TMI Blog1992 (8) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 in pursuance to which assessment was made at an income of Rs. 1,05,90,510. Assessee appealed to CIT(Appeals)-13,New Delhi and succeeded in part. Whereas assessee is in appeal against the additions sustained. Revenue is aggrieved by the relief allowed by the CIT(Appeals). 2. to 11. [These paras are not reproduced here, as they involve minor issues.]. 12. The next ground of appeal is relating to the disallowance of investment allowance on the cost of plant and machinery amounting to Rs. 28,92,595. The Assessing Officer disallowed the claim of the assessee on the ground that the appropriate amount of reserve was not created in the year under appeal. It was further held that assessee was not entitled to an opportunity contemplated by Explanation to section 32A(4). The claim of the assessee was to the tune of Rs. 7,23,149. The CIT(Appeals) has confirmed the disallowance by holding that Explanation to section 32A(4) is applicable in such cases where a reserve had been created and it is found on assessment that such a reserve was inadequate. According to the CIT(Appeals) the benefit of the explanation was not available in such cases where no reserve at all had been created in the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 32A would be permissible to the assessee but for non-creation of the reserve in accordance with sub-section (4) of section 32A. Assessee had filed a return declaring loss of Rs. 1,43,10,940 on26-6-1982. No reserve had been created in accordance with section 32A(4) as there were no profits available for absorption of the deduction. The Assessing Officer, however, has computed the income at a positive figure of Rs. 1,05,90,510. It is not disputed that Assessing Officer did not give any opportunity to the assessee for creating the reserve in accordance with Explanation to section 32A(4). The issue before us is whether creation of investment reserve is necessary for claiming the deduction under section 32A and if so, whether an opportunity is to be allowed to the assessee for creating a reserve before finalising an assessment and denying the benefit of section 32A on the ground that no reserve had been created. The Hon'ble Supreme Court in Shri Shubhlaxmi Mills Ltd.'s case had the occasion to consider the issue regarding the creation of the reserve in respect of deduction permissible on account of development rebate under section 33 of the IT Act, 1961 read with section 34. Their Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 18. In this case, assessee having filed a return declaring loss, would not ordinarily be entitled to deduction under section 32A. Accordingly assessee has not created a reserve in respect of investment allowance in this year. However, since huge additions have been made and assessment made at a positive figure, it was imperative on the part of Assessing Officer to give an opportunity to the assessee for creating the reserve in accordance with Explanation to section 32A(4). The contention raised on behalf of the revenue that Explanation to section 32A(4) presupposes creation of the reserve and permits only adjustment of such creation, in our view, is not well founded. Considering the provisions of section 32A(4) read with its Explanation as well as the clarificatory circular issued by the Central Board of Direct Taxes we are of the view that it is not necessary for an assessee to create a reserve in the event of their being no assessable profits in the year of installation of the machinery or in the year the machinery or plant is put to use. Since deduction under section 32A would not be permisible in the event of there being a loss. The Legislature in its wisdom has incorporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch further credit is made. " 19. This explanation requires the Assessing Officer to give the assessee an opportunity to adjust the Reserve in a case where the amount debited to the profit and loss account and credited to the Investment Allowance Reserve Account under this sub-section is not less than the amount required to be so credited on the basis of the amount of deduction in respect of investment allowance. The view of the learned CIT(Appeals) that the Explanation to section 32A(4) presupposes creation of investment allowance reserve is, in our view, not warranted. It does not sound logically correct that where there are small profits available to the assessee and a reserve is created to that extent, the adjustment under Explanation to section 32A(4) would be permissible whereas in a case where there are no profits, the benefit of the explanation would not be permissible. The intention of the Legislature does not seem to deprive the assessee from a legitimate deduction in the event of the loss disclosed by the assessee is turned into a profit by the Assessing Officer for non-creation of a Reserve in the year of loss. Considering the omission of sub-section (9) of section 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that the assessment year involved in this appeal is 1982-83 and provisions of section 43B are, therefore, inapplicable. 21. The Assessing Officer disallowed the claim of the assessee on the ground that assessee had not received any demand from the Excise Department in respect of the provision made. It was also pointed out that assessee had disputed the claims made by the Excise Department before various High Courts and the orders of the Excise Department had been stayed. The CIT(Appeals) has also confirmed the disallowance. 22. Learned counsel for the assessee contended that the Excise Duty liability accrued in this case on the event of manufacture made by the assessee. The dispute before the authorities was only with regard to quantification. The claim of the assessee that the post-manufacturing expenses are to be deducted from the price has not been accepted by the Excise Department and in fact in respect of one of the Units, namely Hyderabad Unit, the High Court has already rejected the claim of the assessee. According to Shri Vaish, the liability of the assessee towards Excise Department had accrued and that is the only reason that the assessee has executed a bond/bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event. In our view, though happening of the taxable event is one of the important considerations for allowance of claim it is basically the system of accounting followed by the assessee which is decisive as to the admissibility of the deduction. 27. Let us take an example in the case of sales tax. Taxable event takes place as and when sale is effected. In a case where system of accounting maintained by the assessee is cash system, deduction would be permissible only as and when assessee makes the payment. Similarly, in the case of mercantile system of accounting, deduction would be permissible on the basis of accrual of liability and not solely on the happening of the taxable event. If one were to hold that the liability of tax is allowable on the happening of taxable event alone, then deduction in respect of extra demand created by the Assessing Officer under the relevant statute would not be permissible as a deduction in any year other than the year in which the taxable event has taken place. This is not so. As already stated, where the assessee maintains books of account on cash basis, deduction is permissible as and when assessee discharges the liability by making the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any tax, assessee maintaining books of account on mercantile basis would be entitled to deduction notwithstanding the fact that the demand had been disputed and that the liability had not been paid. 28. Another decision that has been approved by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case is that of Calcutta High Court in the case of Royal Boot House. In this case it was found by the High Court that under the provisions of the Sales Tax Act, assessee had an obligation to pay sales-tax voluntarily and accordingly it was held that a deduction could not be denied to an assessee maintaining books of account on mercantile basis merely because the Assessing Officer had not quantified the tax payable by the assessee. In this case one has to remember that event of tax as well as the accrual of liability in the case of assessee had accrued during the previous year and it was found as a matter of fact that under the relevant provisions of the Act assessee's obligation to pay the tax was not dependent on quantification. This principle was also approved by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case. 29. We may point out that the observation of their Lordships ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer may initiate proceedings by issuing notice for reopening of assessment and threafter create a demand. Mere initiation of proceedings for assessment would not enable the assessee to claim a deduction in anticipation of demand. This is so because initiation of proceedings is not sufficient to create enforceable demand. Assess following mercantile system of accounting would be entitled to claim deduction only as and when the demand in respect of the reassessment is created. Though from the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case it is clear that assessee can claim deduction in the year the demand is created, it has been held in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi), that where the assessment to which the demand relates is open before any authority, deduction can be claimed in that year as it pertains to it. Otherwise, deduction is permissible in the year the demand is created. In respect of additional demand of tax several High Courts have ruled that deduction would be permissible in the year of demand. In the case of CIT v. Nathmal Tolaram [1973] 88 ITR 234 (Gauhati) assessee had claimed a deduction on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Assessee claimed deduction of this amount as business expenditure in the assessment year 1971-72. This was disallowed by the Assessing Officer. The Tribunal also rejected the claim of the assessee. On a reference, a Divisional Bench of the Orissa High Court held that though the assessee maintained its accounts on mercantile basis, it was entitled to claim deduction of its liability towards sales-tax in the year when such liability was finally determined by the Sales Tax Tribunal. 35. From the analysis of the case referred to above it is abundantly clear that in the cases where the system of accounting is mercantile deduction on account of statutory liability is permissible on the basis of accrual of liability and not on mere happening of a taxable event. 36. In this case the question to be determined is as to whether the liability of the assessee in regard to the provision of Rs. 43.87 lakhs on account of Excise Duty had accrued in the year or not. It is admitted that the duty in dispute was neither quantified by the Excise Department nor was any demand notice issued to the assessee. In these circumstances, can it be said that there was an accrued liability for the payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction has been claimed. In respect of Hyderabad Unit, assessee had furnished a price list before Excise Department claiming inter alia deductions for post-manufacturing expenses. On 21-5-1969, Superintendent of Central Excise (Technical) decided against the assessee by holding inter alia that post-manufacturing expenses were not to be deducted in computing the tariff on the basis of which tax is payable by the assessee. As provided under the statute, assessee filed an appeal before Deputy Collector against the decision dated21st May, 1969of the Superintendent. The Deputy Collector Excise rejected the appeal of the assessee vide order dated3rd February, 1971. Assessee filed a revision petition against Dy. Collector's order before Government of India. The revision petition was also rejected by the Government vide order dated21st November, 1973. Assessee filed a writ petition against the order of the Government of India dated 21st November, 1973 before Andhra Pradesh High Court vide writ petition No. 4251 of 1974. Vide judgment dated13-7-1976, the Single Judge of the Andhra Pradesh High Court confirmed the orders of the Excise Authorities. Assessee filed appeal before Division Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as the dispute is not finally settled in favour of the assessee, it would be permissible for them to make a provision in the books of account and creating a charge against the profits on the basis of the finding of the Excise Authorities. In this case assessee has been asked to furnish bond/bank guarantee in respect of the differential amount of Excise Duty. This also supports assessee's case that the liability of the assessee had accrued. If the liability of the Excise Duty had not accrued to the assessee, they would not be required to furnish a bond or bank guarantee in respect of the differential amount. The furnishing of bond or bank guarantee has enabled the assessee to postpone the payment of Excise Duty but fact remains that the accrued liability has not ceased to exist. 44. At this stage it may be mentioned that assessee's claim for assessment years 1980-81 and 1981-82 in similar circumstances had been allowed by the Income Tax Authorities on the basis of provision made in the books of account. 45. Considering the facts and circumstances of this case we are satisfied that the liability of the assessee towards Excise Duty amounting to Rs. 43.87 lakhs had accrued during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pported the orders of the revenue authorities. 49. We have given our careful consideration to the rival contentions. In this case, it is not disputed that assessee had sought permission for the change in the previous year. Under section 3 of the IT Act, 1961, the Assessing Officer is empowered to allow a change with or without any condition. In this case, the Assessing Officer has imposed a condition subject to which permission has been granted for the change of the previous year. The question before us is as to whether in a case where the Assessing Officer has power to impose a condition, the assessee can seek redress in an appeal against the assessment on the ground that such a condition was contrary to law. We shall first consider as to whether the condition imposed by the Assessing Officer was in accordance with law or contrary to it. Section 32 of the IT Act, 1961 permits allowance of depreciation to the assessee at the prescribed rates irrespective of the period of user of the asset. The assessee is entitled to deduction subject to fulfilment of other conditions, at full rates irrespective of the fact that the asset was not used for the entire year. Thus it is seen that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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