1995 (10) TMI 71 - AT - Income Tax

Account Books, Assessing Officer, Assessment Year, Deduction In Respect, Excise Duty, High Court, Mercantile System, Per Annum, Technical Know-how, Trading Liability, Trading Receipt

Issues Involved:
1. Addition of Rs. 13,25,557 sustained on account of refund of Excise Duty.
2. Rejection of the assessee's claim of deduction under section 35AB of the Act.

Detailed Analysis:

1. Addition of Rs. 13,25,557 Sustained on Account of Refund of Excise Duty

Facts and Contentions:
- The assessee received Rs. 13,25,557 as a refund of Excise Duty, which was claimed to be non-taxable.
- The Assessing Officer (AO) found that this amount had been reduced from godown charges and was not shown as income.
- The assessee argued that the amount was paid through a running account and no deduction was claimed, hence it was non-taxable.
- The AO and CIT(A) rejected this argument, stating that it formed part of the trading receipt and constituted income under section 41(1) of the Act.

Tribunal's Analysis:
- The Tribunal considered whether the excise duty refund constitutes income and if so, the year it is taxable.
- It was established that all receipts are not necessarily income for tax purposes; the nature of the receipt must be determined.
- Excise duty, akin to sales tax, is a compulsory levy and constitutes a trading receipt when collected.
- The Tribunal noted that the true nature of the receipt is material, not the head under which it is reflected in the account books.
- The refund of excise duty, even if disputed and subsequently refunded, retains its character as a trading receipt and is taxable when received.

Section 41(1) Applicability:
- The Tribunal examined whether the refunded amount is taxable under section 41(1).
- Section 41(1) applies if any allowance or deduction has been made in respect of loss, expenditure, or trading liability, and the assessee obtains any amount in respect of such loss or expenditure.
- The Tribunal referred to various High Court decisions, including the Gujarat High Court in Motilal Ambaidas v. CIT and Kerala High Court in Travancore Cement Ltd v. CIT, supporting the view that section 41(1) applies even if the deduction was not actually made but ought to have been made.
- The Tribunal concluded that the refunded excise duty is taxable in the year it is received, and the deduction is allowable when the amount is refunded to the customers.

Conclusion:
- The Tribunal upheld the view that the refunded excise duty is taxable when received.
- The AO is directed to consider the assessee's claim for deduction when the amounts are refunded to the customers.

2. Rejection of the Assessee's Claim of Deduction Under Section 35AB of the Act

Facts and Contentions:
- The assessee entered into an agreement with Payen International Ltd., England, for acquiring technical know-how, with a lump sum royalty of lb50,000 per annum for five years.
- The assessee claimed 1/6th of the total amount of lb250,000 in the year under consideration.
- The AO allowed 1/6th of lb50,000 only, and the CIT(A) agreed with the AO's decision.

Tribunal's Analysis:
- Section 35AB allows a deduction of one-sixth of the lump sum consideration paid for acquiring know-how.
- The Tribunal noted that the entire liability to pay lb250,000 accrued in the year under consideration, although the payment was spread over five years.
- The Tribunal emphasized that the method of accounting (mercantile or cash) is crucial in determining the liability.
- If the assessee follows the mercantile system, the entire amount of lb250,000 should be considered in the year under consideration, and 1/6th of this amount should be allowed as a deduction.

Conclusion:
- The AO is directed to verify the method of accounting followed by the assessee.
- If the mercantile system is followed, 1/6th of lb250,000 should be allowed as a deduction, reversing the revenue authorities' decision.

Summary:
The Tribunal addressed two primary issues: the taxability of refunded excise duty and the deduction claim under section 35AB. It concluded that the refunded excise duty is taxable when received, with deductions allowed when refunded to customers. For the section 35AB claim, the Tribunal directed the AO to verify the assessee's accounting method, allowing the deduction if the mercantile system is used.

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