1987 (5) TMI 68 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is liable to pay purchase tax.
2. The validity of the CIT's order under section 263 of the IT Act, 1961.
3. The applicability of section 5(3) of the Central Sales-tax Act, 1956 for exemption from purchase tax.
4. The relevance of the Kerala High Court decision in Dy. CST v. Neroth Oil Mills Co. Ltd. and the Supreme Court decision in Sterling Foods.

Detailed Analysis:

1. Liability to Pay Purchase Tax:
The primary issue is whether the assessee-firm, engaged in the processing and export of sea foods, is liable to pay purchase tax. The CIT considered the assessment order allowing a deduction of Rs. 5,12,536 as erroneous and prejudicial to the interests of revenue, citing that the assessee did not receive any demand notice from the Sales Tax Department and referring to the Kerala High Court decision in Dy. CST v. Neroth Oil Mills Co. Ltd. The CIT concluded that the operations carried out by the assessee did not involve manufacturing within the meaning of the Sales Tax Act and thus were not liable to pay purchase tax.

2. Validity of the CIT's Order under Section 263:
The CIT issued a notice proposing to revise the assessment order, arguing that the deduction allowed by the Income-tax Officer was not in order. The CIT rejected the assessee's argument that the freezing of fish involved manufacturing and directed the ITO to disallow the claim of Rs. 5,12,536. The assessee contested this order, arguing that the matter of purchase tax liability was still under dispute and citing various legal precedents to support the claim that a disputed liability is an admissible deduction under the mercantile system of accounting.

3. Applicability of Section 5(3) of the CST Act:
The assessee argued that purchase tax was not payable as the goods were purchased for export, invoking section 5(3) of the CST Act. This section exempts the last purchase preceding the sale occasioning the export from purchase tax if the export order precedes the purchase of goods. The assessee contended that the sales-tax assessment was not yet completed and that the liability existed until the Sales-tax Officer verified the records and determined the exemption under section 5(3).

4. Relevance of Judicial Decisions:
The CIT relied on the Kerala High Court decision in Dy. CST v. Neroth Oil Mills Co. Ltd., which held that the processing of prawns did not involve manufacturing and thus did not attract purchase tax. However, the assessee argued that this decision referred to a period before the amendment of the KGST Act and that the matter was pending before the Supreme Court. The assessee also cited the Supreme Court decision in Sterling Foods, which held that processed or frozen shrimps, prawns, and lobsters remained the same commodity in commercial parlance and were exempt from purchase tax if purchased for fulfilling existing export contracts.

Conclusion:
The Tribunal concluded that the CIT was not justified in holding that the assessee was not liable to pay purchase tax and directing the ITO to disallow the claim of Rs. 5,12,536. It held that the assessee's liability to pay purchase tax subsists until the Sales-tax Department completes the assessment and verifies the records for exemption under section 5(3) of the CST Act. Consequently, the Tribunal set aside the CIT's order and restored the original assessment order by the Income-tax Officer, allowing the appeal filed by the assessee.