1. At the instance of the revenue the following question is referred to us for our determination :
0'Whether, on the facts and in circumstances of the case, deduction in the sum of Rs. 29,33,886 by way of additional export duty for the assessment year 1959-60 is warranted ?'
The assessee is a public limited company incorporated in Great Britain and is having its registered office at London. It is engaged in the business of winning and selling manganese ore. In the relevant assessment year the company was assessed as a non-resident. The company was assessed to provisional duty on the consignments of manganese ore as indicated in the letter dated September 29, 1952, from the Collector of Central Excise, Madras, addressed to the assessee. A relevant extract of the Tribunal (sic). The letter clearly stated that it was proposed to reassess the consignments on the basis of the known cost of the goods of the like kind and quality which could be delivered at the time and place of exportation in the ordinary course of business. In the year 1958 the company finally got various demands as under :
Date of order received Amount of total additionalduty demandRs.28-8-1958 to 1-9-1958 4,09,308.692-9-1958 to 8-9-1958 6,53,496.605-9-1958 to 4-10-1958 16,93,207.9619-12-1958 to 31-12-1958 1,77,873.06-------------Total 29,33,886.31-------------
When the company made a claim for reduction of this amount before the Appellate Assistant Commissioner, the same was rejected by him on the ground that the amount was neither accepted by the company nor any payment made in the year of account. He felt that the deduction could not be allowed in the assessment year in question. According to him, in respect of such claims, the principle followed was that the expenditure was allowed in the year in which the payment was made. He also stated that one had to follow the basis for allowance uniformly in each case and the principle of allowing expenditure uniformly each year in each case could not be ignored. According to him, it would not be correct to depart from the same principle from year to year.
In an appeal by the assessee, the Tribunal allowed the claim for deduction of Rs. 29,33,886.31. The Tribunal pointed out that there was no dispute as regards the fact that the demand was raised only in the previous year relevant to the assessment year 1959-60. According to him, such amount would fall to be considered and allowed in the year in which the liability for the first time accrued. It was also observed by the Tribunal that a similar claim in respect of the same assessee had been allowed by the Tribunal in the earlier year. It also rejected the contention of the revenue that the claim ought not to be allowed as no such claim was made before the Income-tax Officer. It is from this order of the Tribunal that the above question has been referred to us for our determination.
Mr. Joshi, on behalf of the revenue, submitted that the Tribunal was not justified in permitting a deduction because the amount was not paid by the assessee. In fact, the assessee, according to him, disputed that liability to pay this amount. Apart from not making a payment, he did not make an entry even in the books of account for his liability. This being the position, according to his submission, the Tribunal was in error in permitting a deduction of the sum of Rs. 29,33,886 for the relevant assessment year 1959-60 in respect of the demand made for the additional export duty.
It is not disputed before us that the assessee has maintained the accounts on mercantile system of accounts and in respect of such system of accounting when a liability is incurred in an accounting year relevant to the assessment year under a statute, then irrespective of whether the liability is disputed or payment is made or not or even an entry is made or not, the assessee will be justified in making a claim for reduction. It would be relevant in this connection to refer to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax : 82ITR363(SC) , where a question as regards the sales tax liability notwithstanding the fact that it was disputed and no entry was made came to be considered. The facts of the case show that the assessee-company, which followed the mercantile system of accounting, incurred a liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1955-56. The sales tax demand was raised pending the income-tax assessment for that year. The Income-tax Officer rejected the assessee's claim for deduction of that amount on the ground, (i) that the assessee had contested the sales tax liability in appeals, and (ii) that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or courts taken by the assessee contesting its liability to pay the sales tax ultimately failed. It was held by the Supreme Court that the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee, which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year. The assessee was entitled to the deduction of the sum of Rs. 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under section 10(1) or under section 10(2)(xv). It was held by the Supreme Court that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.
The ratio of this case will be clearly applicable to the facts of the present case. It is not disputed in the present case that during the relevant accounting year a demand for payment of additional export duty was made for which deduction was claimed. It is not the case of the revenue that in view of the dispute raised by the assessee, the additional amount of export duty, which the assessee is called upon to pay, has been reduced or modified. As the assessee maintains the books of account on mercantile system, it will be entitled to claim a deduction on the footing of the liability arising in the relevant accounting year. That such is the position even in respect of the taxes payable is also clear not only from this decision by also from a decision of the Madras High Court which has been approved by the Supreme Court in the above case. In Pope the King Match Factory v. Commissioner of Income-tax : 50ITR495(Mad) , a similar demand for excise duty came to be considered before the Madras High Court. Such a demand was served on the assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed, he debited this amount in his accounts on the last day of his accounting year, and claimed this amount as a deductible allowance in computing his income for the assessment year 1955-56, on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court held that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavor to get out of that liability by preferring appeals to statutory authorities cannot in any way detract from or retard the efficacy of the liability imposed upon him by the competent excise authority. This decision of the Madras High Court has been approved by the Supreme Court as laying down the correct law.
Thus, it is quite evident that notwithstanding the dispute having been raised as regards the amount to be paid by way of additional export duty or failure to make entries in the books of account the Supreme Court has taken the view that if a statutory liability arises in a particular relevant year, then, an assessee maintaining the books of account on mercantile system, is entitled to claim a deduction in the year in which the liability arises notwithstanding the fact that he is taking steps to dispute his liability and he fails or omits to make entries in the books of account. The mere fact that such a deduction was not claimed before the Income-tax Officer is, in our opinion, not of much importance. If the liability arises then a claim can be made bona fide at any stage before the higher authority, who is competent to grant relief. In the present case, such a claim was made before the Appellate Assistant Commissioner but was negatived by him. If the liability is arising pursuant to a demand made by a department of the Central Government, it would be improper on the part of the taxing authority to reagitate the same matter and contend that since no claim for deduction was made before the Income-tax Officer, it cannot be made later on before either the Appellate Assistant Commissioner or the Tribunal when the matter is under investigation by these authorities in assessment proceedings. Thus, in our opinion, the Tribunal was right in taking the view that the assessee was entitled to a deduction.
The question referred to us is accordingly answered in the affirmative and in favour of the assessee. The revenue shall pay the costs of the assessee.