Bombay High Court
The C.I.T.B.C-I vs Monica India on 16 April, 2016
Bench: M.S. Sanklecha
1 itr-320-1998
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX REFERENCE NO. 320 OF 1998
The Commissioner of Income Tax,
Bombay City-I, Bombay .. Appellant.
V/s.
Monica India .. Respondent.
Mr. P. C. Chhotrary, for the Appellant.
Mr. S. P. Goyal, Partner of Respondent, present-in-person.
ig CORAM: M.S.SANKLECHA, &
A.K.MENON, JJ.
RESERVED ON : 1st APRIL, 2016.
PRONOUNCED ON :16th APRIL, 2016.
JUDGMENT (Per M. S.Sanklecha, J.) :-
This Reference in respect of Assessment Year 1985-86 under
Section 256(1) of the Income Tax Act, 1961 (the Act) is made by the
Income Tax Appellate Tribunal (Tribunal), seeking our opinion on the
following question of law:-
" Whether on the facts and in the circumstances of the case,
the Tribunal was right in law in setting aside the order of the
Commissioner of Income Tax and restoring that of the Income
Tax Officer allowing the liability on account of customs duty at
Rs.1,78,83,846/-?".
2 The Respondent-Assessee is a firm. During the Assessment
Year 1985-86, it has purchased 600 metric tonnes of imported synthetic
waste from M/s. Ajay Woolen Mills and 350 metric tonnes of cloth with
250 metric tonnes of manufactured TOPS , using imported acrylic staple
S.R.JOSHI
2 itr-320-1998
fiber from M/s. Sanjeev Woolen Mills. These goods were purchased under
Agreements dated 4th January, 1984 and 5th January, 1984. The price as
agreed in both the cases was the gross costs to the seller with a net profit
of Rs.1/- per kg to M/s. Ajay Woolen Mills and Rs.1.50 kg. to M/s.
Sanjeev Woolen Mills. The gross costs included all expenditure incurred
by the seller from the opening of letter of credit up to the final execution
of the contract for supplying the goods to the appellant. However, as
there was uncertainty about the incidence of customs duties, the parties
inserted a clause in the two agreements by another agreement. This
further clause was to make it clear that any liability with respect to duty
of customs payable by the seller, would be a part of the costs and the
buyer would pay for the same. The inserted clause read as under :-
" To avoid any misunderstanding and confusion at some
later date, it is hereby stipulated that although the present
stage, C.V.D. which comes to Rs.36/- per kg. is Auxiliary duty,
not applicable in terms of Court Orders on the consignments
being imported by the seller which the seller, in turn, has
agreed to supply to the buyer, but in case at some later stage,
any such liability occurs and any duty is required to be paid,
the same too, will be the exclusive liability of the Buyer as the
same will be nothing but a part of the cost and for this purpose,
the buyer has undertaken to stand guarantee in any manner
acceptable to the customs or the Bank to the effect that in case
any such duty becomes payable at any stage, the same will be
the exclusive liability of the buyer and not that of the seller by
virtue of this Agreement."
3 Subsequent to the above agreement, there was an increase in
the rate of customs duty payable on the imported goods required for
execution of the two contracts by M/s. Ajay Woolen Mills and M/s.
Sanjeev Woolen Mills. Consequently, customs duty become payable at
Rs.1.78 Crores on the imports. This amount was payable in terms of the
S.R.JOSHI
3 itr-320-1998
contract by the Respondent-Assessee to its seller as a part of the cost of
the goods.
4 Consequently, it debited the sum of Rs.1.78 crores to its
Profit & Loss Account while determining its income chargeable to tax
under the Act in its return of Income for Assessment Year 1985-86. The
Assessing Officer while completing assessment under Section 143(3) of
the Act, by order dated 8th November, 1985 also accepted the expenditure
incurred of Rs.1.78 Crores (on account of customs duty) being debited to
the Profit & Loss Account and determined tax payable by the Respondent-
Assessee at Rs.1.37 lakhs.
5 Thereafter, the Commissioner of Income Tax (CIT) in exercise
of its powers under Section 263 of the Act, passed an order dated 24 th
March, 1988 reversing the Assessment Order dated 8 th November, 1985.
By the order dated 24th March, 1988, the CIT inter alia, held that the
amount of Rs.1.78 Crores was a contingent liability as the seller of goods
i.e. Respondent-Assessee had challenged the same in the Supreme Court
and the payment of the same to customs had been post-poned and thus,
could not be allowed as an expenditure for the subject Assessment Year.
Consequently, CIT by order dated 24th March, 1988 directed the Income
Tax Officer to revise the assessment and re-compute the Respondent-
Assessee's income after disallowing the claim of Rs.1.78 Crores as
expenditure debited to Profit & Loss Account in respect of Assessment
Year 1985-86.
6 Being aggrieved, the Respondent-Assessee carried the issue in
appeal to the Tribunal. By an order dated 17 th July, 1989, the Tribunal
allowed the Respondent-Assessee's appeal, inter alia, holding that
S.R.JOSHI
4 itr-320-1998
Respondent-Assessee was following the mercantile system of accounting.
Therefore, the liability is to be allowed as the deduction on accrual basis.
It further held that the liability was a certain and quantified liability. The
amount of Rs.1.78 Crores had been quantified by the Customs
Department. Further, the Tribunal held that the liability to pay the
customs duty by the Respondent-Assessee, was a part of the sale price to
the two sellers and consequently, ought to be allowed as an expenditure
for purchase of goods. In the above view, the Appeal of the Respondent-
Assessee was allowed.
7 Mr. Chhotaray, learned Counsel appearing for the Revenue in
support of the appeal makes the following submissions :-
(a) The amount of Rs.1.78 Crores being the customs duty which is
payable as a part of consideration of goods, was not reflected in the
bill of seller. Consequently, same was not offered to tax by the
seller of the goods. Thus, the Respondent-Assessee could not claim
an expenditure of Rs.1.78 Crores to reduce to its profit which was
chargeable to tax;
(b) The amount of Rs.1.78 Crores is not an ascertained liability but a
contingent liability. This is for the reason that the seller of the
goods has challenged the levy of customs duty and the issue was at
the relevant time, pending before the Supreme Court which had
granted a stay of the payment. It is therefore submitted that the
liability had not accrued during the subject assessment year and,
therefore, could not be allowed as a deduction; and
(c) Reliance is placed on the decision of the Apex Court in Mcdowell
S.R.JOSHI
5 itr-320-1998
and Co. Vs. ITO 154 ITR 148 to contend that it covers the issue
completely in favour of the Revenue. Thus, the question as raised
be answered in its favour.
8 As against the above, Mr. S. P. Goyal, partner of the
Respondent-Assessee, appearing in-person in support of the impugned
order of the Tribunal submits as under:-
(a) The present Reference has been made in 1998 i.e. nine years after
the date of the order of the Tribunal on 18 th July, 1989.
Therefore, time barred; and
(b) On merits, reliance is placed upon the reasons mentioned in the
order dated 17th July, 1989 of the Tribunal to contend that the
question of law as framed should be answered in favour of the
Respondent-Assessee;
9 The objection of the Respondent-Assessee that the Reference
made to this Court is time barred, is without substance. It is not the case
of the Respondent-Assessee that the Reference Application before the
Tribunal was not made within 60 days by the Commissioner of Income
Tax from the receipt of the order dated 17 th July, 1989 passed by the
Tribunal. The time taken by the Tribunal to dispose of the Reference
Application filed by the Revenue, cannot be held against the Revenue.
Thus, the objection taken by the Respondent-Assessee to answer the
question posed for our consideration is without any merit.
10 Now, turning to the merits of the issue, it is seen that this is a
case of an Assessee being charged to tax on its profits and gains of
S.R.JOSHI
6 itr-320-1998
business under Section 28 of the Act. The charge of income tax in such a
case is not on the gross income / receipts but only profits and gains of
business. Section 29 of the Act provides the manner in which the profits
and gains of business or profession is to be computed i.e. in accordance
with Section 30 to 43D of the Act. Section 37 of the Act is a general /
residury provision which allows all expenditure incurred wholly and
exclusively for the purposes of the business to be deducted from income
in computing profits and gains of business. The expenditure which is
incurred for purchase of goods for the purpose of sale would be an
expenditure allowable for the purpose of computing the profits and gains
of business. One more feature which must not be lost sight of i.e. an
assessee is entitled to determine its profits and gains of business either on
receipt basis or on mercantile basis (Section 145 of the Act). Where an
assessee maintains its books of account, on receipt basis, the same only
takes into account the amounts actually received and amounts actually
expended / spent to determine the profits and gains for the Assessment
Year. On the other hand, where the books of accounts are maintained on
Mercantile system of Accounting, it is as explained by the Apex Court in
Keshav Mills Vs. CIT 23 ITR 230 to be "that system which brings into
credit what is due, immediately it becomes legally due and before it is
actually received and it brings into debit expenditure the amount for which
legal liability has been incurred before it is actually disbursed". Thus, a
liability which has occurred during the year has to be taken into account
even though it may be discharged / paid - in the future. However, a
liability that is not ascertained or that which is contingent is not an
expenditure which is available for deduction even under Mercantile
System of Accounting. It has to be an actual liability in the present duly
S.R.JOSHI
7 itr-320-1998
ascertainable though payable in future for deduction to be allowed as
expenditure. Thus, a disputed liability depending upon the facts of the
case may not be considered to be a liability in the present though payable
in the future. So far the liability to payment of tax is concerned, the Apex
Court in Kedarnath Jute Mills Co. Ltd, v/s. CIT 82 ITR 363 - has, inter
alia, held that once a liability to pay Sales Tax is attracted (on purchase /
sale of goods) merely because the Assessee has taken proceedings to wipe
out and/or reduce the liability by approaching the Court, it would not
cease to be a liability till such time as an higher Authority or Court wipes
out the liability. It must be pointed out that w.e.f. 1 st April, 1984, Section
43B of the Act provides no deduction of any services payable as tax would
be allowed unless it is actually paid in the subject Assessment Year.
11 In the context of the above position in law, we shall now
consider the submission on merits.
12 The first submission made on behalf of the Revenue is that
the amount of Rs.1.78 Crores cannot be allowed as expenditure incurred
for purchase of goods, as the same was not shown in the bill of seller.
However, this is not factually correct as the impugned order of the
Tribunal at page 4 para 6 thereof reads as under:-
" 6:- Observation of the CIT that the bills did not include this
liability is also not correct in view of his own statement that the
following note was appended at the end of the bill:-
"Subject to your liability of Rs...... against custom claim
under dispute."
This in our opinion, is a clear acknowledgment by the assessee
as well as the sellers that consideration for the sale was the price
plus the custom duty."
In any case, the agreements between the parties provides that
S.R.JOSHI
8 itr-320-1998
the consideration payable for the purchase of goods included within it,
duty of customs payable on the imported goods, as a part of the costs
incurred by the seller. Therefore, so far as the Respondent-Assessee is
concerned, the costs of purchase of goods is not only the expenses
incurred by the seller from the opening of letter of credit but continue to
run till the execution of the contract. The inserted clause only explicitly
provides that customs duty paid/payable for the raw materials would also
be included in the costs of the goods. The bills which were issued by the
seller, specifically provides that the bills have been issued subject to the
liability of the buyer to pay customs duty which is under dispute.
The contention of Mr. Chhotrary that the seller had not
shown the aforesaid consideration of Rs.1.78 Crores as his receipt of sale
of the goods and, therefore, the buyer of the goods i.e. Respondent-
Assessee cannot claim the same as a deduction is not sustainable. The
remedy, if any of the Revenue to bring to tax the income of Rs.1.78
Crores in the hands of the seller of the goods. There is nothing on record
to indicate that the seller of the goods has not shown the aforesaid
consideration in its return of income and offered it to tax. This submission
on the part of Mr. Chhotrary, is not supported by the facts on record. In
any case, the buyer of the goods cannot be made liable to tax on the
consideration paid by him to the seller of goods only because the seller of
goods has failed to take it into consideration as a part of his income while
discharging its obligation to pay tax under the Act. Thus, there is no merit
in the first submission made on behalf of the Revenue.
14 It is next submitted that the amount of Rs.1.78 Crores
S.R.JOSHI
9 itr-320-1998
payable by the Respondent-Assessee to the Appellant is a contingent
liability as the seller of the goods was disputing the customs duty payable
with the Customs Department and the Apex Court had also granted a stay
of recovery of the dues of customs from the sellers of the goods. It cannot
be disputed that the Customs Department had raised a demand of Rs.1.78
Crores upon the seller of the goods i.e. M/s. Ajay Woolen Mills & M/s.
Sanjeev Woolen Mills. This amount was a part of the consideration
payable by the Respondent-Assessee to the seller of goods. The mere fact
that the seller of the goods had obtained a stay, would not by itself result
in the same being considered as an unascertained and unqualified
liability. The stay granted by the Supreme Court has merely kept in
abeyance demand of Rs.1.78 Crores payable by the seller to the Customs
Department. The liability to pay the customs duty to the State under the
Customs Act is undisputedly of the seller of the goods. The non-payment
of customs duty by the seller of the goods would invite penalty,
prosecution etc. upon the seller of the goods who had imported the raw
materials. The Respondent-Assessee is liable to pay to the sellers the price
of the goods which in terms of the bargain is cost plus Rs.1/- per kg. or
Rs.1.50/- per kg. The entire consideration of customs duty which has been
demanded by the Customs Department of the seller of the goods is part of
the price so far as the seller and the Respondent-Assessee is concerned.
Moreover, as the Respondent-Assessee is admittedly following the
Mercantile Systems of Accounting and as held by the Apex Court in
Kedarnath Jute Mills (supra), mere challenge to the demand by the seller
may not by itself lead to the liability ceasing. Although, the seller of the
goods may not be able to claim/obtain a deduction on the above account
as the same has not been paid in terms of Section 43B of the Act.
S.R.JOSHI
10 itr-320-1998
However, this does not in any way deprive the Respondent-Assesse of the
deduction of the amounts paid for purchase of goods. Thus, we are not
able to accept the submission on behalf of the Revenue. Thus, the
Respondent-Assessee would be entitled to deduct the aforesaid amount of
Rs.1.78 Crores as consideration paid for the goods in the subject
Assessment Year. In any case, as observed by the Tribunal, if the Apex
Court holds that no custom duty is payable and quashes the demand of
the Customs Department, then the consideration payable for the goods
would stand reduced by virtue of Section 41 of the Act, the very amount
of Rs.1.78 Crores or the extent to which the Apex Court sets aside the
demand. Therefore, Respondent-Assessee would be liable to pay tax under
Section 41 of the Act on remission as its liability to pay for the goods
purchased from the seller would stands reduced.
15 It was next contended on behalf of the Revenue that in any
case, the decision in Mcdowell & Company Ltd. (supra) would cover the
issue in favour of the Revenue. It is submitted that the entire exercise
undertaken by the Respondent-Assessee was only to avail deduction in
respect of customs duty payable which the importer/seller of the goods
would not get in the absence of making payment of duty of customs on
import of the goods in view of Section 43B of the Act. It is submitted that
this entire exercise has been done only to evade payment of tax. It is
submitted that even in case of Mcdowell & Company Ltd. (supra), such
an exercise was not permitted. This submission fails to notice difference
in facts in this case from the facts in Mcdowell & Company Ltd. (supra). In
any case, the Apex Court in UOI v/s. Azadi Bachao Andolan 2004 (10)
SCC 1 an act which is otherwise valid in law, cannot be treated as non-est
on the basis of subjective assessment by the Assessing Officer of the real
S.R.JOSHI
11 itr-320-1998
motive of the Assessee. In this case, the plain bargain between the parties
in respect of the price of goods is costs + Rs.1 or Rs.1.50 per kg. The costs
include customs duties payable on imported goods. The further insertion
of a clause in the Agreements is only to ensure that increase in the
customs duty payable on the imported goods would also be considered to
be a part of the costs i.e. purchase price. This in fact is finding of fact
arrived at by the Tribunal and no issue in respect of it being perverse, is
referred to us. In any event, we are unable to understand how the
agreement arrived at between the parties is a colourable device or a
dubious method resorted to by the Respondent-Assessee. Thus, the
decision in Mcdowell & Company Ltd. (supra) has no application to the
present facts.
16 Moreover, the facts in Mcdowell & Company Ltd., (supra)
was that a manufacturer of liquor was required to pay Sales Tax on the
basis of its turnover. Under the State Excise Act, the excise duty was
payable on removal of liquor from the distilleries and only if the excise
duty has been paid to the Excise Authority of the State, the goods could be
removed. This excise duty element was also to be included in the turnover
of M/s. Mcdowell & Company Ltd. (supra). However, M/s. Mcdowell &
Company Ltd. (supra) asked the buyers of liquor to pay directly to the
State the excise duty on the liquor and obtain pass in respect of the liquor
it is seeking to remove from the Appellant's factory. On receipt of the
pass, the liquor would be removed from the manufacturing premises and
sold to the whole-saler. By this mode, M/s. Mcdowell & Company Ltd.
(supra) sought to reduce sales tax by not including the excise duty paid in
its turnover. The Court frowned upon the entire exercise to hold that this
arrangement was done only so as to avoid payment of tax by colourable
S.R.JOSHI
12 itr-320-1998
device. This in the context of the Sales Tax Act, State Excise Act and Rules
made thereunder, particularly the amended Rules 76 & 79 of the Distillery
Rules. In that view of the matter, the Supreme Court held that the sales
tax is payable on the entire turnover which include the excise duty which
was paid by the buyer of the liquor to the State Government directly
without it ever becoming a part of M/s. Mcdowell & Company Ltd.
(supra) turnover. We are are unable to understand how the facts of the
aforesaid case has any application to the present case. The customs duty,
if any, is payable by the importer at the time of import and clearance of
the goods. The selling price of the goods is on the basis of costs + Rs.1/-.
The costs includes amongst other things, the customs duty which has been
paid or which would have to be paid on the import of the goods. Thus, the
Respondent-Assessee is obliged to pay the consideration in accordance
with the terms of contract entered into between the Respondent-Assessee
and its sellers. Thus, the decision in M/s. Mcdowell & Company Ltd.
(supra) is not applicable to the present facts and does not conclude the
issue in its favour as contended by the Revenue.
17 In view of the above, we answer the question as framed for
our opinion in the following terms:-
In the affirmative i.e. in favour of the Respondent-
Assessee and against the Revenue.
18 Reference Application is disposed of in the above terms. No
order as to costs.
(A.K.MENON,J.) (M.S.SANKLECHA,J.)
S.R.JOSHI
