ORDER
Vimal Gandhi, Judicial Member
1. This appeal by the assessee for the assessment year 1984-85 is directed against order of the Commissioner of Income-tax (Appeals) [hereinafter referred to as ‘CIT(A)’] dated September 19, 1990.
2. The first and the main controversy relates to Rs. 2057.77 lakhs disallowed and added back in the income of the assessee under the provisions of Section 43B of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’). The relevant facts leading to the above addition are as follows.
3. The assessee, a well-known public limited company, carried business of manufacture and sale of tyres and tubes in the previous year ending December 31, 1983, relevant to the assessment year 1984-85. The Company maintained its books of account on mercantile basis. The goods manufactured and produced by the asssssee were liable to Central Excise Duty and it is an admitted position that total liability incurred in the relevant period amounted to Rs. 8312.41 lakhs. The assessee actually paid towards duty a sum of Rs. 6,664.77 lakhs and debited the same in the Profit & Loss Account of the year. This has been allowed as a deduction and is not subject-matter of any controversy. Out of the balance amount of duty liability, the assessee debited a sum of Rs. 1022.64 lakhs in the Profit & Loss Account under the head “Excise Duty and Commercial liabilities (Note 6)”.
4. The circumstances under which the liability remained unpaid as narrated by the assessee are recorded by the CIT(A) in para 5.1, pages 15 to 17 of his order. It is not necessary to repeat them.
5. The Assessing Officer considered the amount of Rs. 1022.64 lakhs as outstanding liability of duty disallowable under the provisions of Section 43 B of the Act. It was contended before him that the amount claimed was not “tax or duty” covered by Section 43B. The assessee explained that it had obtained Stay Order from the High Court and had cleared the goods on the basis of bonds and bank guarantees. The amount claimed was not statutory liability under the Excise Duty Act but commercial liability under the bonds and deductible as such. The Assessing Officer rejected the above contentions, disallowed and added a sum of Rs. 1022.64 lakhs under Section 43B of the Act in the total income.
6. Being aggrieved, the assessee challenged the above disallowance in appeal before the CIT(A). Besides reiterating the contentions advanced before the Assessing Officer, the assessee further challenged the vires of the provisions of Section 43B. It was contended that the rigours of the section were attracted in cases of wrongful nonpayment of tax statutorily payable and not to demands prima facie illegal and in respect of which Stay Orders were issued by competent authorities. Such demands were “accrued liability” but not “payable” to attract application of Section 43B. The assessee relied upon the speech of the Finance Minister, Circulars of the Central Board of Direct Taxes, and on decisions of High Courts and the appellate Tribunal.
7. During the course of hearing of the appeal, the CIT(A) noted that total amount which remained unpaid in respect of the Central Excise liability incurred in the accounting period aggregated to Rs. 1647.64 lakhs. The Assessing Officer, according to him, made a mistake in disallowing only Rs. 1022.64 lakhs which stood debited to the Profit & Loss Account. The CIT(A) was of the view that the entire outstanding liability should have been added back under Section 43B and, therefore, Rs. 625 lakhs was further to be added on account of Central Excise duty. The CIT(A) also noted another outstanding liability of the sales tax amounting to Rs. 410.13 lakhs attracting application of Section 43B but not disallowed by the Assessing Officer. In order to add above two items to the total income of the assessee and to enhance the assessment, the CIT(A) issued show-cause notices dated August 27,1990 and August 31,1990 under Sub-section (2) of Section 251 of the Act to the assessee.
8. The assessee vide reply dated September 7,1990 explained to the CIT(A) that the amount of Rs. 410.13 lakhs represented sales-tax liability for the quarter ended 31st December, 1983 which, according to the provisions of various Sales Tax Statutes, was payable after the close of the accounts .The total amount paid in January 1984 towards sales-tax for the quarter ended 31st December, 1983 was Rs. 4,26,24,000. The provision of Section 43B was not applicable to above amount. In support of this claim the assessee relied on first proviso to Section 43B inserted by the Finance Act, 1987 which, as per decision of the Tribunal in ITO v. K.S. Lokhandwala [1989] 31 ITD 305 (Ahd.) was applicable from the assessment year 1984-85 onwards. In respect of second item of Rs. 625 lakhs representing outstanding liability of Central excise, the assessee contended that amounts stayed by the High Court, were not affected by the provisions of Section 43B. The assessee claimed that “value of Bonds debited to P & L A/c. being Rs. 1,022.64 lakhs there could be no justification for making further addition of Rs. 625 lakhs”. The assessee thus objected to the proposed enhancement of the assessment besides challenging the disallowance made by the Assessing Officer.
9. The CIT(A) carefully considered various submissions advanced by the assessee but was unable to persuade himself to accept them. Rejecting the contention that the amount was not duty, the CIT(A) observed “even though it may be disputed, the entire amount of Rs. 16,47,64,000 still represented, part of excise duty liability. Merely because it is disputed, it does not cease to remain a liability. The fact that the amount has been covered by the issue of bonds and supported by bank guarantees merely shows that the amount represented liability in praesenti. That was why the assessee was required to furnish bonds and bank guarantee to cover the amount. Furthermore, the issue of bonds/bank guarantee could not be treated as payment within the meaning of Section 43B as held by the ITAT, E-Bench, Delhi in the case of Purolator India Ltd. v. IAC [1990] 34 ITD 286 under identical facts and circumstances”.
The other contention of the assessee was rejected observing that Section 43B does not speak of “wrongful non-payment of tax”. The CIT(A) referred to and relied upon decision of Bangalore Bench of Tribunal in the case of A/.V. Textiles v. Third ITO [1987] 23 ITD 523 which took a view different from one taken in K.S. Lokhandwala s case (supra). He further held that the assessee was not eligible for the benefit given by the first proviso to Section 43B as neither of two conditions of the said proviso were satisfied. The CIT(A) concluded “in fine, it may be emphasised that the retrospective amendment of the section by insertion of Explanation 2 by the Finance Act, 1989 sets at naught all the various contentions of the appellant, once it is established that the amount represented statutory liability for excise duty incurred during the year”. On the basis of above conclusion, the CIT(A) disallowed and added back entire outstanding Central excise duty. On above parity of reasoning, he also added back Rs. 410.13 lakhs representing outstanding sales-tax liability. He accordingly disallowed and added back total sum of Rs. 2,057.77 lakhs under Section 43B in place of Rs. 1,022.64 lakhs added by the Assessing Officer. This disallowance/addition of Rs. 2,057.77 lakhs is the subject-matter of first controversy before us.
10. We have heard at length Shri Dastur, the learned counsel for the assessee and Shri M.K. Sarkar, learned Senior Representative of the Department. Out of major controversy connected with Rs. 2,057.77 lakhs we are tempted to dispose of a comparatively easy issue relating to add back of the balance amount of Rs. 410.13 lakhs representing unpaid sales tax liability. The amount is claimed to pertain to last quarter ending 31st December, 1983 and cleared in January 1984.
The learned CIT(A) held that it was not clear as to whether the above amount was actually paid, as claimed before him. He further noticed certain discrepancies between the above figure and Rs. 426.24 lakhs claimed to have paid in January 1984. The learned CIT(A) accordingly directed the Assessing Officer to gather necessary facts/evidence in the matter. The above finding was not challenged before us and, therefore, nothing more be stated. The learned CIT( A) also held that the first proviso to Section 43B inserted by the Finance Act, 1987 was applicable from 1-4-1988 and not in the assessment year 1984-85. This view runs counter to the view taken by the Hon’ble Calcutta High Court in the case of CIT v. Sri Jagannath Steel Corporation [1991] 191 ITR 676 which was cited before us. In the above case relating to assessment year 1984-85 their Lordships considered the first proviso to Section 43B and held it to be retrospective in operation. Its benefit was held to be available to taxpayer in respect of assessment years 1984-85 to 1987-88 also. The requirement to furnish evidence of payment of tax along with the return which, in the view of the learned CIT(A) was a condition to apply the said proviso, is in our opinion directory only. It merely emphasises that evidence relating to payment of tax before the time of filing of return should be available. In our opinion, disallowance cannot be made under Section 43B if the amount is shown to have paid within the time prescribed under Section 139(1) of the Act, but evidence thereof is not attached with the return. Even otherwise, the assessee could not anticipate requirement of the provision introduced in 1987 and furnish evidence with the return filed three years earlier in 1984. We, therefore, hold that requirement is directory only and not a condition for application of first proviso. In these circumstances, we modify the order of the learned CIT( A) on this point and restore the matter to the file of the Assessing Officer for re-examination and verification of the assessee’s claim in the light of the decision of the Hon’ble Calcutta High Court in the case of Sri Jagannath Steel Corporation (supra).
11. In respect of liability of Rs. 1,647.64 lakhs relating to unpaid Central excise duty, Shri Dastur reiterated the submissions advanced before the lower authorities and claimed that the above amount was not a statutory liability. It was a liability under bonds executed by the assessee in terms of orders of the High Court staying the recovery of duty. It was commercial liability. The original liability stood substituted by another liability under bonds which was not hit by the provisions of Section 43B. The aforesaid submissions were opposed by the learned departmental representative who adopted the reasoning of the learned CIT(A).
12. We have carefully considered the rival submissions of the parties. We agree with the learned CIT(A) that the entire amount of Rs. 1,647.64 lakhs was disputed liability covered by the expression ‘duty’ as used in Section 43B. It is settled law that liability to pay excise duty arises as soon as excisable goods are manufactured or produced. In many cases, there, is a dispute between the excise authorities and the manufacturer on the amount of excise duty payable on goods manufactured. The dispute is carried to Courts and stay orders are granted. The ad interim order of stay normally does not affect the nature and character of excise duty. In the present case, the lower authorities rejected the claim of the assessee and held that the amount in question was outstanding liability relating to Central excise duty. It was, therefore, for the assessee to show by placing before us the terms of bonds/bank guarantee or the terms of Stay Orders of the Courts to show that excise duty liability was replaced by some other kind of liability. This has not been done. We may mention that the assessee justifies the claim that it was a liability’ incurred’ wholly on account of the view taken by the authorities under the Excise Act. The above view could be displaced through final order of a competent authority and not on execution of bonds or interim stay order. We, therefore, hold that the entire amount is covered by the word ‘duty’ as understood in Section 43B of the Act.
13. The learned counsel for the assessee then contended that for application of Section 43B the amount, of tax or duly should be “payable”. In the present case, the High Court had stayed recovery of duly on terms of bonds executed by the assessee. There was, thus, no enforceable liability to pay duty. The amount not being “payable” the question of application of Section 43B would not arise. Our attention was drawn to the decision of the Supreme Court in the case of CWT v. J.K. Cotton Mfrs. Ltd, [1984] 146 ITR 552 wherein their Lordships considered the import of the word “payable” in terms of Section 2(m) of the Wealth-tax Act. Shri Dastur further contended that the learned CIT( A) decided the issue against the assessee solely relying upon Explanation 2 to Section 43B inserted by the Finance Act, 1989. But this Tribunal was to decide the issue without taking into account the aforesaid Explanation as directed by the Hon’ble Calcutta High Court vide order dated March 1,1991. If Explanation 2 is not considered, the net effect is that liability was not “payable” and, therefore, not hit by the provision of Section 43B.
14. We have carefully considered the aforesaid contention. The contention, in our view, is not well-founded. Shri Dastur cannot derive any support from the decision of the Supreme Court in the case of J.K. Cotton Mfrs. Ltd. (supra) as in the said case their Lordships were concerned with the expression “outstanding” and the phrase “amount of tax. .. payable in consequence of an order” used in Section 2(m)(iii)(a) of the Wealth-tax Act, 1957. The matter was decided on the basis of express language of the provision involved and the aspect that the liability to pay income-tax for any assessment year crystallises on the last day of the previous year and, therefore, becomes payable on the expiry of the last day irrespective of quantification of the dues was considered irrelevant. In every interpretation, both text and the context are important. This rule is beautifully expressed by the Hon’ble Supreme Court in the case of RBI v. Peerless General Finances & Investment Co. Ltd. [ 1987] 61 Comp. Cas. 633, 692 as under:
Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at in the context of its enactment, with the glasses of the statute maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of this entire Act.
Having regard to the aforesaid principle of interpretation in our view the assessee can derive no help from the decision of the Supreme Court or of the High Court approved therein given in totally different context, circumstances and acts.
15. The assessee strongly relied upon the ad interim order of the Hon’ble High Court dated March 1,1991. The relevant portion which we (respondent No. 3) have to take into account while disposing of this appeal is as under:
(2) The Respondent No. 3 will hear and dispose of the appeal filed before it by the petitioner No. 1 without taking into consideration the provisions of the said Explanation. This restriction should not be understood as an indication that this court has accepted the construction put on the said Explanation by the petitioners viz. that the said Explanation is a mandatory and not clarificatory.
We cannot take into account the Explanation 2 for disposal of appeal. But there is no injunction prohibiting us for taking into account the first proviso to Section 43B introduced through the Finance Act, 1987 with effect from April 1,1988. In fact, we have already applied the above proviso in favour of the assessee relating to Rs. 410.13 lakhs which was disallowed and added back by the CIT(A). The Hon’ble Patna High Court in the case of Jamshedpur Motor Accessories Stores v. Union of India [1991] 189 ITR 70 SLP against this decision dismissed by the Hon’ble Supreme Court as in CIT v. Jamshedpur Motor Accessories Stores [SLP (Civil) No. 11793 of 1991] published in 191 ITR (St.) 8 and the Hon’ble Calcutta High Court in Sri Jagannath Steel Corporation’s case (supra) considered the aforesaid proviso and held that the same was applicable from the assessment year 1984-85 onwards. It was held that Section 43 B, as it stood in the year 1984, was found impossible to comply with and to make it workable amendment in Section 43B was introduced. The proviso was accordingly added. The proviso was held to be retrospective in operation. The Explanation 2 was held to be declaratory- and clarificatory. It was held that Explanation was introduced to clarify the legislative intent by defining the words “any sum payable”. The Court held “having regard to the intent and purport of the provisions of Section 43B and the amendments made from time to time, which we have already indicated, this Explanation must be held to be only clarificatory in nature and will be effective retrospectively”. It is settled law that declaratory or explanatory provisions merely clarify the legal position and do not directly affect the rights of the parties. The decision of the Hon’ble Calcutta High Court is binding on us and is to be given effect to. On consideration of the above decision as also of the first proviso to Section 43B and without Explanation 2 we hold that “any sum payable by the assessee by way of tax, duty” under any law for the time being in force has to be allowed as deduction only in the previous year in which it is actually paid irrespective of method of accounting regularly followed by the assessee. The first proviso to section is an exception to the above rule and makes the main section inapplicable where the amount is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under Sub-section (1) of Section 139 of the Act. Thus, if the main section is considered along with first proviso and both are harmoniously construed keeping in view the intent and purpose of the provision the only conclusion possible is that a liability incurred in respect of amount referred to in Section 43B is to be allowed only on payment basis, subject to exceptions provided in the first proviso. We may mention that the purpose of section now judicially accepted to be reflected in the Budget Speech of 1983-84 of the Finance Minister [1982] 140 ITR St. 31, is to cover taxpayers who do not discharge their statutory liability in respect of excise duty, etc. for long period of time. But nonetheless claim the statutory liability as deduction in their income-tax assessments even as they resort to legal action. Thus depriving the Government of its dues while enjoying the benefit of nonpayment. Section 43B was introduced to cover the cases like that of the assessee before us. Thus, looked from any angle, we are not able to hold that the assessee was entitled to claim deduction of excise duty liability incurred without actual payment in the accounting year. We, therefore, reject this contention of the assessee and uphold the disallowance of Rs. 1,022.64 debited in the Profit & Loss Account under Section 43B as deduction.
16. We are now left with add back of Rs. 625 lakhs made by the learned CIT(A). The learned CIT(A) found that outstanding excise liability for the relevant period aggregated to Rs. 1,647.64 lakhs. But the assessee debited only Rs. 1,022 lakhs to the Profit & Loss Account after adjusting Rs. 625 lakhs representing liabilities of earlier year no longer required. He was of the view that entire outstanding liability amounting to Rs. 1,647.64 lakhs was to be disallowed. The ld. CIT(A) enhanced the assessment accordingly. The basis of enhancement and addition is given by the ld. CIT( A) at para 5.5 of his order which, for the sake of convenience, is reproduced below:
5.5 As stated earlier even though the undisputed outstanding Excise liability was Rs. 16,47,64,000, the Assessing Officer disallowed under Section 43B only Rs. 10,22,64,000 i.e., the amount actually debited to the P & L Account. This was due to the fact that the appellant adjusted Rs. 6,25,00,000 which represented Excise liability for earlier years no longer required. According to the normal principles and practice of accounting this amount should have been credited. However, it is apparent that in order to understate the outstanding Excise Duty liability for the year this amount has been deducted from the gross liability remaining unpaid amounting to Rs. 16,47,64,000 and only the net amount of Rs. 10,22,64,000 has been debited to the P & L Account. Since however the entire amount of Rs. 16,47,64,000 has remained unpaid and not merely Rs. 10,22,64,000, the addition under Section 43B on account of unpaid Excise Duty liability should have been to the extent of Rs. 16,47,64,000. The mere fact that the amount is covered by the issue of Bonds & Bank Guarantee, does not make it any less the Excise Duty liability incurred during the year. There is thus no reason why the addition under Section 43B in this respect should not have been to the extent of Rs. 16,47,64,000. Since the Assessing Officer disallowed only Rs. 10,22,64,000, the assessment is hereby enhanced by Rs. 6,25,00,000.
17. Before us, Shri Dastur vehemently challenged the aforesaid conclusion of the ld. CIT(A). It was contended that the observations made by the 1d. CIT( A) were factually incorrect. The assessee never wrote back excise liability of Rs. 625 lakhs in the accounting year under consideration. In fact, the assessee evaluated its total liability in respect of goods manufactured up to December 31,1983 at Rs. 5,903.31 lakhs. After taking into account the liability already provided for, made further provision of Rs. 1,022.64 lakhs and debited this amount to profit and loss account. No adjustment entry relating to “provision made in earlier year no longer required” was made. Shri Dastur offered the assessee’s books of account of the relevant period for our examination. It was accordingly submitted that there was no excess provision of earlier year written back and adjusted towards the liability of the current year. It was further argued that only the liability which is debited to the Profit & Loss Account and claimed as deduction can be added back under Section 43B. The amount of Rs. 625 lakhs which was not charged to the profit of the year and not deducted in computing the income could not be disallowed. Shri Dastur in this connection relied upon the decision of the Calcutta High Court in the case of CIT v. Duncan Bros. & Co. Ltd. [1983] 140 ITR 335. Reliance was further placed on the decision of the Tribunal in 770 v. Thakersi Babubhai & Co. [1986] 18 ITD 593 (Ahd.) and Hindustan Commercial Corporation v. Second ITO [1990] 32 ITD 295 (Pune). Shri Dastur further submitted that if liability was to be taken at Rs. 1,647.64 lakhs for the purpose of Section 43B, then the said amount of Rs. 1,647.64 lakhs was to be debited to the Profit & Loss Account, instead of Rs. 1,022.64 lakhs actually debited by the assessee. If liability was to be taken at a higher figure, the debit in the recast Profit & Loss account should have been taken at Rs. 1,647.64 lakhs for applying provision of Section 43B of the Act. In this way the net pro fit without deduction of provision of duty would have remained unaffected. But in the inpugned order the learned CIT(A) had only added Rs. 625 lakhs under Section 41(1) of the Act without appreciating facts of case or relevant law. The enhancement of income was beyond jurisdiction and powers conferred by Section 251(1)(a) of the Act. The addition of Rs. 625 lakhs was a new source of income outside the subject-matter of assessment appealed against. It was not an item which was disclosed by the assessee in the return or to which the Assessing Officer had applied his mind. Such new source could not be brought to tax by the learned CIT(A) under his enhancement powers. Shri Dastur relied upon the decision of the Hon’ble Supreme Court in the case of CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443. It was accordingly claimed that there was no jurisdiction of enhancement of the assessment by Rs. 625 lakhs even if other submissions regarding Section 43B are not accepted. These submissions were opposed by Shri Sarkar. He supported the impugned order of the Ld. CIT(A) for the reasons given therein.
18. In order to properly appreciate the rival contentions, we must bear in mind the basic scheme of the Income-tax Act. The said scheme briefly stated is to bring to charge the “total income” of the previous year under different heads. Under Section 28 of the Act, “profits and gains” of business or profession are charged to tax. Such profit is to be computed under Section 29 of the Act after making allowances and deductions permissible by different provisions. Section 43B is a regulatory provision regulating certain deduction. As per the said section “deduction” of liability incurred by the assessee according to the method of accounting regularly employed of any sum payable by way of tax, duty, cess or fees (referred as “duty” hereinafter) “shall be allowed only in computing the income of the previous year in which such sum is actually paid”. The section on its proper construction impliedly prohibits deduction of duty other than actually paid. The provision is meant to neutralise the effect of “deduction” taken into account in the computation of profits in respect of a liability mentioned in the section. But section is not a charging section. The revenue cannot employ it to add an amount which is otherwise not “deducted” in the computation of the previous year’s income. But to find out whether a particular amount has been debited or not, one has not merely to look at Profit & Loss Account. There is no prohibition to claim deduction in an account other than the Profit & Loss Account. AH the same, the manner in which entries are made or not made at all is relevant but not decisive under the Income-tax Act. Legal implication of an event or transaction is important and not the manner in which record is made in the books of account.
19. In the case in hand, there is no dispute that the assessee debited a sum of Rs. 7,687.41 lakhs as “excise duly and commercial liabilities” to the profit and loss account of the relevant year. The above amount includes outstanding liability of excise duty at Rs. 1,022 lakhs and not entire amount of Rs. 1,647.64 lakhs. If Profit & Loss account was alone to be looked into for the liabilities provided and deducted, the addition under Section 43B must be restricted to Rs. 1,022 lakhs only. Shri Dastur further filed a summarised copy of bonded excise duty provision account for the year ended 31-12-1983 which is as follows:
Dr. Cr.
Rs. Rs.
Payments 286.49 Opening balance 5,167.66
Contra entries 4,813.67 Contra entries 4813.67
Reversal of Liabilities provided
liability provided 25.00 for the year 1,047.64
for the year 5,903.81
Closing ------------ ------------
Balance 11,028.97 11,028.97
------------ ------------
20. We have carefully considered the submissions in the light of above accounts and other material available on record. The enhancement of assessment by Rs. 625 lakhs on the circumstances of the case, in our opinion, is fully justified. The assessee adopted a sophisticated device to show that outstanding liabilities on account of excise duty for the relevant period were only Rs. 1,022 lakhs and not Rs. 1,647 lakhs to which the provision of Section 43B could be applied. As per the following discussion, we would try to unfold the device and show that there is no material difference between Rs. 1,022 lakhs admittedly provided for and claimed as deduction and the other liabilities of Rs. 625 lakhs – the subject-matter of present dispute.
21. On receipt of notice under Section 251(2) from the CIT(A) pointing out that outstanding Central Excise liabilities were Rs. 1,647.64 lakhs are, therefore, Section 43B was to be applied to above amount and not to Rs. 1,022 lakhs, the assessee vide its letter dated September 7, 1990 stated as under:
Your letter of 27th August also seeks to add Rs. 6,25,00,000 on the ground that the unpaid outstanding Central Excise liability was Rs. 16,47,64,000 against which only Rs. 10,22,64,000 has been added by the Assessing Officer. We have always contended that the amounts stayed by the High Courts will not be affected by the provisions of Section 43B. Even if this contention is not acceptable for any reason the disallowance can only be confined to amounts debited to P & L Account to’ the extent it is not paid’. The value of Bonds debited to the P & L Account being Rs. 10,22,64,000 there can be no justification for making a future addition of Rs. 6,25,00,000.
The Ld. CIT(A) rejected the above contention and his order has been impugned by raising 59 long grounds of appeal covering almost seventeen foolscap papers. Every conceivable argument has been taken. But still the crucial finding of the ld. CIT(A) that Rs. 625 lakhs represented “provision made in earlier years no longer required” has not been disputed. On the contrary, the above finding is accepted as correct. This is what is stated in Ground No. 25. The relevant portion is reproduced below:
The CIT(Appeals) failed to appreciate that the additional sum of Rs. 625 lacs was not charged to Profit & Loss Account of the relevant year inasmuch as by taking into consideration the liabilities of the earlier years as also of the year concerned and the provisions already made in the earlier years the appellant did not charge the Profit & Loss Account by the sum of Rs. 625 lacs as the same was already covered by the earlier years provisions.
22. It is thus not in dispute that entire outstanding liability stood fully accounted and provided in the excise account. The sum of Rs. 625 lakhs formed part of closing-balance of Rs. 5,903.81 lakhs and had same nature as the other sum of Rs. 1,022 lakhs. As per correct and established principles of accountancy and book keeping actual payment of any part of Rs. 625 lakhs is to be debited to the excise account and not to the Profit & Loss Account as is the case of Rs. 1,022 lakhs when the liability is actually disbursed in future. There is no question of further debiting or charging the Profit & Loss A/c. on actual disbursement. It would have been better and correct for the assessee to debit and show in excise account the sum of Rs. 625 lakhs on account of liabilities of earlier years no longer required and credit this amount to Profit & Loss Account and then separately debit Rs. 1,647.64 lakhs representing outstanding liabilities. For obvious reasons, this was not done and credit entry was eliminated through adjustment reducing the debit which was taken to Profit & Loss Account. But as already stated, the net effect, both under principles of accountancy and law, is the same. No part of Rs. 625 lakhs can further be debited or charged to Profit & Loss Account. It already stood provided in accounts and had to be dealt with and treated exactly like Rs. 1,022 lakhs. It follows from the above that the contention that Rs. 625 lakhs was further to be charged while recasting the Profit & Loss Account before applying Section 43B is without any substance.
23. Shri Dastur has then contended that the ld. CIT(A) has applied Section 41(1) and added Rs. 625 lakhs representing a new source of income outside the subject-matter of assessment appealed against. The ld. CIT(A) thus exceeded his powers of enhancement. This contention in our view is also not well-founded. We have already shown that outstanding liability on account of excise duty was Rs. 1,647.64 lakhs and not Rs. 1,022 lakhs. The provision of Section 43B was to be applied to the entire amount and not to Rs. 1,022 lakhs as done by the Assessing Officer. The ld. CIT(A) discovered the mistake and corrected the figure. No new source of income was assessed. The provision of Section 41(1) has not been considered or applied. The case of remission or cessation of liability is being presumed. In fact, there is not even a mention of Section 41(1) in the impugned order. We have already shown how outstanding liabilities of Rs. 1,647.64 lakhs were provided for but shown at Rs. 1,022 lakhs in the Profit & Loss Account. Under the provision of Section 43B the total outstanding liabilities were to be added back. This is what the ld. CIT(A) has done. He has merely corrected the amount of disallowance already made by the Assessing Officer. For all the above reasons, we confirm the order of the ld. CIT(A) on this point.
24. The next controversy relates to charging of interest under Section 215 of the Act. At the time of assessment, the Assessing Officer charged a sum of Rs. 4,71,59,042 as interest for short-fall in the payment of advance tax. Before the ld. CIT(A) the assessee contended that the A.O. made disallowance under Section 43B and failed to allow proper benefit of tax deducted at source (TDS) and of the amount deposited with IDBL. If tax on disallowed amount was ignored and proper account of deposit with IDBL, TDS, etc. was taken, the difference between 83 1/3% of the assessed tax and the amount deposited by the assessee and paid as advance tax would be negligible. It was further contended that the Assessing Officer should have applied Sub-section (4) of Section 215 and waived the interest as the conditions prescribed in the said sub-section were fully satisfied in this case. It was also contended that before charging interest, it was mandatory for the Assessing Officer to give an opportunity of being heard to the assessee. Such an opportunity was not afforded. The assessee further referred to ad interim injunction granted by the Hon’ble Calcutta High Court on 5th December 1983 in terms of assessee’s prayer in Clauses (f) and (g) (reproduced in the CIT(A)’s order at pages 7 and 8). In view of injunction granted by the High Court the assessee did not take into account Section 43B while depositing advance tax due on second and third instalments. The sum and substance of the assessee’s case was that charging of interest under Section 215 in view of injunction of the Calcutta High Court and on facts and circumstances of the case was illegal.
25. The CIT(A) upheld the levy of interest. He took into account the provision of Sub-section (5) of Section 215 according to which “assessed income” meant tax determined on the basis of regular assessment reduced by amounts deducted at source in accordance with the provisions stated in that sub-section. The learned CIT(A) held that interest under Section 215 is chargeable if advance-tax paid, on the basis of estimate of the assessee, is less than eighty-three and one-third per cent of the assessed tax. He held that the assessee was liable to pay interest from 1-4-1984 up to the date of payment of self-assessment tax on a much larger amount than what was paid by the assessee. He rejected the assessee’s claim that charging of interest under Section 215 was not mandatory. For his above view, he relied upon the decision of J & K High Court in the case of East India Hotels v. State [1987] 70 STC 10. He further held that the assessee was not entitled to waiver of interest under rule 40 of the Income-tax Rules, 1962 read with Sub-section (4) of Section 215 as the Writ Petition not to apply provisions of Section 43B was filed by the assessee and it should be prepared to face the consequences. The ld. CIT(A) further observed that the assessee made no application to the Assessing Officer for reduction or waiver of interest under Section 215 before finalisation of assessment. On considering the decision of the Hon’ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961, the ld. CIT(A) held that appeal against levy of interest under Section 215 was not competent. The assessee is aggrieved, and has brought the issue in appeal before us.
26. Shri Dastur, while assailing the above order of the ld. CIT(A), contended that in the present case the assessee had filed a revised return to take benefit of Amnesty Scheme announced by the Finance Ministry as per CBDT Circular No. 472 [F. No. 225/86/85-IT (A-II)], dated 15-10-1986. It was explained that in the original return the assessee had shown total income at Rs. 667,80,125 against which set off of carried forward loss of Rs. 615,75,210 relating to earlier years was claimed. In the revised return, the assessee did not claim carry forward loss and disclosed total income at Rs. 667,80,125. In the covering letter filed along with the return, the assessee had claimed waiver of interest. Shri Dastur contended that the assessment was completed on the basis of above return which was filed under amnesty scheme and, therefore, the Department could not charge interest under Section 215. He drew our attention to questions and answers of CBDT in Circular No. 451, dated 17-2-1986. In view of the said Circular, the revenue had no right to charge interest. Shri Dastur further contended that filing of estimate of advance tax at nil was justified. As per order dated December 5, 1983, the Hon’ble Calcutta High Court issued injunction not to take provision of Section 43B for the purpose of payment of advance tax. The assessee also approached the Assessing Officer to waive interest chargeable under Section 215 as per application dated 15-1-1990. But no order has been passed thereon in spite of direction of the Tribunal in the Stay Order dated April 19,1991 to dispose of the matter expeditiously. The order of the Assessing Officer charging interest was assailed as bad in law, as before charging interest the assessee was not heard. The Assessing Officer was duty bound to consider circumstances whether interest chargeable should be waived or reduced. In support of the above proposition, Shri Dastur drew our attention to the decision of the Calcutta High Court in the case of CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163. He also relied upon the decision of the Andhra Pradesh High Court in the case of M.G. Bros. v. CIT [1985] 154 ITR 695.
27. Shri M.K. Sarkar, the learned departmental representative, maintained that revised return filed by the assessee could not be treated as return under Amnesty Scheme, and the Circulars relied upon by Shri Dastur were not applicable. It was further contended that application of the assessee dated 15-1-1990 was disposed of by the Assessing Officer as per order dated February 16, 1990, and nothing was pending with the Assessing Officer, If the assessee wrongly did not pay advance-tax on the amount added under Section 43B, the assessee has to face the consequences. Shri Sarkar further contended that charging of interest could not be made subject-matter of appeal.
28. We have carefully considered the rival submissions of the parties. The question of levy of interest under Section 215 and whether an order charging interest under Section 215 can be made subject-matter of appeal under Section 246(c) has been considered by the Hon’ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. (supra). The decisions cited by the parties are to be read subject to the aforesaid decision of the Supreme Court.
29. On consideration of provisions of Section 215 in the light of the decision of the Hon’ble Supreme Court, the following legal propositions relevant to the controversy before us emerge:
(a) The Assessing Officer is required to consider before imposing levy of interest under Section 215 the question of assessee’s liability to pay advance tax, the amount, if any, paid as advance tax as also the income which is subject to advance tax and included in the total income determined on the regular assessment. The Assessing Officer is also expected to consider whether, in the circumstances of the case, interest chargeable is to be reduced or waived altogether. He is further expected to issue notice to the assessee and hear him on the question of levy of interest as the levy of interest is a part of assessment and part of liability imposed in the regular assessment order.
(b) If the assessee is aggrieved by an order levying interest and wishes to challenge its liability to pay interest, it is open to it to challenge the same in an appeal provided under Clause (c) of Sub-section (1)of Section 246 of the Act. Such challenge may relate to liability of the assessee to pay advance tax alone or that the amount of tax determined by the Assessing Officer as payable be reduced. But in an appeal under the above clause the assessee cannot make out a case for reduction or waiver of interest charged under Section 215 of the Act.
(c) If proper opportunity was not made available before the order levying interest was passed, it is open to the assessee to apply to the Assessing Officer after such order has been made and to show that reduction or waiver of interest is required. But quantum of interest charged or the question of waiver or reduction of interest cannot be subject-matter of appeal under Clause (c) of Sub-section (1) of Section 246 of the Act.
(d) Charging of interest under corresponding provision (section 18 A) of the 1922 Act was automatic up to April 1, 1952. It is not so under Section 215 of the Income-tax Act, 1961, as the discretion is vested in the Assessing Officer to waive or reduce the interest in cases and circumstances mentioned in Rule 40 of the Income-tax Rules, 1962. The Assessing Officer is bound to waive or reduce interest if the case is covered under the above rule. If the assessee is not satisfied with the order passed by the Assessing Officer under Rule 40, on question of reduction/waiver of interest, the remedy is to file a Revision Petition before the Commissioner and not an appeal under Section 246 of the Act.
With the abovesaid legal quotings, we proceed to examine the facts of the present case.
30. The regular assessment of the assessee, relevant for our purpose, was made on March 28,1988. The demand raised on the assessee on above assessment included a sum of Rs. 4,71,59,042 as interest under Section 215. The assessee challenged the levy of interest in appeal before the 1d. CIT(A) along with other grounds of appeal. The assessee also approached the Assessing Officer as per letter dated January 15, 1990 contending that levy of interest under Section 215 was bad in law. It was stated that the Hon’ble Calcutta High Court as per ad interim order dated December 5,1983 stayed application of provision of Section 43B in the assessee’s case in terms of prayers (f) and (g) of the Petition and the said Stay Order remained in full force till March 7, 1988 when it was modified. The assessee claimed that charging of interest for alleged short-fall in payment of advance tax due to application of Section 43B is in contravention of the said Stay Order and bad in law. As per para 9 of the said letter, the assessee further requested that interest charged be waived under rule 40 of the Income-tax Rules, 1962. A further request to stay recovery of demand was also made. It appears that by February 16, 1990, the assessee had also approached the Chief Commissioner of Income-tax, New Delhi, with a request to issue directions for waiving interest charged under Section 215. The aforesaid letter of the assessee was considered by the Assessing Officer and a reply dated February 16, 1990 was sent. The Assessing Officer disagreed that the provisions of Section 43B were wrongly applied. In his view interest under Sections 215/216 was properly computed and charged. The Assessing Officer took note of the Petition filed before the Chief Commissioner of Income-tax and made the following observations:
A. The interest under Sections 215 & 216 payment amounting to Rs. 4,76,79,042 is stayed till disposal of your petition before the Chief Commissioner of Income-tax (C), North, New Delhi.
A copy of another application for waiver of interest in terms of Section 215 read with Section 215(4) and rule 40 dated April 30,1990 is also placed on record. It has been contended that the above referred to petition for waiver of interest has not been disposed of.
31. We have considered the above submissions. The frustration of the assessee who has been burdened with liability for more than Rs. 4 crores and its running from post to pillar to have waiver of interest is understandable. In view of the amount involved the question of waiver or reduction of interest should have been decided without delay. We have already held that the question of reduction/waiver of interest cannot be subject-matter of appeal, and therefore we are unable to say anything further. In fact, applications filed by the assessee after the assessment order and their fate need not be considered here. Here, we are only concerned with the question of the assessee’s liability to pay interest demanded under regular assessment. We, therefore, proceed to consider the above question of liability of the assessee to pay interest.
32. The first challenge to the charging of interest is on the ground that the assessee filed a revised return under the Amnesty Scheme of 1985/86 and that in respect of return filed under the above Scheme no interest could be levied. We have carefully considered this submission of the assessee. We have also taken into consideration the Circulars of CBDT in the shape of questions and answers through which the Amnesty Scheme was explained. The Assessing Officer refused to treat the revised return filed on March 30,1987 as an amnesty return as no further voluntary disclosure of income not disclosed in the earlier return was made. In the revised return, the assessee only gave up its claim relating to brought forward losses and showed total income at Rs. 6,62,00,450. This was the income which was disclosed in the original return without the brought forward losses. The Assessing Officer, therefore, rejected the assessee’s claim that the revised return filed was a return under Amnesty Scheme. The above finding was accepted by the assessee in the sense that no issue was raised in this respect by it before the ld. CIT(A) in the long and argumentative grounds taken in the original grounds of appeal. The issue, though raised in the additional grounds of appeal, was given up before the ld. CIT(A). There is no consideration of the issue by the ld. CIT(A). The issue, therefore, does not arise out of the order of the CIT(A). The claim was also not made in the long letters written to the Assessing Officer on January 30,1990 arid on April 30,1990 challenging the levy of interest under Section 215. As an afterthought, however, this claim has been raised again before the Tribunal. We, however, find no substance in the claim. In the first place, there are no clear instructions and circulars having binding force in terms of Section 119 of the Act. Secondly, the assessee in the revised return filed on March 30,1987 made no further disclosure of income not disclosed earlier and, therefore, the revised return could not be treated as a return under Amnesty Scheme. The claim of brought forward loss of earlier years which was not made in the revised return cannot be treated as disclosure of income. The brought forward losses are to be allowed in accordance with law and on the basis of record i.e., assessments made in the earlier years. The Amnesty Scheme was mere directions to the official to apply existing statutory provisions in a more liberal manner in cases where voluntary disclosure of income was made. The assessee’s revised return cannot be treated as Amnesty return. In view of the aforesaid discussion/we do not find any force in this submission of the assessee.
33. We are now to consider the implication of the Stay Order granted by the Hon’ble Calcutta High Court. As observed earlier, the assessee in a Writ Petition challenged the vires and application of Section 43B of the Act, introduced with effect from 1-4-1984. The High Court granted as interim injunction on December 5,1983 in terms of prayers (f) and (g) of the assessee’s Writ Petition which are as under:
(f) that an interim order may be passed restraining the respondents, their servants and agents from giving any effect to and/or taking any steps and/or from applying the provisions of Section 43B of the Income-tax Act, 1961, in the case of the petitioner’s assessment till disposal of the Rules;
(g) that an interim order may be passed restraining the petitioner from submitting any estimate of advance tax or return for the assessment year 1984-85 and onwards under the Income-tax Act, 1961 on the basis of and in accordance with Section 43B of the Act until further orders.
The ad interim order was modified on March 7,1988 with regard to prayer (f) above and the Income-tax authorities were permitted to complete the assessment taking into account the provisions of Section 43B. The Stay Order in terms of prayer (g) continued to remain in force till 4th December’ 1989. On December 5, 1989, the writ of the assessee was finally dismissed and the Stay vacated. The assessee has claimed that in view of the above Stay Order no advance tax was payable on the amount added in the total income under Section 43B. It is not in dispute that advance sax was payable by the assessee by three instalments payable on 15th September, 1983, 15th December 1983 and 15th March 1984. After the abovementioned period, no advance tax could be paid. The assessee certainly could not pay advance (ax when the Stay Order was modified in March 1988 and vacated in December 1989.
34. The scheme of interest payable under Section 215 is to see whether advance tax paid by the assessee is less than 75% of the assessed tax (83 13% in the case of a company). The “assessed tax” is defined under Section 215(5) of the Act as under:
215(5) In this section and Sections 217 and 273, ‘assessed tax’ means the tax determined on the basis of the regular assessment (reduced by the amount of tax deductible in accordance with the provisions of Sections 192 to 194, Section 194A, Section 194C, Section 194D, Section 195 and Section 196 A so far as such tax relates to income subject to advance tax and so far as it is not due to variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made.
It is clear from the definition that “assessed tax”, for the purpose of Sub-section (5) of Section 215, is not the tax determined on the basis of regular assessment. Certain adjustments are to be made while considering short-fall in payment of advance tax. Tax relating to income, subject to advance tax is only to be taken into account as “assessed tax”. To put it differently, out of the total income, the items on which no advance-tax is payable are to be eliminated. In the Act ‘income’ chargeable under the heads “capital gains” and “casual income” in the nature of lottery winnings, etc. are not subject to advance tax. There can be no dispute that for the purpose of Sub-section (5) of Section 215 the above items are to be excluded for determining the “assessed income” under Section 215. The question before us is whether tax payable on the amount added under Section 43B is also to be excluded in the present case, in view of slay order of the Hon’ble High Court? In our considered opinion, the income determined on regular assessment was to be reduced by the amount added or addable under Section 43B. The effect of the Stay Order was that operation of Section 43B for die purpose of payment of advance tax in the relevant period was suspended. The amount disallowable under Section 43B was not part of income subject to advance tax. It makes little difference that advance tax is not payable on an item under the provision of a statute or through an order of a Competent Court. The net effect of both is that advance tax is not payable on a’ particular item. There is specific provision in Sub-section (5) of Section 215 to exclude the above item as it is not possible to hold, in the circumstances of the case, that the assessee was liable to pay advance tax even on the amount added under Section 43B. Deduction of the above amount is clearly permissible and the Revenue has not been able to show how the amount added in the regular assessment under Section 43B in the total income could be treated as income subject to advance tax. We are, therefore, of the view that addition made under Section 43B could not be taken into account for computing “assessed tax” for levy of interest under Section 215. We, therefore, direct the Assessing Officer to exclude the amount added under Section 43B and recompute the interest, if any, payable by the assessee.
35. The learned departmental representative had strongly contended that the issue regarding charge of interest under Section 215 cannot be made subject-matter of appeal. We have already held that the assessee in an appeal under Clause (c) of subsections (1) and (2) of Section 246 can challenge its liability to pay interest wholly or partially. As to what is “assessed tax” in terms of Section 215(5) can always be subject-matter of appeal. The Assessing Officer does not have any discretion to take any amount as “assessed tax”. The amount is to be computed as enjoined by the Statute. There is no discretion in the matter, and liability fixed can always be challenged in appeal. We, therefore, hold that the assessee was perfectly right in challenging the levy of interest in appeal. The other finding of the ld. CIT(A) that the Assessing Officer will make a consequential modification to the quantum of interest chargeable, on the basis of income finally assessed needs no change and the same is upheld.
36. The next controversy relates to disallowance of Rs. 15,09,100 under Section 40A(5) of the Act being cash reimbursement of medical expenses and house rent allowance to employees beyond the prescribed limits. The disallowance made was challenged in appeal before the ld. CIT(A) and it was contended that out of total employees, 71 employees were not in receipt of any perquisite. The total emoluments of these employees inclusive of medical and house rent allowance was well within the limits prescribed under Section 40 A(5) of the Act. The assessee filed the list of such employees and details of salary paid to them and relied on the decision of the Hon’ble Calcutta High Court in the case of CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431. The CIT(A) directed the Assessing Officer to recompute the amount disallowable after excluding the admissible limit of 7.1 employees. Subject to the above direction, the disallowance was confirmed. The assessee has brought the issue in further appeal before the Tribunal.
37. We have heard the parties, Shri Dastur cited certain decisions in support of the claim that reimbursement of medical expenses and house rent allowance in cash could riot be disallowed under Section 40A(5) of the Act. We have carefully considered the aforesaid submission. It is true that the decision of the Tribunal Special Bench in Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 supports the view taken by the revenue and by the ld. CIT(A). But the view of the Special Bench dews not appear to be in line with the view taken by the Hon’ble Bombay High Court. The Hon’ble Calcutta High Court in the case of CIT v. Indian Explosives Ltd. [1991] 192 ITR 114 has held that reimbursement of medical expenses to employees could not be disallowed under Section 40 A(5) or 40(c) of the Act. The details of expenses and salary paid to employees are to be examined by the Assessing Officer. In view of the decision of the Calcutta High Court (supra), we would direct the Assessing Officer to examine the details afresh in the light of binding decision of the Calcutta High Court without being influenced by the observations of the ld. CIT(A) on merit. Accordingly, the order of the CIT(A) on this point is set aside and the matter is restored to the file of the Assessing Officer for passing a fresh order in the light of our above observations.
38. The next controversy relates to disallowance of Rs. 49,000 being contribution to Workers’ Benevolent Fund. The disallowance made by the Assessing Officer was confirmed by the ld. CIT(A) with the following observations:
11.3 As far as the contribution of Rs. 49,000 to the Workers’ Benevolent Fund is concerned the contention of the appellant is correct inasmuch as the fund was first created on 1-1-1968 and has been in operation since then. Therefore, under Section 40A(10) any revenue expenditure in the relevant previous year incurred for the welfare of employees out of this fund should be allowed as deduction in computing the business income of the appellant for such previous year, as if such expenditure has been laid out or expended by the assessee. But the appellant did not make any such claim. The contribution to the Benevolent Fund is however clearly inadmissible under Section 40A(9). Accordingly the disallowance to the extent of Rs. 49,000 is hereby confirmed.
39. Shri Dastur, the learned counsel for the assessee, contended before us that the assessee had constituted the Benevolent Fund in terms of settlement arrived at with the workers under Section 2(p) of the Industrial Disputes Act, 1947 and other labour laws, and the contribution made to the Fund are payments made “under any other law for the time being in force” and therefore not hit by the provisions of Sub-section (9) of Section 40A of the Act. In the alternative, it was contended that contributions made were covered by the provisions of Sub-section (10) of Section 40A. In our opinion, the submissions of Shri Dastur are well-founded. The contributions having admittedly been made under settlement with the workers have to be treated as payment under Industrial Disputes Act and, therefore, covered under exceptions provided in Sub-section (9) of Section 40A. The alternative claim of the assessee has been admitted even by the ld. CIT(A). He refused to grant the relief as the claim was not made before the Assessing Officer. But this factalone, in our opinion, was not sufficient to disallow the claim of the assessee. In our view on the facts and circumstances of the case the disallowance is not justified. We direct the Assessing Officer to delete the disallowance of Rs. 49,000.
40. The next controversy relates to claim of additional depreciation on moulds and other machinery, discounting charges, investment allowance and claim of 100% depreciation on certain items of machinery. For the sake of convenience, these disputes raised in different grounds of appeal are being taken together. The assessee, in the relevant period, carried on business of manufacturing tyres, tubes and allied articles. It replaced and added moulds and segments fitted in the moulds and claimed depreciation and investment allowance. Some additions to machinery was shown under the head “alternation and rearrangements”. The assessee claimed that above caption represented addition of machinery and was shown as per the rules. The Assessing Officer held otherwise and did not allow depreciation on machinery under the above caption. The assessee also added machinery and plant including energy saving and pollution control devices and claimed various allowances thereon. The Assessing Officer disallowed a sum of Rs. 64,61,846 out of claim of initial and normal depreciation as per details below:
(a) Initial depreciation on addition of general plant &
machinery Rs. 40,17,730
(b) Initial depreciation on addition of mould Rs. 12,52,808
(c) Initial depreciation by way of alternation and
rearrangement Rs. 5,62,940
(d) Initial depreciation on alteration and rearrangement
of general plant & machinery Rs. 1,94,399
(e) Depreciation on capitalised interest Rs. 4,34,363
---------------
Rs. 64,61,846
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The Assessing Officer also disallowed depreciation on discounting charges paid to IDBI amounting to Rs. 11,58,300. The assessee had further claimed investment allowance of Rs. 1,80,02,618 but the Assessing Officer allowed a sum of Rs. 1,44,43,688. The balance was disallowed.
41. The assessee challenged the above disallowances in appeal before the ld. CIT(A) and contended that “alteration and rearrangements” really represented addition to plant and machinery and depreciation and additional depreciation on such machinery was rightly claimed. The assessee relied upon the provisions of Income-tax Rules where depreciation is admissible on “alteration and rearrangements”. Regarding discounting charges amounting to Rs. 11,58,300 it was claimed that the amount already stood added to the cost and was twice disallowed. In respect of disallowance of part of investment allowance, it was reiterated that “alteration and rearrangements” were new machinery entitled to investment allowance. Likewise, investment allowance was permissible on discounting charges. The assessee also sought to raise additional ground of appeal claiming 100% depreciation on energy saving devices under rule 5, appendix 1, para F(2A) of the Income-tax Rules, 1962 and on machinery and plant costing less than Rs. 5,000 each. The assessee also claimed that if “alteration and rearrangements” are not new machinery and are to be treated as replacement only then 100% of the cost be allowed as revenue expenditure.
42. The ld. CIT(A) examined the details of “alteration and rearrangements” and found that details included certain items which did not qualify for depreciation at all. He further directed that only normal depreciation should be allowed on them. On the expenditure which was to be treated as revenue, no initial depreciation was admissible. He further directed that the issue relating to the disallowance of Rs. 12,52,808 and Rs. 40,17,730 be re-examined and verified and then proper depreciation allowed in accordance with law. In respect of disallowance of depreciation on other items also, the Assessing Officer was directed to make a de novo enquiry. Regarding disallowance of investment allowance, he observed that “alteration and rearrangements” if qualified for deduction as revenue expenditure are entitled to investment allowance. On other capital items of expenditure included in “alteration and rearrangements” no investment allowance was admissible. For the above view, the ld. CIT(A) relied upon the decision of the Madhya Pradesh High Court in Mittal Ice & Cold Storage v. CIT [1986] 159 ITR 18. As regards claim of investment allowance on discounting charges, the ld. CIT(A) held that it was to be examined whether the charges related to period after such assets were first put to use in terms of Explanation 8 to Section 43(1) of the Act. As the matter was not clear on record, he directed the Assessing Officer to recompute the allowance. Regarding claim made in the additional grounds, the ld. CIT(A), in the first place, refused to admit the additional grounds as the additional grounds filed before him were not signed by a duly authorised person. Alternatively, he also considered the assessee’s claim on merit that the assessee never claimed 100% depreciation on energy saving devices before the Assessing Officer nor furnished particulars of such devices before him. Before the Assessing Officer the assessee claimed higher rate of depreciation at 35%. If depreciation at 100% is allowed, the other claim like investment allowance could not be made. Thus, in his view, the assessee was not sure whether the assets were energy saving devices or merely assets mentioned in Section 32A(2)(c). Likewise, regarding second claim of depreciation @ 100% on the ground that the value of the asset was less than Rs. 5,000 each, the 1d. CIT(A) observed that no particulars were furnished nor the claim was made before the Assessing Officer. He, therefore, relied on the decision in the case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 (SC) and rejected the assessee’s claim. The assessee had challenged the above order of the ld. CIT(A) before us in different grounds of appeal.
43. Shri Dastur, the learned counsel for the assessee, did not challenge the ld. CIT(A)’s direction to re-examine the claim that replacement of machinery was expenditure of revenue nature. His contention was that the Assessing Officer after allowing depreciation on new plant and machinery had erred in not allowing initial depreciation on such machinery. The ld. CIT(A) should have allowed initial depreciation without remitting the matter back to the Assessing Officer. The ld. CIT(A), as an appellate authority, should have disposed of the matter, instead of remitting it for re-examination. Shri Dastur further objected to the CIT(A)’s observation on claim of initial depreciation and investment allowance regarding the additions covered under the head “alteration and rearrangements”. He further objected to the CIT(A)’s refusal to entertain additional grounds of appeal. The mere fact that the claim was not made before the Assessing Officer was not sufficient to reject the additional grounds of appeal, Shri Dastur further argued. It was pointed out that no Form was prescribed for raising additional grounds of appeal like the case of original appeal. The additional grounds could be raised even orally and it was not necessary to file additional grounds in writing. Fresh and repeated scrutiny of the matter was a source of harassment to the assessee and cannot be encouraged under the law. The above submissions were opposed by the learned departmental representative.
44. We have carefully considered the rival submissions of the parties. The ld. CIT(A) found that under the caption “alteration and rearrangements” the assessee had shown items on which no depreciation was admissible. For instance, he referred to claim regarding removal of existing equipments from one building to another, dismantling of overhead runway, dismantling of pipelines, exhaust fans, etc. The above items were not entitled to any depreciation. The above observations of the ld. CIT(A) were not challenged before us. That apart, we find some force in the ld. CIT(A)’s observation that the assessee has been shifting its stand from time to time. In the first place, the addition of new machinery was shown as “alteration and rearrangements” of machinery. This was treated so and claim for normal and initial depreciation, and investment allowance was partly disallowed. The assessee then claimed that even under the above caption new plant and machinery was installed. The stand was again shifted and it was claimed that under the above caption the assessee incurred expenditure which was of revenue nature. That is not the end. In the additional grounds of appeal, 100% depreciation was claimed on items below Rs. 5,000 each, In respect of energy saving devices, the assessee claimed 100% cost as depreciation as against 35% claimed before the Assessing Officer. It is not in dispute that on any expenditure which is treated as replacement and deducted as a revenue expenditure, no other claim is admissible. Similar is the position if 100% depreciation is allowed on cost of machinery and plant valuing less than Rs. 5,000 under rule 5, Appendix I, Para F(2 A) of the Income-tax Rules. Thus, the matter cannot be treated as concluded on any point without further and proper examination by the Assessing Officer. The situation is one of the assessee’s own creation. We, therefore, have no difficulty in agreeing wish the ld. CIT(A) that the matter needed further and proper examination. In this situation, we see no reason for not permitting the assessee to raise its claim regarding claim of 100% depreciation made in the additional grounds of appeal before the ld. CIT(A). The Assessing Officer is accordingly directed to re-examine the whole claim of the addition to the machinery and plant shown under the head “alteration and rearrangements” or otherwise. He should consider the question whether any item shown as addition could be allowed as revenue deduction. On other additions, he should allow proper depreciation and investment allowance as permissible under the law.
45. The next controversy relates to relief claimed by the assessee under sections 80J and 80HH of the Act. The relief was claimed as per additional grounds of appeal raised before the ld. CIT(A). The ld. CIT(A) in the first place refused to entertain the additional grounds. He, however, directed that if the claim was allowed in earlier year consequential relief be allowed, in this year. The aforesaid directions of the ld. CIT(A) have been challenged before us.
46. It was submitted that the Tribunal had already allowed deduction to the assessee under sections 80J and 80 HH in respect of one unit in the assessment year 1979-80 as per its order dated July 11,1985 for the assessment year 1979-80. Therefore, there was no justification for not allowing the claim for the assessment year under consideration.
47. We have heard the parties. In view of the order of the Tribunal for the assessment year 1979-80 the ld. CIT(A) should have permitted the assessee to raise the claim in the additional ground. After all, similar claim was allowed to the assessee in the earlier assessment year and, therefore, there was no justification to reject the assessee’s claim which due to bonafide error could not be made in the original grounds of appeal. Accordingly, we admit the additional grounds raised by the assessee and direct the Assessing Officer to examine the assessee’s claim under sections 80J and 80HH of the Act and allow appropriate relief to the assessee in accordance with law.
48. The assessee has further challenged the disallowance of RS. 30,00,000 claimed as bad debts. The assessee had made provision of bad debts of Rs. 30,00,000 but the amount was added back in the returned income. No claim of bad debt was made in the course of assessment proceedings. Even in the original grounds of appeal filed before the 1d. CIT(A), no claim was made in this respect. However, through additional grounds of appeal, the assessee tried ld raise the claim before the Id, CIT(A). The ld. CIT(A) refused to entertain the additional ground. Alternatively, he found no merit in the claim and rejected the same. The assessee has challenged the above action of the ld. CIT(A) in this appeal before us.
49. We have heard the parties. Shri Dastur vehemently contended that the ld. CIT(A) was in error in refusing to entertain the claim. The bad debt was duly written off and provided in the books of account. The entry of write off established prima facie the case of the assessee. The onus was on the department to show that the debt had not become bad in the assessment year and writing off was not justified. He accordingly prayed that the claim of bad debt be entertained and allowed. These submissions were opposed by the learned departmental representative.
50. We have carefully considered the claim of the assessee. The claim, in our opinion, is being raised as an afterthought. The provisions for bad debt made in the profit and loss account was surrendered in the return with the following remarks:
(k) reserve or provision for bad and doubtful debts other than provision for bad and doubtful debts referred to in Section 36(1)(viia)…30,00,000.
The assessee, thus, clearly admitted that amounts in question represented provision for debts other than admissible under Section 36(1)(v»a). The assessee later on took a somersault and claimed that bad debts were covered under the above provision. In the circumstances of the case, we find no merit in the arguments advanced by Shri Dastur. There is no material on record to show that the original admission or view taken by the assessee was erroneous or was taken under misconception of facts or law. There is thus no justification for permitting the assessee to raise the issue in question through additional grounds of appeal. We, therefore, decline to interfere with the CIT(A)’s refusal to entertain the grounds of appeal relating to bad debts.
51. The Stay granted by the Tribunal vide order dated April 19,1991 is vacated and the Assessing Officer is directed to pass a fresh order in terms of our directions given above.
52. In the result, the assessee’s appeal is allowed partly in the terms indicated above.
ORDER
Dongzathang, Accountant Member
1. I fully agree with the order of my learned brother in regard to the enhancement made by the learned CIT (Appeals) and I am of the considered view that the assessee cannot have any grievance at all on this score. This is because the learned CIT (Appeals) has only reversed the adjustment entries ingenuously made by the assessee in its books. If the learned CIT (Appeals) has correctly set right the entries in the light of the specific provision of the IT Act, 1961, then the assessee cannot blame the revenue nor have any grievance against such action. This will be abundantly clear after properly highlighting the facts.
2. The assessee is a company carrying on the business of manufacture and sale of tyres and tubes. It maintains its accounts on mercantile basis and its previous year is the calendar year ending 31-12-1983 for the present assessment year 1984-85. The goods manufactured by it are liable to Central Excise duty and it is an admitted fact that the total liability incurred in the previous year relevant to the present assessment year is Rs. 8,312.41 lakhs. The assessee has actually paid Rs. 6,664.77 lakhs and debited the same in the P. & L. A/c. of the year. Normally, the remaining amount of Rs. 1,647.64 lakhs should have been debited in the P. & L. A/c. of the year being a provision to be made for the liability. The assessee, however, chooses to make the following adjustment in the Bonded Excise Duty Provision Account as on 31-12-1983 :
Dr. Cr.
Rs. Rs.
Payments 286.49 Opening balance 5,167.66
Contra Entries 4,813.67 Contra Entries 4,813.67
Reversal of liability
Liability provided
provided for the year 25.00 for the year 1047.64
Closing balance 5,903.81
------------- -------------
11,028.97 11,028.97
------------- -------------
3. The assessee accordingly has made the following entries in its P. & L. A/c.
Rs. ,000 Rs. ,000
Sales 315,90,39
Other income 4,36,59
------------
320,26,98
Total Income
(Less:)
Raw materials and finished goods 150,01,77
Expenses and depreciation 77,91,61
Excise duty & commercial 76,87,41
liabilities 304,80,79
------------
15,46,19
Trading Profit
Financing charges 7,00,98
------------
Profit before Taxation 8,45,21
------------
Note 6. Excise duty and commercial liabilities
The company has been required to execute bonds supported by bank guarantees and/ or securities with regard to certain proceedings under the Central Excise Act. Having regard to the terms of the bond ,an amount of Rs. 1,022.64 lakhs has been taken in as commercial liabilities of the company and will be so regarded for the duration of the bond.
4. At the time of assessment, the Assessing Officer did not notice the peculiar effect of the adjustment entries made by the assessee in its P. & L. A/c and the relevant Excise liability account and he made a disallowance of a sum of Rs. 1,022.64 lakh being unpaid Central Excise liability i.e., (Rs. 7,687.41 lakh minus Rs. 6,664.77 lakhs) claimed in the P. & L. A/c. When the assessee took up the matter in appeal before the CIT (Appeals), the learned CIT (Appeals) noticed this aspect and issued notice for enhancement highlighting the issue as follows :
Furthermore, the liability of Central Excise Duty incurred by you during the year was Rs. 83,12,41,000. Against this amount you have made a payment of Rs. 66,64,77,000 during the year. The unpaid outstanding Central Excise liability is, therefore, Rs. 16,47,64,000. This amount should have been added back to your income under Section 43B. However, addition has been made only of an amount of Rs. 10,22,64,000. Thus, the balance amount of Rs. 6,25,00,000 was omitted to be added back under Section 43B in computing your total income for the assessment year 1984-85.
5. The assessee objected to the said notice and contended that the amount stayed by the High Court will not be effected by the provision of Section 43B of the Act and even if this contention is not accepted, the disallowance can only be confined to the amount debited to the P. & L. A/c. and to the extent it is not paid. The value of Bonds debited to the P. & L. A/c. being Rs. 1,022.64 lakh there can be no justification for making a further addition of Rs. 625 lakh under Section 43B. The learned CIT (Appeals), however, did not accept the contentions and enhanced the disallowance by a further sum of Rs. 625 lakh under Section 43B of the Act for the particular year.
6. The main dispute before us now is centered around a sum of Rs. 625 lakh and the question for our consideration is whether the adjustment made by the assessee in its books will amount to making of provision for the liability covered under Section 43B of the Act. The dispute is in a limited field involving the principle of accountancy and the same is to be decided on that basis.
7. Before further analysing the details it will be appropriate to highlight the fact that the amount of Excise liability at Rs. 8,312.31 lakh not in dispute consisted of the following items:
(a) Duty actually paid (inclusive of MODVAT Rs. 36,38.81 lacs
Set off) on clearance of goods from
Sahaganj
(b) -do- from Ambaltur Rs. 3025.96 "
(c) Differential duty bonds executed at Rs. 653.08 "
Sahaganj on account of PME
(d) -do- from Ambattur Rs. 779.27 "
(e) -do- for availing of relief Rs. 215.29 "
under notification 107/81 at Sahaganj
------------
Rs. 8,312.31 "
------------
It is also an admitted fact that the assessee made an actual payment of Rs. 6,664.77 lakh leaving a balance of Rs. 1,647.64 lakh as an outstanding liability. This liability is in the form of differential duty bonds executed at Sahaganj on account of PME at Rs. 653.08 lakh and at Ambattur at Rs. 779.27 lakh and differential duty bond executed for availing of relief under Notification 107/81 at Sahaganj at Rs. 215.29 lakh. It is also an admitted fact that these are the actual net effective liability for which the assessee has to execute bonds to cover the excise liability. It is also a fact that the assessee has opening balance of excise duty provision of Rs. 5,167.66 lakh at the beginning of the year. It has made adjustment of Rs, 286.49 lakh out of the same during the year and also made contra entries of Rs. 4,813.67 lakh during the year. If the entire amount of the liability on account of execution of bonds for Central Excise liabilities during the year at Rs. 1,647.64 lakh is further provided, the balance as on 31-12-1983 would have stood at Rs. 6,568.81 lakh. The assessee, however, evaluated the outstanding duty and it was assessed at Rs. 5,903.81 lakh as on 31-12-1983. Accordingly, it made a provision only of Rs. 1,022.64 lakh as against the actual liability that accrued during the year at Rs. 1,647.64 lakh.
8. It is the case of learned CIT (Appeals) that since the assessee has got the opening balance of excise duty provision of Rs. 5,167.66 lakh at the beginning of the year, and since further liability of Rs. 1,647.66 lakh has accrued, the provision only of Rs. 1,022.64 lakh during the year amounted to adjusting the difference of Rs. 625 lakh against the excess provision no longer required. In that view of the matter, he reversed the entry and treated this as indirectly credited to the P. & L. A/c. and adjusted against the liability during the year at Rs. 1,647.64 lakh. In other words, the adjustment entry would have been as per the specimen entry given by the assessee at page 5 of the paper book as follows:
Dr. Cr.
Payments 286.49 Opening balance 5167.66
Contra entries 4,813.67 Contra entries 4813.67
To P. & L. A/c. being To P. & L. A/c. being
provision no longer bonds during
required 625.00 the year executed 1,647.64
Balance c/f 5903.81
------------ ------------
11,628.97 11,628.97
Now, since this Rs. 625 lakh has not only been not credited back to the P. & L. A/c but adjusted against the current liability which is not a deductible expenditure, the learned CIT (Appeals) held that it is to be further disallowed and added back.
9. The order of the learned C IT (Appeals) in my view, is a correct reversal of the entries made by the assessee and cannot be questioned. The assessee itself gave example of the entries made by the assessee, Assessing Officer and the CIT (Appeals) at page 10 of the loose paper book. The assessee does not seriously challenge insofar as the addition of Rs. 625 lakh to the income as per the example given at pages 10 to 12 of the loose paper book. The main objection is that the learned CIT (Appeals) erred in making a further disallowance all over again and making double addition to which the learned counsel of the assessee mainly addressed us.
10. I am unable to appreciate the arguments. The order of the learned CIT (Appeals) does not travel beyond making correct reversal of the adjustment entries made by the assessee. The learned CIT (Appeals) has been only undoing what the assessee had done in its accounts. As pointed out above, the provision made for Central Excise liability as brought forward at the beginning of the year is Rs. 5,167.66 lakh. It is not the case of the assessee that this provision has not been allowed as deduction in the year of provision. It is also not disputed that the current Central Excise liability for the year for which the assessee executed the bonds and made a bank guarantee is not the correct liability. It is also not the case of the assessee that the actual Central Excise liability of the assessee at the end of the year is a fictitious figure of Rs. 5,903.81 lakh. In such a case, the entry in the provision for Central Excise duty liability account should be in the following manner to reflect the correct position :
Dr. Cr.
Payments 286.49 Opening balance 5167.66
Contra entries 4,813.67 Contra entries 4813.67
Reversal of liability Liability provided
from earlier provision 625.00 for the year 1647.64
Closing balance 5,903.81
------------ ------------
11,628.97 11,628.97
The consequential effect of the entries in the P. & L. A/c should be as follows :
Dr. Cr.
Raw materials Sales -
and finished goods - Other income -
Expenses and Excise provision
depreciation - written back 625.00
Excise duty
(a) Paid 6,664.77
(b) Provision 1,647.64
------------
8,312.41
or
Excise duty paid 6,664.77
Provision 1,647.64
Less : Earlier
provision
adjusted 625.00
----------
1,022.64
----------
7,687.41
11. By resorting to a sophisticated method of adjustment entries the assessee attempted to disguise the real effect of the write back and the adjustment made with the current liability without passing them through the P. & L. A/c. However, on proper analysis made as above, the real effect and import of the adjustment entries made by the assessee are clear and there is no denying the fact that the assessee has indirectly written back an amount of Rs. 625 lakh out of earlier provision and adjusted the same against its current liability. It, therefore, does not lie in the mouth of the assessee to complain that the revenue and in particular the learned CIT (Appeals) goes beyond his jurisdiction by an addition of Rs. 625 lakh as a new source of income.
12. It is not the case of the assessee, as stated above, that the liability of Rs. 625 lakh out of Rs. 1,647.64 lakh is a fictitious liability. Rather, it has already executed bonds supported by bank guarantees for the entire liability and if, there is an element of fraudulence, then the entire liability claimed should be suspect. That, fortunately is not the case of the assessee and the entire liability of Rs. 1,647.64 lakh is a real and accrued liability for which it has made the provision and executed bonds supported by bank guarantees. Similarly, the opening balance of provision for Excise Duty liability of Rs. 5,167.66 lakh is an established figure brought forward from earlier year for which credit has been taken in the earlier years. In that case, the amount can be tinkered with only after cancelling the earlier entry and this can be achieved only by reversal of the entry made through the P. & L. A/c. The assessee chooses a sophisticated method by directly reducing the provision of current liability of Central Excise without writing back the excess provision no longer required in its P. & L. A/c. This action of the assessee does not absolve it from the consequences and the learned CIT (Appeals) rightly appreciated and correctly brought out the consequential effect of such entries and made proper addition and disallowance in this regard.
13. It is also not permissible for the assessee to turn around and claim that the liability has not ceased and mere writing back of the amount does not make it an income assessable under Section 41 (2) of the Act. As elaborately brought out earlier, the assessee in this case re-evaluated and assessed its exact liability at the end of the year at Rs. 5,903.81 lakh. This includes the current liability of Rs. 1,647.64 lakh. However, without writing back the excess provision brought forward at Rs. 5,167.66 lakh it has directly utilised the excess provision for meeting the current liability in the provision account itself and reduced the provision for the current liability to Rs. 1,022.64 lakh as against actual liability of Rs. 1,647.64 lakh. This direct adjustment entry has the same effect and is tantamount to making a provision from out of its earlier provision though such adjustment has been made by means of a short-cut method of entry in its books. Once the full effect of such device is unfolded, the assessee cannot turn around and claim that the amount is not an income and the liability does not cease and it cannot be assessed as income. It is true that neither the principle of resjudicata nor the rule of estoppel is applicable to successive assessment proceedings. But at the same time, it does apply in the same assessment and the assessee will be bound by its earlier representation of facts and will not be allowed to go back on it at a subsequent stage of the same assessment. The fact that the assessee itself has made adjustment entries and thereby adjusted the current liabilities against the earlier provision no longer required, a circumstance has arisen which the taxing authorities are entitled to take into consideration and which the assessee cannot be allowed to retrace.
14. With regard to the alleged double addition made by the CIT (Appeals) it is to be noted that the same is imperative due to the operation of the restrictive provisions of Section 43B of the Act. The assessee in this case considered a sum of Rs. 625 lakh out of its existing provision to be in excess and available for diversion for some other use. It has accordingly used it for adjustment against the current Central Excise liability and reduced the same by that amount. Since the assessee made the adjustment outside the P. & L. A/c it is necessary to add the said sum of Rs. 625 lakhs in the P. & L. A/c as an income at the first instance. Secondly, since it is adjusted against the Central Excise liability for which actual payment has not been made so far, the same is to be disallowed resulting in double addition as the said adjustment comes within the mischief of the provision of Section 43B of the Act. In that view of the matter and keeping in view the full reasons given by my learned brother, I fully agree that the learned CIT (Appeals) was fully justified in making the addition by disallowing the said adjustment made by the assessee.