1994 (12) TMI 142 - AT - Income Tax

Appeal To Supreme Court Assessing Officer Assessment Order Cash Basis Deduction In Respect Excise Duty Mercantile System Original Assessment Profits And Gains Of Business Or Profession Trading Liability Trading Receipt Tribunal s Order

Summary

Issues Involved:
1. Disallowance of sales-tax and labour welfare fund under section 43B.
2. Addition of Rs. 47,83,916 on account of refund of Central Excise Duty.
3. Addition on account of gratuity fund.

Detailed Analysis:

1. Disallowance of Sales-Tax and Labour Welfare Fund under Section 43B:
At the outset, the counsel for the assessee submitted that ground Nos. 1 and 2 relating to the disallowance of sales-tax and labour welfare fund under section 43B of the Act were not being pressed. Consequently, these grounds were rejected.

2. Addition of Rs. 47,83,916 on Account of Refund of Central Excise Duty:
- Background: The original assessment was completed under section 143(3) on 27-2-1989, showing a total loss of Rs. 12,76,550. The CIT passed an order under section 263 on 18-3-1991, setting aside the assessment partly due to unpaid statutory liabilities of Rs. 50,16,888 not being included in the total income. A fresh assessment was passed in July 1991, adding Rs. 47,83,916 on account of Central Excise Duty refund received by the assessee during the year.

- Assessing Officer's Observations: The assessee followed a mercantile system of accounting except for certain items like claims, refunds, and duty drawbacks, which were on a cash basis. The refund of Rs. 47,83,916 was not credited to the Profit and Loss Account as the Assistant Collector of C.E., Jamshedpur had appealed to the Supreme Court against the order granting the refund. The Assessing Officer added this amount to the assessee's income, stating that the refund was taxable in the year received.

- Assessee's Submission Before CIT(A): The assessee argued that the refund amount was an existing liability and should not be included in taxable income, citing various High Court decisions to support the claim that section 41(1) was not applicable until the liability was finally extinguished.

- CIT(A)'s Decision: The CIT(A) held that since the refund was received based on an order of the Customs Central Excise Gold (Control) Appellate Tribunal, it was includible in the income of the assessee.

- Arguments Before ITAT: The assessee's counsel argued that section 41(1) was not applicable as the refund was not a remission or cessation of liability, and the refund was credited to a separate excise duty account, not the Profit and Loss Account. The counsel cited several cases to support the argument that the liability was not finally extinguished.

- ITAT's Analysis: The Tribunal referred to the Delhi Bench decision in Sylvania Laxman Ltd. and the Gujarat High Court decision in Motilal Ambaidas, holding that collections of Central Excise Duty form part of trading receipts and should be shown in the Profit and Loss Account. The Tribunal also noted that the words "deduction has been made" in section 41(1) should be read as "deduction ought to have been made," thus fulfilling the first condition of section 41(1). The Tribunal held that the refund was a reimbursement of expenditure, making it taxable under section 41(1) in the year of receipt.

- Conclusion: The Tribunal confirmed the order of the CIT(A), rejecting the assessee's grounds of appeal and holding that the refund of Rs. 47,83,916 was taxable in the assessment year 1987-88.

3. Addition on Account of Gratuity Fund:
- Background: The assessee claimed a deduction of Rs. 2,89,305 for actual payments made to retired employees. The Assessing Officer disallowed the deduction, stating that no payments were made by the gratuity trust fund, which was approved by the CIT.

- CIT(A)'s Decision: The CIT(A) observed that the deduction had been allowed in subsequent years based on actual payments and thus upheld the addition.

- Assessee's Argument: The assessee's counsel argued that the provision for gratuity had not been allowed as a deduction in earlier years due to section 40A(7)(a), and the deduction was claimed on an actual payment basis.

- ITAT's Decision: The Tribunal directed the Assessing Officer to verify whether the actual payments were made in the current or subsequent year and allow the deduction accordingly. The matter was restored to the Assessing Officer's file for verification.

Final Decision:
The assessee's appeal was partly allowed. The addition of Rs. 47,83,916 on account of Central Excise Duty refund was upheld, and the matter of the gratuity fund was remanded to the Assessing Officer for verification.