1970 (3) TMI 40 - HC - Income Tax

Provision made for excise duty demanded - If the assessee was maintaining its books on mercantile system whether the amount in provision would be deductible

Summary

Issues Involved:
1. Whether the sum of Rs. 14,95,252 or any part thereof can be allowed as expenses of the Samvat Year 2014 under the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Nature of Liability and Accounting System:
- The assessee-firm maintained its books of account in accordance with the mercantile system, which requires debit entries for liabilities incurred even before payments.
- The demand for Rs. 14,95,252 was made during the accounting year ending November 11, 1958.
- The assessee argued that this demand was a crystallized, ascertained liability and thus should be allowed as expenses for the assessment year 1959-60.

2. Excise Duty Demand and Correspondence:
- The Central Excise authorities issued a demand notice for Rs. 14,95,252, believing the cloth was manufactured on behalf of the assessee-firm.
- The assessee-firm contested this demand, arguing it was not a manufacturer and thus not liable to pay excise duty.
- The Assistant Collector, Central Excise, later suggested a review and possible reduction of the duty under a compounded levy system, provided the assessee agreed.

3. Tribunal's Findings:
- The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all rejected the assessee's claim.
- The Tribunal held that the liability was not accepted by the assessee and was contingent, not crystallized.

4. Legal Precedents:
- The assessee relied on the High Court of Madras decision in Pope the King Match Factory v. Commissioner of Income-tax, where a similar excise duty demand was considered an enforceable legal liability despite being contested.
- The High Court of Allahabad in Devi Das Madho Prasad v. Commissioner of Income-tax supported the view that statutory liabilities under the mercantile system should be debited as expenses even if contested.

5. Court's Analysis:
- The court considered the true effect of the letters dated October 22, 1958, and October 31, 1958, and the subsequent notice of demand dated December 22, 1958.
- The court found that the initial demand of Rs. 14,95,252 was not withdrawn or cancelled by the letter dated October 22, 1958.
- The offer to review the duty under the compounded levy system was conditional and did not negate the initial demand.

6. Conclusion:
- The court concluded that the demand for Rs. 14,95,252 was an enforceable legal liability and not a contingent liability.
- The question was answered in the affirmative, allowing the sum of Rs. 14,95,252 as expenses for the Samvat Year 2014.
- The revenue was ordered to pay the costs.

Summary:
The High Court of Bombay ruled that the sum of Rs. 14,95,252 demanded as excise duty was an enforceable legal liability for the assessee-firm for the Samvat Year 2014. The court held that the demand was not contingent but crystallized, despite the possibility of a reduced duty under the compounded levy system. Consequently, the amount was allowed as expenses for the relevant assessment year, and the revenue was directed to pay the costs.