ORDER
M.A. Ajinkya, Accountant Member
1.This is an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals) IV, for the assessment year 1983-84.
2. The only ground agitated in this appeal is that the CIT (Appeals) erred in confirming the addition of Rs. 32,80,110 being a disputed amount of excise duty refunded by the Department. To understand the nature of the controversy, certain facts need to be stated. The appellant-company is involved in two activities, (i) purchase and sale of tea, coffee and spices and (ii) manufacture of foam rubber. During the previous year relevant to the assessment year 1983-84, the company received refund of Rs. 32,80,110 from Excise Department under an order of the High Court of Judicature at Bombay. In a Note appended to the Statement of Computation of Total Income for the assessment year 1983-84, the appellant stated as under :
During the previous year, relevant to the above Assessment Year, the Company has received a refund of Rs. 32,80,110 from the Excise Department under an Order of the Bombay High Court. Since thia matter is in dispute and the Company has given Bank Guarantee for the full amount as per the direction of the Court, the refund so received cannot be reckoned as income of the Company for the year. Pending final outcome of the litigation whatever be, the amount to which the Company will be entitled as may be determined by the Court will be returned as Income in the appropriate year.
The assessee claimed that the refund so received could not be treated as income of the company for the year because the matter concerning the levy of excise duty was in dispute. The amount was taken to the Balance Sheet as an outstanding liability and an assurance was given that pending final outcome of the litigation whatever it may be, amount which, the company will be entitled as may be determined by the Court, will be returned as income in the appropriate year.
3. Now the circumstances which led to the High Court order resulting in the aforesaid refund may briefly be stated. The Collector of Central Excise, Bombay, passed an order on 29-8-1977 (the order No. V-16A(2)ll/76). Although a copy of this order is not filed before us, it appears from the papers produced that the Collector decided that latex foam sponge mattress, seat cushions, back rest cushions etc. manufactured by India Coffee and Tea Distributing Co. Ltd. Bombay (the appellant herein) are classifiable under item 16A(1) of CET and not under item 34A. In terms of this order, certain additional excise duty was demanded from the appellant. The appellant went in appeal to the Central Board of Excise and Customs who passed their order thereon on 16th July, 1980. In the appeal proceedings, the Board accepted the appellant’s contention that the articles manufactured by them could more appropriately be classified as part af motor vehicle and in coming to this conclusion the Board approved of the finding of the Appellate Collector of Customs and Central Excise, Madras, in an order given by him on the appeal of M/s. Enfield (India) Ltd. on 24-12-1979. The Board, therefore, allowed the appeal relating to classification of seat cushions and back rest cushions and modified the orders of the Collector of Central Excise to that extent. This order of the Central Board was reviewed by the Government of India, Ministry of Finance, by their order dated 31st December, 1980. On examination of the records of the case, the Central Government were tentatively of the view that the products such as pillion seats for scooters, autorickshaw driver/passenger seats, tractor seats, back seats for tractors, seats for jeep etc. were classifiable under item 16A of the CET and that the order of the Board was not proper. The Government of India, therefore, in exercise of the powers vested under Section 36(2) of the Central Excise and Salt Act, 1944 proposed to set aside the order of the Board in terms of their letter dated 31st December, 1980. The Superintendent of Central Excise, Thane, issued a demand notice on 3rd January, 1981 requiring the company to pay excise duty after filing a fresh classification list for items such as seats for motor vehicles, etc. under item 16A(1) of the Central Excise Tariff. Against this demand, the appellant went in writ petition under Article 226 of the Constitution in the High Court of Judicature at Delhi. The Delhi High Court by their order dated 27th January, 1981 granted a stay. This matter is still pending before the Delhi High Court. In the meantime, the Central Excise and Gold Control Appellate Tribunal in the case of Collector of Central Excise, Madras v. MM. Rubber Co. Ltd., Madras, were called upon to decide the same issue, namely whether cushion seats for motor vehicles fell, during the period from 1-4-1976 to 31-3-1977, under item No. 16A(1) of the Central Excise Tariff which read as “Latex Foam Sponge” as tentatively held by the Government of India in their impugned show cause notice, or under item 34A of the Tariff, which read as “Parts and Accessories of Motor Vehicles, not otherwise specified”. After considering the arguments on either side, the Tribunal held that the original entry “Latex foam sponge” covered latex foam sponge in all its form and variety and the subject seats too were covered by it. Accordingly, the Tribunal allowed the appeal of the department and restored the order of the Assistant Collector. It further appears that against this order of the Tribunal, M.M. Rubber Co. Ltd. filed a review petition to the Supreme Court, which was dismissed in limine by the Supreme Court on 7-2-1984. The order of the Tribunal, therefore, was confirmed. These facts would prima facie indicate that there is a liability for payment of excise duty on manufacture of latex foam sponge by treating it as an item under 16A(1) of the Central Excise Tariff and this liability may have to be faced by the appellant sooner or later.
4. In the meantime, it is seen that the appellant had filed a writ petition before the High Court of Judicature at Bombay and the order thereon was made on 17-7-1981. This writ petition was filed to enforce the Excise Department to issue refund order, which was due to the appellant in view of the order dated 16-7-1980 passed by the Central Board of Excise and Customs referred to herein-above, which was at the relevant time in favour of the assesses and which directed the modification of the order of the Collector of Central Excise as originally passed. The High Court directed the respondents (namely the Government of India) to deposit the amount due to the petitioners in the Office of the Prothono-tary and Senior Master on or before 3rd August, 1981 and upon making such deposit, the petitioners would be at a liberty to withdraw the amount upon furnishing solvent security to the satisfaction of the Prothonotary and Senior Master. The appellant furnished a bank guarantee for the amount of Rs. 32,80,110 as per the directions of the High Court on 12th August, 1981 and thereupon the refund was issued to the appellant. It is also seen from the papers filed before us that for the preceding year, i.e. for the assessment year 1982-83 a similar issue came before the D-Bench of the Tribunal in ITA No. 3245/Bom./85. All the facts mentioned hereinabove were considered by that Bench and the Tribunal observed that the question whether the rate of 60% or 10% was applicable to latex foam seats was the subject matter of appeal before Special Bench ‘D’ New Delhi, of the Customs, Excise and Gold (Control) Appellate Tribunal in the case of M.M. Rubber Co. Ltd. Madras and the said Tribunal had held by their order dated 18-11-1983 that the rate of 60 % was applicable. Special Leave Petition filed by M/s. M.M. Rubber Co. Ltd. against the said decision of the Tribunal had been dismissed by the Supreme Court and a review petition against the writ petition or special leave petition also had been dismissed by the Supreme Court. On these facts, the provision made for payment of enhanced excise duty was considered by the Tribunal as a liability which had arisen in the relevant accounting year and was allowable when a provision had been made in the accounts.
5. On these facts, Shri P.A. Nair, C.A., argued that the dispute concerning the payment of excise duty on latex foam seats so far as assessment year 1983-84 was concerned, had not been finally resolved. All indications pointed to the possibility of the assessee having to pay excise duty at a higher rate, particularly in view of the decision of the Special Bench of the Customs Tribunal (referred to supra), which was confirmed by the Supreme Court and the review petition on which dismissed and the decision of the Income-Tax Appellate Tribunal on the allowability of the excise duty on similar item for the immediately preceding year. It was Shri Nair’s case that with the receipt of the amount of refund from the Collector of Central Excise consequent to the order of the Bombay High Court there was no final cessation of liability of the assessee towards the payment of excise duty. The assessee had furnished a bank guarantee for the like amount as per the directions of the High Court. No doubt it was pursuing its remedy by filing a writ petition in the Delhi High Court against the review order of the Government of India dated 31st December, 1980 in consequence of which the Superintendent of Central Excise, Thane, had issued a demand notice requiring the assessee to pay excise duty at enhanced rates. Shri Nair argued that there was every possibility that the assessee may finally have to pay excise duty at enhanced rates and the amount received by way of refund would have to be paid towards such demand. Shri Nair finally argued that the provisions of Section 41(1) under which this refund was sought to be brought to tax would come into operation only when finality had been reached in respect of a liability or when there was a complete and final cessation of liability. He relied first on the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864. At page 8G8 of the head note, the Court observed that for Section 41 to apply the liability of the assessee to excise duty must be said to have ceased. There must be no possibility of the liability being revived in the future. If there is such a possibility, then the cessation is not complete and Section 41(1) is not attracted. He next relied on the decision of the Karnataka High Court in Liquidator, Mysore Agencies (P.) Ltd. v. CIT [1978] 114 ITR 853. In this case, the High Court observed that in order to bring a case under Section 41(1), it has to be shown by the department that there has been remission or cessation of the liability. The remission of the liability arises when the creditor voluntarily gives up the claim and the cessation of such liability arises only when it ceased to exist in the eye of law for all intents and purposes. Two decisions of the Bombay High Court in Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR, 578 and Gannon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 supporting the same view were also cited by Shri Nair in support of his case.
6. For the department, Shri Thomas relied on the order of the Commissioner of Income-tax (Appeals). He argued that the assessee had received the money and was in possession of it. The money was being utilised in business. Shri Thomas pointed out that the appellant did everything in its power to secure the refund by moving the High Court of Bombay on the one hand and stalled the operation of the review order of the Government by filing a writ in the Delhi High Court. The appellant was thus trying to eat its cake and have it too, as observed by th8 CIT (Appeals). Although the CIT (Appeals) has referred to Section 43B in paragraph 4 of his order, Shri Thomas did not advance and quite rightly, any arguments with reference to that Section.
7. We have considered the submissions made by both sides. From the facts stated at length in the preceding paragraph, it would be clear that the liability to pay excise duty at enhanced rate has not finally crystallised in the assessee’s case. The details of the excise duty paid in the past and refunded in terms of the’High Court’s order were furnished to us on being called upon to do so by the appellant’s representative and it appears that the refund now received is in respect of the duty relating to the accounting years 1974-75 to 1978-79 as under :
Rs.
1974-75 5,28,191.79
1975-76 1,43,272.92
1976-77 11,17,425.21
1977-78 8,99,302.61
1978-79 5,93,917.77
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32,80,110,30
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Now it is seen that it is in respect of these years that there is a dispute between the appellant and the Government of India about the rate at which the duty should be paid. As stated earlier, the evidence produced before us would indicate that on latex foam seats the assessee may be called upon to pay excise duty at enhanced rates by treating it as item under 16A of the Central Excise Tariff in consonance with the order of the Special Bench of the Tribunal in a connected case, which order, as stated above, has been confirmed by the Supreme Court and on the basis of which excise liability at enhanced rate has been directed to be allowed by the Tribunal in the income-tax assessment of the assessee for the assessment year 1982-83. On these facts, it can hardly be said that the liability of the assessee in respect of the excise duty of the aforementioned years has finally ceased and that the refund received by it in consequence of the Bombay High Court’s order is in cessation of such liability. Two important factors have to be taken into account for deciding whether there is a final cessation of liability in this regard. Firstly, the assessee has been called upon to furnish a bank guarantee and in that sense the refund issued has been conditional. Secondly, the order of the Central Board of Excise and Customs, which resulted in this refund being issued, is a subject matter of review order and which review order, though challenged in a writ petition, is liable to be confirmed. These facts have been wholly ignored by the CIT (Appeals) while giving his decision. It is needless to multiply case law to support the proposition that a receipt can be brought within the scope of Section 41(1) only when there is a final cessation of the liability. On facts, which have been brought to our notice and which have been discussed at length, we are satisfied that the receipt of refund by the assessee during the accounting year relevant to the assessment year cannot be considered as money received on cessation of its liability for the earlier years and, therefore, cannot come within the ambit of Section 41(1). We would, therefore, agree that the amount of Rs. 32,80,110 is not taxable in this year under Section 41(1). It may here be stated that Shri Nair gave an assurance at the time of hearing that if on a final settlement of all litigation in this matter any amount becomes due to the assessee, the same will be offered for taxation when received. In fact, a similar commitment had been made by the assessee in a note given below the statement of income attached to the return of income, which note has been reproduced hereinabove. Further it is seen that the amount received has been taken to the Balance Sheet and shown as a liability. On the other hand, the observation of the Commissioner of Income-tax (Appeals) that the assessee is trying to eat his cake and have it, is not quite borne out by the facts. His reference to Section 43B also appears to be irrelevant. When the Board allowed the assessee’s appeal in 1980 and directed the issue of refund of excise duty, the Government of India issued a review order. This had the effect of withholding the refund that the assessee felt was due to it as a result of the Board’s order. The assessee on the one hand went in writ against the review order of the Government and made all possible efforts to secure the refund by obtaining an order from the Bombay High Court and filing a bank guarantee as required by the Court. All this happened in the year 1981 when the assessee could not have foreseen the outcome of the Customs Tribunal’s order in a connected case, which became known much later. Nor could it know that the Tribunal’s order would be confirmed by the Supreme Court, which event also took place in 1984. The assessee, as submitted by Nair, was entitled to guard its legitimate business interest by doing everything in its power to ensure that whatever was due to it according to its stand in this matter, should be done. The main issue that is raised by Shri Nair and quite rightly, is that there is an uncertainty about the liability of the assessee regarding this excise duty and the liability in this regard has not finally ceased. Even now, in view of the decisions of the Tribunal (both the Customs Tribunal and the Income-tax Tribunal) for the preceding year, the assessee may have to pay the duty at the enhanced rate. Therefore, the order of the CIT (Appeals) in this regard does not appear to be justified.
8. The reference to Section 43B is again misplaced because this Section was inserted by the Finance Act, 1983 with effect from 1-4-1984 and we are concerned with the assessment year 1983-84. For the reasons stated hereinabove, we would accept the arguments advanced on behalf of the assessee and reverse the order of the CIT (Appeals).
9. The appeal of the assessee is allowed.