1991 (9) TMI 34 - HC - Income Tax

Summary

Issues Involved:

1. Whether the excise duty demands raised in the subsequent year but related to the current year are admissible as a deduction.
2. The applicability of the mercantile system of accounting in recognizing liabilities.
3. The timing of the accrual of liability for excise duty under the Central Excises and Salt Act, 1944.

Issue-Wise Detailed Analysis:

1. Admissibility of Excise Duty Demands as Deduction:

The primary issue was whether the excise duty demands raised after the close of the accounting year but related to the goods manufactured during the accounting year could be claimed as a deduction. The Tribunal, Assessing Officer, and Commissioner of Income-tax (Appeals) had disallowed the deduction on the grounds that the quantification of the excise duty demands occurred after the accounting year ended on June 30, 1982. The court, however, emphasized that the excise duty pertains to the goods manufactured during the accounting year and should be recognized as a liability for that year.

2. Applicability of Mercantile System of Accounting:

The court noted that the assessee followed the mercantile system of accounting, which recognizes liabilities as they accrue, regardless of when they are paid. The court cited the Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, which established that under the mercantile system, a fiscal liability should be allowed as a deduction in the year in which the relevant transactions occur, even if the precise quantification and payment occur later. The court reiterated that the liability for excise duty accrues at the time of manufacture, not at the time of quantification or payment.

3. Timing of Accrual of Liability for Excise Duty:

The court examined the Central Excises and Salt Act, 1944, particularly sections 3 and 4, and relevant rules, concluding that the duty is levied on the manufacture or production of goods. The court referenced Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460, where it was held that the levy is on the manufacture or production of goods, and the stage of collection does not need to synchronize with the completion of the manufacturing process. The court affirmed that the taxable event for excise duty is the manufacture of goods, and the liability accrues at that point, making the timing of quantification and payment irrelevant for recognizing the liability.

The court further referenced several cases, including CIT v. Poyilakkada Fisheries P. Ltd. [1992] 197 ITR 85, which supported the view that under the mercantile system, the liability to purchase tax accrues in the year the transactions liable to tax took place. The court also cited CIT v. Shree Krishna Gyanoday Sugar Ltd. [1990] 186 ITR 541, which held that interest on arrears of cess is part of the liability to pay cess and accrues as soon as the prescribed date is crossed without payment.

Conclusion:

The court concluded that the additional excise duty demands related to the goods manufactured during the accounting year should be recognized as a liability for that year, despite the quantification and payment occurring later. The court answered the question in the negative, in favor of the assessee and against the Department, holding that the Tribunal erred in disallowing the deduction.

Judgment:

The court directed that a copy of the judgment be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, under the seal of the court and the signature of the Registrar.