1. Both these appeals are directed against the order dated 1-5-1985 passed by the Commissioner of Income-tax (Appeals)-V, New Delhi (Shri R.S. Rathore). They involve a common ground and, therefore, they are consolidated and disposed of by this common order.
2. Common ground - The revenue has grievance against deletion of the addition of Rs. 4,37,837 (out of addition Rs. 5,19,443 made on a/c. of excess breakage/damaged bottles ; and the assessee has appealed against partial relief sustaining balance. This common ground concerns the claim in respect of breakage in empty bottles, shown in the consumption of stores and spares vide Schedule 13 appearing on page 28 of the audited accounts.
2.1 The Assessing Officer found that breakage of bottles as claimed was highly excessive. After considering the relevant facts the claim of breakage of bottles at 5 per cent of the consumption shown in respect of bottles of 750 ml. (mililitres) size was adopted for allowance. One of the factors considered by him was the position in assessment for assessment year 1980-81 where such claim was restricted to 5 per cent with the approval of Inspecting Assistant Commissioner under Section 144B. In respect of the simliar claim for bottles of other sizes, he adopted the rate of 10 per cent as against higher percentage of breakage claimed by the assessee.
2.2 The CIT (Appeals), however, approached the issue on the basis of percentage of breakage taking the aggregate quantity of bottles of various sizes. Giving a finding that in the absence of proper records for the deficiency recorded on periodic inspection he estimated percentage of 11 per cent to be reasonable and applied the same to the aggregate claim made by the assessee and thereby gave partial relief, sustaining disallowance of Rs. 81,606 as against Rs. 5,19,443 disallowed by the Assessing Officer.
2.3 At the time of hearing before us the representative of the revenue took a strong exception to the manner in which the Commissioner (Appeals) ignored the basis adopted by the assessing officer, It was contended that when the assessing officer had given various data on the basis of which the deficiencies were worked out separately in respect of two categories of the bottles, the CIT (Appeals) should not have proceeded on the basis of combined figure. In doing so the CIT (Appeals) fell into error. There was no material with the assessee which could justify the claim of breakage to such an extent. Since the claim was highly excessive, scrutiny of the claim was "made in this year and on the basis of evidence adduced the assessing officer had given the correct finding. The learned representative of the assessee, on the other hand, submitted that breakage of the bottles whether excessive or otherwise comparatively, was incidental to the business.
No dispute was raised in regard to the purchases effected by the assessee. No dispute was raised either on the basis of suppressed sales. Therefore, the assessee's claim should have been accepted. He then brought to our notice the ways such bottles were purchased and transported to the premises of the assessee's factory.
2.4 For appreciating such type of claim necessarily a perusal has to be made of the audited accounts of the company together with auditors' report as also Directors' report and quantitative details published consequent to the requirements under the Company Law. Such accounts were not placed before us at the time of hearing. This very representative Chartered Accountant had been informed earlier that in cases involving corporate taxes the audited accounts etc. must be placed before Bench. After repeated requests one copy of the audited accounts was submitted by the representative assisting the learned Chartered Accountant appearing before us. The reason for such reluctance could perhaps be grasped from the discussion which follows : On going through the accounts, we find that in note No. 3 annexed to the auditors' report it is specifically mentioned by the auditors that physical verification of stores and spares is in process of completion and, therefore, no adjustment was made on account thereof. Similarly Note 8 on page 10 of the report states that unserviceable, damaged or obsolete stores, spareparts, etc. were in the process of being determined by the company and that adequate provisions for the loss, if any, will be made in the accounts in due course, if necessary. It appears that the authorities below have not seen the above remarks given by the statutory auditors in respect of the accounts/ claim. None of the representatives, before us, brought to our notice this important aspect noted by the statutory auditors and what was the position when the verification was complete. On a query from the Bench in respect of the similar claim for the earlier year it was submitted that for assessment year 1980-81 the matter was pending before the CIT (Appeals). In respect of the subsequent years also the matters are pending before the first appellate authority. Further from reports, we find that the asses-see is obliged to maintain cost accounting records according to the provisions of Section 209 of the Companies Act and the same are also maintained as stated in Note 12 of the auditors' report.
In the cost accounting records, if maintained properly, obviously periodical data in respect of the breakage of the bottles must have been considered while preparing the cost accounting data from time to time. In view of foregoing discussion, in our opinion, the matter requires reconsideration by the CIT (Appeals), We, therefore, restore this issue to his file with the direction to redecide the issue after giving reasonable opportunity to the assessee as also to the assessing officer. It would be necessary for him to bring on record reasons for deviating from the basis adopted by the assessing officer. It would also be advisable to adjudicate the assessee's claim for earlier assessment year first, so as to give proper data for comparison.
Accordingly, this issue is restored.
3 and 4. [These paras are not reproduced here as they involved minor issues.'] 5. The first ground relates to an amount of Rs. 2,09,093 being an amount added by way of deemed interest receivable from M/s. Narang Breweries.
5.1 The assessee-company is a partner in a partnership firm by name M/s. Narang Breweries. The aasessee is having 2.5 per cent share in profits/losses of the firm. As per clause 3 of the reconstituted partnership interest is payable by the firm on advances made by a partner at the rate of 12 per cent per annum or such higher rate as may be mutually agreed upon. The assessee did not charge, on such advance or debit any interest in the account of the said partnership firm, in its own books of accounts. The assessing officer found that the assessee had been paying interest of Rs. 6,00,000 approximately on boirowings. The explanation of the assessee that the partnership firm had suspended manufacturing activities .was rejected on finding that the said firm had restarted production in the year 1981. He also rejected the contention that financial position of the partnership firm was weak. Accordingly, he made addition of Rs. 2,31,182 being deemed interest receivable from firm, as per terms of the deed.
5.2 Before the CIT (Appeals) various contentions were raised as given at length in para 7.1 of the appellate order. The CIT (Appeals), however, found that the facts of the case were similar to those of the assessee's case for assessment year 1976-77 where the Tribunal had decided the issue in favour of the revenue and therefore, the inclusion was required to be upheld. However, on the basis of direction in respect of the calculation of the interest he granted relief partially sustaining an amount of Rs. 2,09,093.
5.3 Before us the learned representative of the assessee submitted that : (i) The facts for assessment year .1976-77 were distinguishable especially because the CIT (Appeals) had ignored the resolution passed by the assessee-company in 1979 as also in 1980 waiving right of interest voluntarily. The resolutions were brought to our notice.
In the year -under consideration the firm did not credit interest to the account of the assessee-partner and, therefore, the conduct of the partner reflected that no interest accrued to the assessee. For this proposition reliance was placed on in the case of CIT v. D'Costa Bros. [1963] 49 ITR 1 (Bom.) and in the case of CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.). Further reliance was also placed on in the case of CIT v. S.P. Jain [1987] 167 ITR 161 (SC).
On mention from the Bench for reference to the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), it was submitted that observations at page 104 as stated in the head-notes (majority view) favoured the assessee because while considering the real income theory the factum in respect of surrendering of right was required to be considered and if it was so the theory of real income would be applicable. Besides in the case of Narang Bros. & Co. Ltd. [IT Appeal Nos. 5417 to 5419 (Delhi) of 1984] on similar facts the Tribunal had deleted such addition for assessment years 1981-82 and others vide order dated 30th May, 1986.
5.4 The learned Departmental Representative, on the other hand, strongly supported the appellate order on the basis that the agreement in respect of charge of interest was in writing and, therefore, subsequent variation, if any, on the basis of oral assessment as stated could not alter the position. There was no evidence in writing in respect of the cessation of liability regarding interest payable.
5.5 On going through the entire material to which our attention was drawn, it appears we should decline to interfere. Again on perusing the audited accounts there is a note appearing on page 22 in respect of the accounts of the partnership firm for the year ended on 31-12-1979 where the auditors of the firm have qualified the report stating that interest on the partners' current accounts had not been provided, indicating existence of firm's liability. Coming to the decisions cited before us, in the case of S.P. Jain (supra) the issue was concerning the accrual to the assessee of salary in respect of two-months in the previous year. The Supreme Court held that the salary did not accrue to the assessee bacause resolution for payment of salary to the assessee came later yet earlier there was an oral agreement which had been believed by the Tribunal. So, the question turned mainly on belief of the Tribunal accepting the factum regarding oral agreement. In this case there is no belief by Tribunal of such oral agreement. Evidence is only in respect of unilateral resolution passed by the assessee-company, taking a decision not to charge interest in view of the absence of source of income to the partnership concern as stated in the Director's report for the year ended 31-12-1980. But this aspect does not cancel or suspend the accrual of income. Under the agreement, the partnership firm is liable to pay interest at the rate of 12 per cent or higher rate, as may be agreed upon but it does not speak of lower rate of interest. Similarly, in the case of D'Costa & Sons (supra) note was taken in respect of the conduct and the manner in which partners acted reflecting implied contract. In case before us other party says interest is payable. Signing of accounts only speaks of confirmation of accounts. But does not absolve the firm from liability to pay interest. In the' case of Motor Credit Co. (P.) Ltd. (supra), the facts were that the assessee-company as financiers advanced certain moneys to persons plying buses. The routes of plying buses were taken over by the State Transport Corporation and, therefore, the debtors defaulted in making payments and consequently the buses were seized. The assessee-company was advised that there was no prospect of recovery of even the principal amount and, therefore, the carry forward of the interest in the accounts was not a advisable.
The Tribunal held that the assessee could not have expected to get any interest income on the outstandings and it would be only unrealistic to take credit for the interest. This decision was upheld by the Madras High Court holding that such credit was highly illusory. The facts under consideration before us are different, apart from the fact that now Supreme Court decision is available subsequent to the Madras High Court decision which was referred to earlier in the case of State Bank of Travancore (supra). In the case before us there is positive finding given by the assessing officer that the debtor firm started manufacturing activities in 1981. Moreover, if we look at the constitution of the partnership firm as given on page 22 of the published copy of the audited accounts it is seen that all the five partners are public limited companies. The major partner holding 90 per cent share is Basti Sugar Mills Co. Ltd., which has undertaken to contribute fixed share capital to the extent, of Rs. 12 lakhs as against Rs. 1 lakh undertaken by the other bodies corporate. There is no material or even everment that if ultimately the amounts are sought to be recovered on dissolution of the partnership firm, it would not be possible for the assessee-company to recover the same from the other partners on final adjustment of the accounts among them. This factual aspect gains more emphasis when we find that no written agreement amongst the partners is executed with regard to cessation of liability in respect of interest payable by the firm. On a straight question from the Bench to the learned Chartered Accountant that instead of going round about, by way of passing resolution from year to year on the basis of voluntary act, etc., why no amendment was sought to be made by the partners by reducing in writing by all partners specifically that no interest would be payable on such advances, there was no answer.
Coming to the case State Bank of Travancore (supra), again the same would not salvage the case of the assessee because there is no surrendering of such right before accrual. On the contrary on the evidence laid and perused by us it appears that there is no such surrender even after accrual. Therefore, the ratio of decision in the case of State Bank of Travancore (supra) would tilt in favour of the Revenue. In the decision given by the Tribunal in the case of Narang Breweries Co. the explanation was substantiated on the basis of accounts of the assessee in the books of the partnership firm and the balance sheet of the firm where the loan from the assessee-company was shown as loan bearing no interest. Considering this fact, the Tribunal took the view that there was an agreement between the assessee and the loanee not to charge any interest. Before us no such evidence is laid.
Again the Tribunal in the said decision was concerned with the balance-sheet as on 31st December, 1976 relevant to the assessment year 1977-78 and in the absence of any distinguishing feature for assessment year 1981-82 the decision was applied for the assessment year 1981-82 also. The decision in the case of State Bank of Travancore (supra) was distinguished on the basis that in the opinion of the Tribunal there was an agreement between the parties. As we have discussed earlier, on the facts now found in respect of this year we find ourselves unable to come to the conclusion that there was any such agreement. If it is really the case that by conduct of the parties it was to be inferred that there was an agreement or variation in the agreement in respect of the clause for payment of interest, then how is it that in the report dated 27th November, 1982 the auditors of the partnership firm had qualified the report (page 15 of Paper Book A) by stating that the interest on partners' current accounts for the period ending on 30-11-1980 had not been provided. This distinguishes the case of Tribunal relied, upon. Such auditor's report has to bo obtained as per the clause 6 of the partnership deed where it is stated that the accounts will be got duly audited and certified as correct and shall be binding on all the partners unless the mistake therein is pointed, out by any of the partners within three months. Such qualification by the firm's Chartered Accountants reflect the correct position. Moreover, it clearly negates any other inference to be drawn from, the conduct of the parties. Again if agreement is required to be inferred from the conduct of the parties then how is it that the assessee-company goes on passing every year Board's resolution stating that no interest is charged in respect of the year ended earlier, because if such an agreement is really existed then there is no need to pass unilateral resolution every year. One more interesting aspect of the case is that all the five partners are limited companies and, therefore, how can there be such oral agreement/or deemed agreement. Further the auditors of the assessee-company on accounts of the year under consideration states at page 9 of the balance-sheet that "the Directors are of the view that the partnership concerned is not in a position to pay the interest hence no interest has been charged from it for the year under report. In our opinion, interest should have been charged from the partnership concern as provided in the partnership agreement". Further a cursory look of the balance-sheet of the partnership firm reveals that an amount of Rs. 25 lakhs plus is recoverable from partners of the firm'. As against this the interest income showed is Rs. 34,000 plus.
The appraisal of the various balance-sheets of the assessee-company and the partnership firm reflect many interesting aspects but we would stop at this since no further elaboration is now considered necessary except that assessee ought not to have agitated. The other contentions raised before the CIT (Appeals) on this issue were already rejected by the Tribunal while rejecting the appeal for assessment year 1976-77 and, therefore, the same are not repeated here.
6. The next ground relates to an amount of Rs. 2,39,567 being export excise and duty storage wastage duty under U.P. Excise Act, 1910.
6.1 The assessing officer disallowed this claim for the reason with which we are concerned is that the assessee did not file evidence of demand raised by the excise authorities. The assessee is following mercantile system of accounting. The liability was not provided in the accounts. The duty is in relation to excessive wastage on account of storage and transit. It was claimed by the assessee-oompany that it is statutory liability under the Excise Act vigte paragraphs 492 and 814 of the Excise Manual. According' to paragraph 492 the duty is charged if the total wastage if stored in a bonded warehouse exceeds the permissible percentage. According to paragraph 314 the duty is payable if the wastage on account of actual loss in transit by leakage, evaporation or other unavoidable cause, of spirit transported or exported exceeds the permissible limit. The details in respect of such wastage had been filed during the course of assessment.
6.2 The CIT (Appeals) found that actually demand was raised on 9-10-1984. Therefore, the liability was not incurred during the accounting year.
6.3 At the time of hearing it was submitted on behalf of assessee that the Allahabad High Court vide order dated 11th October, 1979 had quashed the levy of duty as was being claimed. But the excise department had preferred an appeal before the Supreme Court, and stay against the order was also prayed for. The same was pending even on the date of hearing of appeal before us. But then it was submitted 'that there did exist liability since the same was not extinguished finally.
The liability was required to be deducted on the basis of decision in the case of Kedernath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC).
Pressing into service the ratio of decision in the case of CIT v.Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC) it was submitted that right to demand payment from the assessee on account of statutory liability was still existing. On similar facts the issue was decided by the Allahabad High Court in the case of CIT v.J.K. Synthetics Ltd. [1983] 143 ITR 771. On a query from the Bench regarding the demand notice raised and when received by the assessee, it was submitted that it was not relevant since the liability was under statute and, therefore, even if demand notice is not issued by the Department, deduction was required to be allowed. Reliance was placed on the case of CIT v. Century Enka Ltd. [1981] 130 ITR 267 (Cal.).
Further reliance was also placed on in the case of CIT v. United India Woollen Mills [1981] 132 ITR 457 (Punj. & Har.) and in the case of IT AT v. B. Hill & Co. (P.) Ltd. [1983] 142 ITR 185 (All.).
6.4 The Departmental Representative, on the other hand, relied upon the decision in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi), where the decision in the case of Kedarnath Jute Mfg. Co.
Ltd. (supra) was also considered. In reply the assessee's representative further drew our attention to page 10 of the paper book, where a circular dated 20-1-1981 issued by the Commissioner, U.P.appears clarifying the stand of the Department.
6.5 We have gone through the entire material to which our attention was drawn. On going through the appellate order in para 9.2 the Commissioner of Income-tax (Appeals) has considered the circumstances under which the duty is required to be paid by the manufacturers. It is mentioned that if it is proved to the satisfaction of the concerned excise authority that the wastage in excess of the prescribed limit has been caused by accident or for other unavoidable cause, no sueh payment of duty on wastage is required. Only when the wastage exceeds the prescribed limit the Inspector of the Bombay Branch obtains the explanation and only then the duty if payable is determined by the Assistant/Deputy Excise Commissioner. (See page B/23 of Paper Book where note by the assessee is given.) These factual observations are very relevant in the context of controversy and the complex nature of the issue before us. These facts give rise to the question as to when such liability under statute arises. In our opinion, no such statutory liability unless fastened upon the assessee by raising appropriate order intimating that the assessee is held to be liable under the statute, can be said to have come into existence. In this context, the decision of the Delhi High Court in the case of Rattan Chand Kapoor (supra) is of immense guidance. In that case demand for sales tax liability was raised in February 1964 but related to the period 1958-59 and earlier. The claim could be raised after the liability had been determined and the income-tax assessments for earlier years would have been over long ago. The assessee was denying the liability to sales tax and, therefore, no entries were passed in the books. The returns of income could be revised for the relevant periods if the assessments were not over. But if the assessments are over there is no occasion to file revised returns. In such a situation it was open to the assessee to claim the deduction on the basis of accrual of liability or on the basis of demand raised by the sales tax authorities. Therefore, the deduction was allowable in assessment year 1964-65. Referring to the ratio laid down in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) it was stated that the ratio is limited to those cases in which the demand of sales tax is raised before the assessment had actually been completed and no revised return could be filed after the assessment is over. The scope of the ratio laid down in the aforesaid case was held to be limited. Now in this case before us as could be seen from the facts stated and discussed by us earlier, first of all the liability itself is not yet crystallised. This apart the so-called liability is struck down by the High Court of Allahabad long b8fore the previous year ended. Therefore, there is no question of accrued liability at all. In any event if ultimately Supreme Court decides the issue against assessee and if the liability does get crystallised then the assessee can claim that liability has accrued now though pertaining to earlier year.
6.6 Again the scheme of the Act, when such issue is being adjudicated upon, is also required to be borne in mind. Section 43B in respect of certain deductions on actual payment was inserted by the Finance Act, 1983 with effect from 1-4-1984 which starts with non obstante clause, and the Explanation to the section reads as under: Explanation : For the removal of doubts, it is hereby declared that where a deduction in respect of s ny sum referred to in Clause (a) or Clause (b) of this section is allowed in computing the income referred to in Section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
On plain reading of the Explanation it can clearly be said that the assessee would be entitled to appropriate deduction on the basis of pa.yment. Even if it is assumed that the liability has accrued but since no deduction is being allowed now, the same shall be allowable in the year of payment as per the Explanation. Therefore, there is no room for any grievance on the footing that if such liability is not claimed and agitated then assessee might suffer if eventually the Supreme Court goes against the assessee.
6.7 Coming to the decisions cited on behalf of the assessee, in our opinion, it is not necessary to deal with them in the light of our discussion above. Yet, in an attempt to satisfy the assessee we would state as follows. The decision in the case of Hindustan Housing & Land Development Trust Ltd. (supra) is not directly on the issue under consideration, because in that case the controversy was with regard to tax ability of income while the issue before us is that of allowing a deduction on the basis of clear accrual of liability. Still, however, if at all the ratio is sought to be applied to the controversy before us, yet on a careful consideration we find that the ratio would support the case of the revenue. This is so because that is no right to receive any amount by the Excise Department and, therefore, no liability is created against the assessee. Coming to the case of J.K. Synthetics Ltd. (supra) the facts are distinguishable mainly because in that case, (i) a provision was made in the books of account; which is probably on the basis of the demand raised ; (iii) duty was sought to be levied under the amended provisions of the Central Excise Act.
In the case before us apart from the facts being different the learned Senior Departmental Representative did touch upon the crux of the matter by stating that Excise department could not raise the demand because of the decision of the Allahabad High Court and that is why no demand was raised. In the case of Century Enka Ltd. (supra) the controversy was with regard to to accrued liability and the Assistant Director of Central Excise had held the assessee to be liable to duty, though the demand was not raised. In the case before us we have already held that the liability had not accrued yet. In the case of United India Woollen Mills (supra) it was held that in the case of the assessee adopting mercantile system of accounting deduction would be eligible only in the accounting year in which liability had accrued and not in the year in which liability is discharged. This decision was cited for the proposition that the assessee might suffer if the claim is not made now. But this apprehension we have removed in our foregoing discussion. Coming to the case of B. Hill & Co. (P.) Ltd. (supra), in this case, the assessee disputed the liability under the Sales Tax Act.
The assessee made a provision on ad hoc basis, though no demand was raised. Ultimately the High Court allowed the claim. This decision turns on the facts of its own case. It is stated that the provision was made to meet the liability of sales tax which the Department was seriously pressing but the assessee was disputing, the correctness of the sales tax authorities claim was controversial because the High Court had entertained a writ petition filed by the assessee and had stayed further proceedings, in the opinion of the sales tax authority assessee's liability could not be treated lightly or casually, etc. In the case before us no demand was raised by the Department. Besides matter is not pending before the High Court. On the contrary, the High Court has struck down the liability, if any. So much about the judicial pronouncements. On perusing the accounts on page 21 we find note that no provision is made by the assessee in respect of the liability on the basis that it is a contingent liability. We are of the view that this opinion expressed in the audited accounts by the Directors is correct, the liability being contingent.
7 to 12. [These, paras are not reproduced here as they involved minor issues].