1987 (9) TMI 78 - AT - Income Tax

Summary

Issues Involved:

1. Jurisdiction of the Commissioner (Appeals) to issue an enhancement notice.
2. Entitlement of the assessee to the deduction of purchase tax.
3. Deduction claimed in respect of interest and bank charges.

Detailed Analysis:

1. Jurisdiction of the Commissioner (Appeals) to Issue an Enhancement Notice:

The assessee questioned the jurisdiction of the Commissioner (Appeals) to issue an enhancement notice, arguing that the Commissioner (Appeals) did not have such jurisdiction as this would amount to considering a matter which was never before the Income-tax Officer (ITO). The assessee relied on the Madras High Court decision in CIT v. Chaganlal Kailas & Co., which held that the power of the Appellate Assistant Commissioner (AAC) to enhance an assessment can relate only to those items of income which were before the ITO and considered by him for the purpose of bringing to tax or for granting relief to the assessee.

The Tribunal rejected this argument, stating that the powers of the first appellate authority are limited to the sources of income which had been the subject-matter of consideration by the ITO from the point of taxability. The expression 'consideration' does not mean incidental or collateral examination by the ITO but should be clear from the assessment order/records. The Tribunal held that the ITO, while considering the income from the business of exporting seafood, must necessarily have considered both receipts and expenditures, including the provision for purchase tax, especially given the large amount involved. Therefore, the Commissioner (Appeals) had jurisdiction to enhance the assessment by reconsidering the allowance of the provision for purchase tax.

2. Entitlement of the Assessee to the Deduction of Purchase Tax:

The assessee, a registered firm engaged in the export of seafood, claimed a deduction for the provision of purchase tax on prawns. The Commissioner (Appeals) disallowed this provision, referencing the Supreme Court decision in Sterling Foods v. State of Karnataka, which held that the fishing industry is not liable for payment of purchase tax.

The Tribunal examined Section 5 of the Central Sales Tax Act, which specifies that a sale or purchase of goods in the course of export is exempt from tax. Since the assessee's purchases were for export, they were entitled to this exemption, and there was no liability to pay purchase tax.

However, the Commercial Tax Department's stance and an amendment to the Kerala General Sales-tax Act complicated this issue. The department argued that processed prawns were a new product and thus not exempt. The Kerala High Court in CIT v. Noroth Oil Mill Co. Ltd. held that processed prawns were the same commodity as raw prawns and eligible for exemption. This decision was pending appeal in the Supreme Court.

The Tribunal referred to the Supreme Court's decision in Sterling Foods, which supported the view that processed prawns are commercially the same as raw prawns. The Tribunal concluded that there was no liability for purchase tax based on these principles. Additionally, the Tribunal noted that the issue had been previously considered by this Bench in another case, Rejini Ice & Cold Storage, where the provision was allowed. However, the Tribunal did not follow this ratio due to the absence of certain authorities in that decision.

The Tribunal cited several decisions, including Deep Chand Shyam Sunder v. CIT and CIT v. T. S. Srinivasa Iyer, to support the principle that a liability must be an existing legal liability, not hypothetical, and can only be claimed when appeals have reached finality and the liability has crystallized. The Tribunal distinguished the present case from the Allahabad High Court decisions in J. K. Synthetics Ltd. v. O. P. Bajpai, ITO, and CIT v. J. K. Synthetics Ltd., where the liability was upheld due to ongoing demands by the Central Excise Department.

The Tribunal concluded that there was no liability for the assessee during the accounting year, thus disallowing the claim for deduction of purchase tax.

3. Deduction Claimed in Respect of Interest and Bank Charges:

The assessee claimed an amount of Rs. 5,28,681 towards interest and bank charges. The ITO disallowed part of this interest, arguing that borrowed funds had been diverted for non-business purposes. The Commissioner (Appeals) reduced the disallowance to Rs. 2,50,000.

The Tribunal noted that a similar issue had been previously remitted back to the ITO for proper disposal in the assessment year 1979-80. Both parties agreed that a similar order should be passed in this case. Therefore, the Tribunal remitted this issue back to the ITO for a proper disposal after hearing the assessee.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the jurisdiction of the Commissioner (Appeals) to issue an enhancement notice and disallowed the deduction for purchase tax. The issue of deduction for interest and bank charges was remitted back to the ITO for proper disposal.