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Ramesh Enterprises (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1983)5ITD395(Bang.)
AppellantRamesh Enterprises (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
.....the assessee is an exporter. the coffee produced by any estate has to be delivered to the coffee board. the coffee board sells coffee, which includes internal sales in india and outside india. for exporting to outside india, the coffee board periodically conducts auctions known as 'export auctions'. to export coffee, the exporter has to get himself registered with the coffee board. the dealers who are registered as exporters are allowed to participate in the auctions. the highest bid is accepted. since the coffee board had a doubt about the sales tax liability on the sales conducted at the auctions, it issued a circular dated 7-2-1977 requiring the exporters to make a contingency deposit in cash equal to the sales tax liability or furnish bank guarantee in lieu thereof which was.....
Judgment:
1. The main point in this appeal is with regard to the sales tax liability. The assessee is an exporter. The coffee produced by any estate has to be delivered to the coffee board. The coffee board sells coffee, which includes internal sales in India and outside India. For exporting to outside India, the coffee board periodically conducts auctions known as 'export auctions'. To export coffee, the exporter has to get himself registered with the coffee board. The dealers who are registered as exporters are allowed to participate in the auctions. The highest bid is accepted. Since the coffee board had a doubt about the sales tax liability on the sales conducted at the auctions, it issued a circular dated 7-2-1977 requiring the exporters to make a contingency deposit in cash equal to the sales tax liability or furnish bank guarantee in lieu thereof which was required to be kept for a period of four years. In view of that, the assessee-company furnished bank guarantee in respect of Rs. 1,37,51,682 which was accepted by the coffee board. This was claimed as a deduction for this year. The ITO sent the draft assessment order to the IAC. The IAC by his order dated 20-3-1982 gave directions. He held therein that in the writ petition filed by the exporters in the Supreme Court challenging the coffee board's circular dated 7-2-1977, the Supreme Court by its judgment dated 15-4-1980 held that there was no liability on the part of the individual exporters towards sales tax and the circular requiring the exporters to make deposit or furnish bank guarantee was struck down.

When the Supreme Court by its order dated 15-4-1980 declared that certain liabilities resulting from a circular order of the coffee board to be invalid, it does not mean that these liabilities existed from 7-2-1977 when the circular order was issued till 15-4-1980 when the Court passed the order quashing the circular order. It really means that the liability has never existed despite the circular as the circular has been held to be invalid. The Supreme Court decision made it clear that the liability to sales tax does rot exist and the Supreme Court decision being declaratory of the Sales Tax Act, describes the position in law not merely after the date of decision in April 1980 but the position in law as it has always been in force from the time it was enacted. Thus, he held that the assessee is not entitled to deduct what it claims to be liability on account of central sales tax as no such liability exists and in view of the Supreme Court's finding in the writ petition, no such liability ever existed. In pursuance of the above directions of the IAC the ITO made the assessment order dated 1-4-1982.

He held that the claim for deduction of sales tax of Rs. 1,37,51,682 is only a contingent liability and that liability has ceased to exist after the Supreme Court struck down the circular issued by the coffee board. Thus, the sales tax claim cannot be entertained. The assessee appealed to the Commissioner (Appeals). It was submitted before him that only a sum of Rs. 67,50,872 had been claimed as deduction in computing the profit of the year of account and, hence, the disallowance cannot be more than the above sum. The omission to raise this was due to oversight and the additional ground should be admitted.

The Commissioner (Appeals) called for the comments of the ITO who after verification stated that the contention in the additional ground is correct and the sales tax liability to be treated as contingent liability and disallowed amounts to Rs. 67,50,872 only. The Commissioner (Appeals), accordingly, accepted the additional ground and gave a relief of Rs. 70,00,810. He then dealt with the main dispute with regard to the sum of Rs. 67,50,872 which was claimed by the assessee as an allowable deduction being sales tax liability. Before him the assessee classified the sum of Rs. 67,50,872 into three categories as under : 1. Rs. 42,61,690 purchases which were covered by export contract on hand at the time of the participation in the export auction.

2. Rs. 24,70,598 purchases which were not covered by an export contract on hand at the time of exporters participating in the auction but were covered by an export contract on hand at the time of payment of full price, weighment and setting apart of coffee for delivery to the buyers under clauses 19 and 20 of the auction conditions.

The Commissioner (Appeals) allowed the liability in respect of Rs. 18,583 being item No. 3 and disallowed the balance. He held that a perusal of the coffee board's circular clearly shows that in respect of items coming under category 1 the coffee board was not collecting any sales tax, but only contingency deposit or a bank guarantee. The coffee board did not demand sales tax in respect of items coming under category 1. It only demanded security deposit or a bank guarantee. In such an eventuality, the question of deducting the liability does not arise because there was no liability at all. The liability, if any, would have arisen if and when the coffee board forfeited or adjusted the deposit on the happening of the contingency for which it was intended. It has not happened during the accounting year. Hence, the question of deducting the sum of Rs. 42,61,691 in computing the income of the assessee does not arise. Dealing with the sum of Rs. 24,70,598 coming under category 2, he held that the view of the coffee board that they were liable to sales tax has not found favour with the Supreme Court by its judgment dated 15-4-1980, Thus the sum of Rs. 24,70,598 represented the provision for a non-existent liability and, in view of the same, the ITO was justified in refusing to allow the same as deduction in computing the income of the year.

2. The learned counsel for the assessee strongly urged that by giving bank guarantee, there was an ascertained liability. Since the assessee purchases coffee from the coffee board, sales tax liability arises. It is for that liability that bank guarantee has been given. The decision of the Supreme Court was rendered only in April 1980. In the year of account the Supreme Court decision was not available. Hence, the Supreme Court decision cannot be taken as declaratory law during the year of account. Hence, the decision of the Supreme Court does not unsettle the liability which has accrued. If there was any remission or waiver of liability, that was only on the date when the Supreme Court gave its judgment. He further urged that the bank guarantee is given to satisfy the requirements of the coffee board on account of sales tax liability and the element of sales tax is part of price as it was given at the time of purchase of goods and so it is as good as purchase price and so shall be allowed. A liability can accrue even if it is a contingent liability. He referred to the decision in the case of Shrikant Textiles v. CIT [1971] 81 ITR 222 (Bom.).

3. The learned departmental representative strongly supported the orders of the lower authorities. He urged that in the circular of the coffee board, it is not stated by the coffee board that the sales tax is collected. There is no liability for sales tax on the coffee board.

The decision of the Supreme Court clearly states that there is no liability for sales tax. The decision of the Supreme Court is declaratory law and it should be deemed to have always been in force.

He further submitted that the contingent deposit cannot become part of the sales tax. In view of the decision of the Supreme Court no liability arises. He placed reliance on the decisions in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 and M.S.P.Senthikumara Nadar & Sons v. CIT [1957] 32 ITR 138 (Mad.).

4. We have considered the rival submissions. The question that arises for consideration is whether there was a sales tax liability on the assessee to the extent of Rs. 67,50,872. It will be necessary to refer to Sections 5 and 6(1) of the Central Sales Tax Act, 1956 which read as under : 5. When is a sale or purchase of goods said to take place in the course of import or export - (1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

(2) A sale or purchase of goods shall be deemed to' take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

(3) Notwithstanding anything contained in Sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after and was for the purpose of complying with, the agreement or order for, or in relation to such export.

6. Liability to tax on inter-State sales.-(1) Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint, not being earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales of goods other than electrical energy effected by him in the course of inter-State trade or commerce during any year on and from the date so notified : Provided that a dealer shall not be liable to pay tax under this Act on any sale of goods which in accordance with the provisions of Sub-section (3) of Section 5, is a sale in the course of export of those goods out of the territory of India.

Sub-section (3) of Section 5 was inserted by Section 3 of the Central Sales Tax (Amendment) Act, 1976 with effect from 1-4-1976. Sub-section (3) of Section 5 has been enacted to extend the exemption from tax liability to a penultimate sale which satisfies two conditions, namely : (1) that the penultimate sale takes place after the agreement or order from foreign buyer under which the goods are to be exported ; and (2) it must be for the purpose of complying with such agreement or order. Then under proviso to Section 6(1) a dealer shall not be liable to pay tax on any sale of goods which in accordance with the provisions of Section 5(3) is out of the territory of India. The coffee board was not certain as to how the sales tax authorities will treat the penultimate sale in granting the exemption. So, the board issued a circular dated 7-2-1977 addressed to the registered exporters requiring them to deposit in cash equivalent to sales tax or furnish bank guarantee which was required to be kept for a period of four years. In pursuance of the said circular, the assessee furnished bank guarantee in respect of the sum of Rs. 67,50,872 which is now in dispute before us. This circular of the board dated 7-2-1977 was challenged before the Supreme Court by the registered exporters by way of writ petitions. The said case is reported in the case of Consolidated Coffee Ltd. v. Coffee Board [1980] 46 STC 164. The Supreme Court by its judgment dated 15-4-1980 quashed the circular dated 7-2-1977 to the extent to which it insists on production of an agreement or an order from a foreign buyer from the registered exporters for participating in export auctions and requiring the exporters to make contingent deposits or furnish bank guarantees out of abundant caution inasmuch as such requirement would be unnecessary. The Supreme Court held as under : ... Section 5(3), quoted above in extenso, has obviously been enacted to extend the exemption from tax liability under the Act not to any kind of penultimate sale but only to such penultimate sale as satisfies the two conditions specified therein, namely, (a) that such penultimate sale must take place (i.e., become complete) after the agreement or order under which the goods are to be exported and (b) it must be for the purpose of complying with such agreement or order and it is only then that such penultimate sale is deemed to be a sale in the course of export. . . . (p. 176) It was further observed that the 'agreement' means the agreement with the foreign buyer and not the agreement with a local party containing the covenant to export. Then the Supreme Court held that in the penultimate sales the property in the coffee sold passes to the buyer upon payment of price, weighment and setting apart of the coffee sold for delivery to the buyer. It was observed as under : Having regard to the above discussion it is clear to us that in the penultimate sales (sales of coffee effected to the registered exporters at export auctions conducted by the Coffee Board) the property in the coffee sold thereat passes to the buyer immediately upon payment of full price, weighment and setting apart of the coffee for delivery to the buyer under clauses 19 and 20 of the auction conditions and it would be at this stage, i.e., just before this stage is reached that the agreement with or order from a foreign buyer must be available or produced in order to attract Section 5(3) of the Central Sales Tax Act, 1956.

In the result the writ petitions are partly allowed. The impugned circular dated 7th February, 1977, to the extent to which it insists on production of an agreement with or an order from a foreign buyer from the registered exporters before participating in export auctions is quashed ; it is also quashed hereafter to the extent to which it requires the registered exporters to make contingency deposits or furnish bank guarantees out of abundant caution inasmuch as such requirement would be unnecessary in view of our authoritative pronouncement. The Coffee Board may, if so advised, modify its circular or issue an appropriate circular requiring the production of an agreement with or an order from a foreign buyer from the registered exporters just before the property in the coffee sold at such auctions passes under clauses 19 and 20 of the auction conditions. (pp. 197-98) The circular of the coffee board has been extracted in the Commissioner (Appeals)'s order. It is clear from the said circular that the coffee board was not collecting any sales tax but only required the exporters to make contingent deposit or bank guarantee in order only to provide for a cover against any levy of sales tax by the assessing authority in future. That will clearly show that what was demanded by the Board was not in respect of any sales tax liability ascertained but only by way of contingency. It required the exporters to make security deposit or bank guarantee. Thus, there was no actual sales tax liability on the assessee when the bank guarantee was given. There was no such sales tax liability even on coffee board when the bank guarantee was furnished by the assessee. Thus, the question of deducting the contingent liability does not arise as in fact there was no sales tax liability at all. at that time. Before the Commissioner (Appeals) the assessee has classified the sales into two categories : (a) purchases which were covered by export contract on hand at the time of the participation in the export auction ; and (b) purchases which were not covered by an export contract on hand at the time of exporters participating in the auction but were covered by an export contract on hand at the time of payment of full price, weighment and setting apart of coffee for delivery to the buyers under clauses 19 and 20 of the auction conditions. It was also pointed out before him that to the extent of Rs. 42,61,690 would come under category (a) and to the extent of Rs. 24,70,598 would come under category (b). The above position has not been disputed before us also. It is clear that both the above two types come under Section 5(3) and as such there is no liability for sales tax. The decision of the Supreme Court in Consolidated Coffee Ltd.'s case (supra), though delivered on 15-4-1980, is applicable to the assessee even for the assessment year 1979-80. The said decision of the Supreme Court amounts to declaration of law and binding on all Courts as contemplated by Article 145 of the Constitution and that would be the law of the land from the inception. Hence, we are unable to agree with the assessee's contention that the said decision of the Supreme Court would be applicable only for the period after 15-4-1980 and not prior to that. This issue has been considered by the Cochin Bench of the Tribunal in the case of H.H. Sir Rama Varma v. ITO [1982] 2 ITD 491. It was held therein that the decision of the Supreme Court amounts to declaration of law and it has retrospective effect not only from the time when the judgment was pronounced but from the very inception. We agree with the above view.

5. It is clear from the facts of the case, as pointed out by the assessee before the Commissioner (Appeals) that in respect of Rs. 42,61,690 the agreements with the foreign buyers for exports were already there at the time of the participation in the export auction and in respect of Rs. 24,70,598 the agreements with the foreign buyers for exports were there at the time of payment of full price, weighment and setting apart of coffee for delivery to the buyers under clauses 19 and 20 of the auction conditions. In view of that the assessee clearly comes under Section 5(3) and as such there is no liability to sales tax. Thus, the decision of the Supreme Court in the case of Consolidated Coffee Ltd. (supra) squarely applies to the assessee's case. Thus, there was no sales tax liability on the assessee.

6. In Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 the Supreme Court held that the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose.

Even if the assessee fails to debit the liability in its books, it is not barred from claiming the sum as a deduction. It was observed as under : Now under all sales tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment. . . .

(p. 336) As already pointed out by us, since the export sales of the assessee come under Section 5(3), there is no liability to sales tax. Unless there is actual liability to sales tax, even though not quantified by an assessment order, it is not allowable as a deduction. Thus, a contingent liability cannot be allowed at all.

. . .Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent.

The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant. Ltd. v. Stedeford [1948] 30 TC 496. No doubt, that case was decided under the system of income-tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real. (p. 76) Thus, it is clearly, held that a contingent liability cannot be deducted.

8. in Senthikumara Nadar's case (supra) it was held that the deductions are not permissible for anticipated losses or contingent liabilities even if they are inevitable.

9. Thus, we hold that there was no sales tax liability on the assessee of Rs. 67,50,872 in this year. No assessment has also been made by the sales tax department levying sales tax. There is also no liability on the coffee board in respect of the penultimate sales exported by the assessee. It is only on account of some doubt that the coffee board required the assessee to furnish bank guarantee. In fact, in the circular dated 7-2-1977, it is clearly mentioned that it is only a contingent deposit. The coffee board has not stated in the said circular that there is sales tax liability on the coffee board. The circular also does not say that the amount is collected as a sales tax liability. It is only on account of some doubt that the assessee was required to make a contingency deposit or to furnish bank guarantee towards the sales tax liability. Thus, in our view, there, is no sales tax liability at all of Rs. 67,50,872 and it is not deductible.

10. The next contention of the assessee that the sum of Rs. 67,50,872 should be treated as part of the sale price also cannot be accepted. In fact, the coffee board never treated this amount as part of the sale price. It was not stated so in the circular dated 7-2-1977. As already pointed out by us, it is only on account of some doubt as to the sales tax levy that the coffee board required the assessee to furnish a bank guarantee and in the circular it was treated as a contingent liability.

The question of treating this amount as a part of the sale price never arose. Thus it cannot be treated as part of the sale price. In fact, the assessee has not placed any evidence by way of any contract or any other evidence to show that it is part of the sale price. The assessee was required to furnish bank guarantee. It cannot be treated as part of sale price. Merely because the assessee furnished bank guarantee to the extent of Rs. 67,50,872, it cannot be treated as sales tax liability nor can it be treated as part of sale price.

11. The decisions cited on behalf of the assessee have no application to the facts of the instant case. In Shrikant Textiles' case (supra), the Central excise authorities actually issued a demand notice for Rs. 14,95,252. The said amount was debited in the account. The assessee raised various contentions regarding this liability to pay the duty and requested to cancel the demand notice. On those facts, the Bombay High Court held that the duty was levied and the demand for that was not withdrawn or cancelled and the liability to pay Rs. 14,95,252 remained as an ascertained liability and the assessee was entitled to have this amount allowed as expenses. The above facts are clearly distinguishable from the facts of the instant case. In the instant case, neither there is any liability to sales tax nor any demand was raised by the sales tax authorities. Hence, that case has no application.

12. Hence, in our view, the sum of Rs. 67,50,872 has been rightly disallowed by the lower authorities. Thus, we uphold the same.


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