1988 (9) TMI 80 - AT - Income Tax

Issues Involved:
1. Disallowance of claim for excise duty.
2. Disallowance of incremental liability for gratuity.
3. Disallowance of exchange difference on remittance of foreign currency loan.
4. Disallowance of expenditure on the transit house.

Issue-wise Detailed Analysis:

1. Disallowance of Claim for Excise Duty:
The primary issue was whether the assessee's claim for excise duty of Rs. 28,83,250 should be allowed as a deduction. The assessee argued that since it maintained accounts on a mercantile basis, the liability mentioned in the show-cause notices had accrued in the relevant accounting year. The ITO allowed the deduction for one item (Rs. 20,784.64) as the liability crystallized within the year due to an order by the Asst. Collector but disallowed the rest. The CIT(A) confirmed the disallowance.

The Tribunal analyzed the legal position that excise duty liability for an assessee following the mercantile system of accounting is incurred as soon as excisable goods are manufactured or produced. However, for unadmitted liabilities, the enforceable liability arises only upon receipt of the Collector's demand for payment. The Tribunal concluded that mere show-cause notices do not constitute a demand notice, and thus, the liability had not crystallized in the relevant year. Therefore, the ITO's disallowance of the amounts mentioned in various show-cause notices was justified.

2. Disallowance of Incremental Liability for Gratuity:
The second issue was the disallowance of the incremental liability for gratuity of Rs. 17,02,000. The assessee contended that Section 40A(7) of the IT Act, 1961, did not apply to this case. However, the Tribunal referred to the Supreme Court decision in Shree Sajjan Mills Ltd. vs. CIT, which held against the assessee. Consequently, the Tribunal rejected this ground.

3. Disallowance of Exchange Difference on Remittance of Foreign Currency Loan:
The third issue was the disallowance of the exchange difference of Rs. 1,46,205 as a revenue business expenditure. The Tribunal found that this issue was already decided against the assessee in its own case for the assessment years 1979-80 and 1980-81, based on the decision of the Special Bench in Poysha Industrial Co. Ltd. vs. ITO. The Tribunal upheld the disallowance of the exchange difference as a revenue expenditure.

Regarding the sub-issue of investment allowance, the Tribunal noted that the Bombay Benches of the Tribunal had consistently taken a view against allowing investment allowance on exchange difference amounts paid several years after the installation of new machinery. The Tribunal emphasized that the provisions of Section 32A did not support the allowance of investment allowance in such circumstances, and no investment allowance reserve was created as required by law. Therefore, the Tribunal held that investment allowance could not be allowed on the amount representing exchange fluctuations.

4. Disallowance of Expenditure on the Transit House:
The final issue concerned the disallowance of Rs. 4,182 for the transit house, which the assessee argued was used by officers and employees for business purposes and should not be treated as a guest house. The Tribunal referred to its earlier decisions and held that the accommodation in question was rightly treated as a guest house under Section 37(5) of the IT Act. The Tribunal confirmed the disallowance and rejected the ground.

Conclusion:
The appeal was dismissed, and the Tribunal upheld the disallowances made by the ITO and confirmed by the CIT(A) on all grounds. The Tribunal's decision was based on established legal principles and prior judicial pronouncements.

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