TaxTMI 
TaxTMI 
2003 (11) TMI 302
X X X X Extracts X X X X
X X X X Extracts X X X X
....s somewhat ticklish. Actually, this Special Bench was constituted at the instance of the Division Bench, which heard these appeals in the first instance. The Division Bench suggested reference because of the conflicting views held by different benches of the Tribunal on the issue raised in these appeals. One view, which is against the assessee is expressed by the Hyderabad Bench "A" of the Tribunal; in Jeypore Sugar Co. Ltd. [IT Appeal No.2034 (Hyd.) of 1990, vide its order dated 11-9-1995], whereas the other view, which is in favour of the assessee is expressed by the Delhi Bench 'D' of the Tribunal in the case of Modipan Ltd. v. IAC [1995] 52 TTJ (Delhi) 477. 3. The assessee company is the wholesale distributors for the products manufactured by UB Limited and its group companies for a number of Districts in the coastal region of Andhra Pradesh. For importing liquor from outside the State, the assessee has, to obtain necessary permit by paying what is called as 'countervailing duty' in terms of section 21 of the Andhra Pradesh Excise Act, 1968. The said section of the Excise Act reads as under :- "21. The Government may, by notification, levy an excise ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f countervailing excise duty and such liability also stood discharged in the respective years, and so, the assessee was entitled for deduction in terms of section 43B of the Act. It was also claimed that, if the amount was not claimed as deduction or was not allowed as deduction in the respective years, the deduction for these two amounts could not be claimed in the subsequent years, as the said liability did not arise in the said subsequent year, nor was the payment made in those years. 7. The assessing officer negatived the above contention. He held that what was paid was not an excise duty for the purchase or manufacture, but it represented only a part of the purchase price for goods purchased. He, therefore, held that the provisions of section 43B did not apply. He also held that even if section 43B applies, the payments cannot be allowed as a deduction in these years, as the liability to pay the duty is incurred when the goods are brought into the State and so, the payments represented only advance payments, and they were not paid towards discharge of the statutory liability in the concerned year. He also held that the payments would go to increase the value of the purchase....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n, it is to be allowed when it is incurred and cannot be related with the purchaser in view of the decision of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd [1971] 82 ITR 452. This answers the third and fourth questions that the liability crystallizes at the time of applying for the permit and making the payment and not at the time of receipt of goods. Being a statutory liability, though it is paid for the purchases and may form a part of the purchase consideration subsequently, is independent of the purchase price, when paid. 30. In the case of the appellant, it had not received the stock. So, there is no question of taking the goods to the closing stock. It has claimed the deduction of an amount which it was required to pay. So, the claim is to be allowed under section 37 of the I.T. Act. Now that section 37 is to be read with section 43B, the appellant had claimed it as a deduction under section 43B. But, in my opinion, this being a statutory obligation, and the demand having been paid during the year of account, is to be allowed. The expenditure has been incurred in respect of a business the profits of which are assessable to tax, I do not agree w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lhi) 477, wherein it was held that the excise duty, whether paid in advance or otherwise, retained the character of excise duty and, therefore, covered by the provisions of section 43B and qualified for deduction in the year of actual payment. In this connection it is respectfully submitted that the aforesaid earlier, judgment of Hon'ble ITAT dated 11-9-1995 was based upon the decision of Hon'ble Special Bench 'B' Hyderabad dated 26-3-1991 in the case of KCP Ltd. v. ITO [1991] 38 ITD 15 at page 30. Thus, the issue should have been considered as covered by the decision of Hon'ble Special Bench of ITAT at Hyderabad in the case of KCP Ltd. which was binding on the Division Bench. Hence constitution of another Special Bench on the same issue was not required. Further, similar view has been taken by the Hon'ble A.P. High Court in favour of Department in the case of Gopi Krishna Granite India Ltd. v. Dy. CIT [2001] 251 ITR 337, indicating that incurring of liability is a must for allowing deduction under section 43B. 3. In view of above, it is requested that considering the earlier decision of Hon'ble Special Bench on the issue as well as the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e accrued expenses whether paid or not. To allow the deduction for prepaid expenses would violate this principle. He also relied on the decision of the Mumbai Bench decision of the Tribunal in the case of Dy. CIT v. Amforge Industries Ltd. [2001] 79 ITD 49. 12. In short, the plea taken is that the countervailing duty in question is a business expense, and is directly relatable to the obtaining of stock in trade, and, so, should be allowed as a deduction only in the year in which the related stock is received and is reflected in the trading account. 13. The learned counsel for the assessee; .on the other hand argued that the central issue is whether a liability to pay countervailing duty has arisen in the year or not, and whether it is discharged or not by the assessee. It is claimed that the assessee satisfies both these conditions and so, in terms of section 43B of the Act, assessee is entitled for deduction. The assessee imports liquor and beers from outside the State, to carry on his normal business and when he applies for a permit he has to pay the countervailing duty. He explained that there is always a time lag between the placement of the indent on the supplier and the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in which it was held that receipt of the goods by the assessee has no relevance in law to the accrual of the liability and its eligibility for deduction. Similarly, he relied for the same proposition, on the decision of Delhi Bench of the Tribunal in Modipan Ltd. 5. He also relied upon the Special Bench decision of the Tribunal in ITO v. Food Specialities Ltd. [1994] 49 ITD 21 (Delhi) for, the proposition that excise duty imposed does not form part of cost of manufacture or production and so, is not includible in the figure of closing stock to the extent goods remained unsold. In other words, it is an overhead item which can be debited to Profit & Loss Account, in contradistinction to the manufacturing account. Similarly, he relied upon the decision of the Special Bench in the case of Indian Communication Net Work (P.) Ltd. v. IAC [1994] 49 ITD 56 (Delhi) in which it was held that customs duty and excise duty are allowable as deduction under section 43B even when they are taken into closing stock, upon corresponding reduction of the opening stock of the subsequent year. He also relied upon the decision of the Calcutta High Court in the case of CIT v. Berger Paints (India) Ltd. (No.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....#39; In this decision, as your Honours will appreciate, the Special Bench had no occasion to consider, in the absence of appropriate and detailed submissions by the assessee, the nature of the duty said to have been paid whether consequent upon arisal of liability or merely an ad hoc payment made into the personal ledger account of the assessee with Central Excise Department before clearance of the goods from the Bonded Warehouse. There was no categorical submission by the assessee that the liability to exercise has accrued in the previous year. Therefore, the claim was not considered by the Special Bench from that angle. The reason given by them for sustaining the disallowance is that it involves adjustment to closing stock, which do not make any significant difference. The decision was rendered on balance of convenience rather than a discussion and findings on the material issue involved in the assessee's case before your Honours. For these reasons and basic differences pointed out, it is submitted that the Special Bench decision cannot be considered as affording a precedent of a binding nature. However, it is worth noting that the Bench considered ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duty in advance on his own without having received the goods, the same was held to be not allowable by Hon'ble Special Bench. In this connection, it is submitted that there cannot be any comparison between property tax paid consequent to demand raised by statutory authority and excise duty/countervailing duty paid in advance by the assessee, even though both may be tax/ duty payable under certain statute. In the present case the controversy is regarding advance payment of excise duty and not about any amount statutorily payable under a notice of demand issued by a authority. Thus the decision of Hon'ble Special Bench in the case of KCP Ltd. v. ITO [1991] 38 ITD 15 (Hyd.) is clearly applicable in the present case, as far as advance payment of excise duty is concerned." 21. He also distinguished the other cases relied upon by the learned counsel for the assessee, and in this behalf, his written submissions read as under- "2. The assessee's authorised representative has further relied on the decisions of Hon'ble Special Bench, Delhi reported in 49 ITD 21 and 49 ITD 56. It is submitted in this connection that both the decisions quoted by assessee's autho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sis recently by Hon'ble ITAT, Mumbai in the case law reported in 79 ITD 49. The main basis on which the decisions of Hon'ble ITAT, Delhi have been distinguished by Hon'ble ITAT Mumbai, is the decision of Hon'ble Andhra Pradesh High Court reported in 173 ITR 708 wherein it was held that in order to apply the provisions of section 43B not only should the liability be incurred in the accounting year, but the amount also should be statutorily payable in the accounting year. The opposite view taken by Hon'ble ITAT Delhi has been held to be incorrect as it has not considered the Special Bench, Hyderabad decision in the case of KCP Ltd. and also not taken into consideration the Explanation 2 to section 43B inserted by Finance Act, 1989. In this connection reference may kindly be made to paras 11 to 14 the order of Hon'ble Mumbai ITAT appearing at pages 16 and 17 of the Departmental Paper Book filed on 10-10-2003. 4. All the other case laws quoted by assessee's authorised representative are distinguishable for the reason that in the present case, goods in respect of which advance payment is made have not arrived or entered into assessee's business a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. 7. The costs of purchase, consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase:- The same guidance note states the following in respect of excise duty as an element of cost. "Excise duty as an element of cost 9. In considering the appropriate treatment of excise duty for the purpose of determination of cost for inventory valuation, it is necessary to consider whether excise duty should be considered differently from other expenses. 10. Admittedly, excise duty is an indirect tax but it cannot, for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use/ disposal of goods thereafter, e.g. sale, destruction and captive consumptio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry valuation. 25. However, in the case of Saraswati Industrial Syndicate Ltd. the Apex Court observed as under:- "...Excise duty is really imposed on goods when they have come into existence in the manufactured form. It could more properly be taken into consideration in determining net profits than in calculating cost of manufacture," 26. This decision dealt with the fixation of ex-factory sugar prices by the Central Government. It was in the context of the discussion on this issue that the Apex Court made the above remarks, and from the context, it appears to us that the above remarks are more in the nature of obiter. At any rate, even otherwise, even if excise duty is not part of the manufacturing cost, it does not, to our mind, clinch the issue in favour of the assessee. The assessee before us is not a manufacturer. He is actually a trader. Even in the case of manufacturer, there are separate accounts maintained as under: - (1) Manufacturing Account (2) Trading Accountant (3) P&L Account 27. Even if a consolidated account is maintained for manufacturing and trading, profits are separately determined, and an item which is not debited t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the Supreme Court was dealing with sugar. The point to be noted is that the Supreme Court was dealing with the meaning of the expression 'cost of manufacture' which is of universal application. Thus, the change in the method of accounting effected by the assessee in the assessment year under appeal by excluding excise duty on the unsold goods from the figure of closing stock was a bona fide one, finding support from a direct decision of the Supreme Court as aforesaid, and there being no specific prohibition laid down by the Institute of Chartered Accountants of India and its guidelines being recommendatory in nature. However, in the succeeding assessment year 1985-86, the assessee would not get the benefit of the amount in question and the same would become a part of its income in case it was claimed as a deduction in any manner." 29. It may be observed that the above decision is based upon the decision of the Hon'ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. and to our mind, it appears that the Special Bench did not consider the distinction brought out by us hereinabove between manufacturing profit and gross profit. As to our mind, the dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... section 143(1)(a) in respect of interest payable to financial institutions in succeeding assessment years and not concerned assessment year, it was, as per the relevant portion of the head-note, held as under:- "Held (i) that in accordance with the terms and conditions of the agreement governing the loan between the financial institution and the assessee the interest amounts were payable in the succeeding assessment year and not in the assessment year 1996-97. When the assessee had not even incurred the liability in relation to the amounts of interest for the assessment year 1996-97, there was no basis for the assessee to claim that those interest amounts had accrued during the previous year under consideration. Therefore, the claim of the assessee for the interest payment was inadmissible on the basis of the material available on record and the unambiguous provisions of the Act and the disallowance was permissible while processing the return under section 143(1)(a)." 33. The learned counsel for the assessee submitted that the above case is distinguishable because the above case related to a contractual liability to financial institutions and not statutory liability li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he said excise duty and import duty even on the closing stock was allowable in the accounting year 1983; but because of the specific language of section 43B of the Act, which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made, and therefore, it is not allowable. Therefore, the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles claimed as deduction merely because they are paid, cannot be accepted.' It is thus clear that in that judgment the Hon'ble High Court came to the conclusion that the assessee had incurred the liability to pay import duty and excise duty, that case has not proceeded on the footing that even if the liability had not been incurred on the basis of mercantile system the assessee would be entitled to deduction in view of the provisions of section 43B." 35. For the reasons recorded by the Tribunal in the above case, we also hold that the decision of the Hon'ble Gujarat High Court in the case of Lakhanpal National L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ise duty relatable to the goods purchased is not on par with other statutory levies like property tax. The so-called liability for excise duty arises because of the assessee's business operations. As already mentioned, there are different types of statutory levies or statutory liabilities. Property tax allowed by the Special Bench in the case of KCP Ltd is the result of a statutory demand, which has nothing to do with business operations, whereas the payment of countervailing duty is only in furtherance of the intended trading operations of the assessee. It appears to us that it is an over-simplification on the part of the learned counsel for the assessee to argue that it was not made clear before the Special Bench that a liability arose for the payment of excise duty. For understanding the scope of this decision, it is necessary to read a little more than referred to by the learned counsel for the assessee in his written submissions. We extract hereunder the relevant portion in totality. "26.2 It was claimed by the assessee that since section 43B requires taxes to be allowed in the year in which it is paid, this amount should be allowed as a deduction in this year. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o para 18.3 of this order where we have referred to the decision of the Allahabad High Court in the case of Hindustan Commercial Bank Ltd. to hold that if the amount was laid out and expended wholly and exclusively for the purpose of a business, it has to be allowed as a deduction because for the purpose of a business, it has to be allowed as a deduction, because the Act does not recognise deferred revenue expenditure. In the list of the taxes paid above, it is seen that items such as property tax have been, incurred during the previous year and because the demand raised relates to a period of six months, part of which falls in this previous year and part falls in the next year, the assessee has apportioned it and taken the part of it to the Balance Sheet; as prepaid tax. But for income-tax purposes such an apportionment is not required. So in the case of the levies such as property tax for a period spilling beyond the previous year and for which the demand has been raised in the previous year and has been met by the assessee in the previous year, the deduction has to be allowed. However, with reference to the excise duty paid in respect of raw materials which have not entered into....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced there from. It was therefore, not only the right but the duty of the Income-tax Officer to act in exercise of his statutory powers for determining what, in his opinion, would be the correct income." 40. The decision of the Apex Court in the case of Hindustan Sugar Mills also seems to support the stand of the Revenue. Commenting on what is a safe price as defined in Rajasthan Sales Tax Act, 1954 and Central Sales Tax Act, 1956, the Apex Court observed in that case as under: - "The definition of 'sale price' is given in section 2(P) and according to that definition, it means: '...the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... irrespective of the fact whether the excise duty is separately reflected in the sale bill or included in the sale price itself. If that is so, conversely, it appears that for the purchaser like the assessee, excise duty should form part of the cost of goods sold, whether paid by the vendor and recovered from the assessee or paid by the assessee separately. If it is paid by the vendor (sic), and is recovered by the vendor, it becomes part of the purchase price to the vendee. If on the other hand, the vendee has paid on his own behalf, it may not be part of the purchase price, but it forms part of the cost of goods sold, as a direct expenditure relatable to the purchase of the stock. On this basis, it becomes an allowable deduction only when relevant goods are reflected in the trading account. 42. In the present case, the countervailing excise duty had only been reflected as prepaid expenses. To our mind, it has correctly been so reflected. It has been so reflected correctly and does not require any adjustment in the computation of income. The adjustment claimed by way of a deduction for the prepaid taxes is out of the apprehension that it cannot be allowed in subsequent year bec....