1987 (3) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of disputed Excise Duty liability pertaining to the calendar year 1981.
2. Applicability of the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT.
3. Treatment of show-cause-cum-demand notices versus regular demand notices.
4. Contingent liability versus accrued liability.
5. Relevance of stay orders on the liability of excise duty.

Detailed Analysis:

1. Disallowance of Disputed Excise Duty Liability:
The primary issue in this appeal is the disallowance of the disputed Excise Duty liability amounting to Rs. 1,52,06,200 for the calendar year 1981. The assessee, engaged in the manufacture and processing of grey cloth, had debited Rs. 2,93,77,769 in its accounts for Excise Duty payable. Out of this, Rs. 2,07,16,701 was contested as it was on the processed value added to grey fabrics, which the assessee argued was not payable under the Central Excises and Salt Act, 1944. The liability was contested before the Bombay High Court, which stayed the recovery subject to the furnishing of bank guarantees. The law was later amended retrospectively, leading to further legal challenges. The Supreme Court directed the assessee to pay 50% of the past liability and provide a bank guarantee for the remaining 50%.

2. Applicability of Supreme Court's Decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT:
The CIT(A) allowed the deduction of Rs. 59,89,393 for the Coorla Unit, following the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT, which established that a statutory liability is allowable as a deduction if the accounts are maintained on a mercantile basis. However, the balance liability of Rs. 1,52,06,200 for the Sewree Unit was disallowed, as the CIT(A) followed the previous year's order. The Tribunal in ITA 2545/BOM/85 had previously ruled in favor of the assessee, allowing the deduction for the Swan Unit as well, even though only a show-cause-cum-demand notice was issued.

3. Treatment of Show-Cause-Cum-Demand Notices Versus Regular Demand Notices:
The Tribunal's earlier decision emphasized that the liability for excise duty accrues on the manufacture of goods, regardless of whether a formal demand notice or a show-cause-cum-demand notice is issued. The CIT(A) had disallowed the liability for the Sewree Unit, considering the show-cause-cum-demand notices as initial steps in the process of assessment, not resulting in an enforceable demand. However, the Tribunal held that the liability had accrued upon the manufacture and removal of goods, making the distinction between regular demand notices and show-cause-cum-demand notices irrelevant for the purpose of allowing the deduction.

4. Contingent Liability Versus Accrued Liability:
The department argued that the liability was contingent and should not be allowed until the final resolution of the dispute. However, the Tribunal rejected this argument, stating that the taxable event (manufacture of goods) had already occurred, and the liability had accrued. The Tribunal relied on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd., which held that a statutory liability accrues upon the taxable event, irrespective of subsequent disputes or stay orders.

5. Relevance of Stay Orders on the Liability of Excise Duty:
The department contended that the stay order from the High Court negated the liability, making it non-enforceable and thus not deductible. The Tribunal disagreed, stating that a stay order only postpones the recovery of the liability but does not extinguish it. The liability remains accrued and enforceable once the stay is lifted. The Tribunal emphasized that denying the deduction due to a stay order would unjustly penalize the assessee for exercising its legal right to challenge the levy.

Conclusion:
The Tribunal set aside the CIT(A)'s order disallowing the excise duty liability for the Sewree Unit and allowed the assessee's appeal, confirming that the liability had accrued and was deductible. The Tribunal also dismissed the department's appeal regarding the Coorla Unit, affirming the CIT(A)'s decision to allow the deduction. The Tribunal's decision was guided by the principles established in Kedarnath Jute Mfg. Co. Ltd.'s case and the consistent application of the mercantile system of accounting.