1988 (7) TMI 110 - AT - Income Tax

Assessable Value, Assessment Year, High Court, Income Tax, Liability For Excise Duty, Manufacturing Company, Mercantile System, Supreme Court

Summary

Issues Involved:
1. Allowance of provision towards additional liability on account of Central Excise duty on Corrugated Fibre Containers (C.F.C.) for assessment years 1982-83 and 1983-84.
2. Determination of whether the provision for excise duty on C.F.C. constitutes a legitimate business deduction.
3. Applicability of section 41(1) of the Income-tax Act regarding the remission or cessation of liability.

Issue-wise Detailed Analysis:

1. Allowance of provision towards additional liability on account of Central Excise duty on C.F.C. for assessment years 1982-83 and 1983-84:

The revenue raised an additional ground regarding the allowance of a provision towards additional liability on account of Central Excise duty on C.F.C. The provision disallowed by the I.A.C. (Assts.) was Rs. 94,28,229 for assessment year 1982-83 and Rs. 95,33,549 for assessment year 1983-84. The assessee, a cigarette manufacturer, faced a show-cause notice from the Central Excise Department proposing to include the value of C.F.C.s in the assessable value of cigarettes. The assessee contested this inclusion, leading to various legal proceedings, including a writ petition in the Andhra Pradesh High Court and an appeal to the Supreme Court. Despite the High Court ruling in favor of the assessee, the liability was considered to subsist until the Supreme Court's final decision.

2. Determination of whether the provision for excise duty on C.F.C. constitutes a legitimate business deduction:

The assessee argued that the provision for excise duty on C.F.C. was a legitimate business deduction, citing the Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT, which held that an assessee following the mercantile system is entitled to deduct liabilities accrued during the period for which profits are computed. The assessee contended that despite the High Court's favorable judgment, the liability persisted due to the pending Supreme Court appeal. The I.A.C. (Assts.) rejected the deduction, asserting that the High Court's order held the field until reversed by the Supreme Court. However, the assessee surrendered the amounts as part of income for A.Y. 1986-87 following the Supreme Court's decision.

3. Applicability of section 41(1) of the Income-tax Act regarding the remission or cessation of liability:

The Departmental Representative argued that the High Court's order dated 13-9-1982 ruled until reversed by the Supreme Court, making the revenue entitled to realize the amount under section 41(1). The assessee countered this by citing the Allahabad High Court's decision in J.K. Synthetics Ltd. v. ITO, which held that section 41(1) applies only when a past liability ceases or is remitted. The Tribunal found the facts of the Allahabad High Court's decision analogous to the present case, concluding that the liability to pay excise duty on C.F.C.s did not cease or remit until the Supreme Court's final decision. The Tribunal upheld the C.I.T.(A)'s allowance of the provision for excise duty as a legitimate business deduction, rejecting the Department's appeals.

Conclusion:

The Tribunal concluded that the provisions made towards excise liability on C.F.C.s for assessment years 1982-83 and 1983-84 were legitimate business deductions. The orders of the C.I.T.(A) allowing these provisions were upheld, and the Department's appeals were dismissed. The Tribunal emphasized that subsequent events, such as the High Court and Supreme Court decisions, should not affect the determination of liability for the relevant assessment years.