ORDER
Rajendra, Accountant Member
1. As common points are involved in both these appeals by the revenue, they were heard together and are disposed of by a consolidated order. Revenue is aggrieved against the orders of CIT (Appeals).
2. The assessee is a private limited company which started manufacturing polyester film/sheet from saturated polyester polymer chips at Aurangabad from 8-1-1976. The account year under consideration is ending 30-9-1976 relevant for assessment year 1977-78. For assessment year 1978-79, the account year ended on 30-9-1977.
Grounds 1 & 4 : Asst. Year 1977-78 :
Ground 2 : Asst. Year 1978-79 :
Allowability of Central Excise liability of Rs. 6,03,392 in asst. year 1977-78 and Rs. 32,22,558 in asst. year 1978-79 :
Assessee-company had claimed the aforesaid liability on the basis of Collector of Central Excise’s order dated 12-6-1980 that excise duty on polyester film manufactured by the assessee was payable @ 30% as against 1% paid by assessee. Income-tax Officer in asst. year 1977-78 had rejected the said claim on the ground that the liability had arisen much after the close of the relevant account year and that the assessee had not made provision for the said duty in its books of account and that assessee was disputing the said demand.
3. CIT(A), however, following ITAT, Bombay Bench ‘C’s order in Garware Synthetic P. Ltd. for asst. year 1974-75 and Rasa Buland Sugar Co. Ltd. v. CIT [1980] 122 ITR 817 (All.), held that when a competent authority passed an order quantifying the statutory liability, even if the order is passed during the assessment proceedings, the quantified amount is allowable as a deduction and therefore the passing of the order by Central Excise Collector after the end of the account year was no bar to the deduction of the assessee’s claim nor the fact that the assessee had not made any entries in its account books in view of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 2 ITR 363 (SC).
4. Similarly, in assessment year 1978-79, CIT(A) allowed the assessee’s claim.
5. Revenue is in appeal before us. It is pointed out that assessee had intimated to Central Excise Aurangabad on 7-1-1976 classification list under item T.I. 15A(2), namely, rigid polyester sheets and films, on which duty @ 30% ad valorem was payable (PB 25). Collector of Central Excise, Pune (in his notice dated 30-11-1978 for review of the Asst. Collector’s order), noted that the aforesaid classification list was approved on 4-2-1976 by Asst. Collector, Central Excise, Pune. Assessee changed the classification to ‘other than rigid’ but the excise duty payable was the same as per declaration dated 19-3-1976 (PB 26). On 9-4-1976, assessee made a further revised classification claiming manufactured goods to be non-excisable (PB 27). However, on 11-11-1976, assessee by a further classification, claimed that 1% duty was payable (PB 28). Asst. Collector, by order dated 8-12-1977 (PB 29), accepted the assessee’s claim. Thereafter, Collector of Central Excise, by notice dated 30-11-1978 (PB 30), sought to set aside under Section 35A(2) Asst. Collector’s aforesaid order by directing that the polyester film be classified under item No. 15A(2) of Central Excise Tariff, under which 30 % basic excise duty was payable. After hearing the assessee, Collector passed order on 12-6-1987 annulling the Asst. Collector’s order dated 8-12-1977 and holding that polyester film manufactured by assessee was liable to excise duty under item 15A(2) of First Schedule to Central Excises & Salt Act, 1944. Collector directed the Asst. Collector to determine the differential duty due on the polyester film cleared by the assessee at rates appropriate for tariff under item No. 68 and to raise demand for the same, which would be payable by the assessee.
6. It is worth noting that as per the said Collector’s order, demand had to be determined and demand notice was to be issued. No interest or penalty was charged from the date of payment of excise duty by assessee in the earlier years under Asst. Collector’s order dated 8-12-1977. The short question, therefore, is whether the demand raised as a result of the Collector’s order was liability fastened on the assessee as a result of the said order dated 17-6-1980 or whether the said demand would become liability of the assessee even during the account years under consideration, namely, account years closing on 30-9-1976 for asst. year 1977-78 and account year closing on 30-9-1977 for asst. year 1978-79.
7. When similar matter had come up before Bombay High Court in CIT v. Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734, Bombay High Court held that the liability was allowable when the demand notice was served on the assessee and it was immaterial that the assessee was objecting to the demand. Bombay High Court understood Kedarnath Jute Mfg. Co. Ltd.’s case (supra) as laying down that when a demand for payment of additional export duty was made, assessee was entitled to claim the deduction in that year.
8. The learned counsel for the assessee, however, urged that statutory liability to pay excise duty arose as soon as excisable goods were manufactured, relying on Supreme Court’s decision in Kirloskar Bros. v. Union of India (sic) (PB 67-72) where Supreme Court held that liability for excise duty would arise no sooner the manufacture or the production was completed and it was immaterial as to what machinery would be devised by the Govt. for recovery of the tax and that the point of recovery or any restriction on removal will not be the determining factor for grant of exemption in respect of goods manufactured during the duty free period.
9. Applying the ratio of the aforesaid Supreme Court decision as well as that of the Bombay High Court, the position that emerges is that up to the date of the Collector’s order dated 12-6-1980, both the assessee and the Excise Deptt. were agreed that excise duty only @ 1% on the polyester film manufactured by the assessee was leviable and the assessee had paid the same without any objection by the Excise Deptt. and had debited the said amount in its accounts and was allowed deduction of the same. Thus, the position as it stood in the relevant accounting year was that statutory duty was only @ 1%. It is only on 12-6-1980 that statutory duty came to be determined at 30%. It is true that the assessee challenged the said order in the High Court by filing a writ on 18-7-1980 and also got an interim stay by order dated 5-8-1980 and there is no further progress in the case so far. However, the fact of assessee challenging the Collector’s order and getting a stay from the High Court becomes irrelevant in view of the observations of Supreme Court in Kedarnath Jute Mfg. Co. Ltd.’s case (supra) which was followed by Bombay High Court in Central Provinces Manganese Ore Co. Ltd.’s case (supra).
10. However, the upshot of the above decisions is that only acknowledged/accepted statutory excise duty liability is allowable in the year of manufacture but where some extra demand is raised in a subsequent year, then the said extra demand is the statutory liability of that subsequent year as was held by Bombay High Court in Central Provinces Manganese Ore Co. Ltd.’s case (supra). Under Sales-tax Act when similar problems have arisen, namely, extra demand is raised by the Sales-tax authorities, it has been held that the liability arises only on the completion of the sales-tax assessment–Banwari Lal Madan Mohan v. CIT [1978] 113 ITR 562 (All.)–where it was held that quantification of sales-tax liability took place in the financial year in which sales-tax appellate order was passed (assessment year 1962-63) which related to assessment years 1954-55 to 1957-58. Allahabad High Court had followed its earlier decision in CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868. Gauhati High Court in CIT v. Nathmal Tolaram [1973] 88 ITR 234 held that sales-tax in respect of earlier years was allowable in the year in which the demand notice was received by the assessee.
11. In view of the aforesaid discussion, we hold that the additional excise duty levied as a result of Collector of Customs’ order dated 12-6-1980 was not allowable in assessment years 1977-78 and 1978-79. We accordingly vacate CIT(A)’s orders allowing deduction of Rs. 6,03,392 for assessment year 1977-78 and Rs. 32,22,558 for assessment year 1978-79.
Grounds 2-3 – Asst. year 1977-78 :
12. ITO disallowed legal charges of Rs. 16,500 and consultancy charges of Rs. 10,350 for valuation of property belonging to Garware Plastics Ltd. which company had amalgamated with the assessee-company. ITO held vide para 10 that both these items were capital expenditure relating to the framework of the assessee-company. 13. CIT(A) (vide para 10) accepted the assessee's contention that the said expenditure was for expansion of assessee's business and there was no benefit of enduring nature.
14. Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 at page 44 approved the Full Bench decision of Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185 where it was held that “Outlay is deemed to be capital when it is made for the initiation of a business, for expansion of a business…vide Lord Sands in IRC v. Granite City Steamship Co. [1927] 13 TC 1 at page 14”.
15. Calcutta High Court in Bengal & Assam Investors Lid. v. CIT [1983] 142 ITR 156 held at pages 168-9 that where the expenditure makes basic alterations in the profit-earning structure of the company or the very structure of the company that could be considered to be bringing into existence an asset of an enduring nature, then the expenditure was capital expenditure, as it altered the framework of the structure under which the assessee was carrying on business.
16. Counsel for the assessee, however, relied on four Madras decisions, namely, Addl. CIT v. W.A. Beardsell & Co. (P.) Ltd. [1981] 130 ITR 159 where it was held that amalgamation expenses related to the carrying on or conduct of the business and was therefore an integral part of profit-earning process. Similar view was taken in CIT v. Kisenchand Chellaram (India) (P.) Ltd. [1981] 130 ITR 385 (Mad.) where fee paid to Registrar of Companies for raising the capital of the company was held to be revenue expenditure on the ground that without capital a company cannot carry on its business and therefore the expenses incurred for increasing the capital was bound up with the functioning and financing of the business. Madras High Court had followed the aforesaid two decisions in W.A. Beardsell & Co. (P.) Ltd.’s case (supra) and Kisenchand Chellaram (India) (P.) Ltd.’s case (supra) in CIT v. Bush Boake Allen (India) Ltd. [1982] 135 ITR 306 (Mad.) and in Madras Race Club v. CIT [1985] 151 ITR 675 (Mad.).
17. However, Bombay High Court in Bombay Burmah Trading Corpn. Ltd. v. CIT [1984] 145 ITR 793 at page 801 has dissented from the Madras High Court’s view in Kisenchand Chellaram and has fallen in line with Upper Doab Sugar Mills Ltd. v. CIT [1979] 116 ITR 923 (All.), Mohan Meakin Braveries Ltd. v. CIT [1979] 117 ITR 505 (HP) and Hindustan Gas & Industries Ltd. v. CIT [1979] 117 ITR 549 (Cal.). Bombay High Court held that fee paid to Registrar of Companies for enhancement of capital was capital expenditure.
18. In view of the above discussion, we would follow Calcutta High Court’s view in Bengal & Assam Investors Ltd.’s case (supra) which is in conformity with Supreme Court’s view in Assam Bengal Cement Co.’s case (supra) and that of Bombay High Court in Bombay Burmah Trading Corpn. Ltd.’s case (supra). In the result, we vacate the CIT(A)’s order and restore that of ITO disallowing Rs. 16,500 and Rs. 10,350.
19. In the result, Revenue’s appeal for asst. year 1977-78 is allowed.
20. In asst. year 1978-79, the first ground is regarding the addition of Rs. 32,000 which was received on 22-12-1971 as a deposit from M/s. Cema Pvt. Ltd. for supply of plastic moulds by the assessee-company. As the mould manufactured by the assessee-company was not lifted by the said depositor, ITO treated the said amount as part of assessee’s income in asst. year 1978-79 (account year ending 30-9-1977). As per assessee’s account books, the said credit in the account of the aforesaid creditor is carried forward till 1-7-1985. On these facts, the crucial question is how does the Revenue treat this amount as assessee’s income for asst. year 1978-79. The limitation period of three years had expired much earlier. ITO (vide para 9), however, assessed the said amount in asst. year 1978-79 because the creditor had not claimed the amount after six years.
21. While we see some merit in the Revenue’s contention based on CIT v. Batliboi & Co. (P.) Ltd. [1984] 149 ITR 604 (Bom.), the fact remains that the assessee had not treated this amount as its own by transferring the same to P & L account and therefore there is nothing in the year under consideration to support the Revenue’s case for assessing the same. We accordingly confirm CIT(A)’s order on this point.
Ground 3 : (Asst. year 1978-79) :
22. Amount of Rs. 2,44,655 was deferred revenue expenditure brought forward from assessment year 1977-78 and claimed as deduction in this year. ITO (vide para 11, page 7 of his order) noted the assessee’s claim that the said amount was the cost of raw material consumed in the initial period of trial production in asst. year 1977-78. ITO held (and rightly so) that the said amount was not the expenditure of asst. year 1978-79. CIT(A) (pages 8 & 9) purported to follow Mysore Tobacco Co. Ltd. v. CIT [1978] 115 ITR 698, 699 (Kar.) which held that only the expenditure relating to the relevant accounting year was allowable. However, he still came to the finding that in essence the expenditure of Rs. 2,44,655 related to the manufacturing results of assessment year 1978-79. With respect, we have not been able to follow this logic. We accordingly vacate CIT(A)’s order on this point and restore that of ITO because it is clear that raw material in the shape of polyester chips was consumed in assessment year 1977-78 and did not appear as part of closing stock or goods in process in that year and the balance-sheet only showed at page 6 deferred revenue expenditure of Rs. 2,44,655. We have not been able to understand how consumption of raw material in a particular year can be said to be deferred expenditure of the subsequent year. In the result, CIT(A)’s order on this point is vacated and addition of Rs. 2,44,655 is restored.
23. In the result, Revenue’s appeal is partly allowed.