TaxTMI 
TaxTMI 
2016 (4) TMI 746
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..... These goods were purchased under Agreements dated 4th January, 1984 and 5th January, 1984. The price as agreed in both the cases was the gross costs to the seller with a net profit of Rs. 1/per kg to M/s. Ajay Woolen Mills and Rs. 1.50 kg. to M/s. Sanjeev Woolen Mills. The gross costs included all expenditure incurred by the seller from the opening of letter of credit up to the final execution of the contract for supplying the goods to the appellant. However, as there was uncertainty about the incidence of customs duties, the parties inserted a clause in the two agreements by another agreement. This further clause was to make it clear that any liability with respect to duty of customs payable by the seller, would be a part of the costs and the buyer would pay for the same. The inserted clause read as under : "To avoid any misunderstanding and confusion at some later date, it is hereby stipulated that although the present stage, C.V.D. which comes to Rs. 36/per kg. is Auxiliary duty, not applicable in terms of Court Orders on the consignments being imported by the seller which the seller, in turn, has agreed to supply to the buyer, but in case at some later stage, any such liabil....
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....he Respondent-Assessee's appeal, inter alia, holding that Respondent-Assessee was following the mercantile system of accounting. Therefore, the liability is to be allowed as the deduction on accrual basis. It further held that the liability was a certain and quantified liability. The amount of Rs. 1.78 Crores had been quantified by the Customs Department. Further, the Tribunal held that the liability to pay the customs duty by the Respondent-Assessee, was a part of the sale price to the two sellers and consequently, ought to be allowed as an expenditure for purchase of goods. In the above view, the Appeal of the Respondent-Assessee was allowed. 7. Mr. Chhotaray, learned Counsel appearing for the Revenue in support of the appeal makes the following submissions : (a) The amount of Rs. 1.78 Crores being the customs duty which is payable as a part of consideration of goods, was not reflected in the bill of seller. Consequently, same was not offered to tax by the seller of the goods. Thus, the Respondent-Assessee could not claim an expenditure of Rs. 1.78 Crores to reduce to its profit which was chargeable to tax; (b) The amount of Rs. 1.78 Crores is not an ascertained liability ....
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.... income in computing profits and gains of business. The expenditure which is incurred for purchase of goods for the purpose of sale would be an expenditure allowable for the purpose of computing the profits and gains of business. One more feature which must not be lost sight of i.e. an assessee is entitled to determine its profits and gains of business either on receipt basis or on mercantile basis (Section 145 of the Act). Where an assessee maintains its books of account, on receipt basis, the same only takes into account the amounts actually received and amounts actually expended / spent to determine the profits and gains for the Assessment Year. On the other hand, where the books of accounts are maintained on Mercantile system of Accounting, it is as explained by the Apex Court in Keshav Mills Vs. CIT 23 ITR 230 to be "that system which brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which legal liability has been incurred before it is actually disbursed". Thus, a liability which has occurred during the year has to be taken into account even though it may be discharged / pai....
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....ll the execution of the contract. The inserted clause only explicitly provides that customs duty paid/payable for the raw materials would also be included in the costs of the goods. The bills which were issued by the seller, specifically provides that the bills have been issued subject to the liability of the buyer to pay customs duty which is under dispute. 13. The contention of Mr. Chhotrary that the seller had not shown the aforesaid consideration of Rs. 1.78 Crores as his receipt of sale of the goods and, therefore, the buyer of the goods i.e. Respondent-Assessee cannot claim the same as a deduction is not sustainable. The remedy, if any of the Revenue to bring to tax the income of Rs. 1.78 Crores in the hands of the seller of the goods. There is nothing on record to indicate that the seller of the goods has not shown the aforesaid consideration in its return of income and offered it to tax. This submission on the part of Mr. Chhotrary, is not supported by the facts on record. In any case, the buyer of the goods cannot be made liable to tax on the consideration paid by him to the seller of goods only because the seller of goods has failed to take it into consideration as a par....
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....esaid amount of Rs. 1.78 Crores as consideration paid for the goods in the subject Assessment Year. In any case, as observed by the Tribunal, if the Apex Court holds that no custom duty is payable and quashes the demand of the Customs Department, then the consideration payable for the goods would stand reduced by virtue of Section 41 of the Act, the very amount of Rs. 1.78 Crores or the extent to which the Apex Court sets aside the demand. Therefore, Respondent-Assessee would be liable to pay tax under Section 41 of the Act on remission as its liability to pay for the goods purchased from the seller would stands reduced. 15. It was next contended on behalf of the Revenue that in any case, the decision in Mcdowell & Company Ltd. (supra) would cover the issue in favour of the Revenue. It is submitted that the entire exercise undertaken by the Respondent-Assessee was only to avail deduction in respect of customs duty payable which the importer/seller of the goods would not get in the absence of making payment of duty of customs on import of the goods in view of Section 43B of the Act. It is submitted that this entire exercise has been done only to evade payment of tax. It is submitte....