1990 (10) TMI 111 - AT - Income Tax

Appeal dismissed as contingency not met for excise duty deduction.

FARMSON PHARMACEUTICAL GUJARAT PVT. LTD. Versus INCOME TAX OFFICER.

The Tribunal dismissed the appeal, ruling that the provision made by the assessee regarding the excise duty demand was not deductible as the liability had ... - Issues:1. Allowability of deduction for a provision made by the assessee regarding excise duty demand.2. Determination of liability under the mercantile system of accounting.3. Interpretation of letters from the supplier regarding deposit for excise duty.Analysis:The appeal before the Appellate Tribunal ITAT Ahmedabad-C involved the question of the allowability of a deduction for a provision made by the assessee regarding an excise duty demand. The assessee, a company manufacturing Paracetamol, purchased sodium nitrite as a raw material from a supplier. The supplier, M/s Deepak Nitrite Ltd., received demands for excise duty on sodium nitrite from central excise authorities, citing its potential use in manufacturing dyes. The supplier requested the assessee to deposit a sum equivalent to the excise duty demanded. The assessee claimed a deduction for this provision, which was disallowed by the assessing authorities. The Tribunal had to determine whether the liability had crystallized in the relevant accounting year for the deduction to be allowable.The submission on behalf of the assessee was that since the supplier demanded the amount through letters, the liability was incurred, making it allowable as a deduction under the mercantile system of accounting. The assessee relied on a Supreme Court decision to support its position. However, the Department argued that the liability had not crystallized in the relevant year, and there was no agreement indicating the assessee's acceptance of the liability. The Department contended that the liability was contingent and not allowable as a deduction based on legal precedents.The Tribunal analyzed the contents of the letters from the supplier, which requested the assessee to deposit amounts as a guarantee for the excise duty demanded. The Tribunal noted that the letters did not indicate that a liability had been incurred by the assessee. The Tribunal emphasized that for a liability to be deductible, it must have crystallized in the relevant accounting year. Since the supplier was disputing the excise duty demand, the liability to pay the supplier would only arise when the supplier incurred the liability to the authorities and demanded reimbursement from the assessee. The Tribunal concluded that the provision made by the assessee represented a contingent liability and was not allowable as a deduction.In light of the above analysis, the Tribunal dismissed the appeal, holding that the provision made by the assessee regarding the excise duty demand was not deductible as a liability had not crystallized in the relevant accounting year.