TMI Blog1994 (12) TMI 142X X X X Extracts X X X X X X X X Extracts X X X X ..... unpaid statutory liabilities of Rs. 50,16,888 had not been included in the total income and, therefore, the assessment was erroneous and prejudicial to the interest of revenue. The section of the Act under which the amount should have been added was not mentioned either in the order under section 263 or in the show-cause notice sent earlier. Thereafter a fresh assessment order was passed in July 1991 making an addition of Rs. 47,83,916 on account of Central Excise Duty refund received by the assessee during the year. 4. The Assessing Officer observed in the fresh assessment order that according to auditor's report the assessee was following mercantile system of accounting except for certain items. The auditors noted that the company was following cash basis in respect of " these claims, refunds and duty draw backs etc. " The assessee had received a refund claim of Rs. 47,83,916.45 on the basis of an order of the Customs, Excise Gold (Control) Appellate Tribunal, New Delhi, but the Assistant Collector of C.E., Jamshedpur had preferred an appeal before the Supreme Court against the order. Hence the amount had not credited to the Profit and Loss Account. It was submitted before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit that the disputed amount refunded to the company amounting to Rs. 43,83,916 is an existing liability of the company and the ld. Assessing Officer has erred by including it as a part of taxable income of the company. We request your honour to consider this point in the light of the decisions of Hon'ble High Court of Allahabad in the case of Rameshwar Pd. Kishan Gopal v. ITO [1983] 12 Taxman 281(All.) and Hon'ble High Court of Kerala in the case of M/s. K. V. Moosa Koya Co. v. ITO [1968] 84 CTR page 14. The Hon'ble High Courts have ruled in view of the Government appeal to Supreme Court, assessee's liability to pay excise duty had not been finally extinguished and, therefore, section 41(1) was not applicable. It will be applicable only in the year of liability finally extinguishing." 5. The CIT(A) did not find merit in the contention and held that since the assessee had received a refund claimed on the basis of an order of the Customs Central Excise Gold (Control) Appellate Tribunal, the amount was includible in the income of the assessee. The ground was rejected. The assessee is aggrieved by this decision and is now in appeal before us. 6. In ground No. 3 before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 120 ITR 175 (Ker.). 4. CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC). The ld. counsel for the assessee took us through the relevant parts of the above judgments also. 8. In the course of hearing before us, it was pointed out by the Bench that a Delhi Bench of the Tribunal in the case of Sylvania Laxman Ltd. v. IAC [1992] 41 ITD 192 had considered the question whether sales-tax collected by an assessee is to be treated as trading receipt, even if the assessee had not treated it as such in its account books and the answer had been given in the affirmative. The nature of the assessee's entries with regard to excise duty were similar and the same decision would be applicable in the present case. No further submissions were made by the ld. counsel for the assessee in this regard. 9. It was also pointed out by the Bench that in the case cited by the ld. counsel for the assessee, the accounts were being maintained on mercantile basis and they were cases where it had to be determined whether there was cessation of liability. However, in the present case, refunds of excise duty were being shown on cash basis by the assessee and, therefore, the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no appeal pending. In the circumstances, the cessation of liability was also final. However, in the present case, the matter was subjudice before the Supreme Court and, therefore, the cessation was not final. 14. We have considered the rival submissions carefully. The Assessing Officer has not specified the provisions of Income-tax Act, 1961 under which the addition was being made by him. Thereafter in the assessee's letter submitted to the CIT(A), an extract from which has been reproduced above, it was stated that section 41(1) of the Act was not applicable. The assessee, therefore, replied on the basis that the addition had been made under section 41(1) of the Act. The CIT(A) has also not specified the provisions of the Act under which the addition was being confirmed. Thereafter, the submissions before us by both sides have been made on the basis that the addition was made under section 41(1) of the Act. We agree that the addition, if at all, has to be considered under these provisions and will proceed accordingly. Consequently, the assessee's alternative contention that section 43B of the Act cannot be invoked for the addition loses significance and becomes infructuous. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 where it was held that it is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the Assessing Officer from treating it as a trading receipt. In view of the above it was held that the collections would be treated as part of the trading receipts and the same would be set off by the corresponding accrued liability. A reference was also made, inter alia, to the decision of the Patna High Court in the case of Tata Robins Frazer Ltd. v. CIT [1987] 165 ITR 347 where it was held that sales-tax collected by the assessee but not paid to the treasury was assessable as income of the assessee. 17. We have also referred to the decision of the Gujarat High Court in the case of MotilalAmbaidas where it was held as follows at page 147 : " The amount of sales tax payable in respect of sales effected by the particular assessee forms part of his trading receipts and has to be shown on the credit side. As and when he pays the sales-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn on the receipts side what the assessee-firm paid to the Government as sales-tax dues even though disputing its liability to pay tax, would have been shown as a deduction on the debit side. The assessee-firm would have been entitled to this deduction in view of the decision in Chowringhee Sales Bureau's case [1973] 87 ITR 542 (SC) and Sinclair Murray Company's case [1974] 97 ITR 615 (SC). Under the circumstances, these amounts of sales-tax collections which the assessee's firm was bound to show on the credit side when received and was entitled to claim as deduction when sales tax was paid must be treated as deductions which ought to have been made and thus, the principle had laid down in Gursahai Saigal's case [1963] 48 ITR 1 (SC) would clearly apply in the instant case. We, therefore, read the words at the commencement of section 41(1) 'Where an allowance or deduction has been made in the assessment for any year' as 'Where an allowance or deduction ought to have been made in the assessment for any year' so far as the facts of this case are concerned, and so reading that provision, it must be held that the provision of section 41(1) apply to the facts of this case. It is, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the present case. 23. In this connection, it will be useful to see the facts of the case of Rameshwar Prasad Kishan Gopal in a little greater detail. The petitioner had challenged the levy of excise duty on poppy heads and the High Court held that the provisions levying excise duty were ultra vires. The amount of excise duty was deposited in the High Court in pursuance of the Court and refunded to the assessee when the writ petition was allowed in accounting year relevant to assessment year 1974-75. The State and the Central Governments filed appeals before the Supreme Court and they were pending. The reassessment proceedings were initiated for assessment year 1974-75 treating the amount of refund as income. It was held by the High Court that since appeals were pending before the Supreme Court, liability was not finally extinguished so as to treat refund receipt as income liable to tax under section 41(1) of the Act. At a first glance it may look as if the amount of excise duty actually paid was still treated as trading liability. However, this was not so. The High Court held that the deposit of excise duty in the High Court was not by way of discharge of liability, but w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mercantile system of accounting completely. However, in the case before us, the assessee was following mercantile system with certain exceptions which have been duly enumerated in the assessment order. The company was following cash basis in respect of claims, refunds and duty drawbacks, etc. The implications of this system have to be seen. 25. There are two principal systems of book keeping. Firstly, there is the cash system in which a record is maintained or actual receipts and actual disbursement, entries being posted when money or moneys worth is actually received, collected or disbursed. Secondly, there is the mercantile system in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liability is incurred, irrespective of the date of payment. Apart from the two principal systems, there is a possibility of an assessee adopting a hybrid system of accounting in which certain elements and incidents of cash and mercantile systems are combined. The assessee was following such a hybrid system of accounting. The acceptability or otherwise of the hybrid system in the facts and circumstances of the case has no ..... 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