TMI Blog1994 (1) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... hanpal National Ltd. v. ITO [1986] 162 ITR 240 and adjudicated in the assessee's favour whereas the Tribunal in certain decisions delivered by it had decided the matter against the assessees being of the view that the decision of the Gujarat High Court [1986] 162 ITR 240 did not apply. As the issue raised involved legal principles as also those of accountancy having far-reaching consequences, it was decided to constitute a Special Bench by the President to hear the same, accepting the suggestion made by the Division Bench by its note dated August 26, 1992. At the outset, we propose to decide the main ground and the remaining grounds would be decided in their respective order. A return of income showing total income of Rs. 14,22,830 was filed on August 31, 1984. In a revised return filed on December 31, 1984, the assessee "claimed deduction under section 43B amounting to Rs. 27,04,579 on account of customs duty and excise duty paid before December 31, 1983, included in the closing stock" and which figure now stands revised to Rs. 26,98,713, vide page 59 of the assessee's compilation. It is an accepted fact between the parties that the aforesaid sum represents the customs duty an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ITD 524. Learned counsel, Shri R. Ganesan, at the outset, outlined the provisions of section 43B vis-a-vis the explanatory notes/legislative intent and the Circular of the Board thereof. [ See 140 ITR (St.) 31 and 146 ITR (St.) 34 ]. The further detailed arguments can be summarised as under : (1) The non obstante clause with which section 43B begins makes it abundantly clear that it overrides all other sections of the Act. A comparison was drawn to the provisions of sections 40A(1) and 40A(7) ; (2) The effect of the said section is to disturb the regular "method of accounting" stipulated by section 145 and which includes valuation of closing stock. To this extent the section operates as a proviso to section 145; (3) That section 43B envisages a "recasting" of the revenue account on "cash basis" and the resultant "processed" profits alone are to be considered for purposes of sections 28 to 41 ; (4) That only a transaction of sale results in a profit and not when the goods are lying in stock ; (5) That non-allowance in one year would mean automatic deduction in the subsequent year inasmuch as closing stock of one year would become the opening stock of the next year and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion of India [1986] 160 ITR 50 (Kar) ; (iv) CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) ; (v) CIT v. Jagannath Mahadeo Prasad [1969] 71 ITR 296 (SC) ; (vi) Sanghi Motors v. Union of India [1991] 187 ITR 703 (Delhi) ; (vii) P. M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) ; (viii) Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad) ; (ix) CIT v. S. Teja Singh [1959] 35 ITR 408 (SC) ; and (x) Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). Learned counsel also referred to the commentary of learned authors Kanga and Palkhivala, Eighth Edition, Volume I, pages 740 and 741. He further contended that a "double deduction" was not contemplated. As regards the various decisions of the Tribunal on the subject learned counsel stated that these were distinguishable since the arguments raised in the present appeal were not raised nor dealt with in those decisions. According to him, the decision in the case of Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 (Delhi), did not deal with the question whether the regular method of accounting stood disturbed by invoking section 43B, the main sum and substance being that closing stock could not be "tink ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and could not be deferred to any other year ; (v) Section 43B created a legal fiction by which a deduction was available on the basis provided in the said section irrespective of the method of accounting followed by the assessee. Further, the legal fiction had to be carried to its logical conclusion ; (vi) The issue raised in the appeal was squarely covered by the decision of the Gujarat High Court in the case of Lakhanapal National Ltd. v. ITO [1986] 162 ITR 240, and this being the only decision the Tribunal was duty-bound to follow it. In support of his arguments, Shri Vaish relied on the following reported decisions : (i) Ramswarup Bengalimal v. CIT [1954] 25 ITR 17 (All) ; (ii) Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad) ; (iii) Investment Ltd. v. CIT [1970] 77 ITR 533 (SC) ; (iv) All-India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1 (Delhi) ; (v) CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 (Bom) ; (vi) CIT v. S. Teja Singh [1959] 35 ITR 408 (SC) ; (vii) Hariprasad Jayantilal and Co. Ltd. v. ITO [1962] 45 ITR 294 (Guj) ; and (viii) Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43B was defined and limited to deductions and it did not stipulate the recomputation of profits as was normally understood for purposes of section 28 read with section 145. That this was evident from the language of the section itself as also the marginal notes as well as the speech of the Finance Minister ; (v) That the use of the words " . . . . . . irrespective of . . . . . . method of accounting . . . . . only in computing the income referred to in section 28 . . . . . " by the Legislature was to qualify the deduction and not to recompute the income under section 28 ; (vi) While interpreting a statute the language of the section was to be strictly followed and it was only in case of doubt that the background of bringing the said provision on the statute book had to be considered. In respect of section 43B the mischief which was proposed to be curbed was the claim of deduction vis-a-vis the unpaid amounts ; and (vii) That the interpretation on the section placed by the appellant would be tantamount to adjusting the figure of profit twice over and which was not permissible. For doing so, one would have to read "many more words" which were not there in the said section. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of their submissions on behalf of another appellant and intervener, respectively. In support of the aforesaid arguments, learned counsel invited our attention to the following authorities and which were in addition to those already cited : (i) CIT v. J. H. Gotla [1985] 156 ITR 323 (SC) ; (ii) Gursahai Saigal v. CIT [1963] 48 ITR (SC) 1 ; and (iii) Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC). A reference was also made to the Commentary of Sampath Iyengar's "Law of Income-tax", Eighth Edition, pages 2467 and 2468, to outline the scope of section 43B. The Departmental Representative was again heard on these arguments. We have examined the rival submissions and have also perused the material on record to which our attention was invited during the course of the hearing. The decisions cited at the Bar have also been duly considered. Section 43B was no doubt introduced to curb the practice adopted by the assessees to retain substantial funds by not depositing amounts into the Government account and claiming deductions at the same time, but it also brought about a change in the "method of accounting" regularly followed by an assessee. This happened due to certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how that somehow, the High Court got the impression that the Income-tax Officer wanted to disallow that portion of the customs and excise duties which pertain to the goods in the closing stock and the High Court held that in view of section 43B, this could not be done when the duties had actually been paid during the relevant accounting year. The Income-tax Officer's assertions, on the other hand, had been that he is not disallowing any portion of the duties paid by the assessee which are already debited to the trading and profit and loss account and that what the assessee wanted was an extra deduction in respect of the duties pertaining to the goods in the closing stock which was not permissible as those amounts were an element of cost of the goods in the closing stock consistent with the established accounting principles. The High Court has not dealt with this question at all. The issue that arose before the High Court was (1) Whether by including the value of duties in the value of goods in the closing stock, as per accounting practice, it can be said that the expenditure on such duties which is already debited in the trading and profit and loss account stands disallowed to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salutary way to appreciate the precedent of a High Court judgment. Even in the case of Durametallic (India) Ltd. [1991] 38 ITD 211 (Mad), the Tribunal dealt with the question of stock valuation vis-a-vis inclusion of customs duty. This is what was observed while dealing with the question raised ( at page 215 ) : " We have carefully considered the rival contentions and perused the records. Section 43B does not govern the valuation of closing stock and deals only with the disallowance of claim for deduction under section 43B where taxes remained unpaid. The established method of claiming deduction in the mercantile system of accounting based on the provisions made in the accounts has all been disturbed by the provisions of section 43B and the case of Lakhanpal National Ltd. [1986] 162 ITR 240 (Guj) cited above was more concerned with the provisions of section 43B. The assessee has been consistently valuing the closing stock by including the customs duty for the purpose of valuing the same. The opening stock for the year in fact contains the element of customs duty so paid and any other method which excludes the component of customs duty in the valuation of the closing stock of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce-sheet or as pre-paid expenditure once again in the balance-sheet then by virtue of section 43B he gets a deduction of Rs. 100 in the assessment year 198485 itself. No part of the deduction is carried over to the assessment year 1985-86. Example 'B'. _ Where an assessee has paid Rs. 100 as customs duty in the assessment year 1984-85 and claimed the same as a deduction, but Rs. 20 related to the goods unsold is embedded in the closing stock then he gets an effective deduction of Rs. 80 only and Rs. 20 is allowed in the assessment year 1985-86 as a part of the opening stock. This is on the interpretation of section 43B made by the Department. In other words, an assessee who claims Rs. 80 in the trading or profit and loss account gets deduction for Rs. 100, whereas the one who claims Rs. 100, in fact, gets a deduction for Rs. 80 both within the meaning of section 43B. In our opinion, such a result could not have been stipulated by section 43B. We cannot help but lay stress on the bringing to tax of the correct income of an assessee relevant to an assessment year and this can only come about if income and expenditure pertaining to a year are duly accounted for in the said year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Lakhanpal National Ltd. [1986] 162 ITR 240 (Guj) and which, according to the parties, is the only decision so far rendered on the subject, meets the points raised before us on behalf of the assessee and the view-point canvassed thereto. The various Benches of the Tribunal appreciated the said decision in different perspective and held that it was a case of "stock valuation" and "tinkering of closing stock" although what in effect was intended by their Lordships was to provide full deduction within the meaning of section 43B in the year of payment. This becomes quite clear from the following observations of their Lordships ( at page 247 of 162 ITR ) : " There is no dispute on the point that the amount of import and excise duty are allowable deductions. What is disputed on behalf of the respondent is that the amount of customs and excise duty on the value of the closing stock of the petitioner-assessee should not be permitted in the assessment year 1984-85 (accounting year ending on December 31, 1983), though actually paid in the year 1983, because the assessment of the closing stock of the year 1983, will be in the subsequent previous year which would be in 1984 and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se duty on the said goods was incurred by the petitioner-assessee. When that is so, it is also clear that the deduction of the said excise duty and import duty even on the closing stock was allowable in the accounting year 1983, but because of the specific language of section 43B of the Act which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made and, therefore, it is not allowable. Therefore, the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles are claimed as deductions merely because they are paid, cannot be accepted. The last facet of Mr. Shelat's argument is that the expenditure on paying import and excise duty in respect of the closing stock does not pertain to the goods sold in the year. This argument runs counter to the mercantile method of accounting as well as the specific language of section 43B of the Act. It is not disputed that the said goods in the closing stock were either imported or manufactured in the accounting year 1983 and as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of the assessment proceedings made a disallowance/addition of Rs. 4,51,154 which represented the unpaid amounts on account of sales tax, etc. On further appeal before the Commissioner of Income-tax (Appeals), it was contended that the aforesaid figure included certain amounts brought forward from the preceding assessment year and these could not be disallowed in the assessment year under appeal because no deduction had been constructively claimed and allowed in the accounts. The aforesaid arguments found favour with the Commissioner of Income-tax (Appeals) who proceeded to delete the addition to the extent of Rs. 3,00,000 confirming the balance. Learned counsel, at the outset, was fair enough to accept that the issue was squarely covered against the assessee by the decision of the Delhi High Court in the case of Sanghi Motors v. Union of India [1991] 187 ITR 703, but hastened to add that the appeal had been filed with a view to keep the matter alive. The further submission on his part was that a sum of Rs. 34,500 pertained to the collections made in the previous year relevant to the assessment year 1983-84 and not having been debited to the profit and loss account t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year as well and facts remaining identical there was no good basis on the part of the tax authorities to reject it in the intervening assessment year. According to him, the assessee had complied with all the relevant provisions of law by obtaining approval for research from the notified authority and inasmuch as the expenditure had actually been incurred the claim be directed to be allowed. The alternative submission on the part of counsel was that it was in a position to satisfy the Assessing Officer about the bona fides of the claim and for which purpose the matter could be remitted back. The learned Departmental Representative although initially opposing the arguments of learned counsel was later on fair enough to accept that there would be no objection on the part of the Revenue in case the matter was restored back to the Assessing Officer for a decision de novo on the merits. In view of the aforesaid accepted position, we set aside the order passed by the Commissioner of Income-tax (Appeals) and restore the matter back to the file of the Assessing Officer for a decision de novo. In the view that we have taken to remit the matter back, it would not be necessary for us to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income-tax (Appeals) who observed that the Assessing Officer had taken a "very rigid view of the matter", but at the same time noting that the assessee did not have any break-up of the expenditure. The further argument which was advanced before him was that the estimate be suitably reduced. The latter argument found favour with the Commissioner of Income-tax (Appeals) who concluded that one-third of the expenditure be treated as reimbursement and taken out of the purview of the disallowance. He, however, upheld the inclusion of Rs. 1,00,000 out of the expenditure incurred on touring by the employees. He rejected the argument advanced by the assessee to the effect that the said expenditure was not includible. The Commissioner of Income-tax (Appeals), however, gave relief in respect of various other items such as brokerage, commission, etc., but these are not the subject-matter of the appeal before us and hence not discussed. We have heard both the parties at some length in respect of the specific grounds raised by the assessee. We have also perused the material on record to which our attention was invited. In our opinion, there does not appear to be any scope for accepting the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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