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Commissioner of Income Tax Vs. Morarji Goculdas Spg. and Wvg. Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIT Reference No. 344 of 1987 26 November 1999
Reported in[2000]108TAXMAN502(Bom)
AppellantCommissioner of Income Tax
RespondentMorarji Goculdas Spg. and Wvg. Co. Ltd.
Advocates: S.E. Dastur, B.V. Jhaveri and JI. Patel, for the Applicant R.V. Desai and B.M. Chatterjee, for the Respondent
Excerpt:
.....the above two contentions, we pointed out to the learned counsel that as there was no accrual of liability in the year under consideration, the allowance of deduction was not correct in law and, in our opinion, the tribunal committed a manifest error of law in applying the decision of the supreme court in kedarnath jute mfg. 455 of 1980. the decision of this court clearly goes to show that what the petitioners had challenged in the writ petition were show-cause notices issued by the respondent no. , parel, bombay-12, are further directed to state whether they would like to avail of the opportunity to be heard in person before the case is adjudicated. that was the case where liability clearly existed under the statute. it was pointed out that deduction can be claimed only in a case..........accounts for the assessment year 1981-82, the assessee had claimed deduction on account of excise duty liability of a sum calculated. on the basis of the weight of upsized yarn, ill its return submitted to the income tax officer for the said assessment year, in the computation of income, a sum of rs, 88,41,112 was claimed as deduction on account of excise duty liability. however, at the time of assessment, the authorised representative of the assessee submitted a copy of the writ petition filed by the assessee before this court being writ petition no. 455 of 1980, and a copy of the judgment of this court therein. according to the judgment and order of this court dated 14-7-1980, the excise duty liability of the assessee had been determined at rs. 29,66,499. in view of the above.....
Judgment:

Saraf, J.

By this reference under section 2 56(1) of the Income Tax Act, 1961, the Tribunal has referred the following question of law to this Court for opinion:

'Whether, on the' facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is entitled to deduction of differential excise duty to the extent of Rs. 76,52,169 for the assessment year 1981-82 ?'

2. The material facts giving rise to this reference are as follows:

The assessee is a public limited company running a spinning and weaving mill. On the production of yarn, the assessee had been paying Central excise duty on the basis of weight of the upsized yarn. However, in the accounting year ending on 30-6-1980, relevant to the assessment year, 1981-82, some dispute arose in regard to the calculation of the excise duty on the basis of the weight of the yam before it was sized. The Excise department was of the, opinion that excise duty was payable on the basis of the weight after sizing. Though in its accounts for the assessment Year 1981-82, the assessee had claimed deduction on account of excise duty liability of a sum calculated. on the basis of the weight of upsized yarn, ill its return submitted to the Income Tax Officer for the said assessment year, in the computation of income, a sum of Rs, 88,41,112 was claimed as deduction on account of excise duty liability. However, at the time of assessment, the authorised representative of the assessee submitted a copy of the writ petition filed by the assessee before this Court being Writ Petition No. 455 of 1980, and a copy of the judgment of this Court therein. According to the judgment and order of this Court dated 14-7-1980, the excise duty liability of the assessee had been determined at Rs. 29,66,499. In view of the above statement and the decision of this Court, the Income Tax Officer modified the claim for deduction on account of excise duty liability made by the assessee in its return and allowed deduction of a sum of Rs. 29,66,499 only. The assessee appealed to the Commissioner (Appeals). There was no dispute before the Commissioner (Appeals) that the disputed claim on account of excise duty had been quashed by the High Court and the amount of excise duty payable was only the amount allowed by the Income Tax Officer. The Commissioner (Appeals), however, following the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) , held that since the excise duty liability was a statutory liability, it had to be allowed in the year in which the demand was actually raised even if the assessee contested the liability and allowed the appeal of the assessee. The appeal of the revenue against the above order was dismissed by the Tribunal. Hence, this reference at the instance of the revenue.

3. Mr. R.V. Desai, the learned counsel for the revenue, submitted before us that both the Tribunal and the Commissioner (Appeals) committed manifest error of law in following the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) because it has no application to the facts of the present case. It was submitted that the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra), which is applicable only in case where there is a demand on account of tax or duty which is disputed, cannot be applied in the present case where there is no demand at all and the claim is based only on show-cause notices issued by the Superintendent of Central Excise. Our attention was drawn to the. decision of this Court in Writ Petition No. 455 of 1980 filed by the assessee , to challenge the validity and legality of the show-cause notices to show that what the assessee had received during the year under consideration were merely show-cause notices dated 22-2-1980 and 25-2-1980 for different periods from 1-4-1975 to 31-12-1975 issued by the Superintendent of Central Excise (4th respondent in the writ petition) by which the assessee was called upon to show cause why the amounts mentioned therein should not be recovered from it by way of differential duty. There was no demand made on the assessee during the relevant previous year or at any point of time thereafter. The assessee challenged the legality and correctness of the above show-cause notices by filing writ petition before this Court, which was allowed by judgment and order dated 14-7-1980 and the impugned show-cause notices, which were marked collectively Exhibit-E in the Writ Petition, were quashed. The learned counsel for the revenue submitted that in the above factual matrix, the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra), has no application to the present case. The learned counsel further submitted that both the Commissioner (Appeals) and the Tribunal committed a manifest error of law in applying the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) to the present case without noticing the fact that the said decision was applicable only where liability had accrued against an assessee which was disputed by him. It was submitted that the ratio of the above decision of the Supreme Court is that where a demand of tax or duty is served on an assessee maintaining mercantile system of accounting in the accounting year, the amount so demanded would be deductible as an accrued liability even though the assessee object s to it and seeks to get the order of the concerned authority reversed. It was contended that in the present case, the Tribunal proceeded on an erroneous assumption of law that the above decision was applicable without taking note of the fact that no demand was made on the assessee in the accounting year or even at any point of time thereafter. Our attention was down to the fact that the notices served by the Central Excise department on the assessee in the accounting year were merely show-cause-cum-demand notices. It was contended that it is clear on a perusal of the decision of this Court that the claim of the assessee for deduction of liability on account of excise duty was based merely on show-cause notices issued by the respondent No. 4 on the assessee in the year under consideration and there was no demand notice at all. It is these show-cause notices which were challenged by the assessee and were set aside by this Court. No liability ever accrued against the assessee. It was contended that the distinction between a demand notice and a show cause notice has been considered by this Court in Standard Mills- Co. Ltd. v. CIT : [1998]229ITR366(Bom) and CIT v. Indian Smelting & Refining Co. Ltd : [1998]230ITR194(Bom) and it has been held that if what was served on the assessee by the Collector was a show-cause notice, the liability, claimed by the assessee on account of excise duty on the basis thereof, was merely a contingent liability which would not constitute expenditure for the purpose of income-tax. The learned counsel submitted that the above decisions of this Court are squarely applicable to the facts of the present case. He submits that the question referred to this Court may, therefore, be answered in favour of the revenue.

4. We have heard Mr. B.V. Jhaveri the learned counsel for the assessee. Though Mr. Jhaveri could not challenge the contentions of the learned counsel for the revenue that the assessee was served by the respondent No. 4 merely with show-cause notices, which were challenged by the assessee by filing the writ petition and were quashed by this Court and no demand was ever made in respect of the liability claimed by the assessee, he took objection to the reliance placed by the revenue on the decision of this Court in the writ petition filed by the assessee to show that the notices in question were show-cause notices and not demand notices. It was contended that the decision of this Court in the writ petition of the assessee could not be looked into by us in this reference for deciding the controversy as it did not form part of the statement of the case. In the alternative it was contended that this reference has become academic because on the basis of the above decision of this Court, the amount which was allowed as a deduction in the year under consideration as liability has been treated as the assessee's income under section 41 (1) of the Act in the assessment year 1983-84 on cessation of liability on quashing of the show cause notices by this Court. He placed a copy of the assessment order for the assessment year 1983-84 before us in support of the above contention. As we were not satisfied with any of the above two contentions, we pointed out to the learned counsel that as there was no accrual of liability in the year under consideration, the allowance of deduction was not correct in law and, in our opinion, the Tribunal committed a manifest error of law in applying the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) and allowing the deduction. At this stage, the learned counsel prayed for some time to obtain inspections. Time was granted. On the next date, Mr. S.E Dastur the learned counsel appeared with Mr. Jhaveri for the assessee and contended that this Court cannot look into the decision of this Court in the writ petition of the assessee in exercise of reference jurisdiction to ascertain whether the claim was based on demand notice or show-cause notice, A number of authorities were cited in support of the contention that in exercise of reference jurisdiction, the High Court cannot go behind the finding of fact arrived at by the Tribunal. it was contended that the Tribunal in its order has nowhere mentioned that the claim for deduction was based on show-cause notices and not on demand notices and that being so the High Court cannot look into the decision of this Court to ascertain that fact.

5. We have carefully considered the rival submissions. We have also considered objection of the learned counsel for the assessee to our looking into the decision of this Court in the writ petition filed by the assessee to ascertain whether there was a demand notice or a show-cause notice. For the reasons stated hereinafter we do not find any substance in this objection. It is clear from the order of the Income Tax Officer that the order of this Court dated 14-7-1981 in Writ Petition No. 455 of 1980 and a copy of the writ petition were furnished to the Income Tax Officer by the assessee itself and his attention was drawn to the fact that the writ petition had been allowed by this Court. The Income Tax Officer relied upon the above decision of this Court and allowed the claim of the assessee for deduction on that basis. Not only that the writ petition and the decision of this Court thereon are part of the records of the Income Tax Officer, but they are the foundation of the order of the Income Tax Officer. As the f acts were stated in the writ petition and the decision of this Court, the Income Tax Officer did not reiterate the same and acted upon the decision of this Court.. The facts of the case stated in the decision of this Court and the writ. petition and impugned notices form part of the order of the Income Tax Officer by incorporation. Before the Commissioner (Appeals), the assessee relied on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra). The Commissioner (Appeals), without noticing the fact that in the instant case there was no demand, but merely show-cause notices, applied the above decision of the Supreme Court and allowed the claim of the assessee. The Tribunal also dismissed the appeal of the revenue on the erroneous assumption that the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) was applicable without noticing the fact that there was no demand at all against the assessee in the year under consideration and that the show-cause notices which were issued were also quashed by this Court.

6. We called for the original records of Writ Petition No. 455 of 1980. The decision of this Court clearly goes to show that what the petitioners had challenged in the writ petition were show-cause notices issued by the respondent No. 4, the Superintendent of Central Excise, which were collectively marked Exhibit-E. We have also perused the notices annexed to the writ petition (Exhibit-E) which are show-cause-cum-demand notices. It is clear that the notices challenged by the assessee were merely show cause notices and they were not demand notices, which could have given rise to any liability. One of the show-cause notices being show-cause notice dated 25-2-1980 is set out below:

'Office of the Superintendent of Central Excise, Range XV BP, BAU Dovosopm 'F' H. Q. India Limited, Mills No. 1, Dr. Ambedkar Road, Parel, Bombay- 12.

Show Cause Cum Demand Notice

25th February, 1980

To

M/s. Morarjee Goculdas Spg. & Wvg. Co. Ltd.,

Dr. Ambedkar, Road, Parel, Bombay- 12.

Where the account of Non-cellulose yarn falling under T.I. ISE in the SG- 1 Register is to be maintained at spindle point and for the purpose of assessment of duty, the weight of yarn at the stage of cones, bobbins, beans, etc., has to be taken into account.

And whereas it appears that M/s. Morarjee Goculdas Spg. &03 Wvg. Co. Ltd., Dr. Ambedkar Road, Parel, Bombay-12, had next disclosed the weight of sized yarn falling under T.I. 18E and had paid duty on the weight on upsized yarn. during the period from 1-10-1979 to 31-12-1979 which has resulted in short levy of duty as detailed in the annexure and said amount is recoverable from them under Rule (2) read with proviso (a) and/or (b) of rule 10(1) of the Central Excise Rules, 1944.

Particulars :

Now, therefore, the said M/s. Morarjee Goculdas Spg. & Wvg. Co. Ltd., Dr. Ambedkar Road, Parel, Bombay- 12, are hereby required to show case within 30 days of receipt of this notice by them to the Asstt. Collector, Central Excise, Bombay Division 'F', having his office at 8th floor, Piramal Chambers, Parel, Bombay- 12, as to why the aforesaid sum of duty amounting to Rs. 4,54,406.40 (Rupees four lakhs fifty four thousand four hundred six and paise forty only should not be demanded and recovered from them under proviso (a) and/or (b) of rule 10(1) read with rule 9(2) of the Central Excise Rules, 1944.

M/s. Morarjee Goculdas Spg. & Wvg. Co. Ltd., Parel, Bombay-12, are directed to produce at the time ' of showing cause all the evidence upon which they intend to rely in support of their defence.

M/s. Morarjee Goculdas Spg. & Wvg. Co. Ltd., Parel, Bombay-12, are further directed to state whether they would like to avail of the opportunity to be heard in person before the case is adjudicated. If no mention is made about this in their application, it would be presumed that they do not desire a personal hearing.

If no cause is shown against the action proposed to be taken within 30 days of the receipt of this notice or they do not appear in person before the Adjudicating Officer when the case is posted for hearing, the case will be decided ex parte.

Sd/-

(D.A. Kamble)

Superintendent Central Excise,

Range XV, Bombay Division 'F'

No. C. Ex. 13A/MGM/80/231

Bombay, the 23rd February, 1980.

Copy submitted to

A.G.C.E. Bombay Div.'F'

for information.'

The notice dated 22-2-1980, which is also a show-cause-cum-demand notice is in identical terms except the particulars. It is these show-cause notices which were challenged by the assessee and set aside and quashed by this Court. The learned counsel for the assessee, Mr. Jhaveri could not dispute the fact that the notices received by the assessee were mere show-cause notices and. not demand notices and that if that fact is taken into account, the decisions of this Court in Standard Mills Co. Ltd.'s case (supra) and Indian Smelting & Refining Co. Ltd's case (supra) would be applicable and the assessee would not be entitled to deduction on account of the amounts mentioned in the show-cause notices.

7. It is clear in this case that the Tribunal and the Commissioner (Appeals) produced on an erroneous assumption of law that the decision in Kedarnath Jute Mfg. Co. Ltd's case (supra) was applicable to the present case. As is clear from the decisions of this Court in Writ Petition No. 455 of 1980 and the writ petition, which were before the Income Tax Officer at the time of the assessment and are the foundation of disallowance of claim by him that there was no liability, in praesenti in the relevant accounting year. In fact, in the present case, no liability ever accrued against the., assessee, because the show-cause notices themselves were quashed by this Court. Otherwise also, there was no liability in praesenti existing against the assessee in the year of account. It was merely a contingent liability witch might or might not arise. That being so, the amount, claimed as deduction' on account of excise duty liability on the basis of the show-cause notices cannot constitute expenditure for the purposes of income-tax. It Is clear that the decision of the Supreme Court in Kedarnath Jute Mfg, Co. Ltd's case (supra) has no application to the facts of the present case. That was the case where liability clearly existed under the statute.

8. This aspect was considered by this Court in Standard Mills Co. Ltd's case (supra) and Indian Smelting & Refining Co. Ltd.'s case (supra). In those two cases also, the claim of deduction was based on show-cause notices. This Court held that expenditure which is deductible for the income-tax purpose is towards liability actually existing in the year of account. It was further held that the Act makes as distinction between actual liability in praesenti and a liability do futoro Which, for the time being, is only contingent. The former is deductible but not the latter. It was observed that the question to be decided in each case is whether any present liability has accrued against the assessee. It was pointed out that deduction can be claimed only in a case where the liability clearly existed under a statute. It is in such a case, as held by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra), deduction cannot be denied on the ground that the assessee was disputing the liability.

9. As in the present case, in Standard Mills Co. Ltd.'s case (supra) also, no demand was raised against the assessee of any amount. What was served on the assessee by the Collector was merely a show-cause notice. The assessee did not admit any liability and showed cause refuting the allegations made in the show-cause notice. It was held that there was no liability actually existing against the assessee In the year of account. It was merely a contingent liability which might or might not arise. That being so, it was held that the amount in question did not constitute expenditure for the purpose of income-tax. This decision was followed in Indian Smelting & Refining Co. Ltd.'s case (supra).

10. The ratio of the above decision squarely applies to the facts of the present case. In this case also, there was no Actual liability in praesenti. No demand was raised against the assessee. The assessee was served merely with two show-cause notices. The assessee did not admit any liability and challenged the show-cause notices before' this Court. Admittedly the show-cause notices were quashed by this Court. It is clear from these uncontroverted facts that the liability claimed by the assessee was merely a contingent liability which cannot constitute expenditure for the purposes of income-tax. In view of the above, in our opinion, the Tribunal proceeded on an erroneous assumption of law that the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) was applicable without noticing the fact that there was no liability in praesenti, which is manifest from the decision of this Court which was the foundation of the order of the Income Tax Officer and committed manifest error of law in holding that the assessee was entitled to deduction for the differential excise duty claimed by it for the: assessment year 1982-83 on the basis of the show-cause notices which was a contingent liability. It is well-settled now by the decision of the Supreme Court in Salem Co-operative Central Bank Ltd. v. CIT(1993) 261 ITR 697 : 68 Taxman 33 that if the Tribunal proceeds on an erroneous assumption of law, the High Court can correct the same. It cannot be called upon to act on an erroneous assumption of law because doing so would neither be in the interest of law nor of justice. In the premises, we answer the question referred to us in the negative, i.e., in favour of the revenue and against the assessee.

11. Before parting with this case, we would like to observe that if any addition has made by the Income Tax Officer in the assessment year 1983-84 as stated by the assessee under section 41(1) of the amount allowed in this year, the Tribunal should issue suitable consequential directions while giving effect to the opinion of this Court.

Reference is disposed of, accordingly, with no order as to costs.


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