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TMI Blog1987 (3) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... Salt Act, 1944 the liability in this respect had been contested before the High Court of Bombay which, by its interim order given in July 1979, had directed the stay of recovery of this part of the Excise Duty, subject to the assessee furnishing bank guarantees for the relevant amount. In the meantime, the law was amended retrospectively by an Ordinance issued on 24-11-1979, which had become an Act on 26-2-1980. This legislation was also challenged. The High Court decided the matter against the assessee-company on 17-11-1983, but the assessee took up the matter to the Supreme Court, where the matter is still pending. The Supreme Court, by its order dt. 9-12-1983, directed the assessee to pay 50% of the past liability contested and to provide bank guarantee for the balance 50%. 3. The ITO followed his order for the assessment year 1981-82 and disallowed the assessee's claim for allowance of the disputed liability of Rs. 2,07,16,701. 4. The CIT(A) noticed that out of the disputed liability, the demand of Rs. 59,89,393 pertaining to Coorla Unit, was a statutory liability allowable as a deduction, following the decision in the Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the grey cloth. The Gujarat High Court in the case of Vijay Textiles v. Union of India [1979] ELT J. 180, decided that the taxable event being manufacture and the manufacture of cloth being complete at the grey stage, duty was incorrectly levied on the value of the processed fabrics. Accordingly, Vijay Textiles, who were only involved in the processing of fabrics, were held to be not liable to pay excise duty. Pursuant to the said decision, the assessee filed writ petition before the Bombay High Court challenging the levy of excise duty on cotton fabrics and man-made fabrics manufactured by it and/or belonging to the customers and processed by it. In the assessee's Misc. Petition No. 1604 of 1979 before the Bombay High Court, copy of which is at pages 109 to 161 of the paper book, a perusal of the prayer set out in para 22 of the said petition will show that the assessee sought a writ directing that the levy of additional duties on the man-made fabrics manufactured and processed by the assessee and excise duty and additional duty on cotton fabrics manufactured and processed by the assessee be declared ultra vires and pending the final disposal of the said petition, the Court be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the assessee and similar interim orders were passed by the Hon'ble Bombay High Court. Its plea for refund of duty paid in these subjects in the earlier years was stated to have been rejected by the Hon'ble High Court. " " 42. The President of India promulgated an Ordinance (being Central Ordinance No. 12 of 1979) called 'the Central Excises and Salt Additional Duties of Excise Amendment Ordinance, 1979' on 24-11-1979. The said ordinance was replaced by the Act called 'the Central Excises Salt Additional Duties of Excise (Amendment) Act, 1980'. The said Act received the assent of the President on 12-2-1980 with retrospective effect from 24-2-1979. As per terms of the ordinance and the Act, cotton fabrics and man-made fabrics were exigible for Excise duty and additional duty, and provisions were made for validating the levy and collection of Excise duty and additional duty on these items in the past. The assessee recd. the demand notices issued by the Superintendent of Central Excise, Range-VII, in respect of Sewri unit. A detailed compilation of these notices is given at pp. 86A and 86B. 86A deals with the Coorla unit and 86B deals with the Sewri Unit. The assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other decisions relied upon by the assessee correctly interpret the legal position and the assessee was entitled to claim the excise duty and additional duty liability as deduction from the income as it was maintaining the accounts on mercantile system, and provision for the said liability had been made in the books of its accounts. However, he proceeded to examine whether legally enforceable liability had arisen as regards the sum of Rs. 1,10,17,461 covered by show-cause-cum-demand notices received by the assessee in respect of its Sewri unit, the details which are given at page 86B of the paper book furnished before us. These details were also furnished to the ITO. Out of this, a sum of Rs. 1,10,17,561 was disallowed by the CIT(A) on the ground that these were covered by show-cause-cum-demand notices and there was no enforceable demand in respect of the same. The CIT(A), in coming to the conclusion, reproduced old rule 10 of the Central Excise Rules, 1944, which was in force from 6-8-79 till 16-11-80. It was his view that only the first step to consider the possibility of raising a demand under rule 10 was set in motion and this represented proceedings which were not conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liability was staring at the assessee all the time in view of the fact that only the recovery of the amount of liability was stayed by the Bombay High Court in the writ petitions. He submitted that the Commissioner of Income-tax (Appeals) did not appreciate in the proper perspective the show-cause-cum-demand notices issued by the Excise Department. He took us through a sample of the show cause notice (page 96 of the paper book). He emphasised that the liability of the assessee is very clear but the excise department wanted to secure the payment of duty by obtaining bank guarantee in terms of the High Court's directions. This will only emphasise the fact that the liability of the assessee for excise duty and differential duty had accrued. He further submitted that the assessee had received a show-cause-cum-demand notice for the period of goods cleared during the previous year and, therefore, the liability had already accrued due. The assessment is only a matter of procedure in so far as the central excise is concerned, because the duty has to be paid or is payable upon the clearance of goods from specified premises. Therefore, even without completion of assessment, it could be sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground No. 8 of departmental appeal). It has been held in Chowringhee Sales Bureau Pvt. Ltd. per Curium that the appellant would of course be entitled to claim deduction of the amount as and when it pays to the State Government. He also referred to the decision of the Income-tax Appellate Tribunal, Bangalore Bench, in Motor Industries Co. Ltd. v. ITO, wherein it was held that the provision made by the assessee for additional customs duty payable for which no demand was raised by customs authorities during the relevant year was not to be allowed. According to Sri Tuli, the entire liability was a contingent liability fit to be disallowed. " " 49. Sri Anil Diwan in his counter argument submitted that the proposition that the decision of the Supreme Court in Kedarnath Jute Mfg. Co.'s case was overruled by the decision in the case of Chowringhee Sales Bureau Ltd. is not correct and in fact the Supreme Court did not consider or refer at all to the said decision in the Chowringhee Sales Bureau Ltd.'s case. He further submitted that the other cases relied on by the departmental representative are inapplicable to or distinguishable from the facts of the instant case. It was his plea tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts covered by regular demand notices as accounting the accrual of liabilities but did not allow the amount covered by show-cause-cum-demand notices. According to the CIT(A), show-cause notices only form the initial step in the process of assessment and, therefore, unless these steps result in assessment and raising of demand, no accrual of liability takes place. The assessee in its appeal objects to the view taken by the CIT(A). The department in its appeal objects to the conclusion reached by the CIT(A), that in respect of the amounts covered by regular demand notices, the liability had accrued. " " 51. In order to appreciate the rival contentions in the background of the case detailed in paras 39 to 43 of our order, it is necessary to have a look at the scheme of Central Excises and Salt Act, 1944. Section 3 is the charging section. Section 4 deals with valuation of excisable goods for purposes of charging of excise duty. Rule 9(1) deals with time and manner of payment of duty. It has been provided therein, "no excisable goods shall be removed from any place where they are produced, cured or manufactured or any premises appurtenant thereto... whether for consumption, expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before the proper duty has been paid. Rule 49 states that duty is chargeable only on removal of goods from the factory premises or from an approved place of storage. Rule 173A enables the assesses to determine the duty due on the goods and to remove them upon payment of such duty. Rule 173B details the procedure to be followed by the assessee in case an account-current is kept with the Collector of Central Excise. " " 53. A close study of the Act with the Rules thereunder brings out beyond doubt that legal position that the duty on excisable goods is upon manufacture and the charge is crystallised upon removal of the goods from the specified premises. Therefore, the liability for excise duty and additional duty had arisen and had accrued due upon their removal from the assessee's places of manufacture or storage. This view is supported by the ratio of the decision of the Calcutta High Court in the CIT v. Century Enka Ltd. 130 ITR 267. In that case, only show cause notices were issued under the Central Excises and Salt Act, 1944. Demand notices had not been issued by the Central Excise authorities and no process had been started for recovering the same. No penalty had been levie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e processed fabrics (own and others) falling under T.I. 22(1)B without payment of appropriate central excise duty during the period from recovery 1980 to April 1980 whereas you have to pay central excise duty at appropriate rate on man made processed fabric on the value of goods under section 4 of the Central Excise Act, 1944. As per the minutes passed by the Hon'ble High Court dt. 16-7-1979 (vide writ petition No. 604 dt. 19-7-1979 and vide writ No. 156 respectively you have to furnish the bank guarantee for the differential amount of central excise duty between the duty worked out on the basis of grey value and processed value of man made fabrics. In order to enable you to execute the said bank guarantee, this demand is raised.... (figures omitted). (Emphasis ours) From the above, it is very clear that the purpose was only to enable the assessee to provide bank guarantees for the amount involved. In fact, in the case of Indra Match Works v. Supdt. of Excise Duty [1983] ELT 931 (Mad.), where it was contended by the assessee that the proceedings in relation to the notices should have been initiated under s. 11A of the Central Excises and Salt Act (s. 11A is only an adaptation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Factory v. CIT 50 ITR 495. In the former case, the assessee suffered a short age which arose from the processing of tobacco in one year. The Excise Department, which is empowered to levy excise duty in respect of shortages in stocks of tobacco, had the discretion to allow the loss partly or wholly, levied excise duty in respect of short ages in the accounting year 1953-54 in respect of shortages suffered in the accounting year 1952-53. Upon determination of duty on shortages by the Excise authorities, after the exercise of discretion, the assessee claimed the same as deductible expenditure in the year in which the demands were raised. The court noted that the liability to pay duty arose only after the exercise of the discretion of the excise authorities and only after they reached a decision that any duty is payable. Therefore, the court held that the decision of the Central Excise authorities after the exercise of discretion was known only when the demands were raised and it was only a proper claim by the assessee as the liability in his case arose only upon raising of demand. The facts of the case are thus not on all fours with the case before us where there is no discretion left ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee manufactured excisable goods under the provisions of the Central Excises Salt Act, 1944, and the charge is attached to the goods upon removal and the liability had accrued due. Therefore, we reject the argument of Sri Tuli that the said liability is a contingent liability. " " 60. This leaves us to consider the stand of the department raised in the course of arguments and also specifically in the connected departmental appeal ITA No. 3635/B/85 (ground No. 8) that the decision in the case of Kedarnath Jute Mfg. Co. P. Ltd. had been overruled by the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT 87 ITR 542. In that case, the Hon'ble Supreme Court was concerned with the character of the sales tax collected by an auctioneer which was not made over to the State exchequer nor paid to the actual owner of the goods. It was held that the sales tax collected in that case was a trading receipt. There was an observation to the effect that the appellant would be entitled to claim deduction of the amount as and when it pays it to the State Government. In Sinclair Murray Co. (P.) Ltd. v. CIT 97 ITR 615, the issue was similar and the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction in respect of the liability for these duties that is before us and we are of the view that the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. is still applicable, as the assessee's case is very similar to the said case in respect of-- (a) sequence of dates, (b) accrual of liability, (c) dispute by the assessee about its liability, (d) claim before the income-tax authorities as regards deduction of the liability in the computation of its income, and (e) last, but not least, the mercantile system of accounting adopted by the assessee. " " 62. In the result, we set aside the order of the CIT(A) in respect of Rs. 1,10,17,461 as regards excise duty liability of Sewri unit and allow the appeal of the assessee and confirm the order of the CIT(A) as regards Coorla unit and dismiss the appeal of the department on this behalf. " 6. We have reproduced above the order, in extenso, because if no new facts are alleged or are pointed out on behalf of the department and no apparent mistake in appreciation of the facts or of law is noticed, then it would be but proper for us to follow this order. In this order, the departmental representative, Shri Tuli, who had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter the stay order, the excise department had no right to demand and receive the disputed excise duty and the assessee had no obligation to pay the same. He urged that liability was not only postponed, as wrongly held in various reported cases, but there was no liability at all during this year in view of the stay. Mathematical precision was required for liability to be allowed as a deduction. He cited authorities for the meaning of the word "stay" and also contended that this was nothing but a contingent liability. 8. The departmental representative also urged that proviso to s. 145 of the Act applied in this case because though the assessee's accounts were correct and complete, its income could not be computed correctly by allowing the disputed demand. Therefore, he urged, that the order of the CIT(A) disallowing the demand as a deduction should be upheld and we should not follow the earlier order of the Tribunal. 9. Insofar as the earlier Bench of the Tribunal had considered the entire issue, we asked the departmental representative to point out as to what was the reason that excise duty liability, which accrued on the manufacture of an article, should not be allowed as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Vijay Textiles Ltd. v. Union of India [1979] ELTJ 180 referred to in para-39 of the earlier order and re-produced above (which has since been overruled by the Supreme Court in Empire Industries, the assessee started disputing its liability to pay the excise duty on that portion of the value-added to the grey cloth on account of processing and obtained the stay order from the High Court. To hold that because of the stay order by the High Court, which had been granted conditionally on the bank guarantee being furnished, the assessee loses the right to claim deduction of an accrued liability would, in effect, impose a fetter on the person's right to challenge the levy in a court of law. Such a view would, in our opinion, be erroneous in law. If by merely challenging the levy in a court of law, the assessee would be disqualified from claiming the deduction, then, the question would arise as to when the assessee would be entitled to claim the same if the writ is finally dismissed and the stay becomes inoperative ? Certainly, the demand cannot be allowed in the year of payment because the assessee maintains the accounts on mercantile basis. The liability to pay excise duty wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e departmental representative, suffice it to say that as late as in July, 1986, in 161 ITR 524, the Supreme Court in CIT v. Hindustan Hsg. Land Development Trust distinguished the ruling in Kedarnath Jute case, which was cited before it. This clearly shows that the said ruling still has effect and has not been overruled. The Bombay High Court had occasion to consider the Supreme Court ruling in Kedarnath Jute Mfg. Co. Ltd.'s case and CIT v. Tata Chemicals Ltd. [1986] 162 ITR 556 (Bom.). That is a case which was not reported till the earlier Bench of the Tribunal had decided the matter, but is one which, more or less, clinches the issue in favour of the assessee. The assessee in that case produced carbon dioxide for the manufacture of soda ash. The carbon dioxide manufactured by it was used to make soda ash. By a notification, the Central Government exempted carbon dioxide used in the manufacture of soda ash from so much of excise duty as was in excess of Rs. 25 per MT. The assessee received a demand notice for excise duty on carbon dioxide at the rate of Rs. 25 per MT. It filed a writ petition in the Supreme Court that it was not a manufacturer of carbon dioxide and was, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hee Sales Bureau (P.) Ltd. was distinguished because the principal question in that case, was whether the amount of sales-tax collected by the company was a trading receipt or not. In that case, there had been no demand made upon the assessee for sales tax. On the other hand, the Bombay High Court distinguished CIT v. Sinclair Murray Co. (P.) Ltd. [1970] 75 ITR 494 (Cal.) and followed the Calcutta High Court ruling in CIT v. Century Enka Ltd. [1981] 130 ITR 267. In that case, only the Asstt. Collector of Excise had informed the assessee that it was liable to pay excise duty on its production of polymer chips. No demand notice was served on the assessee. The assessee, however, made a provision for liability for excise duty in its accounts which were maintained on the mercantile system of accounting and claimed the amount as a deduction which was allowed by the Calcutta High Court. The case of the assessee before us is far more strong insofar as the assessee has received both the demand notices and had made provision in its books of account and has also subsequently paid 50% of the tax, as directed by the Supreme Court, and only the remaining 50% still remained stayed. There is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1965-66. In the instant case, the Act itself has been amended in 1979 by an Ordinance which became an Act in 1980. This amended Act was in force in the year under appeal. It is not permissible for us to ignore the amended Act in the year under appeal irrespective of the fact that the Supreme Court has granted a partial stay of recovery. There is no stay of the operation of the Act itself. Therefore, the assessee was rightly entitled to the claim of deduction of excise duty in the year under appeal. 14. The departmental representative also relied on Addl. CIT v. U.P. State Agro Industrial Corpn. [1982] 133 ITR 597 (All.) in the case of U.P. State Agro-Industrial Corporation. That was the case of contractual liability and not statutory liability. The High Court held that under the mercantile system of accounting before the credit/debit entry can be legitimately made in the accounts, it must be shown that a certain enforceable liability had accrued or had arisen. Such a liability must be one that has been ascertained and capable of being enforced by the person in whose favour the debit has been raised. The mercantile system cannot be stretched to embrace all sorts of provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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