2016 (4) TMI 746 - HC - Income Tax

Allowance of liability on account of customs duty - Held that - Contention of Mr. Chhotrary that the seller had not shown the consideration as his receipt of sale of the goods and, therefore, the buyer of the goods i.e. Respondent-Assessee cannot claim the same as a deduction is not sustainable. The remedy, if any of the Revenue to bring to tax the income in the hands of the seller of the goods. There is nothing on record to indicate that the seller of the goods has not shown the aforesaid consideration in its return of income and offered it to tax. This submission on the part of Mr. Chhotrary, is not supported by the facts on record. In any case, the buyer of the goods cannot be made liable to tax on the consideration paid by him to the seller of goods only because the seller of goods has failed to take it into consideration as a part of his income while discharging its obligation to pay tax under the Act. Thus, there is no merit in the first submission made on behalf of the Revenue. As the Respondent-Assessee is admittedly following the Mercantile Systems of Accounting and as held by the Apex Court in Kedarnath Jute Mills ( 1971 (8) TMI 10 - SUPREME Court), mere challenge to the demand by the seller may not by itself lead to the liability ceasing. Although, the seller of the goods may not be able to claim/obtain a deduction on the above account as the same has not been paid in terms of Section 43B of the Act. However, this does not in any way deprive the RespondentAssesse of the deduction of the amounts paid for purchase of goods. Thus, we are not able to accept the submission on behalf of the Revenue. Thus, the Respondent-Assessee would be entitled to deduct the aforesaid amount of ₹ 1.78 Crores as consideration paid for the goods in the subject Assessment Year. In any case, as observed by the Tribunal, if the Apex Court holds that no custom duty is payable and quashes the demand of the Customs Department, then the consideration payable for the goods would stand reduced by virtue of Section 41 of the Act, the very amount of ₹ 1.78 Crores or the extent to which the Apex Court sets aside the demand. Therefore, Respondent-Assessee would be liable to pay tax under Section 41 of the Act on remission as its liability to pay for the goods purchased from the seller would stands reduced. The customs duty, if any, is payable by the importer at the time of import and clearance of the goods. The selling price of the goods is on the basis of costs ₹ 1/. The costs includes amongst other things, the customs duty which has been paid or which would have to be paid on the import of the goods. Thus, the Respondent-Assessee is obliged to pay the consideration in accordance with the terms of contract entered into between the Respondent-Assessee and its sellers - Decided in favour of the Respondent-Assessee and against the Revenue.

Summary

Issues Involved:
1. Whether the customs duty liability of ?1,78,83,846/- was an allowable expenditure for the Assessment Year 1985-86.
2. Whether the Tribunal was correct in setting aside the order of the Commissioner of Income Tax and restoring the order of the Income Tax Officer.
3. Whether the liability was a contingent liability or an ascertained liability.
4. Whether the Reference made to the High Court was time-barred.
5. Applicability of the decision in Mcdowell & Co. Ltd. v. ITO to the present case.

Issue-wise Detailed Analysis:

1. Allowability of Customs Duty Liability as Expenditure:
The Respondent-Assessee, a firm, had purchased goods under agreements which stipulated that any customs duty liability would be borne by the buyer. Subsequent to the agreements, there was an increase in customs duty, resulting in a liability of ?1.78 crores. The Respondent-Assessee debited this amount to its Profit & Loss Account for the Assessment Year 1985-86. The Assessing Officer accepted this expenditure, but the Commissioner of Income Tax (CIT) later reversed this decision, considering the liability contingent as it was under dispute in the Supreme Court. The Tribunal, however, held that the liability was certain and quantified, thus allowable as a deduction on an accrual basis under the mercantile system of accounting.

2. Tribunal Setting Aside CIT's Order:
The Tribunal allowed the Respondent-Assessee's appeal, holding that the customs duty liability was a part of the purchase cost and thus deductible. The Tribunal noted that the Respondent-Assessee followed the mercantile system of accounting, where liabilities are accounted for when they are incurred, not when they are paid. The Tribunal also observed that the liability was quantified by the Customs Department and was part of the sale price agreed upon in the contracts.

3. Contingent vs. Ascertained Liability:
The CIT had considered the customs duty liability as contingent because the seller had challenged the duty in the Supreme Court, which had granted a stay on payment. However, the Tribunal and the High Court found that the customs duty demand by the Customs Department was a definite liability, regardless of the ongoing dispute. The High Court referred to the Supreme Court's decision in Kedarnath Jute Mills Co. Ltd. v. CIT, which held that a liability does not cease to be an actual liability merely because it is disputed in court.

4. Timeliness of the Reference to the High Court:
The Respondent-Assessee argued that the Reference to the High Court was time-barred as it was made nine years after the Tribunal's order. However, the High Court found this objection without merit, noting that the time taken by the Tribunal to dispose of the Reference Application could not be held against the Revenue. The High Court emphasized that the Reference Application was filed within the statutory period by the CIT.

5. Applicability of Mcdowell & Co. Ltd. v. ITO:
The Revenue argued that the decision in Mcdowell & Co. Ltd. v. ITO applied, suggesting that the arrangement was a tax avoidance scheme. However, the High Court distinguished the facts of the present case from Mcdowell, noting that the customs duty was a genuine part of the purchase cost agreed upon in the contracts. The High Court also referred to UOI v. Azadi Bachao Andolan, which held that a valid legal act cannot be disregarded based on the perceived motive of tax avoidance.

Conclusion:
The High Court answered the question in favor of the Respondent-Assessee, affirming that the customs duty liability was an allowable expenditure for the Assessment Year 1985-86. The Reference Application was disposed of with no order as to costs.