SRINIVASAN J. - The assessee is a registered firm carrying on business in manufacture and sale of beedies. The assessment year is 1954-55, the previous year relevant to which ended on the 31st March, 1954. It would appear that during the account year 1952-53, the excise authorities verified the stock of tobacco with the assessee and found certain shortage. Since the commodity is excisable and excise duty has to be paid as and when tobacco is removed for the purpose of manufacture, these shortages were, under the Excise Rules, deemed to be tobacco which had been taken out without payment of excise duty. Accordingly, demand notices were issued by the excise authorities on 30th July, 1953, for a sum of duty of Rs. 1,590-12-0. Two demand notices covering a duty of Rs. 4,961-8-0 were met by the assessee by a payment on the 5th September, 1953. Lastly, another demand for Rs. 1,404-6-0 was paid on the 5th January, 1954. The total of these amounts came to Rs. 7,856-10-0. The assessee claimed that this amount should be deducted as an item of expenditure. The Income-tax Officer thought that the duty related to tobacco found short in processing not accounted for by the assessee in the account year 1952-53, relevant to the assessment year 1953-54, and that it have no relevance to the tobacco consumed or utilised during the account year concerned in this reference for manufacturing purposes. He thought further that the payment was in the nature of a penalty. Both on the ground that the duty related to an earlier account year and that it was a penalty, the quantum of excise duty referred to above was disallowed as a valid item of expenditure. On appeal, the Appellate Assistant Commissioner concurred in the view taken by the Income-tax Officer that this expenditure had no relation to tobacco consumed or utilised during the account year for manufacturing purposes. The further appeal to the Tribunal also failed. The Appellate Tribunal did not examine the matter any further, merely agreeing with the departmental authorities and holding that the rejection of the claim was proper.
On an application of the assessee to this court under section 66(2) of the Act, the Tribunal was directed to submit a statement of the case and refer the following question for the determination of this court :
'Whether, on the facts and in the circumstances of the case, the payment of the sum of Rs. 7,857-0-0 in the year of account as excise duty by the assessee is not a permissible deduction in the computation of the total income of the assessee ?'
It is not a dispute that excise duty paid by the assessee would, generally speaking, be a deductible item of expenditure. But the view taken by the department and the Tribunal appears to be, firstly, that this payment was not relevant to the income that was earned in the year of assessment 1954-55, and, secondly, that the payment of excise duty partook of the nature of a penalty imposed upon the assessee under the Central Excise and Salt Act, 1944. It is to these question that we direct our attention.
The copies of the proceedings of the Collector of Central Excise in relation to the demands that were made upon the assessee for excise duty form part of the record. It is seen from these orders that in respect of the demand for Rs. 1,590-12-0 the assessee carried an appeal to the Collector of Central Excise. The order shows that the loss in processing noticed by the department varied from 4.5 per cent. to nine per cent. and the Superintendent, Vellore, condoned to loss to the extent of four per cent. of the quantity of tobacco. The Collector, on an examination of the question, condoned the entire loss noticed in some instances and enhanced the allowable loss in certain others up to as much as eight per cent. The result was that as against the duty of Rs. 1,590-12-0 originally demanded, the appellate order of the Collector of Excise reduced the demand to Rs. 497-14-0. In respect of the next demand, as against a loss varying from one to nine per cent. shown by the assessee, the Assistant Commissioner condoned the loss to the extent of two per cent. in the case of certain kinds of tobacco and five per cent. in the case of other types of tobacco. The extent of allowable loss was enhanced by the Collector of Central Excise on appeal to four per cent. and six per cent. in these cases. The demands in these cases were accordingly reduced. In the case of the third demand as well, the appellate order of the Collector reduced the duty demanded from Rs. 1,631-14-0 to Rs 979-2-0.
One fact emerges very clearly from this proceedings. It is not the case of the department of Central Excise that there was any unauthorised removal of tobacco from the warehouse entailing penal consequences. It was admitted by the department that a certain amount of loss was inevitable in the case of the processing of tobacco for the purpose of manufacture, the quantum of loss varying with the kind of tobacco used. A rule of thumb method for allowing for this loss is generally adopted by the department and it is in the exercise of the discretion of the excise authorities that ad hoc allowances, even exceeding the normal percentage of shortage, are allowed. Had it been a case of the department discovering that the assessee had unauthorisedly removed the tobacco, penal consequences would have followed, but the orders that have been placed before us clearly indicate that it was not in the nature of a penalty that these demands for duty were made upon the assessee.
It seems to us that the department and the Tribunal have failed to have regard to the special features of the levy in the present case in holding that the payment of this excise duty had relevance only for the account year 1952-53 relevant to the assessment year 1953-54. It is true that the loss was noticed in the account year 1952-53. It was fully open to the excise department to have condoned the loss in it entirety and to have made no demand upon the manufacturer. The matter was fully within the discretion of the excise authorities, as to the quantum of loss in processing which they could allow. The mere existence of a shortage of this kind arising from the processing in manufacture does not involve any liability on the part of the assessee to pay a duty. The liability to pay a duty arises only after the exercise of the discretion of the excise authorities and after they reach a decision that any amount of duty is payable. The view of the Tribunal and the department that the payment of duty would be relevant only to the year in which the liability to duty was incurred would in the normal sense be correct, but that would not cover a case where there is no legal liability to pay duty except on an order being passed by the excise authorities. Clearly then, unless and until the excise authorities made that order, the assessee could not have known what amount of duty he was even expected to pay.
This aspect of the matter was considered by us in T.C. No. 145 of 1959. In that case, a match factory had been classified as category II. The assessee founds that his production during the year 1954 was likely to exceed the ceiling of five lakhs gross of match boxes fixed for category II. The factory would in that event have to be reclassified and treated as category I, the excise duty payable being higher than the category II. The assessee applied for reclassification. He was permitted to come under category I, but a condition was imposed upon him that he should give an undertaking to pay the differential duty on the production during certain periods. Subsequently, a demand was made upon him on the 9th December, 1954, for the deferential duty for the period 1st January, 1954, to 30th June, 1954. On the last day of his account year 1954-55, which was 12th April, 1955, the assessee debited his account with the sum of Rs. 21,373 and claimed this amount as a deductible allowance in computing his income. It may be stated that the assessee had not by that date paid any part of this amount, his contention being that as he was maintaining his accounts on the mercantile basis and as a legal liability to pay duty had been cast upon him, it would be a proper deduction to make in the accounting year 1954-55. The department took the view that since the amount had not been paid and since the assessee was disputing his liability to pay the amount by way of appeals, the deduction could not be allowed. The question that we had examine in that case was whether in view of the fact that the assessee was maintaining his accounts on the mercantile basis, the legal liability to meet the demand issued under the rule 10 of the Rules under the Central Excise and Salt Act did not arise, and, if it did, whether the debit of this amount in the accounts for 1954-55 was not proper. We observed in that connection :
'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 the 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 is no proper levy legally recoverable till such protest or opposition ceases or is silenced.'
We accordingly took the view that where there was a legally enforceable liability to pay duty arising on foot of a statutory demand made by the excise authorities, that could be debited in the year of account when such demand was made.
It seems to us that this decision applies to the facts now before us. As we have pointed out, there can be no liability, either notional or legal, unless and until a demand had been made by the appropriate authority. A demand in the exercise of the lawful authority conferred by the Central Excise and Salt Act imposes a legal liability upon the assessee and it is only at that point of time that he is called upon to incur the expenditure in question. It may be that the loss in processing was discovered at an earlier point of time, but that circumstance did not, as we have pointed out, impose a liability upon the assessee to pay any amount of tax. The determination of the quantum of tax was within the exercise of the administrative discretion conferred upon the excise authorities, and till they determined that the assessee was liable to pay any amount, there was no question of any liability arising. It is not disputed that such demands were made only during the accounting year relevant to the present assessment year and it should necessarily follow that it was a liability that arose and was discharged during that account year.
We, therefore, hold that this amount is a permissible deduction in the computation of income of the assessee for the assessment year 1954-55. We may mention incidentally that these demands were reduced on appeal and obviously the refunds which the assessee received in the succeeding year must be brought into account on the revenue side.
The question is answered in favour of the assessee, which is entitled to its costs. Counsels fee Rs. 250.