1999 (11) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction of differential excise duty.
2. Applicability of the Supreme Court decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT.
3. Distinction between demand notices and show-cause notices.
4. Consideration of contingent liabilities for tax deduction purposes.

Detailed Analysis:

1. Entitlement to Deduction of Differential Excise Duty:
The primary issue was whether the assessee was entitled to a deduction of differential excise duty amounting to Rs. 76,52,169 for the assessment year 1981-82. The assessee, a public limited company running a spinning and weaving mill, had paid excise duty based on the weight of unsized yarn. However, a dispute arose regarding the calculation of excise duty based on the weight of sized yarn. The Income-tax Officer (ITO) allowed a deduction of Rs. 29,66,499 based on a High Court judgment, but the Commissioner of Income-tax (Appeals) allowed the full claimed amount following the Supreme Court decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363.

2. Applicability of the Supreme Court Decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT:
The Revenue argued that the Tribunal and the Commissioner of Income-tax (Appeals) erred in applying the Kedarnath Jute decision, as it pertains to cases where there is an actual demand of tax or duty, not merely show-cause notices. The Supreme Court decision in Kedarnath Jute held that a statutory liability must be allowed in the year it is raised, even if contested. However, the Revenue contended that in the present case, there was no actual demand, only show-cause notices, which do not constitute an accrued liability.

3. Distinction Between Demand Notices and Show-Cause Notices:
The court examined whether the notices served on the assessee were demand notices or show-cause notices. The Revenue highlighted that the notices were merely show-cause notices, which were subsequently quashed by the High Court, indicating no actual liability. The court referred to the decisions in Standard Mills Co. Ltd. v. CIT [1998] 229 ITR 366 and CIT v. Indian Smelting and Refining Co. Ltd. [1998] 230 ITR 194, which distinguished between demand notices and show-cause notices, concluding that liabilities based on show-cause notices are contingent and not deductible.

4. Consideration of Contingent Liabilities for Tax Deduction Purposes:
The court determined that the assessee's claim for deduction was based on contingent liability, as the show-cause notices did not create an actual liability. The Tribunal and the Commissioner of Income-tax (Appeals) erroneously assumed that the decision in Kedarnath Jute was applicable without recognizing the lack of an actual demand. The court emphasized that for a liability to be deductible, it must be an actual liability in praesenti, not a contingent one.

Conclusion:
The court concluded that the Tribunal committed a manifest error of law in applying the Kedarnath Jute decision to the present case. The liability claimed by the assessee was contingent, based on show-cause notices that were quashed, and thus did not constitute deductible expenditure. The question was answered in the negative, in favor of the Revenue and against the assessee. The Tribunal was directed to issue suitable consequential directions if any addition was made under section 41(1) of the Act in the assessment year 1983-84. The reference was disposed of with no order as to costs.