2004 (11) TMI 88 - HC - Income Tax

Liability for the export duty - investment allowance - 1. Whether Tribunal was justified in holding that the liability of Rs. 5, 81, 534 for the export duty was allowable as a deduction in the year in question? 2. Whether Tribunal was justified in allowing the assessee s claim for investment allowance on the ground that the products manufactured by the assessee was not hit by item No. 1 of the Eleventh Schedule to the Income-tax Act? - we answer the question referred to us in the affirmative i.e. in favour of the assessee and against the Revenue.

Summary

Issues:
1. Deductibility of export duty liability as a deduction in the assessment year.
2. Allowance of investment allowance on plant and machinery for manufacturing products not falling under prohibited industry list.

Analysis:

Issue 1: Deductibility of export duty liability
The case involved a public limited company engaged in the manufacture and sale of rectified spirit and Indian made foreign liquor. The company claimed a deduction of Rs. 5,81,534 for export duty during the assessment year 1980-81. The company had not paid the duty due to a pending matter in the Supreme Court with a stay order. The Income-tax Officer rejected the claim stating it can only be allowed as a deduction when paid to the government. The Commissioner of Income-tax (Appeals) allowed the deduction, considering it a statutory liability under the mercantile system of accounting. The Tribunal upheld this decision. The court agreed that the export duty was a statutory liability accrued during the assessment year, following the mercantile system of accounting. Citing the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, the court held the deduction was justified in the year it accrued, not when paid, contrary to the decisions in Chowringhee Sales Bureau P. Ltd. [1973] 87 ITR 542 and Sinclair Murray and Co. P. Ltd. [1974] 97 ITR 615.

Issue 2: Allowance of investment allowance
The company also claimed investment allowance on plant and machinery. The Inspecting Assistant Commissioner disallowed it, citing the industry's coverage under item No. 1 of the Eleventh Schedule related to alcoholic spirits. However, the Commissioner of Income-tax (Appeals) allowed the investment allowance, noting a separate plant for manufacturing rectified spirit not falling under the prohibited list. The court upheld this decision, stating that investment allowance on plant and machinery for manufacturing products not listed under item No. 1 of the Eleventh Schedule was admissible.

In conclusion, the court ruled in favor of the assessee, allowing the deduction of export duty liability and the investment allowance on plant and machinery.