K.K. Desai, J.
1. In this reference under section 66 (1) of the Indian Income-tax Act, 1922, the following question arises for decision :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 14,95,252 or any part thereof can be allowed as expenses of the Samvat Year 2014 ?' The facts appear in the statement of the case. The assessee is a registered firm and carries on business in sale and purchase of cloth. In this case, the assessment year in respect whereof the above question has arisen is 1959-60, the accounting year being S. Y. 2014, i.e., October 24, 1957, to November 11, 1958. It appears that between March, 1956, and December, 1957, the assessee purchased a large quantity of handloom cloth-cotton fabrics manufactured by certain groups of weavers at Sangli, Madhavnagar and Ichalkaranji. The officers of the Central Excise were of the view that the cloth purchased in the above manner was in fact manufactured by the weavers on behalf of the assessee-firm. As excise duty was levied on cotton fabrics, the Suprintendent, Central Excise, Sangli, by a demand notice issued under rule 9(2) of the Central Excise Rules, 1944, and addressed to the assessee-firm, called upon it to pay the excise duty in the sum of Rs. 14,95,252 within 10 days from the date of the notice. The assessee-firm was informed that in respect of the cotton fabrics manufactured on its behalf and detailed in the attached sheet it had failed to pay duty as laid down in rule 9 (1) of the Central Excise Rules, 1944. In respect of the amount demanded by the above notice, the assessee-firm made entries in its books as of November 11, 1958, debiting the above sum as excise duty payable and crediting the excise duty payable account.
2. By its attorneys' letter, dated September 18, 1958, the assessee-firm made diverse contentions regarding the firm being not liable to pay the duty demanded under the above notice and called upon the Assistant Collector, Central Excise, to cancel and withdraw the notice. In the letter it was, inter alia, pointed out that business of the assessee-firm was not of manufacturing cloth and it had not got manufactured the cloth in question. Reference was made to diverse sections in the Central Excise and Salt Act as also the Central Excise Rules, 1944. It was contended that under the Act and the Rules the assessee-firm (being not a manufacturer) was not liable to pay any excise duty. The assessee-firm had accordingly not failed to pay duty in accordance with the provisions in rule 9 (1). The demand for payment of excise duty under rule 9 (2) was accordingly misconceived. The attorneys of the assessee-firm sent a reminder, dated September 30, 1958, for cancellation and withdrawal of the notice of demand. By his reply letter dated October 22, 1958, the Assistant Collector, Central Excise, referred to the above two letters of the attorneys of the assessee-firm. In the letter it was, inter alia, stated that :
'....I have now been directed to inform you that the demand for duty of Rs. 14,95,252 at standard rate served on you by Superintendent, Sangli, can be reviewed and duty only under compounded levy system can be charged in your case, as a special case, provided you agree to pay such duty under compounded levy system instead of duty at standard rate which is ordinarily due to the Government. Please, therefore, let this office know immediately by furnishing a written undertaking that you are agreeable to pay the duty at compounded rates, so that necessary steps to issue revised demand can be taken to enable you to pay the amount of duty without any delay.'
3. The assessee-firm by its letter dated October 31, 1958, wrote to state :
'We note that the demand can be reviewed and charged on compounded levy system in our case as a special case and that you want a written undertaking to this effect. We are agreeable to payment of duty calculated on compounded levy system provided we are found liable for the same after being heard by you and provided further that should we feel aggrieved by your decision we may have a right of appeal to the higher authorities.'
4. By a fresh notice of demand dated December 22, 1958, issued under rule 10A of the Central Excise Rules, the Superintendent of Central Excise, Sangli, called upon the assessee-firm to pay excise duty in the sum of Rs. 2,42,090 within 10 days from the date of the notice in respect of the same cotton fabrics as were mentioned in the prior notice of demand, dated September 5, 1958, on the same ground as mentioned in the prior notice. In the second paragraph of the particulars of demand mentioned in the notice it was stated that the prior notice of demand dated September 5, 1958, may be treated as canceled and the demand made by the notice dated December 22, 1958, may be treated as served in lieu of the demand made by the prior notice.
5. On the facts mentioned above, before the tax authorities the contention of the assessee-firm was that it had maintained its books of account in accordance with the mercantile system. The demand for the sum of Rs. 14,95,252 was during the accounting year expiring on November 11, 1958. The demand was for crystallized ascertained liability and that liability was statutory liability enforceable in accordance with the provisions in the Excise Act and the Rules. In the result, in the assessment year 1959-60, the debit in the above sum of Rs. 14,95,252 was justly liable to be allowed as expenses. This contention was rejected by the Income-tax Officer as also by the Appellate Assistant Commissioner and thereafter by the Income-tax Appellate Tribunal by its appellate order dated September 7, 1962. The Tribunal held that on the facts of the case it was abundantly clear that the assessee had never accepted the liability to pay excise duty and the objection was partly accepted by the excise department in the accounting year itself. The fact that the assessee had debited the full amount of excise duty in its books by itself did not make any difference 'when the assessee's conduct clearly showed that the assessee has not at all accepted the liability to pay the excise duty and a mere lifeless entry in the books of accounts unsupported by actual fact cannot turn the unascertained and uncured liability into an ascertained and accrued liability.' The further observation was that the liability in the accounting year in question was only a contingent liability and 'would accrue as and when it would be finally determined.' The Tribunal rejected the alternative contention made on behalf of the assessee that in any event Rs. 2,32,690 which were demanded by the second notice, dated December 22, 1958, should at least be allowed, on the ground that the assessee-firm had altogether disputed its liability to pay any excise duty.
6. Now, as regards the true position in law, there was no dispute before us at the Bar. Where books of account are maintained in accordance with the mercantile system, debit entries are made in respect of liabilities incurred even before payments. Where these entries relate to ascertained and/or crystallised liabilities, the amounts thereof must justly be allowed as deductions for computation of income. There was agreement that where these debit entries made are in respect of contingent liabilities, the amount mentioned in the debit entries could not be allowed as expense. In this connection, Mr. Mehta for the assessee-firm strongly relied upon the decision of the High Court of Madras in the case of Pope the King Match Factory v. Commissioner of Income-tax. The facts in that case and in the present case are in many respects similar. A demand notice, dated December 9, 1954, demanding excise duty in the sum of Rs. 21,373-7-0 was served by the Collector of Excise on the assessee in that case. The assessee had debited this amount in his accounts on April 12, 1955, being the last day of his accounting year. Even before making that entry, the assessee had vehemently objected to the demand and had taken proceedings seeking to get the order of demand reversed. Even so, the assessee claimed that the above sum was 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 and a legal liability to pay the amount had accrued in the accounting year 1955-56 on the ground that he was keeping his accounts on the mercantile basis and a legal liability to pay the amount had accrued in the accounting year 1954-55 when he received the demand notice. The tax authorities disallowed the claim for expenses. The court reversed the finding of the tax authorities and in that connection the court took notice of the fact that the assessee had preferred appeals to the Collector of Central Excise and to the Board of Central Revenue for cancellation of the demand. The court took notice of the contention made on behalf of the assessee that 'unless and until the demand was actually cancelled by a competent authority he was legally compellable to pay the amount demanded. His failure to pay would only keep him in peril of coercive proceedings being launched against him'. The question that arose was mentioned as :
'The true question to be considered in this case is whether the assessee had incurred an enforceable legal liability on and from the very date he received the Collector's demand for payment which was dated December 9, 1954.' The court further observed :
'If he had incurred such liability undoubtedly the amount of excise duty was due and payable by him and that accrued liability would be a proper allowance in computing the income of that year, ...... The endeavour made by the assessee to get out of that liability by preferring appeals to the statutory authorities cannot in any way detract from or retard the efficacy of the liability imposed upon him by the competent excise authority levying the duty and making the demand for payment of that duty.'
7. In that connection, the further observations was :
'The liability to pay excise duty on the part of the assessee arose out of the levy of the duty and the demand made against him for payment of such duty. Any dissatisfaction on his part regarding the quantum or propriety of the assessment and levy of the duty cannot minimise the liability or impair its effectiveness. He may raise a dispute over it and strain every never to avoid that liability. He may file appeals to the proper authorities..... There are only constitutional modes in which a subject reacts to the levy of taxes..... A protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or opposition ceases or is silenced.'
8. Mr. Mehta also relied upon the observations of the High Court of Allahabad in the case of Devi Das Madho Prasad v. Commissioner of Income-tax. In that case, the assessee who followed the mercantile system of accounts debited his profit and loss account with the sum of Rs. 27,167 being the estimated liability to sales tax and claimed it as a deduction. The Income-tax Officer held that the amount was not an ascertained liability as the validity of the levy of sales tax had been challenged when the matter was before the Supreme Court. This finding of the tax authority was reversed by the High Court which observed :
'The liability to sales tax was a statutory liability which had been incurred and under the mercantile system of accounting the assessee was obliged to debit the expenditure in his accounts. If, as pointed out by the Supreme Court, the estimate of liability was wrong, the department could have substituted its own estimate, but that would not convert the statutory liability into an unascertained liability, particularly as it was admitted that the assessee's accounts were properly maintained.'
9. As already stated, as regards the law applicable to the facts of the case, there is no dispute between the parties. Mr. Joshi relied upon the case of H. Ford & Co. Ltd. Commissioner of Inland Revenue, where having regard to the facts before it, the court held that the sum in question was not an admissible deduction in computing the profit of the accounting period ending on September 30, 1920, being contingent liability only.
10. The main dispute between the parties centres round the true effect of the statements in the letter dated October 22, 1958, addressed by the Assistant Collector to the assessee-firm, the reply, dated October 31, 1958, and the notice of demand, dated December 22, 1958. The submission on behalf of the assessee was that the claim made by the first notice of demand, dated September 5, 1958, was for an ascertained amount of excise duty in the sum of Rs. 14,95,252 and the demand was legally enforceable and continued to be so enforceable till the end of the accounting year on November 11, 1958. The demand being for this ascertained amount, and the liability to pay the same being statutory, there was no force in the contention made on behalf of the revenue that this was a demand in respect of a contingent liability. In that connection, the submission of Mr. Joshi on behalf of the revenue was that in fact by the letter dated October 22, 1958, long before the end of the account year, the demand had been altogether withdrawn. The assessee-firm was informed that the demand for the sum of Rs. 14,95,252 which was made at standard rate was being reviewed and a further demand would be made by calculating duty under compounded levy system. That is how the letter was understood by the assessee-firm as can be ascertained by reading its reply, dated October 31, 1958. His submission was that in fact by that letter the assessee-firm expressed willingness to pay duty calculated on the basis of compounded levy system, but further stated that it reserved to itself the right to make legal challenge to the levy. Thereafter, the levy was calculated according to compounded levy system and by the fresh notice, dated December 22, 1958, the reduced sum of Rs. 2,42,090 was claimed and the previous demand notice, dated September 5, 1958, was withdrawn and cancelled. In Mr. Joshi's submission the true effect of the above correspondence is that the excise authorities had in fact even prior to the close of the accounting year on November 11, 1958, informed the assessee-firm that the excise duty at standard rate was not liable to be collected from the assessee-firm. The notice of demand for Rs. 14,95,252 was not going to be enforced and would be withdrawn. The letter, dated October 22, further indicated that the amount payable by way of excise duty in accordance with the compounded levy system was being calculated and had remained to be determined. That letter indicated that after determining the excise duty payable in accordance with the compounded levy system a fresh notice of demand would at a subsequent date be served on the assessee. In the submission of Mr. Joshi, the true effect of the above correspondence and the subsequent notice of demand was that the excise duty payable by the assessee-firm had remained a contingent liability to be ascertained at a subsequent date. The ascertained amount of Rs. 14,95,252 had ceased to be payable.
11. In connection with these contentions, it has appeared to us that the letter dated October 22, 1958, does not have the effect as submitted by Mr. Joshi. In this connection, the following contents of the letter are important :
'...... the demand for duty of Rs. 14,95,252, at standard rate served on you by Superintendent, Sangli, can be reviewed and duty only under compounded levy system can be charged in your case, as a special case, provided you agree to pay such duty under compounded levy system instead of duty as standard rate which is ordinarily due to Government....'
12. It is quite clear from the above quoted contends of the letter that duty levied in the sum of Rs. 14,95,252 and the demand, therefore, was not withdrawn or cancelled. An offer was made to levy excise duty at a different rate, i.e., under compounded levy system, but in that connection, the specific condition indicated was that the assessee should agree to pay duty calculated on the basis of the compounded levy system. The condition which is stated has the effect of conveying to the assessee-firm that if this condition was not agreed to, there was no question of withdrawing and/or cancelling the demand for payment of the duty of Rs. 14,95,252 calculated on the basis of standard rate. In fact, in the subsequent part of the paragraph containing the above proposal, the assessee-firm was called upon to give a written undertaking in connection with the condition mentioned above. There is nothing in the contents of the letter, dated October 22, 1958, on the basis whereof it can be held in favour of the revenue that the demand for Rs. 14,95,252 that was previously made had been withdrawn and/or cancelled. There is nothing in this letter on the basis whereof it can be held that the assessee-firm was specifically informed that excise duty was being recalculated under compounded levy system in respect of the transactions mentioned in the previous notice of demand. The fact that by the second notice of demand the reduced amount of excise duty was claimed after the accounting year was closed on November 11, 1958, cannot be the basis for a finding that by the letter, dated October 22, 1958, the assessee-firm was definitely or specifically informed that the excise duty in respect of the business of the assessee-firm in the accounting year was being recalculated on a fresh basis. There is nothing in the reply of the assessee-firm dated October 31, 1958, that can alter the above true effect of the statements contained in the letter, dated October 22, 1958.
13. Having regard to the above position, we are unable to accept Mr. Joshi's contention that prior to the close of the accounting year of November 11, 1958, the demand for payment of Rs. 14,95,252 had been withdrawn or cancelled or that it had been made apparent to the assessee-firm by the letter dated October 22, 1958, that the amount of excise duty payable by the assessee-firm had remained under consideration and was being calculated on the alternatives basis of compounded levy system and according had become merely a contingent liability.
14. In the result, the question in this reference is answered in the affirmative for the whole of the sum of Rs. 14,95,252. The revenue will pay costs.