1996 (7) TMI 120 - HC - Income Tax

Summary

Issues Involved:
1. Whether the provision for excise duty is an accrued liability for the year 1977-78.
2. Whether the provision for excise duty should be allowed as a deduction even though it includes duty payable for goods manufactured in earlier years.

Issue-wise Detailed Analysis:

1. Whether the provision for excise duty is an accrued liability for the year 1977-78:
The court examined whether the liability to pay excise duty had accrued under the statute. It was noted that the liability arises as soon as the excisable goods are manufactured or produced. The assessee, a company manufacturing electrical equipment, made a provision for Rs. 5,75,000 in its accounts for the year ending March 31, 1977, towards excise duty and claimed it as a deduction. The Department disallowed this claim, arguing that the demand from the Excise Department was received only in July 1977, after the accounting year had ended. The Tribunal, however, held that the liability to pay excise duty arises at the point of manufacture, not when the demand is raised. This conclusion was based on precedents such as CIT v. Century Enka Ltd. [1981] 130 ITR 267 and Shinde Bros. v. Deputy Commissioner, AIR 1967 SC 1512, which emphasize that the taxable event in excise duty is the manufacture of goods.

2. Whether the provision for excise duty should be allowed as a deduction even though it includes duty payable for goods manufactured in earlier years:
The court considered whether the liability for earlier years could be allowed as a deduction in the year under consideration. The Tribunal had relied on various judicial precedents, including Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 and Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, to conclude that the liability accrues as soon as the taxable event occurs. The court agreed with the Tribunal's view that the liability to pay excise duty arose when the assessee started manufacturing the excisable goods and that the provision made in the accounts was justified. The Tribunal also noted that the assessee had applied for a license on February 1, 1977, and the liability became quantified during the year under appeal. The Tribunal's decision was supported by the principle that the liability for excise duty is not contingent but accrues at the point of manufacture, making it an allowable deduction for the year 1977-78.

Conclusion:
The court upheld the Tribunal's decision, affirming that the provision for excise duty of Rs. 5,75,000 was an accrued liability for the year 1977-78 and was allowable as a deduction. The court found the Tribunal's reasoning sound and saw no infirmity in its order, thus answering the referred question in the affirmative and against the Department.