The judgment of court was delivered by
JAGADISAN J. - Under section 66(2) of the Indian Income-tax Act, this court directed the Income-tax Appellate Tribunal, Madras, to state the case raising the following question of law : 'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the claim of the assessee that Rs. 21,373 constituted an allowable sum of deduction in the year of account.'
The assessee is a manufacturer and dealer in safety matches owning a factory called 'Pope The King Match Factory' at Kalugumalai, Tirunelveli District. Till the end of the year 1955 this factory was classified as 'category No. 2' for purposes of levy of excise duty. During the year 1954 the assessee found that the production in the factory was higher than in the previous years, and that such production was likely to exceed 5 lakhs gross to match boxes, annual ceiling fixed for category No. 2 factory. This meant that the factory would have to be re-classified and treated as category No. 1. In the event of the factory being classified as category No. 1 the excise duty payable would also be more than that levied for category No. 2 factory. The assessee, therefore, submitted a petition to the Assistant Collector of Central Excise, Trivandrum, on August 23, 1954, and prayed for permission to work the factory so as to produce more than the maximum limit of 5 lakhs gross of match boxes permissible for category No. 2 factory. The excise duty payable in respect of category No. 2 factory is Rs. 1-15-0 per gross on 40s. and Rs. 2-14-6 per gross on 60s. The duty payable by factory under category No. 1 exceeds the duty in respect of category No. 2 by 1 anna 6 pies for 60s. and 1 anna for 40s. per gross. The Assistant Collector of Central Excise, Trivandrum, by his communication to the assessee dated September 27, 1954, granted permission for the transfer of the factory from category No. 2 to category No. 1. But two conditions were imposed on the assessee : (1) He should remit immediately the differential duty at the rate one anna per gross of 40s. and 1 and a half annas per gross of 60s. for the quarter ended September 30, 1954, and (2) he should give an undertaking to pay the differential duty even on the production for the half year ended June 30, 1954, if the Collector so decided. The assessee accepting the terms of the condition paid the sum of Rs. 10,364-1-0 on October 9, 1954, into the Koilpatti Sub-Treasury representing the differential excise duty payable for the quarter ended September 30, 1954. On December 9, 1954, the assessee received a demand for payment under rule 10A of the Central Excise and Salt Act, 1944, for the sum of Rs. 21,373-7-0. This amount was claimed as differential duty payable by the assessee from January 1, 1954, to June 30, 1954. The demand was in these terms : 'Take notice that on behalf of the Central Government I hereby demand payment by you of the sum of Rs. 21,373-7-0 within ten days from the date hereof.
Particulars of demand.
Differential duty from the licensee, consequent on his factory having exceeded in 1954 the 5,00,000 gross maximum and thereby having become liable to match excise duty under items 2(1) and 2(2) of the First Schedule of the Central Excise and Salt Act, 1944. The details of demand are as follows :
(a) Total production from 1-1-1954 to 30-9-1954
(b) Total amount of differential duty between Cat. II and Cat. I rates to be A.P. collected during the period
60s. 27,980 gross at 0-1-6
40s. 46,480 gross at 0-1-0
Amount already paid as per chalan No.772 dated 9-10-1954 of Kovilpatti Sub-Treasury Balance amount to be realised
The assessee preferred an appeal to the Collector of Central Excise, Madras, for cancellation of the demand on grounds which need not however be adverted to in this judgment. This appeal was rejected on April 19, 1955. The assessee preferred a further appeal to the Central Board of Revenue but was again unsuccessful as the Board rejected it on October 11, 1956. It seems that the assessee moved the Government of India against the order of the Board but did not succeed in obtaining the cancellation of the demand of the differential duty for the period January 1, 1954, to June 30, 1954.
During the pendency of these proceedings the assessee debited his account on April 12, 1955, the last day of his accounting year 1954-55 with the sum of Rs. 21,373. He claimed this amount as a proper deductible allowance in computing his income of the year of assessment 1955-1956. The assessees claim was that though the amount was not actually paid in the year of account, having regard to the fact that he was maintaining the accounts on the mercantile basis, he was entitled to the deduction as the legal liability to pay the duty accrued to him in the previous year relevant to the assessment year 1955-56 in view of the Collectors demand for payment on December 9, 1954.
The Additional Income-tax officer, Tuticorin, disallowed the claim for deduction of the amount as the assessee did not actually pay the amount in the year of account and as he was disputing his liability to pay that amount, having preferred appeals to the statutory authorities against the order demanding payment of the duty. The assessee preferred as appeal to the Appellate Assistant Commissioner, Tuticorin, who however affirmed the order of the income-Tax Officer. He took the view that with regard to the payment of the excise duty the appellant has not been following the mercantile basis of accounting and that in any event the demand of the Collector of Central Excise dated December 9, 1954, had not become final during the year ending April 13, 1955, and that finality was reached only on rejection of the appellants petition to the Central Board of Revenue which was on October 11, 1956. The assessee next preferred an appeal before the Income-tax Appellate Tribunal but was again unsuccessful. The Tribunal did not negative the claim for disallowance on the ground that the assessee adopted only the cash basis and not the mercantile basis of accounting in the matter of payment of the excise duty. In the opinion of the Tribunal the assessee had not incurred legal obligation to pay the amount during the relevant year. The reasoning of the Tribunal can best be stated in its own words :
'Even though the assessee firm has maintained its books on the mercantile basis, it is not entitled to the deduction in this year purely on the basis of the demand made by the excise authorities, which after all that is said and done, in the above circumstances, may be theoretical only.'
It is now fairly clear that the assessee adopted only the mercantile method of accounting. There is no basis for the view expressed by the Appellate Assistant Commissioner that the assessee had not been following the mercantile basis with regard to the payment of excise duty. Learned counsel for the department attempted to justify this view but totally failed to convince us. Our attention was not drawn to any single instance of the assessee having claimed the payment of excise duty as a proper allowance only in the year of payment, though the liability to pay had accrued earlier in the year or years prior to the year of payment. We have no doubt that the Tribunal reached the correct conclusion when it held that the assessee maintained its books only on the mercantile basis. We are however unable to understand what the Tribunal meant by stating that the statutory demand of the excise authorities couched in clear and peremptory words can be called 'theoretical'. We have already adverted to the terms of the demand and it is obvious that the excise authorities meant what they said. The assessee was asked to pay the amount of Rs. 21,373 within ten days of the receipt of the demand. No assessee can after the receipt of such demand treat it is an idle demand not meant to be enforced.
Rule 10A referred to in the demand notice of the Collector reads :
'Where these rules do not make any specific provision for the collection of any duty, or of any deficiency in duty if the duty had for any reason been short-levied or of any other sum of any kind payable to the Central Government under the Act or these rules, such duty, deficiency in duty or sum shall, on a written demand made by the proper officer, be paid to such person and at such time and place, as the proper officer may specify.'
Section 11 of the Act (Central Excise and Salt Act of 1944) provides that in respect of duty and any other sums of any kind payable to the Central Government under any of the provision of this Act or of the rules made thereunder, the officer empowered by the Central Board of Revenue may recover the amount by attachment and sale of excisable goods belonging to the person liable to pay and if the amount payable is not so recovered he may prepare a certificate signed by him specifying the amount due and send it to the Collector of the district in which such person resides or carries on business and the said Collector shall proceed to recover the amount specified as if it were an arrear of land revenue.
It is true that the assessee preferred appeals to the Collector of Central Excise and to the Central Board of Revenue for cancellation of the demand. But his position however was 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 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 Collectors demand for payment which was dated December 9, 1954. 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, namely, the accounting year 1954-1955 (April 13, 1954, to April 13, 1955). 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.
In Rajarathina Nadar v. Commissioner of Income-Tax and Excess Profits Tax, a Division Bench of this court held that where the assessee maintained his accounts on the mercantile basis any ascertained liability for a particular sum with a corresponding entry in his accounts was sufficient for claiming revenue expenditure. At page 842 Rajagopalan J. observes as follows :
'An ascertained liability is still there. It is still legally enforceable against the assessee. That the assessee avowed his intention in the proceedings before the Tribunal not to discharge that ascertained liability will not alter his legal liability to the Travancore state nor affect his legal rights under the Income-tax Act and the Excess Profits Tax Act.'
We respectfully agree with his observation of the learned judge.
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 nerve to avoid that liability. He may file appeals to the proper authorities questioning the imposition of the liability and praying for relief by way of cancellation of the duty. These are only constitutional modes in which a subject reacts to levy of taxes and, indeed, there is nothing improper in them. 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 no proper levy legally recoverable till such protest or opposition ceases or is silenced.
Learned counsel for the department referred to the decision in James Spencer & Co. v. Commissioner of Inland Revenue. In that case the appellant (assessee) was a firm which took over the business of another firm from April 1, 1945. The firm was carrying on business as stevedores. Neither the appellant firm nor its predecessor had insured against risks or liabilities arising from claims by workmen either under the Workmens Compensation Acts or under common law. In taking over the business the appellant firm assumed responsibility for the previous partnerships liabilities to its workmen in this respect. In respect of an assessment to excess profits tax for the chargeable accounting period ended December 31, 1945, the firm contended that as soon as an accident to a workman occurred in its employment a liability arose, that whether the liability was admitted or disputed it was proper to make provision for it in the accounts for the period within which the accident occurred, and that in computing its profits for the nine months ended December 31, 1945, it was entitled to deduct (a) a sum representing claims against the appellant firm or its predecessor in respect of which no payments had been made at 31st December, 1945, either because (i) liability had not been admitted; or (ii) liability was admitted but the amount payable was not agreed; or (iii) the amount payable was agreed but no payment had actually been made. For the Crown it was contended that no deduction was permissible in respect of claims for which liability had not been admitted at December 31, 1945, that where liability to pay a lump sum was admitted by the firm, or imposed upon it by a court, a deduction was due for the period in which the liability was admitted or imposed and not for the period in which the accident occurred. The Commissioners held that no liability in respect of an accident arose until it was admitted by the firm or, it disputed, determined by a competent court and that the firms claim failed. The court held that the Commissioners decision was correct. Lord President Cooper observe thus at page 116 :
'From an examination of the numerous cases conveniently summarised in Simon on Income-tax II, 128ff., the broad working rule which emerges as a guide to the crediting or debiting in a tax computation of subsequently maturing credits or debits is to enquire in which accounting period the right or liability was established and to carry the item into the account in that year... In Bernhard, Lord Hanworth M. R. put the matter thus : If there is a liability which is subsequently determined, but which is none the less to be a liability existing at a particular date, the fact that it is, subsequently to that date, determined and ascertained, does not prevent that liability belonging historically to its right place in the accounts. The quantum of it is ascertained at a later date; but the payment is to be made as at the date when it rightly occurs in the accounts, even if the quantum of it cannot be fixed at that moment .... its seemes to follow that, if in the earlier period there is only a provisional or contingent liability , it is not until it has been subsequently determined to be an actual liability by admission or decision that it can properly be brought into computation, and it should then be debited even if it is not until a still later period that the exact quantum can be inserted, if need be by reopening the accounts.'
This decision does not help the department in asserting before us that the excise duty payable, namely, the sum of Rs. 21,373, cannot be debited in the assessees year of account 1954-55. It was not a contingent liability on the part of the assessee which the Collector of Central Excise was seeking to enforce by making the demand for payment. The duty was levied for an ascertained sum, and the levy accompanied by a statutory demand. It was undoubtedly open to the excise authorities to have collected the amount fully in December, 1954, or January, 1955, by taking coercive steps against the assessee. There was nothing uncertain, tentative, provisional, or contingent in the matter of the assessees liability to pay to the excise duty. It was a clear-cut unqualified liability which was imposed upon the assessee who became bound in law to discharge it whatever hopes he might have entertained of escaping from that liability by preferring appeals to the hierarchy of authorities under the Excise Act.
Mr. S. Ranganathan, learned counsel for the department, also relied upon a recent decision of this court in Associated printers v. Commissioner of Income-tax, in support of his contention that there was no accrual of liability consequent on the service of the demand notice upon the assessee by the excise officials. The facts of that case were as follows : The assessee took over a running business on February 1, 1950, at a time when a dispute between its predecessor and its workmen regarding their claim for Deepavali bonus for 1949 was pending adjudication by the Industrial Tribunal. After the transfer of the business the assessee was impleaded as a party to the industrial dispute before the Tribunal. The Tribunal passed an award on February 9, 1951, directing payment of one and half months basic wages as bonus. On June 30, 1951, the assessee agreed to pay Deepavali bonus for the year 1950 on the same basis. The total amount of bonus for 1949 and 1950 amounting to Rs. 54,140 was debited in the assessees accounts (maintained on the mercantile system) in the accounting year ending January 31, 1952. The question was whether the said sum was an allowable expenditure under section 10(2)(xv) of the Income-tax Act in the relevant assessment year 1952-53. It was held that the liability to pay bonus under the award and the agreement was a liability legally enforceable against the assessee. The liability itself accrued only after the date of the transfer of the business. When the assessee provided for the bonus payments in the year ending January 31, 1952, it discharged its own liability accruing in that year of account. The expenditure was held to be properly deductible in the accounting year ending on January 31, 1952. It was only in that year that the liability accrued; in the earlier years it was but a contingent liability. That case merely pointed out the distinction between a contingent liability and a payment depending upon a contingency. In fact the expression of the opinion by the Division Bench was obiter as is apparent from the following observation of the learned judge at page 295 :
'The learned counsel for the department urged that, even if the requirements of section 10(2)(xv) were satisfied, the deduction should not be permitted in the assessment year 1952-53, and that the bonus payments for 1949 and 1950 were properly debitable only to the years of accounts that ended on January 31, 1950, and January 31, 1951, respectively. That was not one of the grounds on which the Tribunal negatived the claim of the assessee company. Such a contention was never put forward by the department for adjudication by the Tribunal. Such a contention does not arise for consideration at this stage. As a question of law it does not arise on the order of the Appellate Tribunal.'
The payment of Deepavali bonus was a matter of dispute between the management and its employees and the liability to pay bonus for the years 1949 and 1950 would not therefore be said to have arisen in those years. The award by the Industrial Tribunal itself was made only on February 9, 1951, with reference to the Deepavali bonus of the year 1949 and the management agree to pay bonus for the Deepavali 1950, only on June 30, 1951. Both these dates fell within the year of account of the assessee. The legal liability to pay bonus was, therefore, rightly, if we may say so with respect, held to have accrued only on the dates of the award and the agreement.
In our opinion the assessee rightly claimed that this sum of Rs. 21,373 was legally enforceable liability to pay the excise duty in consequence of the statutory demand by the excise authorities in the year of account relevant to the assessment year 1955-56. He was entitled to debit this amount on April 12, 1955, as an accrued liability on the basis of mercantile method of accounting adopted by him. The disallowance of the claim by the department and by the Income-tax Appellate Tribunal is clearly erroneous in law. The question is answered in favour of the assessee who will get his costs from the department. Counsels fee Rs 250.