9911796707
TMI Blog2003 (11) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the extent warranted by what is called matching principle in mercantile system of accounting, to which we have referred to hereinabove. We are of the opinion that the view taken by the Special Bench in KCP Ltd. s case is clearly supported by the decision of the Apex Court in the case of British Paints India Ltd. In the present case, the countervailing excise duty had only been reflected as prepaid expenses. To our mind, it has correctly been so reflected. It has been so reflected correctly and does not require any adjustment in the computation of income. The adjustment claimed by way of a deduction for the prepaid taxes is out of the apprehension that it cannot be allowed in subsequent year because of the provisions of section 43B. That apprehension, to our mind, seems to be misplaced because the scope of section 43B is to disallow deduction for an otherwise allowable liability on the ground of non-payment, but when the payment had already been made and the payment is transferred to the trading account in the next year, it becomes allowable as part of cost of goods sold, and no separate deduction is called for. It is not for us at this stage to give any direction as to what sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For importing liquor from outside the State, the assessee has, to obtain necessary permit by paying what is called as 'countervailing duty' in terms of section 21 of the Andhra Pradesh Excise Act, 1968. The said section of the Excise Act reads as under :- "21. The Government may, by notification, levy an excise duty on any excisable article manufactured or produced in the State at such rates, not exceeding the rates mentioned in the schedule, as may be specified in the notification. (2) The Government may, by notification, levy a countervailing duty on any excisable article manufactured or produced elsewhere in India and imported into the State at such rate as may be specified..." 4. Under Rule 4 of the Foreign Liquor and Indian Liquor Rules, 1970, framed under the said Act, a holder of wholesale licence for the sale of foreign or Indian liquor desiring to import from outside the State shall apply to the Collector in Form No. EL-I for grant of an import permit. Under Rule 6, the Collector, after making such enquiries as he deems fit, and subject, inter alia, to the following conditions, may issue the permit- (i) The applicant has paid and produced the chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability to pay the duty is incurred when the goods are brought into the State and so, the payments represented only advance payments, and they were not paid towards discharge of the statutory liability in the concerned year. He also held that the payments would go to increase the value of the purchases, arid if not sold up to the end of the year, they would increase the value of the closing stock, independent of the fact whether relatable goods were finally received or not in the concerned previous year. 8. On appeal, the CIT(A) however held that the assessee had not received the relevant stocks during the previous years under consideration, and so, there was no question of taking it into purchases or closing stock. He further held that such payments were made towards the discharge of a statutory liability and so the deduction was allowable under section 37 of the Income-tax Act read with section 43B. The CIT(A) framed the following issues as arising for consideration in these appeals- "(1) Whether the countervailing duty is different from the excise duty (2) Whether it is paid by the appellant itself for importing the goods or it is paid on manufactured items, by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 43B. But, in my opinion, this being a statutory obligation, and the demand having been paid during the year of account, is to be allowed. The expenditure has been incurred in respect of a business the profits of which are assessable to tax, I do not agree with the views of the assessing officer that at the time of making the order for the goods, the appellant entered into an unconditional contract with the manufacturer and the goods had passed to it at the time when the order was accepted by the producer. Because, between the period of making the order and the arrival of goods inside the boundary of the State hundred and one situations may take place. Hence, by making the order of consignment, the appellant has not entered into an unconditional contract. 31. In view of the above discussion, I am of the opinion that the claim is to be allowed as a deduction in the year in which it is paid i.e. the previous year, under section 37 read with section 43B. I direct the assessing officer to allow the claim of Rs. 25,36,671 and Rs. 58,44,632 for the assessment years 1990-91 and 1991-92." Revenue came up in appeal before the Tribunal questioning, inter alia, deletion of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [2001] 251 ITR 337, indicating that incurring of liability is a must for allowing deduction under section 43B. 3. In view of above, it is requested that considering the earlier decision of Hon'ble Special Bench on the issue as well as the view of Hon'ble jurisdictional High Court on the similar issue, the action of the Assessing Officer in disallowing advance payments of excise duty may kindly be upheld on the facts of the case." 11. In short, the learned CIT (DR) submitted that the amounts of Rs. 25,36,671 for the assessment year 1990-91 and Rs. 58,44,632 for the assessment year 1991-92 represented the part of purchase price of the stock in trade, and that it is a direct expense relatable to the stock in trade. He, however, held that, though the amount is payable in the relevant previous year, no particular liability has been incurred inasmuch as the amounts represented only a part of the purchase price of the stock. He also relied upon the decision of the Apex Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 and argued that the amounts have to be either taken to the Trading Account in this year as part of the purchase price and closing sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or and beers from outside the State, to carry on his normal business and when he applies for a permit he has to pay the countervailing duty. He explained that there is always a time lag between the placement of the indent on the supplier and the receipt of the goods from the supplier. Summer is the peak season for the consumption of the beer. When the assessee places the indent in March i.e. the last month of the previous year; he gets the goods in April which falls in the succeeding year. There is no question of any manipulation of figures or permits because the time lag between the date of indent and the date of receipt of the goods is inevitable and considering the scale of operations of the assessee, the amounts left as prepaid expenses are not at all abnormal. 14. Referring to the contention of the learned assessing officer that the countervailing duty in question is paid by the assessee on behalf of the manufacturer, the learned counsel for the assessee argued that such is not the case. He explained that the countervailing duty is paid by the, assessee in its capacity as wholesaler and not on behalf of the manufacturer. He referred to the decision of the Apex Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 43B even when they are taken into closing stock, upon corresponding reduction of the opening stock of the subsequent year. He also relied upon the decision of the Calcutta High Court in the case of CIT v. Berger Paints (India) Ltd. (No.1) [2002] 254 ITR 498 in which it was held that excise duty was deductible in the year of payment and that the assessee cannot add the duty paid in one year to the extent relatable to the unsold goods relating to closing stock and claim deduction in the subsequent year as opening stock, and that such a claim would be contrary to the provisions of section 43B. 17. Similarly, the learned counsel for the assessee relied on the decision of the Hon'ble Allahabad High Court in the case of CIT v. CL Gupta & Sons [2003] 259 ITR 513 in which it was held that customs duty paid in March, 1987 was allowable as deduction in the assessment year 1987-88 even though the relevant goods were received in the subsequent year, viz., 1988-89. 18. The learned counsel for the assessee further relied on the decision of the Hon'ble Madras High Court in the case of Chemicals & Plastics India Ltd. v. CIT [2002] 125 Taxman 648 in which it was held that even where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basic differences pointed out, it is submitted that the Special Bench decision cannot be considered as affording a precedent of a binding nature. However, it is worth noting that the Bench considered levies such as property tax and held that they were incurred during the previous year by virtue of the demand raised in the same year, and therefore the entire payment including what the assessee considered as prepaid in its accounts has to be allowed as deduction. This finding in fact advances the claim of the assessee in the present appeal inasmuch as taxes duty and cess fall in the same category viz. statutory liabilities and call for same treatment. In fact they are clubbed together for similar treatment under section 43B of the I.T. Act." 20. The learned Departmental Representative, in his rejoinder argued that the decisions relied upon by the learned for the assessee are all distinguishable. He pleaded that the points of distinction between the present case and that considered by the Special Bench in KCP Ltd.'s case made out on behalf of the assessee, are not valid. In this context, the written submissions of the learned Departmental representative read as follows; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther relied on the decisions of Hon'ble Special Bench, Delhi reported in 49 ITD 21 and 49 ITD 56. It is submitted in this connection that both the decisions quoted by assessee's authorised representative are distinguishable as the same dealt with the issue of valuation of closing stock after the goods had entered into assessee's business and then in the income computation. In the present case there is no dispute about the valuation of the stock because the goods had not been imported by the assessee from other states and whatever amount was paid by him is only in anticipation of future transactions for purchase of goods. The duty paid cannot be considered in isolation and it is linked to the future import of goods into the State. If for any reason, the goods could not have been delivered to the appellant, the duty so paid would become refundable to the appellant and therefore before the actual delivery of goods, the duty was rightly shown as 'prepaid duty' in the Balance Sheet by the appellant. The prepaid duty is only setting apart money which might become expenditure on the happening of an event i.e. the import of goods into the State and therefore at best, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stinguishable for the reason that in the present case, goods in respect of which advance payment is made have not arrived or entered into assessee's business activities during the relevant previous year and, therefore, the liability has not accrued in the relevant previous year in any sense and even presuming for a while for argument's sake that it is a liability of this year, it is at best a contingent liability which cannot be allowed as a deduction in this year." 22. We are of the view that the Revenue deserves to succeed. Countervailing duty has been paid in compliance with the statutory requirements as a precondition for the import of goods from outside the State. The learned counsel for the assessee has claimed it as a liability, which has crystallized during the year. A liability in its strict sense represents an amount due for payment for the economic benefit already received. When goods are purchased or other expenses directly referable to the goods are incurred, it is not, to our mind, correct to describe it as a liability incurred. Stock-in-trade is an asset acquired and subsequently becomes business expenditure when it is sold. If there is a credit purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrespective of the manner of use/ disposal of goods thereafter, e.g. sale, destruction and captive consumption. It does not cease to be a levy merely because the same may be remitted by appropriate authority in case of destruction or exempted in case goods are used for further manufacture of excisable goods in the factory. Tax (other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expenditure incurred by him and it does not cease to be an expenditure merely because it is exaction or a levy of because it is unavoidable. In fact, in a wider context, any expenditure is an imposition which a manufacturer would like to minimize. 11. Excise duty contributes to the value of the product. A 'duty paid' product has a higher value than a product on which duty remains to be paid and no sale or further utilization of excisable goods can take place unless the duty is paid. It is, therefore, a necessary expense which must be incurred if the goods are to be put in the location and condition in which they can be sold or further used in the manufacturing process. 12. Excise duty cannot, therefore, be treated differently from other e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are separately determined, and an item which is not debited to the manufacturing account can still be regarded as a trading expense. Net profit is arrived at after ascertainment of manufacturing profit and trading profit. So, when, the Apex Court mentioned that the excise duty is not a manufacturing cost but falls for consideration in determining the net profit, it does not, to our mind, follow that it is not an item falling for consideration in the determination of gross profit which is the relevant item of profit for considering the issue before us. 28. In the case of Food Specialities Ltd. wherein claim for deduction of excise duty relatable to the goods sold was involved, it was, as per the relevant portion of the head-note observed as under:- "Excise duty is a levy, on the 'manufacture' or 'production' of goods and not related to a stage prior to the completion of the manufacturing or production process, but to a stage thereafter, viz. Post-manufacture and on coming into existence of a marketable commodity. The very basis of quantification of excise duty is related to the value to be placed on the commodity (i.e. the selling price) and if that be so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing profit and gross profit. As to our mind, the decision of the jurisdictional High Court in the case of Gopi Krishna Granites India Ltd. v. Dy. CIT [2001] 251 ITR 337(AP) is against the decision of the Special Bench of the Tribunal, we are unable, with respect, to follow the said Special Bench Decision of the Tribunal. Similar is the position with the decision of the Special Bench of the Tribunal in Indian Communication Network (P.) Ltd.'s case. 30. In the case of CL Gupta & Sons, which is in favour of the assessee, on the scope of section 43B, Hon'ble Allahabad High Court observed as under: - "In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it is deductible only in the year in which it is actually paid, i.e. for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of the method of accounting regularly adopted by him. Section 43B in clear terms provides that the deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity to financial institutions and not statutory liability like excise duty. The point is not whether the liability is contractual or statutory. The question is whether a deduction for payment can be allowed in terms of section 43B even when the liability for the payment did not accrue in the relevant previous year. To our mind, the Hon'ble jurisdictional High Court has clearly held that under section 43B only a disallowance can be effected for non-payment of an accrued liability, and no deduction can be allowed simply because payment had been made when there is no liability incurred for the said payment, whether the payment is towards statutory liability or contractual liability. As the ratio laid down by the Hon'ble Allahabad High Court in the case of CL Gupta & Sons and Hon'ble Calcutta High Court in Berger Paints (India) Ltd.'s case and Hon'ble Madras High Court in the case of Chemicals & Plastics India Ltd. is not consistent with the ratio laid down by the jurisdictional High Court in the case of Gopi Krishna Granites, we feel bound by the decision of the jurisdictional High Court. 34. In the case of Amforge Industries Ltd., decided by the Bombay Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Lakhanpal National Ltd. is distinguishable. At any rate, if the said decision has to be construed as supportive of the stand of the learned counsel for the assessee that deduction under section 43B can be allowed on payment basis irrespective of the fact whether the liability for the same accrued or not, we have to follow the contrary view of the jurisdictional High Court in the case of Gopi Krishna Granites India Ltd. which is the binding decision. We may also mention that we have already pointed out that excise duty, though a statutory levy, is a legitimate business expenditure. 36. We find that the Bombay Bench of the Tribunal in the case of Amforge Industries Ltd. has also referred to the Special Bench decision in the case of KCP Ltd and observed as under:- "14. On a reading of the complex provisions of section 43B as a whole, we find that it cannot be pressed into service to claim a deduction otherwise not available to the assessee. In other words, the assessee must incur liability of the nature mentioned in various clauses in the first instance. Thereafter the year of allowability would be determined on the basis of the year of actual payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as a deduction in this year. The Income-tax Officer was of the view that the pre-paid taxes were not payable by the assessee under any law and, therefore, disallowed the claim to be considered during the year in which the taxes were payable under the law. On appeal, the Commissioner (Appeals) was of the view that the relevant question was whether the, expenditure related to the year of account and only if there was a provision for the expenditure, section 43B could be invoked. He accordingly confirmed the rejection of this claim. 26.3 Before us it was contended on behalf of the assessee that since the assessee had admittedly paid all the taxes and under section 43B taxes are to be allowed as a deduction on payment, the claim of the assessee should be accepted. On the other hand, it was contended on behalf of the revenue that since the expenditure had not been claimed as a deduction under the profit and loss account, it was not required to be considered. 26.4 On a consideration of the rival submissions, we are of the opinion that the provisions of section 43B have no relevance to the issue. That section only enables the Income tax Officer to disallow the claim for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have not entered into the computation of the value of stock sold during the previous year the apportionment made by the assessee will have to stand. This is because, if such prepaid taxes are to be taken into account then valuation of closing stock has to be revised as a consequence, with the result that only will it meet an unnecessary recomputation but the result may, not also be significantly different. In the circumstances, we direct the ITO to verify the above expenditure and allow such expenditure as have been incurred in the previous year and apportioned on time basis. But prepaid taxes apportioned on the basis of stock valuation need not be considered for such deduction. The ITO is directed to recompute the total income." 38. From the above, it is clear that what is allowed is only levies like property tax for which there is a demand. Such levies, though the represent prepaid expenses in the books, are held to be allowable. Whereas levies referable to the stock in trade like the excise duty are clearly not held allowable. It was also mentioned that, if the prepaid excise duty is allowed as an expenditure, there should be a revaluation of the closing stock, which woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in case where such costs is separately charged." This definition is in two parts. The first part says that 'sale price' means the amount payable to a dealer as consideration for the sale of any goods. Here, the concept of real price or actual price retainable by the dealer is irrelevant. The test is, what is the consideration passing from the purchaser to the dealer for the sale of the goods. It is immaterial to enquire as to how the amount of consideration is made up, whether it includes excise duty or sales tax or freight. The only relevant question is as to what is the amount payable by the purchaser to the dealer as consideration for the sale and not as to what is the net consideration retainable by the dealer. 8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily it is not shown as a separate item in the bill, but it is included in the price ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in subsequent year because of the provisions of section 43B. That apprehension, to our mind, seems to be misplaced because the scope of section 43B is to disallow deduction for an otherwise allowable liability on the ground of non-payment, but when the payment had already been made and the payment is transferred to the trading account in the next year, it becomes allowable as part of cost of goods sold, and no separate deduction is called for. It is not for us at this stage to give any direction as to what should happen in the subsequent year. However, the amount of Rs. 25,36,671 disallowed in the first year deserves to be taken to the assessment year 1991-92 as part of the cost of the goods sold in that year. We hope that a similar treatment would be given for the amount of Rs. 58,44,632 involved in the second year, viz;, assessment year 1991-92 in its succeeding year. 43. For the above reasons, we answer the question referred to us in the negative and in favour of the Revenue and hold that the excise duty paid in advance cannot be allowed as a deduction under section 43B because the goods have not been received during the year. 44. The matter may now go before the regular Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X
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