Commissioner of Income Tax vs Dharampal Satyapal Sons (P) Ltd.

A.K. Sikri, J.—The following question of law is proposed to be raised in this appeal:

Whether the Tribunal was correct in law and on facts in affirming the order of CIT(A) whereby the CIT(A) has deleted the addition of Rs. 7.5 crores added by assessing officer on the ground that the penalty/pre-deposit paid by the Assessee on the direction of CESTAT was not allowable in as much as the same was not in the nature of excise duty?

The factual background in which the aforesaid question has cropped up for consideration is as follows:

This appeal pertains to the assessment year 2006-07 for which the Respondent/Assessee had filed its return declaring the loss of Rs. 2,12,57,698 while framing the assessment. The assessing officer had noticed that the Assessee had claimed deduction in the sum of Rs. 7.5 crores for excise duty. On enquiry, the assessing officer had found that the said amount was deposited by the Assessee as pre-deposit in pursuance of the direction of CESTAT. The assessing officer, on that basis, held the view that the amount was not actually as payments towards excise duty and therefore, as per provision of Section 43B of the Income Tax Act, this deduction was not permissible and, therefore, he disallowed the same. The CIT(A) however, allowed the aforesaid deduction on the ground that payments were towards excise duty. The Tribunal has upheld the order of the CIT(A) by impugned decision dated 13-8-2009 and the present appeal is preferred against that order of the Tribunal.

It may be noted in this behalf that the Assessee had certain disputes with the Excise Department for payment of actual excise duty. The excise authorities had issued show-cause notice to the Assessee on the ground that the Assessee had not paid the exact excise amount and the penalty proceedings for the alleged were initiated simultaneously. The issuing authority had passed the order whereby a demand of Rs. 16.91 crores towards excise duty was raised against the Assessee. A penalty of Rs. 2 crores was also imposed.

Challenging these orders, the Assessee had preferred an appeal before the CESTAT. In that appeal, the Assessee had also filed an application for stay of the excise demand and levy of penalty. It is in that application the CESTAT passed orders dated 17-10-2005 directing the Assessee to pay a sum of Rs. 7.5 crores as a pre-deposit for stay of the orders passed by the adjudicating authorities and also for hearing of the appeal which was filed before the CESTAT. It is the character of this payment of Rs. 7.5 crores which needs to be examined.

Two facts emerged from the aforesaid application, namely: (i) The Excise Department had raised a demand for payment of excise duty fastening the liability to the extent of Rs. 16.91 crores. As per the adjudicating authority, this amount was the liability of the Assessee on account of excise duty (ii) The Assessee had challenged the order of the adjudicating authority by filing an appeal before the CESTAT and in those proceedings the stay of the excise demand as well as penalty was prayed for. The order of pre-deposit of Rs. 7.5 crores had a direct nexus and co-relation with the excise demand raised.

The first aspect that would arise for the consideration is as to whether the aforesaid order of pre-deposit would have no bearing only because the Assessee had challenged the said order by filing the appeal before the CESTAT i.e., the Assessee was challenging the payment of the excise duty itself. Such a question is no more res integra and the Supreme Court in the case of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, has decided this very question in the context of provision of Section 43B of the Act. This case relates to payment of sales-tax and demand was raised by the Sales-tax department. The Assessee had disputed the liability to pay sales-tax and has thus preferred an appeal. The apex court held that, merely because the Assessee was disputing the liability would not mean that liability had not accrued on determination thereof by the sales-tax authorities in as much as under the sales-tax laws, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. In these circumstances, it was held that the Assessee would be entitled to seek reduction of such liability which had accrued under the law. Interestingly, in that case, the Assessee had not even made any entry in its books of accounts treating the same as liability. Still the Supreme Court has allowed this as deduction on the ground that when the law had entitled the Assessee to claim the deduction, merely because it had committed a mistake in not making an entry in the books of accounts, it will not be debarred from getting the said deduction. The detailed analysis of this principle is contained in paras 5 and 6 of the said judgment which are reproduced below:

Now under all sales-tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment. It is significant that in the present case, the liability had even been quantified and a demand had been created in the sum of Rs. 1,49,776 by means of the notice dated 21-11-1957 during the pendency of the assessment proceedings before the Income Tax Officer and before the finalisation of the assessment. It is not possible to comprehend how the liability would cease to be one because the Assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the Assessee did not prevail with regard to the quantum of liability etc. An Assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sales-tax had accrued during the year of assessment even though it had to be discharged at a future date. In Pope The King Match Factory Vs. Commissioner of Income Tax, Madras, a demand for excise duty was served on the Assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed, he debited that amount in his accounts on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court had no difficulty in holding that the Assessee had incurred an enforceable legal liability on and from the date on which he received the Collectors demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. In our judgment, the above decision lays down the law correctly.

The main contention of the learned Solicitor General is that the Assessee failed to debit the liability in. its books of accounts and, therefore, it was debarred from claiming the same as deduction either u/s 10(1) or u/s 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an Assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law a deduction must be allowed by the Income Tax Officer, the Assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the Assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the Assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The Assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776 being the amount of sales-tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the Assessee had taken appeals to higher authorities or courts which failed. The appeal is consequently allowed and the judgment of the High Court is set aside. The question which was referred is answered in favour of the Assessee and against the revenue. The Assessee will be entitled to costs in this Court and in the High Court.

The principle contained in the aforesaid judgment is reiterated by the Supreme Court in Commissioner of Income Tax, Orissa Vs. Kalinga Tubes Ltd., , Commissioner of Income Tax, Delhi Vs. Bharat Carbon and Ribbon Mfg. Co. P. Ltd., .

Once this aspect is clarified, answer to the problem posed before us is no more liable to be sought. No doubt the Tribunal had directed the Assessee to make aforesaid payment by way of pre-deposit for stay of the impugned demand and pre-addition for hearing the appeal. However, as mentioned above, indubitably this direction was given keeping in view the total excise duty demand raised by the adjudicating authority under the excise law, therefore, it had direct nexus and co-relation. The fact is that the Assessee had made the payment towards excise duty albeit on the direction of the CESTAT as pre-deposit which therefore, would not seize to have the character of excise duty as held in the case of Bharat Carbon & Ribbon Mfg. Co. (P) Ltd. (supra). The ultimate decision in the appeal will have no bearing on the issue. Before us, the admitted position is that the said amount of Rs. 7.5 crores is made against as a part payment against the excise duty demand raised by the excise authorities and since it was a statutory liability on that part, therefore, the conditions stipulated in Section 43B of the Income Tax Act are duly fulfilled and thus the Assessee was entitled to claim the deduction thereof.

We thus answer the question in favour of the Assessee and against the revenue and as a result thereof, this appeal is dismissed.