Full Judgment
2. On 16-7-1980, the assessee received an order from the Central Board of Excise and Customs, classifying Latex Foam Seats manufactured by the assessee as Motor Vehicle Seats and not as 'Latex Foam'. On account of this classification, excise duty was payable at 10 per cent. If the Latex Foam Seats had been classified as 'Latex Foam' excise duty would have been payable at 60 per cent. Thus, the above order of the Central Board of Excise and Customs was favourable to the assessee. Prior to that order dated 16-7-1980, the assessee had been paying excise duty at the rate of 60 per cent under protest. Subsequently, the assessee received an order dated 30-12-1980, from the Government of India, Ministry of Finance seeking review of the order of the Central Board of Excise and Customs dated 16-7-1980 and calling upon the assessee to show cause in this regard. In this order, it was specifically mentioned that if no reply was received from the assessee within 30 days, the case would be decided on the basis of evidence available on record. On 20-1-1981, the assessee filed a writ petition in the Delhi High Court, seeking to quash the review proceedings started by the Government of India by order dated 30-12-1980. The assessee applied for stay of the proceedings before the Government. The High Court passed an order of interim stay on 21-1-1981, which was made effective till further orders. The said writ petition is still pending in the High Court. On 3-1-1981, the Superintendent of Central Excise, Thane had issued notice to the assessee to pay excise duty at enhanced rates. The liability to pay excise duty at the enhanced rate amounted to Rs. 4,92,621 and it was for this liability that a provision had been made in the accounts by the assessee as mentioned above. The assessee claimed deduction of the said amount which, according to the assessee, represented deductible liability. The claim for deduction was rejected by the ITO and also by the Commissioner (Appeals). The assessee has now come in appeal before us and has reiterated the said claim.
3. The main reason given by the lower authorities for rejection of the claim for deduction was that the order of the Government dated 30-12-1980, seeking to review the order of the Board dated 16-7-1980, had been stayed by the High Court, and, as such, there was no existing liability in respect of the said amount. The liability, if any, was a contingent liability for which no deduction was allowable. The learned representative for the assessee has challenged the validity of these reasons for disallowing the claim, while the departmental representative has relied on these reasons to support the order of the lower authorities.
4. We have considered the rival submissions and facts brought on record. In addition to the facts narrated above, we may here refer some additional facts. The question whether the rate of 60 per cent or 10 per cent was applicable in respect of Latex Foam Seats was subject matter of consideration before the Special Bench 'D', New Delhi of the Customs, Excise and Gold (Control) Appellate Tribunal, in Collector, Central Excise v. M.M. Rubber Co. Ltd. and the said Tribunal has by its order dated 18-11-1983 held that rate of 60 per cent was applicable.
Special leave petition filed by M.M. Rubber Co. Ltd. against the said decision of the Tribunal has been dismissed by the Supreme Court and a review petition against dismissal of special leave petition has also been dismissed by the Supreme Court. As regards excise duty liability in respect thereof comes into existence by force of the relevant provisions of the statute. It is not disputed that in regard to the admitted liability for the assessee's keeping mercantile system of accounts, the liability is incurred as soon as excisable goods are manufactured or produced. This is because the taxable events in the case of excise duty is the manufacture and not sale of goods. The excise duty is not directly on the goods but on the manufacture thereof. Consequently, the assessee following the mercantile system of accounting is entitled to claim deduction in respect of such accrued liability on the basis of the provisions made therefor in the books of account even though no demand notice in respect thereof had been served on the assessee. CIT v. Century Enka Ltd. [1981] 130 ITR 267 (Cal.) or even though a writ petition challenging the levy of excise duty on the assessee had been allowed by a single Judge in the High Court and appeal thereagainst was pending-J.K. Synthetics v. O.S. Bajpai, ITO [1976] 105 ITR 864 (All.) As regards unadmitted liability for excise duty, an assessee incurs an enforceable legal liability on and from the date on which he receives the demand for payment and that neither the endeavour made by the assessee to get out of that liability by preferring appeals to the statutory.authorities, in any way detract from or retard the efficacy of the liability imposed upon the assessee-Pope the King Match Factory v. CIT [1963] 50 ITR 495 (Mad.).
Similarly, the fact that upon objection by the assessee, the authorities agreed, in a subsequent year to reduce the duty would not affect the assessee's right to claim the deduction. This was laid down by the Bombay High Court in Shrikant Textiles v. CIT[1971] 81 ITR 222.
In L.J. Patel & Co. v. CIT[1974] 97 ITR 152, the Kerala High Court has held that the liability of the assessee, following mercantile system of accounting, to pay excise duty arose in 1952 in which year the goods were manufactured although the assessee was contesting that liability and the amount was actually paid in 1962. The High Court rejected the claim for deduction in the assessment year 1963-64, wherein the amount had been paid on the ground that liability had arisen in the assessment year 1953-54. The above-mentioned principles shall have to be borne is mind for deciding the question whether the amount of Rs. 4,92,621 was allowable as deduction in the present case. As already stated the Central Government has started proceedings to review the order of the Board dated 16-7-1980 and the Government has already directed that the order of the Board dated 16-7-1980 shall remain stayed. Consequently, as a result of the order of the Central Government dated 30-12-1980, the order of the Board declaring 10 per cent as the rate of excise duty, was not enforceable. In addition, the Superintendent of Central Excise has by notice dated 3-1-1981 demanded excise duty at enhanced rates. In the face of this notice read with the order of the Government dated 30-12-1980, when the assessee made provision for the above-mentioned amount, in respect of liability to pay excise duty at enhanced rate, it must be held that the said provision had been made in respect of liability which was staring in the face of the assessee. No prudent businessman would fail to make the provision for such liability in these circumstances. Consequently, the said liability must be held to be a liability which had arisen in the relevant accounting year and under the mercantile system of accounting deduction in respect of the said liability was allowable particularly when a provision had been in the accounts. The fact that the assessee was challenging the said liability in the writ petition would not make any difference in the legal position. Similarly, the fact that the High Court had granted stay of operation of the order of the Government would also not make any difference. This is because the order of the stay is an interim order. By that order the dispute has not been finally decided. The essential question is whether on the preponderance of the circumstances, the liability can be said to be real and not merely imaginary. The question whether excise duty was payable at 10 per cent or 60 per cent was a highly debatable question. In all the previous years, the assessee had been paying excise duty at 60 per cent. In the present year, the only event that happened is that the Board gave a decision to the effect that rate of 10 per cent was applicable.
However, soon thereafter, the Government stayed the said order of the Board. Consequently, that order of the Board was not effective. It is true that the High Court has stayed the order of the Government.
However, that order has been passed in order to maintain the status quo. On account of the said order of the High Court, it cannot be said that the liability itself had disappeared. The effect of the order of the stay was to postpone the date of payment if, ultimately, it is held that rate of 60 per cent was justified. In addition, as already stated, there is a decision of the Customs, Excise and Gold (Control) Appellate Tribunal which goes against the assessee and the Supreme Court has refused to grant special leave against the decision of the said Tribunal. Considering all the circumstances, in the light of the principles laid down in several decisions, we are of the opinion that in the present case the claim for deduction of the said amount was allowable under Section 37 (1) of the Income-tax Act, 1961 and that mere fact that the assessee had obtained interim stay order from the High Court would not disentitle the assessee to claim the said deduction. We, accordingly, set aside the orders of the authorities below and direct the ITO to allow deduction of the said amount after verifying the fact that it represents liability to pay excise duty at enhanced rate.