| SooperKanoon Citation | sooperkanoon.com/72395 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Jan-08-2003 |
| Judge | B Chhibber, N Vijayakumaran |
| Reported in | (2003)81TTJ(Mum.)779 |
| Appellant | Lathia Rubber Mfg. Co. (P) Ltd. |
| Respondent | Assistant Commissioner of Income |
2. The assessee-company is in the business of relining and recoating rubber rollers which are used in the textile, paper and other industries. It follows the mercantile system of accounting. There was a dispute between the assessee-company and the Central excise authorities regarding the liability of the assessee for payment of excise duty.
Ultimately, the first appellate authority decided the matter in favour of the assessee. As the excise department had carried the matter further by way of appeal, the assessee continued to collect the excise duty. However, each invoice had printed thereon an undertaking to return the duty collected in the event of final success. The undertaking read as follows: "All the supplies are made as per terms and conditions mentioned in our quotation. In case of any Addl. levies or any Government taxes or excise duty if applicable will be charged to you extra even after the supplies are made. Amount received for reimbursement of excise duty will be returned on the Government accepting the order of the Collector of Central Excise (Appeals) Bombay, being order No. V-2(68) 2242/BO/2575 dt. 19th Dec., 1981, holding that process of recoating/rerubber lining would not amount to manufacture. Amount will be kept in separate account." 3. In addition, the assessee gave an undertaking to the excise department to return the excise duty collected and pursuant thereto issued a circular to the customers. The total amount so collected by way of excise duty was Rs. 45,70,000. In contesting the matter the assessee had incurred expenses and obviously, the amount to be returned to the customers was after taking into account such expenses. As the legal expenses had been claimed as deductions, the "reimbursement" thereof was taxable under Section 41(1) and the assessee has been assessed in respect of Rs. 29,70,994.
4. As noted above, the assessee further accepts the taxability of Rs. 1,17,062 and accordingly the present appeal is confined to Rs. 14,81,944. In respect of the entirety of this amount not only was there an undertaking to repay to the customers the duty collected but credit notes were also issued in their favour. Out of these credit notes, Rs. 76,400 was adjusted against amounts due to the assessee by the customers from whom excise duty had been collected in respect of sales made by the assessee to them. The balance amount of Rs. 14,05,544 payable to the customers in respect of excise duty collected from them has over a period of time been adjusted against amounts payable by them in respect of orders placed with the assessee. The amount of Rs. 14,05,544 not actually adjusted during the asst. year 1989-90 but adjusted in subsequent years is reflected as a liability in the balance sheet as on 31st March, 1989. A comprehensive accounts statement exhibiting such adjustment in the subsequent years was submitted during the course of the hearing. During the course of assessment proceedings, the AO was of the view that there was a tax liability to the tune of Rs. 14,81,944 and accordingly, the provisions of Section 41(1) of the IT Act are attracted. He, therefore, brought this amount under tax.
5. On appeal, the learned CIT(A) held that provisions of Section 41(1) of the Act were applicable. He held that the assessee's claim for deduction of corresponding liability under Section 37 should not be considered because he was not interpreting the scope of Section 37(1) but his examination was restricted to Section 41(1). According to him, there was a material distinction between the scope and the provisions of Sections 37 and 41(1) of the IT Act. One cannot jump to the provisions of Section 37, while considering the taxability of amount under Section 41(1) of the Act. He further noted that the assessee had not made any entries in respect of corresponding liability in its books of accounts. He further held that simply by giving undertaking, no liability is created and that if deduction is permitted on the strength of the credit notes issued by the assessee, though in fact no payments were actually made the very purpose of Section 41(1) would be defeated.
Relying upon the following judgments, he upheld the action of the AO: (b) Paniyam Cements & Mineral Industries Ltd v. Addl. CIT (1979) 117 ITR 770 (AP) 6. Shri Dastur, the learned counsel for the assessee drew our attention to the provisions of Section 41(1) of the Act and submitted that the case of the assessee does not fall within the ken of Section 41(1) in as much as it has an unconditional and unqualified liability towards its customers in pursuance of the undertaking furnished by it to the customers in the invoices raised by the assessee-company on them.
Further, the assessee has also unconditionally undertaken with the excise department to refund the excise duty to the customers on a resolution of the dispute in its favour which is also set out in the circular issued to the customers (pp. 3 and 4 of the compilation). The learned counsel for the assessee further submitted that the same principle is embodied in Section 64A of the Sales of Goods Act, 1930 which provides that where excise duty is not payable the buyer may deduct so much from the contract price as is equivalent to the remitted tax and he shall not be liable to pay or be sued for in respect of such deduction. In the premises, the assessee contends that the amount of Rs. 14,81,944 does not fall within the four corners of Section 41(1) in as much as it has admittedly and undoubtedly a corresponding liability to refund the amount to its customers in pursuance of the undertaking given to the customer or under Section 64A of the Contract Act and amount refund/adjustment has in fact been made. In support of his contention, he relied upon the following judgments : (b) D.R. Desai v. ITO (1993) 47 TTJ (Bom)(TM) 509 : (1993) 47 ITD 103 (TM) (Bom)(TM) (d) CIT v. Deora Pu Canbeon Mfg. Co. (P) Ltd. (1985) 156 ITR 831 (MP) (f) Mehta Spices Co. v. Dy. CIT (1995) 52 TTJ (Coch) 685 : (1995) 54 ITD 311 (Coch) 7. Shri Arun Dewan, the learned Departmental Representative strongly supported the orders of the authorities below. He submitted that there was no liability on the part of the assessee to refund the amount of excise duty which was collected from the customers and accordingly, for the reasons given by the AO and the learned CIT(A), the provisions of Section 41(1) of the Act are clearly attracted. He also placed reliance on the judgments relied upon by the learned CIT(A).
8. We have considered the rival submissions and perused the facts on record. Section 41(1) of the IT Act, in so far as it is relevant is extracted as under: "Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, (a) the first mentioned person has obtained, whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not." 9. It is noted that the assessee has an unconditional and unqualified liability towards the customers in pursuance of the undertaking furnished by it to the customers, reproduced in para 2 above. In the invoices raised by the assessee an undertaking to return the amount duty collected in the event of final success was printed. Further, the assessee has also unconditionally undertaken with the excise department to refund the excise duty to the customers on a resolution of the dispute in its favour, which is also set out in the circular issued to the customers (pp, 3 & 4 of the compilation).
10. We have gone through the copies and samples of credit notes issued and letters received from the customers appreciating the return to them of the excise duty collected. At p. 3 of the compilation is the letter to the Asstt. Collector (Audit), Central Excise, Bombay communicating the decision to refund the excise duty and at p. 4 is the circular issued to the customers for refund of excise duty. Not only the credit notes were issued but in the subsequent year, the amounts were adjusted/refunded. Thus, the assessee was collecting the excise duty and holding it as a proceed and on final settlement of the dispute with the excise authorities, it was dutybound to return to the customers, and it did so. Accordingly, in our considered opinion, the provisions of Section 41(1) of the Act are not applicable.
11. In the case of CIT v. East Asiatic Co. India (P) Ltd. (supra) before the Madras High Court, the assessee made excess sales-tax collection from its customers and also received sales-tax refund which amounts it was liable to refund. In fulfilment of its liability towards the customers, the assessee issued credit notes to the customers. The Department sought to invoke Section 41(1) on the excess sales-tax collections made by the assessee and refund received by it and tax these amounts. The matter went up to the Madras High Court and at p.
355 of the report, it ruled that the assessee's liability to refund the sales-tax collected to its customers continued and, therefore, the same would not be taxed notwithstanding that the amount of refund of sales-tax was not passed on to the customers. It is noted that in the case before us, the assessee had actually refunded and adjusted the excise duty collected and to that extent the position of the assessee is superior.
12. In the case of CIT v. Wolkem (P) Ltd. (supra), the assessee credited its P&L a/c on account of excise duty refund received by it.
The assessee claimed during the course of assessment proceedings that the refund of excise duty is not exigible to tax. The assessee argued that when it raises bills on the customers, which includes excise duty as well, the bills would specifically mention that this was being charged only as precautionary measure and the company was really contending that no excise duty was payable on it. The AO concluded that the company had no intention of providing the names of the customers to whom they were refunding the amount and the only motive was to grab the amount which was clear from the fact that the amount was credited to the P&L a/c. When the matter came up before the Hon'ble Rajasthan High Court, the Hon'ble High Court sustained the order of the Tribunal, which had held that the said item could not be taxed within the boundaries of Section 41(1) of the Act inasmuch as there existed liability to repay various customers and the receipt does not bear the character of income. At p. 140 of the report, the Court has instructively summarized the position as under : "Diversion at source on account of overriding title, where the dispute was of the nature of trust fund does not really amount to revenue receipt. The liability for payment to the central excise and/or return to the customers, really take the entire matter to the perspective of a financial transactions and it does not amount to trading receipt. " 13. In the case of Navjivan Udyog Mandir (P) Ltd. v. CIT (supra), the Hon'ble Gujarat High Court accepted such claim of the assessee. At p.
45 of the report, the High Court noted that the excise duty-refund received by the assessee was taken to the balance sheet in the account labelled as "Excise duty refundable to customers retained as deposit against free services to be rendered" and thus observed that the assessee had acknowledged the balance owed to the customers. Moreover, the assessee had also written letters to all the customers intimating the fact that an amount of excise duty was refunded by the Government and the amounts were credited by way of deposit in their account from the date of receipt. Furthermore, the assessee also undertook that it would adjust the amount so received towards service charges which may become payable by the customers and in fact the service cards were issued to the customers. In addition, the High Court also noted that when the assessee had earlier collected excise duty from the customers, it was separately mentioned in the bills which were issued to the customers. The High Court at p. 46 of the report categorically observed that all the aforesaid factual aspects indubitably demonstrate that the assessee had acknowledged the liability to its customers. In that view of the matter and keeping in perspective the fact that the assessee was maintaining accounts in conformity with the mercantile system, the liability to refund excise duty to customers had been incurred and the assessee was entitled to deduction of that amount.
14. In our opinion, the case of the assessee is covered by all the three cases discussed supra. The other decisions relied upon by the learned counsel for the assessee also support the case of the assessee.
Accordingly, we hold that the provisions of Section 41(1) of the Act are not applicable.
15. Now, we come to the prder of the learned CIT(A). His observations on Section 37(1) are not very material because what is to be computed in the Act is the total income of the assessee and needless to say that all the deductions permissible under the Act ought to be allowed and granted to the assessee. The observations of the learned CIT(A) are not very relevant. As regards the observation of the learned CIT(A) that the assessee had not made the entries in respect of corresponding liabilities in its books of accounts, we find that this observation is baseless and erroneous, The assessee had, in fact, issued credit notes to the customers and had' exhibited this liability to the year ended 31st March, 1989, under the nomenclature "advance against orders" falling within the broad classification of 'current liabilities'.
Moreover, the assessee has reflected the said individual amounts in the respective customers account in the journal register maintained by it.
The observation of the learned CIT(A) that simply by giving undertaking no liability is created cannot be upheld in view of the overriding judicial principles accepting the undertakings which have been mentioned above. As regards the observation of the learned CIT(A) that if deduction is permitted on the strength of credit notes issued by the assessee, though in fact, no payments were actually made, the very purpose of Section 41(1) would be defeated, we are of the opinion that the learned CIT(A) while adopting this line of argument, has failed to distinguish between the cash and mercantile system of accounting. The act of the assessee in issuing credit notes created a liability in praesenti and not a contingent liability. The fact that actually the payments were not made during the year but were made subsequently either by way of cheque or by way of adjustments is immaterial.
16. As regards the authorities cited by the learned CIT(A), we find that the same have no relevance whatsoever to the dispute to be adjudicated upon by us. The common thread running through all these decisions is that whenever the loss or expenditure is recouped, the same shall be liable to tax by dint of provisions envisaged in Section 41(1) of the Act. In none of these cases, was there an undertaking to pay the amount in the event of a refund being obtained nor was a claim made for deduction of the liability to make such refund.
17. In the light of the above discussion, we accept the claim of the assessee with regard to a sum of Rs. 14,81,944 only. This ground accordingly succeeds in part.
18. Ground No. 2 relates to the addition of a sum of Rs. 6,47,134 on account of works contract tax. At the time of hearing, this ground was not pressed. The same is accordingly dismissed.
19. Vide letter dt. 8th Dec., 2001, the assessee has raised the following additional ground: "The assumption of jurisdiction to levy interest under Sections 234B and 234C is a pure question of law going to the root of the competency to impose interest and, therefore, can be raised at any stage. It arises from the facts found and assessment proceedings attaching the liability of the assessee--National Thermal Power Co.
Ltd. v. CIT (1988) 229 ITR 383 (SC)." 20. After hearing both the parties, we hold that the assumption of jurisdiction to levy interest under Sections 234B and 234C is, purely a question of law, going into the root of competency to impose interest and, therefore, we admit the Addl. ground in view of the judgment of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (supra).
21. Shri Dastur, the learned counsel for the assessee submitted that in the last page of the assessment order, it can be seen that the AO has given a direction to the effect that "Charge interest as per law". He submitted that this command of the AO to charge interest is not specific and clear in that the specific section under which the assessee is liable to pay interest is not ascertainable with definiteness and certainty as judicially propounded by the Supreme Court in the case of CIT v. Ranchi Club (2001) 247 ITR 209 (SC) and later on followed in the case of Tejkumari and Ors. v. CIT (2001) 247 ITR 210 (Pat)(FB).
22. The learned Departmental Representative opposed the admission of the Addl. ground and submitted that the interest is not penal in nature but compensatory in nature and the AO had specifically mentioned "charge interest as per law".
23. After hearing both the parties, we hold that the AO has rightly charged interest under Sections 234B and 234C of the Act. In his order, the AO had given direction "charge interest as follows". Then, in the computation of tax, which forms part of the assessment order, interest has been charged under Sections 234B and 234C of the Act. These definite sections have been invoked. Therefore, we reject the contention of the learned counsel for the assessee that the AO is not justified in charging interest under Sections 234B and 234C. However, this ground is consequential in nature and we direct the AO to charge interest under Sections 234B and 234C, if any, after taking into consideration the relief given by this order.