allowance in respect of foreign exchange rate difference relatable to the machinery installed during the earlier years.
9.1 The learned counsel for the assessee contended that this matter is clearly covered in favour of the assessee by the decision of the Tribunal in the case of Windsor Foods Ltd. [IT Appeal No. 728 (Ahd.) of 1984, dated 1-12-1984].
9.2 The learned Departmental Representative pointed out that the various conditions for grant of additional depreciation under Section 32(1)(iia) and conditions prescribed for grant of investment allowance are not fulfilled in relation to the aforesaid ground, as it has been admitted by the assessee that the ground in question related to machinery installed in earlier years. Both these deductions can be granted only in the year in which the machinery is installed or in the immediately subsequent year, when it is first put to use. Since these conditions are apparently not fulfilled in the present case, the CIT(A) has rightly confirmed the disallowance to that extent. He also relied upon a recent decision of the Tribunal in the case of Gujarat Carbon Ltd. [IT Appeal Nos. 407 to 410 (And.) of 1987, dated 8-2-1991] in which similar contention raised on behalf of the assessee has been rejected. In view of this, he urged that the findings given by the CIT(A) in this regard deserve to be confirmed.
9.3 We have carefully considered the submissions made by the learned representatives. A plain reading of Section 32A clearly indicates that investment allowance is allowable in respect of the previous year when the machinery or plant were installed or if such machinery or plant is first put to use in the immediately succeeding year, then, in respect of that previous year. Section 32A(4) further provides that deduction under Section 32A(1) shall be allowed only if the various conditions prescribed in Sub-section (4) of Section 32A are fulfilled. One of the conditions mentioned in Sub-section (4) is that an amount equal to 75% of the investment allowance to be actually allowed is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be called "investment allowance reserve account" and such investment allowance reserve account has to be utilised in the manner prescribed in this section. Since the ground raised by the assessee relates to plant and machinery, admittedly installed and first put to use in earlier years, these conditions are obviously not fulfilled in the present case. The additional depreciation under Section 32(1)(iia)as it existed in the relevant year provided for grant of such additional depreciation in the year of installation or in respect of the previous year in which such machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year. The said condition, admittedly, cannot be fulfilled in the present case, as the assessee's claim relates to plant and machinery installed and first put to use in the earlier years. We are, therefore, of the considered view that the CIT(A) has rightly rejected the said contention of the assessee. This view is also fortified by the decision of the Tribunal in the case of Gujarat Carbon Ltd. (supra) to which one of us (Accountant Member), was a party. Following the said view taken by the Tribunal/in the said case, we confirm the findings given by the CIT(A) in this regard.
10. In view of the aforesaid discussions, the assessee's appeal No. 786/Ahd/1988 is dismissed.
11. Now, we will consider assessee's appeal No. 787/Ahd/l988 against the order passed by the CIT(A) confirming the levy of interest under Section 215. In the assessment order passed on 20-3-1986 the Income-tax Officer issued a show cause notice for charging interest under Section 215. Thereafter, he passed a separate order after hearing the assessee and levied interest of Rs. 12,89,170 - under Section 215. The CIT(A) has confirmed the said order.
11.1. Before us, the learned counsel for the assessee contended that the CIT(A) has erred in holding that no appeal is maintainable against the order charging interest under Section 215 passed by the Income-tax Officer. It was submitted that the assessee has denied its liability to be assessed in respect of total amount of interest charged under Section 215 and the appeal against said order is clearly maintainable in view of the judgment of the Gujarat High Court in the case of Bhikhoobhai N. Shah v. CIT [1978] 114 ITR 197. The Hon'ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 has also held that levy of interest is a part of the process of assessment and it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. In the present case, the assessee could not have anticipated that the amount of sales-tax provision of Rs. 27,25,770 would be disallowed by the Income-tax Officer at the time when the assessee was required under the law to submit an estimate of advance-tax payable. In view of the decision of the Gujarat High Court in the case of CIT v. Bharat Machinery & Hardware Mart [1982] 136 ITR 875, no interest could be charged under Section 215 under such facts and circumstances of the assessee's case. He therefore, urged that interest charged under Section 215 should be cancelled.
11.2 The learned Departmental Representative supported the order of the CIT(A). He contended that the amount; of sales-tax provision of Rs. 27.25 lakhs included an amount of Rs. 15,40,615 which admittedly relates to the accounting year ended on 30-6-1981 and the said amount, by no stretch of imagination, could be considered by the assessee as deductible for computing the taxable income of the year under consideration. If this item alone is taken into consideration, the shortfall will exceed by more than the permissible limits and the assessee is clearly liable for levy of interest under Section 215.
11.3 We have carefully considered the submissions made by the learned representatives and have also gone through the judgments relied upon by the learned counsel for the assessee. The Hon'ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd (supra) has held that the levy of interest under Section 215 and 139(8) is a part of the process of assessment. It is open loan assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy of interest at all. The Gujarat High Court in the case of Bhikhoobhai N. Shah (supra) also took the similar view. The only dissenting opinion expressed in the matter by the Gujarat High Court arose on the question whether the assessee could challenge in appeal his partial liability to be assessed to interest under the aforesaid sections. In the present case, the assessee relying on the decision of the Gujarat High Court in the case of Bharat Machinery & Hardware Mart (supra) has challenged the total levy of interest on the ground that after excluding the addition made on account of disallowance of sales-tax provisions, there will be no short-fall in the payment of advance-tax made by the assessee. To support this contention the learned counsel has submitted a chart explaining the position of advance-tax paid by the assessee which is as follows :-
A. Position as per return of income Rs. 1. Total income as per return of income dated 27-6-1983 8,83,179 2. Tax on income returned 4,97,893 3. Adv. Tax and TDS paid 5,00,728 4. Refund due 2,835 B. Position as per assessment 1. Income assessed after appeal effect dated 8-3-1988 33,52,520
Less : Provision for sales-tax included in the assessed total income 2 25,770
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Balance 6,26,750
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Tax on Rs. 6,26,750
IT 55% Rs. 3,44,712
SC 2 1/2% Rs. 8,018 3,53,330
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2. Advance tax and TDS 5,00,728
In view of the aforesaid decisions, the appeal submitted by the assessee against the order charging interest under Section 215 is clearly maintainable.
11.4 We will now have to consider whether the assessee's case is covered by the ratio of decision of Gujarat High Court in the case of Bharat Machinery & Hardware Mart (supra). For arriving at any conclusion in this regard we will have to consider again as to whether the provision for sales-tax claimed as deduction by the assessee amounting to Rs. 27,25,770 can be said to be of such a nature, which possibly could not have been anticipated as an item of taxable income at the time when the assessee was required to submit estimate of advance-tax for the aforesaid year. The estimate of advance-tax was required to be furnished on or before 15-12-1982 and the advance-tax for the year under consideration was to be paid latest before the end of financial year 1982-83. The provision made by the assessee for the year under consideration as well as for the preceding year ended on 30-6-1982 was based on the opinion obtained from the sales-tax advocate and also after having prolonged discussion with WI. The position was fluid and uncertain till the end of the accounting year. In fact, the first sales-tax assessment for the year ended on 30-6-1980 was made on 21-3-1983 in which the sales-tax authorities created as demand of Rs. 89,227 pertaining to the supplies made in the accounting year ended on 30-6-1980. It is thus possible that till the end of financial year 1982-83 the assessee could entertain a doubt about the sales-tax liability, which ultimately was settled only when the sales-tax assessment for the accounting year ended on 30-6-1981 was finalised on 16-5-1983. The said provision was made in the accounting year under consideration. The assessee is a company in which public are substantially interested. The Board of Directors authenticated the accounts as representing true and fair view in accordance with the provisions of the Companies Act. The auditors have given an unqualified report dated 14-9-1982 and have confirmed that the balance sheet discloses a true and fair view as on 30-6-1982. Although we have taken a view that the sales-tax liability in fact did not accrue and the transaction in question was not liable to sales-tax, we have further held that even if it was leviable, the same was recoverable from the customer company and in view of these facts, the deduction claimed by the assessee is not allowable. However, the circumstances pointed out hereinbefore clearly indicate that the assessee had entertained the doubt about the sales-tax liability in a bona fide manner. Even a mistaken belief about the accrual of such sales-tax liability may still be a bona fide belief for the purposes of determining the assessee's liability for payment of advance tax. It is well settled law that for the purpose of determining the assessee's liability for advance-tax payable by them, the estimate has to be an estimate of current income, which according to the assessee's own bona fide estimate was its current income at the contemporary period, when such estimate of advance-tax is filed. If we visualise the state of mind of the persons responsible for furnishing the estimate in the month of December 1982 or till the end of the financial year 1982-83 the bona fides of their entertaining a doubt about the sales-tax liability cannot be suspected. If the aforesaid items of sales-tax provision is excluded, the amount of pre-paid taxes by way of advance-tax and TDS is found to be more than the tax due and there will be no short-fall as prescribed in Section 215 of the IT Act. We are therefore, of the considered view that the assessee's case is clearly covered by the judgment of the Gujarat High Court in the case of Bharat Machinery & Hardware Mart (supra). This view is also fortified by the judgment of the Hon'ble Rajasthan High Court in the case of CIT v. Golcha Properties (P.) Ltd. In that case, the official liquidator submitted an estimate showing nil income on the ground that the realisation made by the official liquidator by running the business of company in liquidation and the income derived therefrom is not liable to tax. Hence, Nil estimate was furnished. Ultimately, the point of taxability of income derived by the company in liquidation was held against the official Liquidator and the income was held to be liable to tax. The Hon'ble High Court held that under such circumstances, the official Liquidator was of the bona fide belief that the income derived by the company in liquidation is not liable to tax and hence, no interest under Section 217(1A) could be charged.
11.5 In view of the aforesaid discussions, we are of the considered view that no interest could be validly charged under Section 215 on the facts and circumstances of the case. The Income-tax Officer will, however, verify the correctness of figures given in the aforesaid chart by the assessee showing that pre-paid taxes by way of advance-tax and TDS come to Rs. 5,00,728 and the tax on income assessed after appeal effect and after deducting the tax payable on provision for sales-tax will work out to only Rs. 3,53,330. If these figures are found to be correct, we direct the Income-tax Officer to delete interest under Section 215.
12. Now, we will deal with the Revenue's appeal. The first ground of appeal is that the CIT(A) has erred in holding that the subsidy was not to be deducted from the actual cost for the purpose of depreciation and investment allowance. This matter is clearly covered against the Revenue by the Judgment of the Hon'ble Gujarat High Court in the case of CIT v. Grace Paper Industries (P.) Ltd. [1990] 183 ITR 591. In view of the said judgment of Gujarat High Court, ground No. 1 of Revenue's appeal is rejected.
12.1 The second ground of Revenue's appeal is that the CIT(A) has erred in allowing additional depreciation and investment allowance on the amount of exchange rate difference. The CIT(A) in para 35 of his order has given the following findings:-
35. The ITO is directed to verify the exchange rate difference relatable to the machinery installed during the year and allow additional depreciation under Section 32(1)(iia) and investment allowance on such admissible sum which amounts to an addition to the machinery provided the other conditions as laid down in law are fulfilled in this connection and amend his order accordingly.
12.2 After bearing the parties, we do not find any merit in the contention of the learned D.R. in relation to this ground. The CIT(A) has given clear direction that additional depreciation and investment allowance is to be allowed only on those items of additions in the machinery which have been installed during the year and he has also directed the Income-tax Officer to verify as to whether other conditions as laid down in the relevant provisions are fulfilled. We do not find any infirmity in the order of the CIT(A) in this regard. Hence ground No. 2 of Revenue's appeal is also rejected.
13. In the result, ITA Nos. 786 and 763 are dismissed and ITA No. 787 relating to interest under Section 215 is treated as allowed for statistical purposes.