TMI Blog2003 (11) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... ause of the conflicting views held by different benches of the Tribunal on the issue raised in these appeals. One view, which is against the assessee is expressed by the Hyderabad Bench "A" of the Tribunal; in Jeypore Sugar Co. Ltd. [IT Appeal No.2034 (Hyd.) of 1990, vide its order dated 11-9-1995], whereas the other view, which is in favour of the assessee is expressed by the Delhi Bench 'D' of the Tribunal in the case of Modipan Ltd. v. IAC [1995] 52 TTJ (Delhi) 477. 3. The assessee company is the wholesale distributors for the products manufactured by UB Limited and its group companies for a number of Districts in the coastal region of Andhra Pradesh. For importing liquor from outside the State, the assessee has, to obtain necessary permit by paying what is called as 'countervailing duty' in terms of section 21 of the Andhra Pradesh Excise Act, 1968. The said section of the Excise Act reads as under :- "21. The Government may, by notification, levy an excise duty on any excisable article manufactured or produced in the State at such rates, not exceeding the rates mentioned in the schedule, as may be specified in the notification. (2) The Government may, by notification, le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not allowed as deduction in the respective years, the deduction for these two amounts could not be claimed in the subsequent years, as the said liability did not arise in the said subsequent year, nor was the payment made in those years. 7. The assessing officer negatived the above contention. He held that what was paid was not an excise duty for the purchase or manufacture, but it represented only a part of the purchase price for goods purchased. He, therefore, held that the provisions of section 43B did not apply. He also held that even if section 43B applies, the payments cannot be allowed as a deduction in these years, as the liability to pay the duty is incurred when the goods are brought into the State and so, the payments represented only advance payments, and they were not paid towards discharge of the statutory liability in the concerned year. He also held that the payments would go to increase the value of the purchases, arid if not sold up to the end of the year, they would increase the value of the closing stock, independent of the fact whether relatable goods were finally received or not in the concerned previous year. 8. On appeal, the CIT(A) however held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permit and making the payment and not at the time of receipt of goods. Being a statutory liability, though it is paid for the purchases and may form a part of the purchase consideration subsequently, is independent of the purchase price, when paid. 30. In the case of the appellant, it had not received the stock. So, there is no question of taking the goods to the closing stock. It has claimed the deduction of an amount which it was required to pay. So, the claim is to be allowed under section 37 of the I.T. Act. Now that section 37 is to be read with section 43B, the appellant had claimed it as a deduction under section 43B. But, in my opinion, this being a statutory obligation, and the demand having been paid during the year of account, is to be allowed. The expenditure has been incurred in respect of a business the profits of which are assessable to tax, I do not agree with the views of the assessing officer that at the time of making the order for the goods, the appellant entered into an unconditional contract with the manufacturer and the goods had passed to it at the time when the order was accepted by the producer. Because, between the period of making the order and the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased upon the decision of Hon'ble Special Bench 'B' Hyderabad dated 26-3-1991 in the case of KCP Ltd. v. ITO [1991] 38 ITD 15 at page 30. Thus, the issue should have been considered as covered by the decision of Hon'ble Special Bench of ITAT at Hyderabad in the case of KCP Ltd. which was binding on the Division Bench. Hence constitution of another Special Bench on the same issue was not required. Further, similar view has been taken by the Hon'ble A.P. High Court in favour of Department in the case of Gopi Krishna Granite India Ltd. v. Dy. CIT [2001] 251 ITR 337, indicating that incurring of liability is a must for allowing deduction under section 43B. 3. In view of above, it is requested that considering the earlier decision of Hon'ble Special Bench on the issue as well as the view of Hon'ble jurisdictional High Court on the similar issue, the action of the Assessing Officer in disallowing advance payments of excise duty may kindly be upheld on the facts of the case." 11. In short, the learned CIT (DR) submitted that the amounts of Rs. 25,36,671 for the assessment year 1990-91 and Rs. 58,44,632 for the assessment year 1991-92 represented the part of purchase price of the stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, and, so, should be allowed as a deduction only in the year in which the related stock is received and is reflected in the trading account. 13. The learned counsel for the assessee; .on the other hand argued that the central issue is whether a liability to pay countervailing duty has arisen in the year or not, and whether it is discharged or not by the assessee. It is claimed that the assessee satisfies both these conditions and so, in terms of section 43B of the Act, assessee is entitled for deduction. The assessee imports liquor and beers from outside the State, to carry on his normal business and when he applies for a permit he has to pay the countervailing duty. He explained that there is always a time lag between the placement of the indent on the supplier and the receipt of the goods from the supplier. Summer is the peak season for the consumption of the beer. When the assessee places the indent in March i.e. the last month of the previous year; he gets the goods in April which falls in the succeeding year. There is no question of any manipulation of figures or permits because the time lag between the date of indent and the date of receipt of the goods is inevitable and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty imposed does not form part of cost of manufacture or production and so, is not includible in the figure of closing stock to the extent goods remained unsold. In other words, it is an overhead item which can be debited to Profit Loss Account, in contradistinction to the manufacturing account. Similarly, he relied upon the decision of the Special Bench in the case of Indian Communication Net Work (P.) Ltd. v. IAC [1994] 49 ITD 56 (Delhi) in which it was held that customs duty and excise duty are allowable as deduction under section 43B even when they are taken into closing stock, upon corresponding reduction of the opening stock of the subsequent year. He also relied upon the decision of the Calcutta High Court in the case of CIT v. Berger Paints (India) Ltd. (No.1) [2002] 254 ITR 498 in which it was held that excise duty was deductible in the year of payment and that the assessee cannot add the duty paid in one year to the extent relatable to the unsold goods relating to closing stock and claim deduction in the subsequent year as opening stock, and that such a claim would be contrary to the provisions of section 43B. 17. Similarly, the learned counsel for the assessee reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al submission by the assessee that the liability to exercise has accrued in the previous year. Therefore, the claim was not considered by the Special Bench from that angle. The reason given by them for sustaining the disallowance is that it involves adjustment to closing stock, which do not make any significant difference. The decision was rendered on balance of convenience rather than a discussion and findings on the material issue involved in the assessee's case before your Honours. For these reasons and basic differences pointed out, it is submitted that the Special Bench decision cannot be considered as affording a precedent of a binding nature. However, it is worth noting that the Bench considered levies such as property tax and held that they were incurred during the previous year by virtue of the demand raised in the same year, and therefore the entire payment including what the assessee considered as prepaid in its accounts has to be allowed as deduction. This finding in fact advances the claim of the assessee in the present appeal inasmuch as taxes duty and cess fall in the same category viz. statutory liabilities and call for same treatment. In fact they are clubbed toget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice of demand issued by a authority. Thus the decision of Hon'ble Special Bench in the case of KCP Ltd. v. ITO [1991] 38 ITD 15 (Hyd.) is clearly applicable in the present case, as far as advance payment of excise duty is concerned." 21. He also distinguished the other cases relied upon by the learned counsel for the assessee, and in this behalf, his written submissions read as under- "2. The assessee's authorised representative has further relied on the decisions of Hon'ble Special Bench, Delhi reported in 49 ITD 21 and 49 ITD 56. It is submitted in this connection that both the decisions quoted by assessee's authorised representative are distinguishable as the same dealt with the issue of valuation of closing stock after the goods had entered into assessee's business and then in the income computation. In the present case there is no dispute about the valuation of the stock because the goods had not been imported by the assessee from other states and whatever amount was paid by him is only in anticipation of future transactions for purchase of goods. The duty paid cannot be considered in isolation and it is linked to the future import of goods into the State. If for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of KCP Ltd. and also not taken into consideration the Explanation 2 to section 43B inserted by Finance Act, 1989. In this connection reference may kindly be made to paras 11 to 14 the order of Hon'ble Mumbai ITAT appearing at pages 16 and 17 of the Departmental Paper Book filed on 10-10-2003. 4. All the other case laws quoted by assessee's authorised representative are distinguishable for the reason that in the present case, goods in respect of which advance payment is made have not arrived or entered into assessee's business activities during the relevant previous year and, therefore, the liability has not accrued in the relevant previous year in any sense and even presuming for a while for argument's sake that it is a liability of this year, it is at best a contingent liability which cannot be allowed as a deduction in this year." 22. We are of the view that the Revenue deserves to succeed. Countervailing duty has been paid in compliance with the statutory requirements as a precondition for the import of goods from outside the State. The learned counsel for the assessee has claimed it as a liability, which has crystallized during the year. A liability in its strict s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of determination of cost for inventory valuation, it is necessary to consider whether excise duty should be considered differently from other expenses. 10. Admittedly, excise duty is an indirect tax but it cannot, for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use/ disposal of goods thereafter, e.g. sale, destruction and captive consumption. It does not cease to be a levy merely because the same may be remitted by appropriate authority in case of destruction or exempted in case goods are used for further manufacture of excisable goods in the factory. Tax (other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expenditure incurred by him and it does not cease to be an expenditure merely because it is exaction or a levy of because it is unavoidable. In fact, in a wider context, any expenditure is an imposition which a manufacturer would like to minimize. 11. Excise duty contributes to the value of the product. A 'duty paid' product has a higher value than a product on which duty remains to be paid and no sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the assessee. The assessee before us is not a manufacturer. He is actually a trader. Even in the case of manufacturer, there are separate accounts maintained as under: - (1) Manufacturing Account (2) Trading Accountant (3) P L Account 27. Even if a consolidated account is maintained for manufacturing and trading, profits are separately determined, and an item which is not debited to the manufacturing account can still be regarded as a trading expense. Net profit is arrived at after ascertainment of manufacturing profit and trading profit. So, when, the Apex Court mentioned that the excise duty is not a manufacturing cost but falls for consideration in determining the net profit, it does not, to our mind, follow that it is not an item falling for consideration in the determination of gross profit which is the relevant item of profit for considering the issue before us. 28. In the case of Food Specialities Ltd. wherein claim for deduction of excise duty relatable to the goods sold was involved, it was, as per the relevant portion of the head-note observed as under:- "Excise duty is a levy, on the 'manufacture' or 'production' of goods and not related to a stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any manner." 29. It may be observed that the above decision is based upon the decision of the Hon'ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. and to our mind, it appears that the Special Bench did not consider the distinction brought out by us hereinabove between manufacturing profit and gross profit. As to our mind, the decision of the jurisdictional High Court in the case of Gopi Krishna Granites India Ltd. v. Dy. CIT [2001] 251 ITR 337(AP) is against the decision of the Special Bench of the Tribunal, we are unable, with respect, to follow the said Special Bench Decision of the Tribunal. Similar is the position with the decision of the Special Bench of the Tribunal in Indian Communication Network (P.) Ltd.'s case. 30. In the case of CL Gupta Sons, which is in favour of the assessee, on the scope of section 43B, Hon'ble Allahabad High Court observed as under: - "In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it is deductible only in the year in which it is actually paid, i.e. for the assessment year 1987-88, irrespective of the year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbiguous provisions of the Act and the disallowance was permissible while processing the return under section 143(1)(a)." 33. The learned counsel for the assessee submitted that the above case is distinguishable because the above case related to a contractual liability to financial institutions and not statutory liability like excise duty. The point is not whether the liability is contractual or statutory. The question is whether a deduction for payment can be allowed in terms of section 43B even when the liability for the payment did not accrue in the relevant previous year. To our mind, the Hon'ble jurisdictional High Court has clearly held that under section 43B only a disallowance can be effected for non-payment of an accrued liability, and no deduction can be allowed simply because payment had been made when there is no liability incurred for the said payment, whether the payment is towards statutory liability or contractual liability. As the ratio laid down by the Hon'ble Allahabad High Court in the case of CL Gupta Sons and Hon'ble Calcutta High Court in Berger Paints (India) Ltd.'s case and Hon'ble Madras High Court in the case of Chemicals Plastics India Ltd. is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee would be entitled to deduction in view of the provisions of section 43B." 35. For the reasons recorded by the Tribunal in the above case, we also hold that the decision of the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. is distinguishable. At any rate, if the said decision has to be construed as supportive of the stand of the learned counsel for the assessee that deduction under section 43B can be allowed on payment basis irrespective of the fact whether the liability for the same accrued or not, we have to follow the contrary view of the jurisdictional High Court in the case of Gopi Krishna Granites India Ltd. which is the binding decision. We may also mention that we have already pointed out that excise duty, though a statutory levy, is a legitimate business expenditure. 36. We find that the Bombay Bench of the Tribunal in the case of Amforge Industries Ltd. has also referred to the Special Bench decision in the case of KCP Ltd and observed as under:- "14. On a reading of the complex provisions of section 43B as a whole, we find that it cannot be pressed into service to claim a deduction otherwise not available to the assessee. In other wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act hereunder the relevant portion in totality. "26.2 It was claimed by the assessee that since section 43B requires taxes to be allowed in the year in which it is paid, this amount should be allowed as a deduction in this year. The Income-tax Officer was of the view that the pre-paid taxes were not payable by the assessee under any law and, therefore, disallowed the claim to be considered during the year in which the taxes were payable under the law. On appeal, the Commissioner (Appeals) was of the view that the relevant question was whether the, expenditure related to the year of account and only if there was a provision for the expenditure, section 43B could be invoked. He accordingly confirmed the rejection of this claim. 26.3 Before us it was contended on behalf of the assessee that since the assessee had admittedly paid all the taxes and under section 43B taxes are to be allowed as a deduction on payment, the claim of the assessee should be accepted. On the other hand, it was contended on behalf of the revenue that since the expenditure had not been claimed as a deduction under the profit and loss account, it was not required to be considered. 26.4 On a consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the previous year and has been met by the assessee in the previous year, the deduction has to be allowed. However, with reference to the excise duty paid in respect of raw materials which have not entered into the computation of the value of stock sold during the previous year the apportionment made by the assessee will have to stand. This is because, if such prepaid taxes are to be taken into account then valuation of closing stock has to be revised as a consequence, with the result that only will it meet an unnecessary recomputation but the result may, not also be significantly different. In the circumstances, we direct the ITO to verify the above expenditure and allow such expenditure as have been incurred in the previous year and apportioned on time basis. But prepaid taxes apportioned on the basis of stock valuation need not be considered for such deduction. The ITO is directed to recompute the total income." 38. From the above, it is clear that what is allowed is only levies like property tax for which there is a demand. Such levies, though the represent prepaid expenses in the books, are held to be allowable. Whereas levies referable to the stock in trade like the excis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aler as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in case where such costs is separately charged." This definition is in two parts. The first part says that 'sale price' means the amount payable to a dealer as consideration for the sale of any goods. Here, the concept of real price or actual price retainable by the dealer is irrelevant. The test is, what is the consideration passing from the purchaser to the dealer for the sale of the goods. It is immaterial to enquire as to how the amount of consideration is made up, whether it includes excise duty or sales tax or freight. The only relevant question is as to what is the amount payable by the purchaser to the dealer as consideration for the sale and not as to what is the net consideration retainable by the dealer. 8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The adjustment claimed by way of a deduction for the prepaid taxes is out of the apprehension that it cannot be allowed in subsequent year because of the provisions of section 43B. That apprehension, to our mind, seems to be misplaced because the scope of section 43B is to disallow deduction for an otherwise allowable liability on the ground of non-payment, but when the payment had already been made and the payment is transferred to the trading account in the next year, it becomes allowable as part of cost of goods sold, and no separate deduction is called for. It is not for us at this stage to give any direction as to what should happen in the subsequent year. However, the amount of Rs. 25,36,671 disallowed in the first year deserves to be taken to the assessment year 1991-92 as part of the cost of the goods sold in that year. We hope that a similar treatment would be given for the amount of Rs. 58,44,632 involved in the second year, viz;, assessment year 1991-92 in its succeeding year. 43. For the above reasons, we answer the question referred to us in the negative and in favour of the Revenue and hold that the excise duty paid in advance cannot be allowed as a deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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