Income Tax Appellate Tribunal - Mumbai
Ruby Mills Ltd. vs First Income-Tax Officer on 28 November, 1991
Equivalent citations: [1992]41ITD171(MUM)
ORDER
R.P. Garg, Accountant Member
1. to 4. [These paras are not reproduced here as they involve minor issues]
5. The next ground is with regard to the disallowance of the liability of excise duty of Rs. 19,59,972 and Rs. 12,32,881. The facts are that in the draft order of assessment, the ITO had disallowed these two claims by observing that regarding the demand of Rs. 19,59,970, the company did not accept the liability and challenged the same in a court of law and the Bombay High Court on 1-9-1981 struck down the demand note on the company. Thus, according to the ITO, there was no liability on the company in regard to this demand. Regarding the other demand of Rs. 12,32,882, he observed that it was also not accepted by the company and the same was disputed in writ petition in the High Court which has granted a stay and a final decision was pending. He further observed that the company had not paid this demand nor had made any provisions in the accounts for the year under consideration or even in the subsequent year. In 144 B proceedings, the IAC allowed the claim of the assessee, after taking note of various decisions in Shrikant Textiles v. CIT [1971] 81 ITR 222 (Bom.), [1974] 97 ITR 162 (sic), J.K. Synthetics Ltd. v. O.S. O.S. Bajoat, ITO [1976] 105 ITR 864 (All.), CIT v. Century Enka Ltd. [1981] 130 ITR 267 : 6 Taxman 64(Cal.) and CIT v. United India Woollen Mills [1981] 132 ITR 457(Punj. & Har.). He, however, directed the ITO to tax the refund of excise duty as per High Court's decision in the assessment year in which it was struck down. In view of the directions of the IAC in 144B proceedings, no addition was made in the final order of assessment.
6. In the appeal proceedings, the CIT (Appeals), however, observed that the excise authorities had merely issued show-cause notices to the assessee and as the assessee had objected to the levy of the above said additional excise duty, no adjudication had been made by the Assistant Collector of Central Excise during the accounting year and it appeared prima facie that the said amounts had been claimed and allowed in the course of assessment wrongly. He, therefore, issued a notice under Section 251(2) of the Act withdrawing the allowance and to enhance the income accordingly.
7. It was contended on behalf of the assessee before the CIT (Appeals) that the excise duty was levied on the manufacturing of the goods and as the goods in question had been manufactured during the accounting year, the liability in respect of the excise duty thereon should be deemed to have accrued during the accounting year under consideration. The CIT (Appeals) observed that the assessee was a composite textile mill manufacturing amongst other things cellulosic spun yarn falling under Tariff item No. 18(III)(ii) of the Central Excise Tariff and it had been paying excise duty on the yarn manufactured by it on the weight of unsized yarn, including the year under consideration. He further observed that an attempt was made by the Superintendent of Central Excise to levy excise duty on the basis of weight of the sized yarn in the case of certain mills but the Collector of Central Excise in appeal in the case of Lakshmi Vishnu mills, vide order dated 23-7-1980, held in favour of the textile mills. He further stated that the assessee company also approached the Bombay High Court and obtained a stay regarding payment of additional excise duty on sized yarn and even on merits, a Single Judge of the Bombay High Court held in favour of the assessee vide order dated 1-9-1981. On these facts, he held that the show-cause notices issued by the Superintendent of Central Excise, never reached the stage of being converted into demand notices which alone would have the effect of crystallising the liability. A mere issue of show-cause notice under any Act, according to him, did not result in the creation of demand; it only indicated the intention of the Assessing Officer to levy certain amount of tax or cess or duty in a particular manner, and the liability could arise only after adjudication had taken place after considering the objections raised by the assessee. He held that the assessee followed mercantile system of accounting and, therefore, it must be shown that certain enforceable liability had accrued or arisen, i.e., such liability must be one that has been ascertained or atleast capable of being ascertained and was capable of being enforced by the person in whose favour the demand had been raised. He further held that it could never be said to embrace provisional, notional or contingent payments which the assessee considered that he might ultimately be called upon to pay and for this proposition, he referred to the judgment of the Allahabad High Court in the case of New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395. He has also referred to the following observations of the Supreme Court in the ease of Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767:
...This court has on more than one occasion emphasised the fact that the real income of the assessee has to be ascertained on commercial principles subject to the provisions of the Income-tax Act....
According to him, Their Lordships held that a distinction must be made between the case where there was an existing debt, payment whereof was deferred and a case where both debt and its payment rested in future. According to him, in the former case there was an attachable debt and in the latter case there was not. According to the CIT (Appeals), in the present case, the Assistant Collector, Central Excise did not adjudicate in pursuance of the said show-cause notices and no liability to pay the excise duty actually accrued or arose against the assessee. Furthermore, the assessee having succeeded on merits, vide the order of the High Court dated 1-9-1931 quashing the proceedings initiated by the Central Excise authorities in this respect, there was no existing liability and although the Collector of Central Excise had filed an appeal against the said decision, no further proceedings had taken place. He, therefore, held that the assessee was clearly in error in claiming the same and the ITO in allowing it. He, accordingly, directed the ITO to withdraw the allowance of the sum of Rs. 19,59,972 and to enhance the income.
8. As regards the other amount of Rs. 12,32,881, the CIT (Appeals) observed that the assessee-company manufactured blended yarn of various compositions in its mills and paid excise duty thereon at the appropriate rates. Afterwards, the yarns of different compositions were doubled together for utilisation in the weaving of textiles. The Superintendent of Central Excise by a notice dated 20th March, 1981 called upon the assessee to show cause as to why differential duty amounting to Rs. 12,32,881 on a quantity of 1,25,957 kg. of doubled yarn produced during the period February, 1980 to December, 1980 should not be recovered from the assessee under Section 11A of the Central Excise Act. It was stated in the said notice as to whether the assessee would like to avail of the opportunity of a personal hearing before the case was adjudicated by the concerned officer. According to the CIT(Appeals), it was clear that during the year ended 31st March, 1981, all that had happened was that the assessee had received a show-cause notice whereby an opportunity was provided to it to object to the proposed levy and even the period during which the objection could be raised had not expired. The assessee filed its objections on 11-5-1981. It had also filed a writ petition against the proposed levy and the same was pending final decision before the Bombay High Court and in the meanwhile, further proceedings in pursuance of the said show-cause notice had been stayed by the High Court. On these facts, the CIT (Appeals) held that no liability had accrued or arisen against the assessee during the accounting year under consideration. He, therefore, directed the ITO to withdraw the allowance of the sum of Rs. 12,32,881 and to enhance the income by the said amount.
9. The assessee is aggrieved by the enhancement of the income by withdrawing these two claims, which had been allowed by the ITO in pursuance of the directions issued by the Inspecting Assistant Commissioner of Income-tax (IAC) under Section 144B of the Act. Two objections are raised before us-(i) that the CIT(Appeals) had no power to enhance the assessment as this very point had been the subject-matter of discussion under 144B proceedings; and (ii) that on merits, the claim was allowable and wrongly withdrawn. On the first point, the learned counsel for the assessee referred to the judgments of the Supreme Court in the case of CIT v. McMillan & Co. [1958] 33 ITR 182; and CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891; and submitted that the powers of the CIT(Appeals) are co-terminus to that of the ITO; he could do what the ITO could do; and vice-versa it meant that he could not do what the ITO could not have done. The order of the IAC under Section 144B was binding on the ITO and, therefore, it was binding on the CIT(Appeals) as well. He also referred to the decision of the Bombay High Court in Lokenath Tolaram v. CIT [1986] 161 ITR 82 24 Taxman 486 and that of the Supreme Court, in Kapurchand Shrimal v. CIT [1981] 131 ITR 451.
10. On merits, the learned counsel for the assessee referred to various notices issued by the excise authorities and submitted that the demand for payment of excise duty was raised by the excise authorities during the previous year and, therefore, the liability has arisen this year and should be allowed as an admissible deduction as the assessee follows mercantile system of accounting. The liability being statutory one, the mere fact that the liability had been disputed or that it had not been provided for in the books of account would not come in assessee's way to claim the said deductions, if the liability had accrued or arisen under the provisions of law. The assessee relied upon the following decisions in support of his case:
(i) Pope The King Match Factory v. CIT [1963] 50 ITR 495 (Mad.);
(ii) T. M. Abdul Rahim Sahib & Co. v. CIT [1963] 50 ITR 508 (Mad.);
(iii) Kedarnath Jute Mfg. Co, Ltd. v. CIT [1971] 82 ITR 363 (SO;
(iv) Shrikant Textiles' case (supra);
(v) CIT v. Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734 (Born.);
(vi) CIT v. J.K. Synthetics Ltd. [1983] 143 ITR 771 (All.);
(vii) CIT v. Tata Chemicals Ltd. [1986] 162 ITR 556 : 26 Taxman 664 (Bom.); and
(viii) Century Enka Ltd.'s case (supra).
Mr. Shroff explained to us various provisions of Central Excise and Customs Act for the liability and the levy of the excise duty with specific reference to Section 3, the charging section, Section 11A providing for levy and collection in cases of short collection.
11. The learned Departmental Representative, on the other hand, supported the order of the CIT(Appeals) and submitted that the CIT(Appeals) had the powers to enhance an assessment irrespective of the fact whether the assessment was made by the ITO suo motu or in pursuance of the directions issued by the IAC under Section 144B of the Act. In both the situations, the order would be that of the ITO under Section 143(3) of the Act. Directions under Section 144B are binding on the ITO but not on the appellate authorities. According to him, there is no restriction on the powers of the CIT(Appeals) to enhance the assessment. On merits, he submitted that there was no liability of excise duty against the assessee. Various notices were mere show-cause notices issued under Section 11A(1) of the Act. A valid and enforceable demand arises against the assessee nor before and only on adjudication of the matter by the Assistant Collector/Collector under Section 11A(2) and since in this case, no adjudication had taken place and the said show-cause notices were quashed by the High Court before adjudication, no demand was even raised against the assessee which could be allowed to it. He further submitted that the liability, if there was any, was quashed by the order of the Bombay High Court dated 1-9-1981 and, therefore, there existed no ultimate liability on the assessee; much less an enforceable one. He relied on the decisions of the Supreme Court in the cases of Indian Molasses Co. (P.) Ltd. v. CIT [959] 137 ITR 66 and Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 : 23 Taxman 37.
12. We have heard the parties and considered their rival submissions. We shall first take up the assessee's objection raised on the powers of the CIT(Appeals) to enchance the income. Ordinarily, an assessment is made by the ITO himself as per the procedure laid down under the Income-tax Act. If the variation in the assessment and the income as per the return is more than Rs. 1 lac, the ITO has to prepare a draft order of assessment at the first instance. The assessee is given an opportunity to file objections there against and those objections are to be heard by a senior officer, namely, the IAC. After hearing the objections, if any, filed by the assessee, the IAC issues directions on the objections raised by the assessee to the ITO and the ITO thereupon makes the assessment in pursuance of the said directions. The final order is that of the ITO made after the proceedings under Section 144B of the Act. All these proceedings are for making the assessment under Section 143(3) and would, therefore, in our opinion, be assessment proceedings.
13. Powers of the CIT(Appeals) in disposing of an appeal are contained in Section 251 of the Income-tax Act, 1961. In an appeal against an assessment order, he may confirm, reduce, enhance or annul the assessment, or he may set aside the assessment and restore the case back to the ITO for making a fresh assessment, in accordance with the directions given by him. The only restriction that is provided in Sub-section (2) is that the shall not enhance an assessment unless the assessee has had a reasonable opportunity of showing cause against such enhancement. We do not find any restriction in any of the provisions under the Income-tax Act, to restrict the powers of the CIT(Appeals) whereby it could be said that an enhancement could not be made by him, if the matter had been considered or adjudicated by the IAC and before the final assessment has been made by the ITO. It is true that the power of the CIT(Appeals), the first appellate authority, is co-terminus with that of the ITO and he could do what the ITO could do; but that would not mean that he could not do what the ITO could have done or had in fact done in this case, but was directed not to do by an authority superior to him established for his guidance to complete the assessment under Section 143(3) of the Act. The provisions of Section 144B of the Act, make it obligatory on the part of the ITO to complete the assessment in pursuance of the directions issued by the IAC and in that connection, it is provided that the directions given by the IAC under Section 144B would be binding on the ITO while completing the assessment. These provisions do not exclude the power of the CIT(Appeals) for making enhancement on any of the points, including the points which were the subject matter of discussion and directions by the IAC in proceedings under Section 144B of the Act. The powers of the CIT(Appeals) are independent of and not subject to the provisions of Section 144B of the Act. Even otherwise, the CIT(Appeals) being an authority higher in hierarchy of the Income-tax authorities, besides an appellate authority established to hear the appeals against an order under Section 143(3) made in pursuance of the directions of the IAC issued under Section 144B of the Act, could not be said to be bound by the directions of the lower authority. The powers of the CIT (Appeals) as stated above are that in an appeal against an order of assessment, he may confirm, reduce, enhance, or annul the assessment and so on. Nowhere these powers are made subject to the directions given by the IAC under Section 144B of the Act. The first objection of the assessee, in our opinion, thus has no force and it is accordingly rejected.
14. We shall now deal with the assessee's case on merits. The liability that is claimed by the assessee is that arising under Section 3 of the Central Excise and Salt Act, 1944 is a charging section. It provides that-
There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India....
For a case of short levy etc., Section 11A of the said Act, inserted with effect from 17-11-1980 provides:
11A. Recovery of duties not levied or not paid or short-levied or short-paid or erroneously refunded:
(1) When any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, a Central Excise Officer may, within six months from the relevant date, serve notice on the person chargeable with the duty which has not been levied or paid or which has been short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice:
Provided that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, by such person or his agent, the provisions of this sub-section shall have effect, as if, for the words 'Central Excise Officer', the words 'Collector of Central Excise' and for the words 'six months', the words 'five years' were substituted.
Explanation. -Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in computing the aforesaid period of six months or five years, as the case may be.
(2) The Assistant Collector of Central Excise, or, as the case may be, the Collector of Central Excise shall, after considering the representation, if any, made by the person on whom notice is served under Sub-section (1), determine the amount of duty of excise due from such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount so determined.
(Emphasis supplied)
15. As per the details given in this case, the show-cause notices had been issued during the period 12th June, 1980 to 31st March, 1981, all within the previous year, calling upon the assessee to show cause against the determination of the duty amounting to Rs. 19,59,970 and Rs. 12,32,881. These were issued under Section 11A(1) of the Central Excise and Salt Act, calling upon the assessee to file objections, if any, so that its case can be adjudicated by the Assistant Collector/Collector under Section 11A(2) of the said Act, who shall thereupon determine the amount payable by the assessee, not exceeding the amount stated in the show-cause notices issued under Section 11A(1) of the said Act, which have been reproduced above.
16. On a careful reading of these two provisions, we are of the opinion that the charge is created for the duty, the moment the assessee manufactured/ produced the goods. Taxable event is the manufacture or production. Where, however, the assessee does not pay excise duty in the year of manufacture or production as per the procedure laid down in that Act, for any reason whatsoever and the excise authorities are of the view that was liable to pay the duty, they can levy and collect the same as per the provisions of Section 11A of the said Act.
17. The liability of excise duty arises against the assessee in the year in which chargeable goods were produced/manufactured. No quantification in an assessment thereof by any authority, nor any demand notice, nor any entry in the account book would be necessary to claim such a liability as a deduction. It being a statutory liability, it would be an allowable deduction to the assessee in the year of manufacture/production, even though the assessee disputed the same before the excise authorities or in a court of law. This is what has been held by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. 's case (supra) in connection with a claim of sales-tax liability and the Calcutta High Court in the case of Century Enka Ltd. (supra) for a claim of excise duty itself. Quantum of such a liability, which could be a matter of dispute in such a case, should be fairly estimated taking into consideration the concerned provisions of law which fasten the liability upon the assessee. While any authority under the relevant law quantifies it in any proceedings therein, such an amount could be taken as the best estimate for allowing the deduction in such a year. Liability claimed in the present case does not pertain to the production/manufacture of the year under consideration and, therefore, the assessee would not be entitled to any deduction on the basis of this principle.
18. Courts have held that a statutory liability can alternatively be claimed as a deduction in the year in which the assessment was made/duty was assessed and demand made irrespective of the fact that the transaction relates to earlier years. See in this connection two decisions of the Bombay High Court in Shrikant Textiles' case (supra) and Central Provinces Manganese Ore Co. Ltd. 's case (supra); that of the Calcutta High Court in CIT v. Orient Supply Syndicate [1982] 134 ITR12; that of the Delhi High Court in Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR : 18 Taxman 491; and by the Madras High Court in the case of Pope The King Match Factory (supra). Although we find contrary view taken by the Punjab & Haryana High Court in the cases of CIT v. United India Woollen Mills [1981] 132 ITR 457 and Sirsa Industries v. CIT [1989] 178 ITR 437 : 44 Taxman 54; by the Patna High Court in CIT v. General Trading Agency [1989] 176 ITR 303 : 45 Taxman 108; and by the Allahabad High Court in CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121, taking a view that as per the judgment of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), a liability can only be claimed in the year of taxable event and not in the year of demand but insofar as Bombay Benches of the Tribunal are concerned, the view of the jurisdictional High Court is binding and is to be given effect to. We, therefore, proceed to examine the assessee's case as to whether a demand was made by the authorities and deduction can be allowed on that ground.
19. The deduction for the two amounts is claimed on the basis of various notices under Section 11A of the Act. According to the assessee, as all the show-cause notices were issued during the previous year, therefore, a demand was created against it and the same should be allowed as a deduction. Here also, we do not find any force in assessee's contention. As per the provisions of the Central Excise and Salt Act contained in section HA, demand is not created by the issue of show-cause notice alone and it arises only on and after adjudication has taken place. As provided in the section itself, a notice is issued at the first instance, calling upon the assessee to show cause within thirty days as to why the duty be not levied and collected from him. After hearing the objections of the assessee, the Assistant Collector/Collector determines the amount of duty payable by the assessee under Section 11 A(2) of the said Act and requires the assessee to pay the duty. When show-cause notice is issued, the liability does not become payable. It is only provisional, notional and contingent upon adjudication. It becomes a demand enforceable in law only upon and after adjudication has taken place under Section 11A(2). Show-cause notice is like a draft order under Section 144B of the Income-tax Act which becomes an assessment only upon finalisation of proceedings under Section 144B.
20. Furthermore, the show-cause notices, before they could take the form of a demand upon adjudication, were challenged by the assessee before the Bombay High Court and the Court quashed/set aside the notices for demanding Rs. 19,59,970 and prohibited the excise authorities to take any step or proceedings to levy or collect, demand or recover the amount of excise duty in pursuance to such notices on 1-3-1981. Appeal there against was dismissed by the Division Bench on 24-6-1987. No appeal by the Excise Department. Consequently notices were withdrawn oh 24-8-1988. It appears that the Collector had filed appeal against that withdrawal, we do not know how could it have been filed in view of Bombay High Court decision, which were rejected on 13-2-1991.
21. Similarly, for the amount of Rs. 12,32,882, the Bombay High Court decided the matter in favour of the assessee on 17-6-1987 quashing/setting aside all the show-cause notices. SLP was filed by the revenue which was admitted. In an interim order, no stay was granted to the revenue but the assessee was directed that if the revenue wins, 12 per cent shall be paid on adjudicated amount from the date of adjudication. In these circumstances, the proposal of the Superintendent of Excise never converted into a demand and the show-cause notices were quashed before they were adjudicated resulting an enforceable demand. In both the cases before the Bombay High Court, the deduction was allowed because enforceable demand was existing. In Shrikant Textiles' case (supra), demand was raised under rule 9(2). Here, there were no provisions of issuing show-cause notices and adjudication thereafter like they are appearing in Section 11A of the Central Excise and Salt Act inserted with effect from 17-ll-1980.It was a case where demand notice was issued to the assessee without anything further to be adjudicated. It was a case of legally enforceable demand which continued up to the end of the accounting year. In that case, an offer to levy excise duty at a different rate was made to the assessee on the express condition that the assessee should agree to pay duty calculated on the basis of that different system and since this condition was not accepted, the court held that liability remained and was an ascertained liability and the assessee was entitled to deduction. There is no such statement in this case. In this case, it was only a show-cause notice yet to be converted into a demand upon adjudication. In Central Provinces Manganese Ore Co. Ltd.'s case (supra), there was no dispute before the Bombay High Court that the liability arose in the year under consideration and, therefore, that case does not help the assessee. In Kedarnath Jute Mfg. Co. Ltd.'s case (supra), the claims were in the year of taxable event, i.e., in the year of sale for sales-tax liability and, furthermore, there was a demand notice issued in that year and there was no question of show-cause notice. In Pope The King Match Factory's case (supra), the Madras High Court dealt with a situation where demand was raised on the basis of the order of the Collector of Excise and in that context, the court held that the assessee incurred an enforceable, legal liability on and from the date on which he received the Collector's demand. In T. M. Abdul Rahim Sahib & Co.'s case (supra), also there was no dispute that the demand was raised against the assessee. At page 512 of the report, the Court held that there could be no liability, either notional or legal, unless and until a demand had been raised by the appropriate authority. A demand in the exercise of lawful authority conferred by the Central Excise and Salt Act imposes a legal liability upon the assessee and it is only at, that point of time that the assessee is called upon to incur the expenditure. This case, in fact, goes against the assessee inasmuch as, there being no enforceable legal liability existing in the previous year. In the case of Century Enka Ltd. (supra), the excise duty was allowed not on the ground that a show-cause notice was issued but on the ground that it pertained to production/manufacture of the year under consideration. The question whether it could be allowed on the basis of the show-cause notice was not at all considered by the Court. In the decision of the Allahabad High Court in J.K. Synthetics Ltd.'s case (supra) and that of the Bombay High Court in Tata Chemicals Ltd.'s case (supra), there was no dispute about the incurring of the liability in the year under consideration and the dispute was whether a demand raised in that year but subsequently knocked off could be claimed as a deduction as a statutory liability as at the end of the previous year, and in that context, it was held to be allowable as it was existing in the previous year though knocked off in a subsequent year.
The decisions relied upon by the learned Departmental Representative have dealt with cases of contractual liability for payment of pension, bonus and gratuity. They have no bearing in deciding a case of a statutory liability. We, however, find some observations made in these decisions which could be and are applicable in deciding the present case. They are : a" contingent, provisional or notional liability is not an allowable deduction under the Income-tax Act and it is allowable only when it has been ascertained and became capable of being enforced against the assessee.
22. To conclude, this year being not the year of production or manufacture, nor the year in which an enforceable legal demand was raised, the assessee would not be entitled to any deduction in computing its business income. We, therefore, hold that the CIT(Appeals) was justified in enhancing the assessment by withdrawing these two liabilities allowed by the ITO in pursuance of the directions issued by the IAC in 144B proceedings. We, accordingly, uphold the add backs of Rs. 19,59,972 and Rs. 12,32,881 made by the CIT(Appeals). His order on enhancement is accordingly confirmed.
23. [This para is not reproduced here as it involves minor issue.]