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2016 (12) TMI 674 - HC - Income TaxDeduction towards the Central Excise on the basis of provision made - matter was under dispute - Held that - The extent of liability of central excise duty payable by the assessee for the assessment year 2009-10 will flow from the final verdict on the legality of the curtailment notification No.17/2008-Central Excise dated 27.03.2008 and although the notification was quashed in the HERBO FOUNDATION PVT. LTD. And Others Versus UNION OF INDIA 2009 (6) TMI 624 - GAUHATI HIGH COURT the consequential departmental challenge to the verdict of the High Court is awaiting finality in the Supreme Court. Thus the precise amount of excise duty payable in the concerned year has remained inconclusive and therefore the reflection of the disputed amount in the books of accounts cannot be said to be an unreasonable act. In our understanding a prudent assessee following the mercantile system can certainly make provision for expenditure towards tax liability even though the assessee may dispute the departmental claim but when the litigation is not yet finalized it cannot be said with authority that the provision made will never be categorized as expenditure for the concerned assessment year. That apart if the Supreme Court finally declares that the curtailment notification of 27.03.2008 is legally unsustainable the revenue will not suffer any prejudice since the department can bring the provisional amount to tax under Section 41(1) of the IT Act. Therefore we are of the considered opinion that the substantial question of law framed in this proceeding has to be answered in favour of the assessee and against the revenue.
Issues Involved:
1. Deduction of Central Excise Duty provision. 2. Justification for provision of excise duty under mercantile accounting. 3. Treatment of disputed tax liability. Issue-wise Detailed Analysis: 1. Deduction of Central Excise Duty Provision: The core issue was whether the assessee could claim a deduction of ?3,43,18,499 towards the Central Excise refund during the assessment year 2009-2010. The assessee's claim was initially disallowed by the Assessing Officer, CIT (Appeals), and the Income Tax Appellate Tribunal (ITAT), which upheld the disallowance on the grounds that the provision for central excise duty was not an ascertained liability but a contingent one. 2. Justification for Provision of Excise Duty Under Mercantile Accounting: The appellant, previously known as Kamakhya Cosmetics & Pharmaceuticals Pvt. Ltd., set up its unit in a tax-free zone and was entitled to 100% excise duty refund until 31.03.2008. However, a curtailment notification issued on 27.03.2008 reduced this benefit to 56%. The assessee challenged this notification and succeeded before the Single Judge, but the decision was stayed pending appeal. The assessee made a provision for the excise duty liability in its accounts for the assessment year 2009-2010, arguing that under the mercantile system of accounting, such provisions are justified even if the liability is disputed and pending final adjudication. 3. Treatment of Disputed Tax Liability: The court examined precedents, including the Supreme Court's decision in Kedarnath Jute MFG. Co. Ltd. Vs. Commissioner of Income-Tax, which supported the view that liabilities under the mercantile system are deductible even if disputed. Similarly, the Andhra Pradesh High Court and Kerala High Court had held that provisions for disputed liabilities are deductible if made in good faith. The court distinguished the present case from the Gujarat High Court's decision in Ideal Sheet Metal Stampings & Pressing (P) Ltd., which dealt with unpaid tax under Section 43B of the IT Act, not with provisions for disputed liabilities. Conclusion: The court concluded that the provision for central excise duty made by the assessee was a reasonable and prudent business practice under the mercantile system of accounting. The court held that the provision could not be dismissed as merely contingent and should be allowed as a deduction. The court also noted that if the Supreme Court ultimately rules in favor of the assessee, the revenue can address the provisional amount under Section 41(1) of the IT Act. Consequently, the court answered the substantial question of law in favor of the assessee, set aside the impugned orders, and allowed the appeal. Disposition: The appeal was allowed, and the case was disposed of with each party bearing its own costs.
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