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2016 (4) TMI 746 - BOMBAY HIGH COURT

2016 (4) TMI 746 - BOMBAY HIGH COURT - [2016] 386 ITR 608 - Allowance of liability on account of customs duty - Held that:- Contention of Mr. Chhotrary that the seller had not shown the consideration as his receipt of sale of the goods and, therefore, the buyer of the goods i.e. Respondent-Assessee cannot claim the same as a deduction is not sustainable. The remedy, if any of the Revenue to bring to tax the income in the hands of the seller of the goods. There is nothing on record to indicate th .....

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erit in the first submission made on behalf of the Revenue. - As the Respondent-Assessee is admittedly following the Mercantile Systems of Accounting and as held by the Apex Court in Kedarnath Jute Mills ( 1971 (8) TMI 10 - SUPREME Court), mere challenge to the demand by the seller may not by itself lead to the liability ceasing. Although, the seller of the goods may not be able to claim/obtain a deduction on the above account as the same has not been paid in terms of Section 43B of the Act. .....

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ms Department, then the consideration payable for the goods would stand reduced by virtue of Section 41 of the Act, the very amount of ₹ 1.78 Crores or the extent to which the Apex Court sets aside the demand. Therefore, Respondent-Assessee would be liable to pay tax under Section 41 of the Act on remission as its liability to pay for the goods purchased from the seller would stands reduced. - The customs duty, if any, is payable by the importer at the time of import and clearance of t .....

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ted:- 16-4-2016 - M. S. Sanklecha And A. K. Menon, JJ. For the Petitioner : Mr. P. C. Chhotrary For the Respondent : Mr. S. P. Goyal JUDGMENT ( Per M. S. Sanklecha, J. ) This Reference in respect of Assessment Year 198586 under Section 256(1) of the Income Tax Act, 1961 (the Act) is made by the Income Tax Appellate Tribunal (Tribunal), seeking our opinion on the following question of law: Whether on the facts and in the circumstances of the case, the Tribunal was right in law in setting aside th .....

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under Agreements dated 4th January, 1984 and 5th January, 1984. The price as agreed in both the cases was the gross costs to the seller with a net profit of ₹ 1/per kg to M/s. Ajay Woolen Mills and ₹ 1.50 kg. to M/s. Sanjeev Woolen Mills. The gross costs included all expenditure incurred by the seller from the opening of letter of credit up to the final execution of the contract for supplying the goods to the appellant. However, as there was uncertainty about the incidence of customs .....

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terms of Court Orders on the consignments being imported by the seller which the seller, in turn, has agreed to supply to the buyer, but in case at some later stage, any such liability occurs and any duty is required to be paid, the same too, will be the exclusive liability of the Buyer as the same will be nothing but a part of the cost and for this purpose, the buyer has undertaken to stand guarantee in any manner acceptable to the customs or the Bank to the effect that in case any such duty be .....

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dent-Assessee to its seller as a part of the cost of the goods. 4. Consequently, it debited the sum of ₹ 1.78 crores to its Profit & Loss Account while determining its income chargeable to tax under the Act in its return of Income for Assessment Year 198586. The Assessing Officer while completing assessment under Section 143(3) of the Act, by order dated 8th November, 1985 also accepted the expenditure incurred of ₹ 1.78 Crores (on account of customs duty) being debited to the Pr .....

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same in the Supreme Court and the payment of the same to customs had been postponed and thus, could not be allowed as an expenditure for the subject Assessment Year. Consequently, CIT by order dated 24th March, 1988 directed the Income Tax Officer to revise the assessment and recompute the Respondent-Assessee's income after disallowing the claim of ₹ 1.78 Crores as expenditure debited to Profit & Loss Account in respect of Assessment Year 198586. 6. Being aggrieved, the Respondent- .....

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eld that the liability to pay the customs duty by the Respondent-Assessee, was a part of the sale price to the two sellers and consequently, ought to be allowed as an expenditure for purchase of goods. In the above view, the Appeal of the Respondent-Assessee was allowed. 7. Mr. Chhotaray, learned Counsel appearing for the Revenue in support of the appeal makes the following submissions : (a) The amount of ₹ 1.78 Crores being the customs duty which is payable as a part of consideration of g .....

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he Supreme Court which had granted a stay of the payment. It is therefore submitted that the liability had not accrued during the subject assessment year and, therefore, could not be allowed as a deduction; and (c) Reliance is placed on the decision of the Apex Court in Mcdowell and Co. Vs. ITO 154 ITR 148 to contend that it covers the issue completely in favour of the Revenue. Thus, the question as raised be answered in its favour. 8. As against the above, Mr. S. P. Goyal, partner of the Respon .....

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ondent-Assessee that the Reference made to this Court is time barred, is without substance. It is not the case of the Respondent-Assessee that the Reference Application before the Tribunal was not made within 60 days by the Commissioner of Income Tax from the receipt of the order dated 17th July, 1989 passed by the Tribunal. The time taken by the Tribunal to dispose of the Reference Application filed by the Revenue, cannot be held against the Revenue. Thus, the objection taken by the Respondent- .....

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in accordance with Section 30 to 43D of the Act. Section 37 of the Act is a general / residury provision which allows all expenditure incurred wholly and exclusively for the purposes of the business to be deducted from income in computing profits and gains of business. The expenditure which is incurred for purchase of goods for the purpose of sale would be an expenditure allowable for the purpose of computing the profits and gains of business. One more feature which must not be lost sight of i.e .....

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pex Court in Keshav Mills Vs. CIT 23 ITR 230 to be that system which brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which legal liability has been incurred before it is actually disbursed . Thus, a liability which has occurred during the year has to be taken into account even though it may be discharged / paid - in the future. However, a liability that is not ascertained or that which is co .....

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IT 82 ITR 363 - has, inter alia, held that once a liability to pay Sales Tax is attracted (on purchase / sale of goods) merely because the Assessee has taken proceedings to wipe out and/or reduce the liability by approaching the Court, it would not cease to be a liability till such time as an higher Authority or Court wipes out the liability. It must be pointed out that w.e.f. 1st April, 1984, Section 43B of the Act provides no deduction of any services payable as tax would be allowed unless it .....

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that the bills did not include this liability is also not correct in view of his own statement that the following note was appended at the end of the bill: Subject to your liability of Rs...... against custom claim under dispute. This in our opinion, is a clear acknowledgment by the assessee as well as the sellers that consideration for the sale was the price plus the custom duty. In any case, the agreements between the parties provides that the consideration payable for the purchase of goods in .....

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which were issued by the seller, specifically provides that the bills have been issued subject to the liability of the buyer to pay customs duty which is under dispute. 13. The contention of Mr. Chhotrary that the seller had not shown the aforesaid consideration of ₹ 1.78 Crores as his receipt of sale of the goods and, therefore, the buyer of the goods i.e. Respondent-Assessee cannot claim the same as a deduction is not sustainable. The remedy, if any of the Revenue to bring to tax the in .....

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eration as a part of his income while discharging its obligation to pay tax under the Act. Thus, there is no merit in the first submission made on behalf of the Revenue. 14. It is next submitted that the amount of ₹ 1.78 Crores payable by the Respondent-Assessee to the Appellant is a contingent liability as the seller of the goods was disputing the customs duty payable with the Customs Department and the Apex Court had also granted a stay of recovery of the dues of customs from the sellers .....

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Court has merely kept in abeyance demand of ₹ 1.78 Crores payable by the seller to the Customs Department. The liability to pay the customs duty to the State under the Customs Act is undisputedly of the seller of the goods. The nonpayment of customs duty by the seller of the goods would invite penalty, prosecution etc. upon the seller of the goods who had imported the raw materials. The Respondent-Assessee is liable to pay to the sellers the price of the goods which in terms of the bargain .....

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y ceasing. Although, the seller of the goods may not be able to claim/obtain a deduction on the above account as the same has not been paid in terms of Section 43B of the Act. However, this does not in any way deprive the RespondentAssesse of the deduction of the amounts paid for purchase of goods. Thus, we are not able to accept the submission on behalf of the Revenue. Thus, the Respondent-Assessee would be entitled to deduct the aforesaid amount of ₹ 1.78 Crores as consideration paid for .....

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bility to pay for the goods purchased from the seller would stands reduced. 15. It was next contended on behalf of the Revenue that in any case, the decision in Mcdowell & Company Ltd. (supra) would cover the issue in favour of the Revenue. It is submitted that the entire exercise undertaken by the Respondent-Assessee was only to avail deduction in respect of customs duty payable which the importer/seller of the goods would not get in the absence of making payment of duty of customs on impor .....

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as nonest on the basis of subjective assessment by the Assessing Officer of the real motive of the Assessee. In this case, the plain bargain between the parties in respect of the price of goods is costs + ₹ 1 or ₹ 1.50 per kg. The costs include customs duties payable on imported goods. The further insertion of a clause in the Agreements is only to ensure that increase in the customs duty payable on the imported goods would also be considered to be a part of the costs i.e. purchase p .....

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was required to pay Sales Tax on the basis of its turnover. Under the State Excise Act, the excise duty was payable on removal of liquor from the distilleries and only if the excise duty has been paid to the Excise Authority of the State, the goods could be removed. This excise duty element was also to be included in the turnover of M/s. Mcdowell & Company Ltd. (supra). However, M/s. Mcdowell & Company Ltd. (supra) asked the buyers of liquor to pay directly to the State the excise duty .....

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