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Issues Involved:
1. Disallowance under Section 43B of the IT Act. 2. Treatment of Excise Duty collected as trading receipts. Detailed Analysis: Issue 1: Disallowance under Section 43B of the IT Act The primary issue in dispute for the assessment years 1986-87 and 1987-88 was the disallowance made by the Assessing Officer (AO) under Section 43B of the Income Tax Act, which was subsequently deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The amounts involved were Rs. 58,75,999 for the assessment year 1987-88 and Rs. 44,58,378 for the assessment year 1986-87. The assessee-firm, engaged in dyeing and printing cloths on a job work basis, collected Excise Duty from merchants and deposited it as an advance with the excise department. The firm maintained separate excise accounts for each merchant and did not show the receipts in the trading account nor claimed the Excise Duty paid as an expenditure. The unpaid Excise Duty collected was shown in the balance sheet under 'Deposit against differential Excise Duty'. The firm disputed the mode of charging Excise Duty and obtained a stay from the Supreme Court, requiring them to furnish a bank guarantee. The CIT(A) found that the Excise Duty collected was not a trading receipt in the hands of the assessee, as the firm acted merely as an agent for the merchants. The CIT(A) also held that the assessee had made constructive payments of the Excise Duty by placing the collected amounts in fixed deposits and furnishing bank guarantees, thus complying with the Supreme Court's conditions. Issue 2: Treatment of Excise Duty collected as trading receipts The AO considered the Excise Duty collection as part of the trading receipts, citing various case laws, including Chowringhee Sales Bureau (P.) Ltd. v. CIT and others. The AO did not allow any deduction for the Excise Duty on the grounds that it was not paid to the Government account as required by Section 43B. The CIT(A) disagreed, stating that the Excise Duty collected was not the liability of the assessee but that of the merchant or manufacturer. The CIT(A) relied on decisions from the Tribunal, including Happy Trust, Surat v. ITO and Sunil Silk Mills Ltd. v. Dy. CIT, to support this view. Upon appeal, the Tribunal considered the binding ratio of Supreme Court decisions, including Jonnalla Narasimharao & Co. v. CIT and CIT v. T. Naggi Reddy, which established that Excise Duty collected forms part of the trading receipts. The Tribunal held that the AO was justified in treating the Excise Duty as a trading receipt. Regarding the deduction under Section 43B, the Tribunal noted that the assessee had made fixed deposits as security to the Central Excise Department. However, under Section 43B, the deduction is permitted only on actual payment to the Government account. The Tribunal referred to several decisions, including Krishna Textiles, Purolator India Ltd., and Dunlop India Ltd., which held that furnishing a bank guarantee is not equivalent to actual payment of Excise Duty for the purposes of Section 43B. The Tribunal concluded that the assessee is not entitled to the deduction under Section 43B for the assessment years in question but may claim it when the Excise Duty is actually paid. Conclusion: The Tribunal reversed the CIT(A)'s order, restoring the AO's decision to treat the Excise Duty collected as trading receipts and denying the deduction under Section 43B until actual payment is made. The appeals were allowed.
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