1987 (3) TMI 144 - AT - Income Tax

Excise Duty Liability Deductible Upon Manufacture of Goods: Tribunal Decision

The Tribunal allowed the assessee's appeal, confirming the accrued excise duty liability for the Sewree Unit as deductible. The decision was based on the ... Accrual of statutory excise duty liability on manufacture/removal - deductibility of excise duty under mercantile system of accounting - show-cause-cum-demand notice construed as demand - effect of judicial stay of recovery on accrual and deductibility - application of Kedarnath Jute precedent to excise liabilities - validity and effect of retrospective legislative amendment validating past leviesAccrual of statutory excise duty liability on manufacture/removal - deductibility of excise duty under mercantile system of accounting - show-cause-cum-demand notice construed as demand - effect of judicial stay of recovery on accrual and deductibility - application of Kedarnath Jute precedent to excise liabilities - validity and effect of retrospective legislative amendment validating past levies - Whether the disputed excise duty liability in respect of the Sewri (Swan) Unit for the year under appeal had accrued and was deductible in computing income for the relevant year despite show-cause-cum-demand notices and a judicial stay of recovery. - HELD THAT: - The Tribunal held that the taxable event under the Central Excises & Salt Act, 1944, is manufacture and that the charge for duty crystallises upon removal of goods from the specified premises; accordingly the liability had arisen and accrued due in the year of manufacture. The earlier Bench's reasoning was followed: liabilities covered by regular demand notices and those covered by show-cause-cum-demand notices both represented accrual of statutory liability where goods had been removed and the duty was exigible. The existence of a court-ordered stay of recovery (subject to bank guarantees and the Supreme Court's partial stay requiring 50% payment) did not negate the accrual of liability or disentitle the assessee, who maintained accounts on the mercantile system and had made provision in its books, from claiming the deduction in that year. The Tribunal applied and followed the ratio in Kedarnath Jute Mfg. Co. Ltd. and supporting High Court authorities (including Century Enka and Tata Chemicals decisions), distinguished authorities relied on by the Revenue, and noted that the retrospective amendment validating the levy was operative in the year under appeal. On these grounds the Tribunal allowed the deduction in respect of the Sewri (Swan) Unit and confirmed allowance in respect of the Coorla Unit. [Paras 6, 10, 11, 17]The excise duty liability for the Sewri (Swan) Unit accrued in the year and is allowable as a deduction under the mercantile system; the Tribunal allows the assessee's claim and follows the earlier Bench's order.Final Conclusion: The Tribunal, adhering to the earlier Bench's detailed decision and applicable precedents, allowed the disputed excise duty as a deductible liability for the year (calendar year 1981 / assessment year 1981-82) in respect of both the Sewri (Swan) Unit and the Coorla Unit; the Revenue's plea to disallow was rejected. Issues Involved:1. Disallowance of disputed Excise Duty liability pertaining to the calendar year 1981.2. Applicability of the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT.3. Treatment of show-cause-cum-demand notices versus regular demand notices.4. Contingent liability versus accrued liability.5. Relevance of stay orders on the liability of excise duty.Detailed Analysis:1. Disallowance of Disputed Excise Duty Liability:The primary issue in this appeal is the disallowance of the disputed Excise Duty liability amounting to Rs. 1,52,06,200 for the calendar year 1981. The assessee, engaged in the manufacture and processing of grey cloth, had debited Rs. 2,93,77,769 in its accounts for Excise Duty payable. Out of this, Rs. 2,07,16,701 was contested as it was on the processed value added to grey fabrics, which the assessee argued was not payable under the Central Excises and Salt Act, 1944. The liability was contested before the Bombay High Court, which stayed the recovery subject to the furnishing of bank guarantees. The law was later amended retrospectively, leading to further legal challenges. The Supreme Court directed the assessee to pay 50% of the past liability and provide a bank guarantee for the remaining 50%.2. Applicability of Supreme Court's Decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT:The CIT(A) allowed the deduction of Rs. 59,89,393 for the Coorla Unit, following the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT, which established that a statutory liability is allowable as a deduction if the accounts are maintained on a mercantile basis. However, the balance liability of Rs. 1,52,06,200 for the Sewree Unit was disallowed, as the CIT(A) followed the previous year's order. The Tribunal in ITA 2545/BOM/85 had previously ruled in favor of the assessee, allowing the deduction for the Swan Unit as well, even though only a show-cause-cum-demand notice was issued.3. Treatment of Show-Cause-Cum-Demand Notices Versus Regular Demand Notices:The Tribunal's earlier decision emphasized that the liability for excise duty accrues on the manufacture of goods, regardless of whether a formal demand notice or a show-cause-cum-demand notice is issued. The CIT(A) had disallowed the liability for the Sewree Unit, considering the show-cause-cum-demand notices as initial steps in the process of assessment, not resulting in an enforceable demand. However, the Tribunal held that the liability had accrued upon the manufacture and removal of goods, making the distinction between regular demand notices and show-cause-cum-demand notices irrelevant for the purpose of allowing the deduction.4. Contingent Liability Versus Accrued Liability:The department argued that the liability was contingent and should not be allowed until the final resolution of the dispute. However, the Tribunal rejected this argument, stating that the taxable event (manufacture of goods) had already occurred, and the liability had accrued. The Tribunal relied on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd., which held that a statutory liability accrues upon the taxable event, irrespective of subsequent disputes or stay orders.5. Relevance of Stay Orders on the Liability of Excise Duty:The department contended that the stay order from the High Court negated the liability, making it non-enforceable and thus not deductible. The Tribunal disagreed, stating that a stay order only postpones the recovery of the liability but does not extinguish it. The liability remains accrued and enforceable once the stay is lifted. The Tribunal emphasized that denying the deduction due to a stay order would unjustly penalize the assessee for exercising its legal right to challenge the levy.Conclusion:The Tribunal set aside the CIT(A)'s order disallowing the excise duty liability for the Sewree Unit and allowed the assessee's appeal, confirming that the liability had accrued and was deductible. The Tribunal also dismissed the department's appeal regarding the Coorla Unit, affirming the CIT(A)'s decision to allow the deduction. The Tribunal's decision was guided by the principles established in Kedarnath Jute Mfg. Co. Ltd.'s case and the consistent application of the mercantile system of accounting.