1983 (4) TMI 64 - AT - Income Tax

Summary

Issues:
1. Whether the assessee is liable to pay excise duty on the goods manufactured.
2. Whether the assessee is entitled to deduction of excise duty in the computation of income.
3. Disallowance of expenses towards advertisement and sale promotion under section 37(3A) of the Act.

Analysis:

1. Excise Duty Liability Issue:
The case involved a manufacturer of tobacco and 'pan masala' who contested the liability to pay excise duty on their products. The Central Excise authorities issued notices to the assessee post a search at their premises, leading to a legal battle. The High Court's interim order allowed the release of seized goods on a bank guarantee and permitted future manufacturing under certain conditions. The CIT(A) upheld the view that the liability was contingent and not legally enforceable, hence not deductible. The Appellate Tribunal noted the unsettled nature of the excise duty liability and referred the matter back to the ITO pending a final decision by the High Court.

2. Deduction of Excise Duty Issue:
The assessee claimed a deduction of excise duty amounting to Rs. 61,784 in the computation of income. The ITO rejected the claim, stating that the liability was not ascertained during the relevant year. The CIT(A) concurred with the ITO, emphasizing the absence of a clear decision by the Excise Department on the liability. However, the Appellate Tribunal highlighted the Supreme Court's decision allowing deduction of statutory liabilities under the mercantile system of accounting, directing the ITO to allow the claim if the High Court decided in favor of the assessee.

3. Disallowed Expenses Issue:
Regarding the disallowance of expenses towards advertisement and sale promotion under section 37(3A) of the Act, the ITO disallowed a portion of the claimed amount. The CIT(A) disagreed, citing the nature of the expenditure as primarily for promoting sales and not extravagant. The Appellate Tribunal overturned the CIT(A)'s decision, deeming the expenditure as sales promotion based on the clear motive to increase sales, thus upholding the ITO's disallowance.

In conclusion, the Appellate Tribunal partially allowed the assessee's appeal while fully allowing the Department's appeal, addressing the excise duty liability, deduction claim, and the disallowed expenses issues comprehensively based on legal interpretations and precedents.