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TMI Blog1995 (10) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... aid cloth. The assessee as well as various other processors filed Writ Petitions in the Gujarat High Court and the Hon'ble High Court decided the point in favour of the assessee and other processors. In further appeal, the Hon'ble Supreme Court had granted stay in relation to the recovery of the disputed part of the excise duty which was attributable to the value of cloth belonging to the customers. The assessee was duly paying to the Government the excise duty relatable to the job work. As far as excise duty relatable to the value of cloth was concerned that amount, after being collected from the customers, was being separately accounted for. The assessee also obtained certain fixed deposits with the banks in lieu of which the bank had given a bank guarantee in favour of the Excise Department in compliance with the terms of grant of stay by the Hon'ble Supreme Court. 2.1 The Hon'ble Supreme Court ultimately gave the judgment in favour of the Excise Department vide its order dated 4-11-1988. The main judgment was delivered in the case of Ujagar Prints v. Union of India [1989] 179 ITR 317/42 Taxman 151 (SC). The said order was made applicable in the case of other process houses al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomers in their books of accounts in relation to excise duty payments made to the processing units and whether the customers had an over-riding title over the loan amount; (h) Whether the facts of the present case in relation to payments made in FDs with the Banks for arranging bank guarantee in favour of the Excise Department can be treated as almost similar to the facts of the case of Newchem Plastics Ltd. v. Dy. CIT 44 TTJ (Delhi) 261. In this regard the I.T.A.T. further directed to examine the matter---- (i) To examine whether any agreement has been executed by the appellant for furnishing the bank guarantee; whether the bank has agreed to discharge the liability of the appellant after receiving the payment in the form of FDs or what were the other consideration on account of which the banker had agreed to furnish the guarantee in favour of the excise department in terms of stay order granted by the Honourable Supreme Court; (ii) Whether as per the terms of the bank guarantee, the excise department in the event of their success before the Honourable Supreme Court could directly recover the money from the bank against the said guarantee; (iii) To examine whether the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a trading receipt, the assessee has discharged its liabilities, the moment the amount of excise duty collected was put into fixed deposit against which bank guarantee was issued to the Excise Department. The assessee had therefore made constructive payments of the excise duty as collected by putting the amount so collected in the fixed deposits and furnishing bank guarantee against these fixed deposits. In support of this proposition, the CIT(A) relied upon the decision of the Delhi Bench of the Tribunal in the case of Nuchem Plastic Ltd. v. Dy. Commissioner [1992] 44 TTJ (Delhi) 261. 4. Shri R.B. Shah, Advocate appeared on behalf of the assessee. His arguments are four-fold : (a) Firstly, the disputed excise amount which was the subject to the stay of the Supreme Court is not a trading receipt. As per law of Excise, the merchant manufacturers are primarily liable to obtain licence for payment of duty. Under Rule 174A, the merchant manufacturers have been conditionally exempted to obtain registration for direct payment of excise. The excise duty collected from the customers is not payment receivable by him in the course of trading and the same is received purely in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter to the file of the CIT(A) for fresh decision vide their order dated 6th April, 1993 passed in the case of the assessee for the assessment years 1985-86 to 1987-88 made certain observations and gave guidelines at para 10 of the order and all points and issues raised by the Bench had been replied in the detailed submissions filed before the CIT(A) (pages 315 to 319 of the paper book). According to the learned counsel for the assessee the CIT(A) deleted the additions by following the directions and after fully considering the observations of the Bench. He, therefore, submitted that the order of the CIT(A) deserves to be upheld. 5. Shri M.P. Lohia, the learned D.R. submitted that the order passed by the CIT(A) was erroneous inasmuch as it was not based on the correct appreciation of legal position. According to him, in the Scheme of Taxation by the Government, the excise duty falls under the category of 'Indirect Tax'. So is the case with Sales-tax which is also "Indirect Tax". The Hon'ble Supreme Court had examined the nature of the sales tax collected by a seller from the customers in the case of Chowringhee Sales Bureau (P.) Ltd. and Sinclair Murray Co. (P.) Ltd. and held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dir (P.) Ltd. He further submitted that the ratio laid down by the Bombay Bench of the Tribunal in the case of Sunil Silk Mills Ltd. is also not applicable in view of the true nature of the excise duty as held by the Hon'ble Supreme Court in the two recent judgments in the cases of Jonnalla Narashimharao Co. and T. Naggi Reddy. 5.1 As regards the second arguments of the learned counsel for the assessee the learned DR submitted that the argument of the assessee that disputed excise duty cannot be termed as "duty" is wrong. According to him, merely for the reason that the assessee disputed the amount of excise duty payable, the nature of duty does not get changed. In support of this argument, he relied upon the decision of the Calcutta Bench of the Tribunal in the case of Dunlop India Ltd. v. Asstt. CIT [1992] 41 ITD 582. The learned DR further submitted that once the excise duty collections are treated as part of trading receipts, the assessee's contention that no deduction was claimed, and, therefore, section 43B is not applicable, would not survive. 5.2 With regard to the third argument of the learned counsel for the assessee that section 43B read with Explanation 2 was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 43B in right perspective; because if the interpretation given by the I.T.A.T. that bank guarantee should be treated as actual payment is backed by fixed deposits is accepted in all cases as actual payment to the Exchequer, it will defeat the very objective for which the provisions of section 43B were brought on statute book. He further submitted that it is settled canon of interpretation that any statute has to be so interpreted as to advance the object and the purpose behind the statutory provisions and not in such a way as to defeat the very object for which the provisions are brought on the statute book. In support of this proposition, he relied upon the following decisions : (1) CIT v. S. Teja Singh [1959] 35 ITR 408 (SC) (2) Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC) (3) CWT v. Hashmatunnisa Begum [1989] 176 ITR 98 (SC) (4) Petron Engg. Construction (P.) Ltd. v. CBDT [1989] 175 ITR 523/[1988] 41 Taxman 294 (SC) (5) Tinsukhia Electric Supply Co. Ltd. v. State of Assam [1989] 45 Taxman 29 (SC) (6) CIT v. Federation of Indian Chambers of Commerce Industry [1981] 130 ITR 186/6 Taxman 7 (SC), and (7) CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Relying upon the above observations, the learned D.R. submitted that the interpretation made by the I.T.A.T. in the case of Nuchem Plastic Ltd. ignores the very objective of section 43B when it equates the furnishing of bank guarantees as actual payment. The learned D.R. submitted that the Governments are not to run on mere bank guarantees and in support of this proposition he relied upon the judgment of the Supreme Court in the case of Asstt. Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172. The learned DR further drew our attention to an earlier decision of the Tribunal in the case of Purolator India Ltd. v. IAC [1990] 34 ITD 286 (Delhi) wherein the Tribunal held that furnishing of guarantee Bond could not be treated as payment within the meaning of section 43B. He further distinguished the facts of the case from those in the case of Nuchem Plastic Ltd. inasmuch as the assessee himself in written submissions had stated that it had not to keep the full amount in fixed deposit as margin money with the bank for obtaining bank guarantees i.e., the assessee has categorically admitted that bank allowed 50% margin for fixed deposit in case of certain bank guarantees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, the facts have not come out in detail in that judgement but the relevant High Court judgment dealt with by the Supreme Court is P. Krishna Rao v. CIT [1978] 112 ITR 26 (AP). That was the case for assessment year 1968-69 when sales tax in the guise of "Rusumme" was collected when no sales tax was liable at the relevant time. The High Court held it to be illegal collection as is clear from the Head Note and such case would obviously fall under the ratio laid down by the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. The Sales-tax Act in Andhra Pradesh was amended in 1970 with retrospective of feet from 1963 making those amounts taxable but at the relevant time it was not so. The Supreme Court judgment in the case of T. Naggi Reddy is only a four lines judgment merely following the earlier judgment in the case of Jonnalla Narashimharao Co. According to the learned counsel for the assessee, unfortunately the judgment of the Supreme Court in the case of Hindustan Housing Land Development Trust Ltd. was not brought to the notice of the Supreme Court in either of the aforesaid two judgments and the Supreme Court had no opportunity to consider it. The learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which year the bank guarantees were enforced. 7. We have considered the rival submissions and perused the facts on record. In the Scheme of Taxation by the Government, Excise Duty falls under the category of "Indirect Taxes". So is the case with sales-tax which is also an "Indirect Tax". The Hon'ble Supreme Court had examined the nature of sales tax collected by a seller from the customers in the cases of Chowringhee Sales Bureau (P.) Ltd. and Sinclair Murray Co. (P.) Ltd. and held that the sales-tax constituted a trading receipt in the hands of the seller who collects it from the customers and pays to the Government. However, the trader shall be entitled to claim deduction in respect of such realisation or any part thereof as and when he pays it to the Government or to the purchaser. The principles discerned in relation to sales-tax collections have identical application also in case of other imposts such as the excise duty, etc. in view of the case laws --- Partabmull Rameshwar and Bijli Cotton Mills (P.) Ltd. relied upon by the learned D.R. In the case of McDowell Co. Ltd., the Hon'ble Supreme Court has held that excise duty collections made by the assessee are part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is what in sales management is called as pricing theory of "Cost Plus". In fact for that very reason the assessee has to get itself registered with the Excise Department and obtain a licence. The assessee in this case has admittedly got the licence number. Even otherwise, if for the sake of argument it is accepted that the liability for payment of excise duty was that of merchants, even then by virtue of undertakings given by the merchants to the Excise Department in Rule 174A of the Central Excise Rules, 1994 the liability shifts to the Process House i.e., the assessee. Therefore, in any case excise duty remains a statutory duty payable by the assessee. In fact, in the assessee's case and similar other cases of Process Houses the dispute with reference to excise duty was due to the contention that job work processing operations do not amount to 'Manufacture' and the imposition of excise duty on the processor on the basis of the full value of the processed material (inclusive of value of grey fabrics, processing charges and selling profits) is unfair. The contention of the processing houses that "processing" does not amount to "manufacture" was taken care of by retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to the assessment year 1968-69 certain amounts by way of sales tax under the name "rusum" inasmuch as its liability to sales tax was disputed by it and was questioned in various proceedings. (In assessee's case also excise duty has been collected even though it was disputed by him). In 1970, there was a retrospective amendment of the Sales-tax Law as a result of which the appellant's liability was upheld by the Courts. (In assessee's case also there was a retrospective amendment of Excises and Salt Act, 1944 which included "Processing" within the meaning of the term "Manufacture" so as to attract levy of excise duty on processing of cloth beyond doubt). Though the appellant had not remitted the tax during the assessment year 1968-69, it paid the tax later (In assessee's case also though the excise was recovered from the merchants in respective years, it was paid later after the Supreme Court's Judgment in Ujagar Prints' case. The question in Jonnalla Narashimharao Co.'s case was whether the amounts collected by the appellant in the name of "rusum" were the assessee's income and whether the sales tax paid later was allowable as a deduction in the assessment year 1968-69. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of land --- Additional Compensation fixed by arbitrator --- Appeal by Government against award --- Amount deposited in Court --- Assessee permitted to withdraw only on furnishing security --- Additional Compensation does not accrue and not taxable a profit at that stage. Income --- Accrual --- Compulsory acquisition of land --- Right to enhanced Compensation is an inchoate right --- Additional Compensation does not accrue when amount awarded is disputed by Government by filing appeal. " Thus, from the reading of the above Head Notes itself it is clear that the case does not have any bearing to the facts of the present case. In fact, the Hon'ble Supreme Court in the said judgment itself took pains to make it clear that : " There is clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. " In so far as the assessee in question is concerned, there is no doubt that his c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the deduction of the said amount on the basis of Mercantile Method of accounting as section 43B cannot be invoked as the disputed excise amount cannot be termned as duty and/or the assessee has not claimed deduction of the same in Profit and Loss A/C. but credited the same to the Excise Liability A/C. by debiting the separate account of Customer (Excise), is also not acceptable. Once the excise duty collected are treated as part of trading receipts, the assessee's contention that no deduction was claimed and therefore section 43B is not applicable, would not survive. The effect of treating the said collections as trading receipts would mean that the trading account if recast would include the excise duty collection as a part of the turnover on the credit/income side and the net income shown would necessarily imply that the amount of excise duty has been claimed as a deduction on the basis of Mercantile System of Accounting which is now not permissible after introduction of section 43B of the Act. The Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. itself had clarified that crediting sales tax separately in its account books under the head "Sales-tax col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Dunlop India Ltd.'s case when the High Court had stayed the excise duty levy and the assessee contended that the excise duty ceased to be "payable" as far as application of section 43B was concerned. However, after analysing the whole scheme, the Hon'ble Tribunal there did not find the contention of the assessee as acceptable. 7.8 Further, it is significant to note in the case of the assessee and other process houses, the Supreme Court's stay was not absolute but conditional i.e. subject to furnishing of bank guarantee which the assessee by its contention wanted to treat as equivalent to paid. If the excise duty was not "payable" as contended by the assessee, then how is it so that he made a payment of the same (by bank guarantees). In fact, the fallacy in assessee's argument is apparent from the final decision of the Hon'ble Supreme Court in this matter. The extracts from the decision in Ujagar Prints' case are quoted below : " In the result, the appeals preferred by the Union of India are allowed and the judgment of the Gujarat High Court under appeal is set aside. The appeals preferred by the processors against the judgment of the Bombay High Court and the writ petitions f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst Schedule to the Central Excises and Salt Act, 1944, were exempt from a certain percentage of excise duty to the extent that the manufacturers had not availed themselves of the exemptions granted under certain other earlier notifications. The Department was of the view that the company was not entitled to exemption as it had cleared the goods earlier without paying central excise duty, but on furnishing bank guarantees under various interim orders of Courts. The company claimed the benefit of the exemption to the tune of Rs. 6.05 crores and filed a writ petition in the Calcutta High Court and sought an interim order restraining the Central Excise authorities from the levy and collection of excise duty. The learned Single Judge took the view that a prima facie case had been made out in favour of the company and by an interim order allowed the benefit of the exemption to the tune of rupees two crores ninety-three lakhs and eighty-five thousand for which amount the company was directed to furnish a bank guarantee, that is to say, the goods were directed to be released on the bank guarantee being furnished. An appeal was preferred by the Assistant Collector of Central Excise under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the bank for obtaining bank guarantees. It is categorically admitted by the assessee that the bank allowed 50% margin for fixed deposits in case of certain bank guarantees. Therefore, under these circumstances, when the assessee has merrily used funds by way of recovery of excise duty from the merchants and kept only a part of it as fixed deposits, where also the assessee was enjoying the fruits thereof by way of bank interest etc. how it can be said that the assessee should be deemed to have made actual payment of excise duty by furnishing bank guarantee. Further, a specimen copy of the bank guarantee as submitted by the assessee in its paper book also shows that in case of default only by the assessee, the bank will pay the excise duty to the Department. The guarantor has thus undertaken to make good to the Excise Department only in the event of default by the assessee. Therefore the logic explained in the case of Purolator India Ltd. squarely applies to the facts of the present case whereby the provisions of guarantee cannot be treated as synonymous with the actual payment. Thus, the contention of the assessee to treat furnishing of bank guarantee as equal to actual payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l not be out of place to mention that processing on job work basis also includes the processing for sister concerns viz. Vimal Silk Mills, J.K. Silk Mills, Anil Silk Mills. Therefore, in view of these distinguishing facts the decision of the Tribunal in Sunil Silk Mills Ltd.'s case cannot be applied to the facts of the present case. 8.1 As regards the bank guarantee it may be stated that the attention of the I.T.A.T. was not drawn to the observations of the Supreme Court in the case of Dunlop India Ltd. 9. While on the subject we would like to refer to the provisions of Excises and Salt Act, 1944. The provisions of section 11D read as under : " Duties of excise collected from buyer to be deposited with Central Government. Notwithstanding anything to the contrary contained in any order or direction of the Appellate Tribunal or any Court in any other provision of this Act or the rules made thereunder, every person who has collected any amount from the buyer of any goods in any manner as representing duty or excise shall forthwith pay the amount so collected to the credit of the Central Government. " The above provision makes it clear beyond doubt that any payment which falls ..... X X X X Extracts X X X X X X X X Extracts X X X X
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