High Court Of Andhra Pradesh
I.D.L. Chemicals vs. CIT
Sections 32, 37(1), 40A(8), Rule 5
Asst. Year 1980-81, 1981-82
Mrs. T. Meena Kumari & S. Ananda Reddy, JJ.
Case Refd. No. 44 of 1993
8th December, 2004
Counsel Appeared
Ratnakar, for the Assessee : S.R. Ashok, for the Revenue
JUDGMENT
S. Ananda reddy, J. :
At the instance of the assessee, the Tribunal, Hyderabad Bench A, has referred the following questions under s. 256(1) of the IT Act, 1961 (hereinafter referred to “the Act”), for the opinion of this Court, said to arise out of its order in IT Appeal Nos. 248 and 249 of 1985 for the asst. yrs. 1980-81 and 1981-82 :
“1. Whether, on the facts and circumstances of the case, the Tribunal is correct in upholding the disallowance out of interest payable on the deposits accepted under the Companies (Acceptance of Deposits) Rules, 1975, by applying the provisions of s. 40A(8) of the IT Act,1961, for the asst. yrs. 1980-81 and 1981-82 ?
Whether, on the facts and circumstances of the case, the assessee is entitled to claim depreciation at the revised rates effective from 2nd April, 1983 for the asst. yrs. 1980-81 and 1981-82 ?
Whether, on the facts and circumstances of the case, the assessee is entitled to the deduction of the sales-tax liability of Rs. 28,41,461 based on the demand pursuant to the completion of the assessment on 18th Feb., 1980, under the Central sales-tax while computing its income liable to tax for the asst. yr. 1981-82 ?”
The assessee is a company and the previous years relevant to the assessment years in question, ended on 30th June, 1979, and 30th June, 1980, respectively. For the assessment years in question, the assessee claimed the deduction of certain interest on the ground that it is payable on the deposits accepted by the company under the Companies (Acceptance of Deposits) Rules, 1975. The AO, however, applying the provisions of s. 40A(8) of the IT Act, disallowed the claim.
At the time of hearing, it is represented by counsel appearing for the respective parties that the first question referred, is covered by a decision of this Court in the assessee’s own case in R.C. No. 44 of 1988, dt. 31st July, 1997, relating to the asst. yrs. 1977-78 and 1978-79. This Court while answering the identical question referred, found that the assessee has not created any charge prior to 9th Dec., 1980, and, as such, it is not entitled for any deduction. In the light of the opinion expressed by this Court, the first issue referred for the opinion of this Court has to be answered against the assessee and in favour of the Revenue.
Coming to the second question, the assessee claimed depreciation based on the revised rates of depreciation, this claim was rejected by the authorities which was confirmed by the Tribunal on the ground that the said rate of depreciation was introduced w.e.f. 2nd April, 1983, and the same cannot be applied for the years in question, as the amended rates of depreciation are only prospective and applicable only from 2nd April, 1983.
At the time of hearing, it is represented by both counsel that this issue is also covered by the decision of this Court reported in Andhra Cements Co. Ltd. vs. CIT (1999) 152 CTR (AP) 270 : (1998) 232 ITR 364 (AP). In view of the said decision, this question is also answered against the assessee and in favour of the Revenue.
The next question relates to the deduction of sales-tax liability of Rs. 28,41,461 this issue is relevant for the asst. yr. 1981-82 for which the previous year ended on 30th June, 1980. According to the assessee, the sales-tax demand was served on the assessee on 23rd Feb., 1980, i.e., during the relevant previous year, and therefore, the assessee is entitled for deduction.
The AO while framing the assessment, negatived the claim on the ground that the sales-tax liability pertains to the period 1976-77, though the assessee relied upon the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). The assessee was unsuccessful even before the first appellate authority. On further appeal before the Tribunal, the Tribunal also confirmed the view of the Departmental authorities, observing that the assessee-company maintains its books of account under the mercantile system of accounting and the sales-tax liability pertains to the year 1976-77, though the demand notice dt. 18th Feb., 1980, was served on 23rd Feb., 1980, which fell during the accounting year relevant to the assessment year in question. The Tribunal also relied upon the decisions of the Kerala High Court in CIT vs. K.A. Karim & Sons (1981) 24 CTR (Ker)(FB) 83 : (1982) 133 ITR 515 (Ker)(FB) and L.J. Patel & Co. vs. CIT (1974) 97 ITR 152 (Ker), while confirming disallowance of the deduction. Hence, the reference.
At the time of hearing, learned counsel for the assessee contended that though the sales-tax liability pertains to the period 1976-77, the assessee was not aware of the liability as there was no demand from the sales-tax Department till 1980. Till the demand notice was served, there was no occasion for the assessee either to make entries in the books of account or to make a claim for deduction at any earlier point of time. Learned counsel also contended that the ratio laid down by the apex Court in the case of Kedarnath Jute Manufacturing Co. Ltd. (supra) may not be applicable. In view of the peculiar facts of the case, it is contended that by the time the demand notice was served on the assessee, the assessment for the period 1976-77 must have been completed long back, and, therefore, there was no possibility for the assessee to make a claim in that assessment year. Therefore, the assessee claimed the deduction only when it was served with a demand, which in fact was an unexpected demand by the assessee.
Learned counsel for the assessee relied upon the following decisions in support of his contention : Addl. CIT vs. Rattan Chand Kapoor (1984) 43 CTR (Del) 283 : (1984) 149 ITR 1 (Del); CIT vs. East India Corporation Ltd. (1986) 53 CTR (Mad) 212 : (1986) 159 ITR 712 (Mad); CIT vs. Woodland Oil Co. (P) Ltd. (1992) 195 ITR 852 (Cal) and CIT vs. New Gujarat Cotton Mills Ltd. (1998) 148 CTR (Cal) 563 : (1998) 230 ITR 595 (Cal).
Learned standing counsel, on the other hand, supported the view expressed by the Departmental authorities as well as the Tribunal.
According to learned counsel, the present facts are almost identical to the facts in Kedarnath Jute Manufacturing Co. Ltd. (supra), where the apex Court had considered a similar issue and laid down the principle, the circumstances under which the assessee could claim deduction. According to learned counsel, the decision was categorical and applied in all force to the facts of the present case. The decisions relied upon by the assessee cannot be applied in view of the binding decision of the apex Court.
The dispute relating to the third question is as to the allowability of the sales-tax liability of Rs. 28,41,461 during the relevant assessment year. It is not in dispute that the liability pertains to the transactions of sale that were effected during the period 1976-77. But, however, the claim of the assessee is that as there was no demand by the sales-tax Department, and the assessee was under the impression that there was no tax liability, the assessee did not make a claim during the relevant assessment year in which the sales transactions took place. However, when a demand was served on the assessee, it is only then the assessee came to know of its liability, therefore, it made a claim.
According to the assessee, it could not make a claim in the assessment proceedings for the period 1976-77, as the assessment for the said period had already been completed long ago. Therefore, the assessee could make a claim only for the assessment year in question. Before considering the decision of the apex Court in Kedarnath Jute Manufacturing Co. Ltd. (supra), it would be convenient to refer to the decisions of the other High Courts relied upon by the assessee.
In the case of Addl. CIT vs. Rattan Chand Kapoor (supra), the Delhi High Court was considering as to the allowability of the sales-tax liability. In that case admittedly, the sales-tax pertains to the period 1953-54 to 1958-59. But, however, a demand for the said amount was received on 25th Feb., 1964, relevant for the asst. yr. 1964-65. Therefore, the assessee claimed deduction of the said demanded sales-tax liability as a deduction in that assessment year. The Departmental authorities negatived the claim on the ground that the liability relates to the earlier years. But, however, the Tribunal by a majority view, allowed the claim. On a reference, the Delhi High Court upheld the majority view of the Tribunal. A perusal of the facts referred to the said decision, it is not clear as to the method of accounting that was being followed by the assessee therein. Further, the Delhi High Court upheld the view of the Tribunal, which held that a claim as contemplated in Kedarnath Jute Manufacturing Co. Ltd. (supra) can be made where there was a demand before completion of the assessment for the relevant assessment year. But, however, if a demand had been raised so, after 10 years, it would not be possible for making a claim for deduction for the relevant assessment year. As by that time, the assessment may not be pending and in such circumstances, the claim has to be made only in the year in which a demand of liability was served on the assessee. Therefore, the Tribunal order, distinguishing the applicability of the decision of the apex Court in Kedarnath Jute Manufacturing Co. Ltd. (supra), to the facts of that case, which was affirmed by the Delhi High Court. CIT vs. East India Corporation Ltd. (supra), the Madras High Court was considering the deductibility of the sales-tax with reference to the year, in which such deduction is permissible. The assessment year in question, was the asst. yr. 1973-74 and in that year, the assessee claimed the deduction of a sum of Rs. 1,41,316 as Central sales- tax liability in respect of the sales that had taken place during the accounting year 1957-58.
The assessee-company was dealing in cotton and an assessment was framed for that year determining certain liability under the Central Sales-tax Act. The assessee filed appeal against the assessment, disputing the liability, however, the assessee was not successful. But, the Board of Revenue exercising the revisional powers revised the assessment, enhancing the liability. Thereafter, the assessee carried the matter to the High Court. The High Court decided the issue in favour of the assessee following the decisions of the Supreme Court that there was no tax liability in respect of the inter-State sales. The matter was carried in appeal by the State to the Supreme Court. During the pendency of the appeal, the Ordinance came to be issued called the Central Sales-tax (Amendment) Ordinance, 1969, dt. 9th June, 1969, which was later replaced by the Amendment Act, 1969. The effect of the amendment was creating a liability retrospectively in respect of the inter-State sales, as a result of which, a liability was created against the assessee. As the appeal filed by the State against the order of the High Court was pending, the Supreme Court remanded the matter to the AO for fresh determination, giving liberty to the assessee to raise all objections. Thereafter, the AO made assessment on 31st Aug., 1972, i.e., the accounting year 1972, for which the relevant assessment year is 1973-74. Therefore, the assessee claimed deduction of the said quantified sales-tax liability as a deduction during the asst. yr. 1973-74. The AO negatived the claim on the ground that the assessee is entitled to claim deduction only during the relevant assessment year in which the sales had taken place. However, on appeal, the AAC accepted the claim of the assessee, on the ground that the liability in respect of the sales-tax for the year 195758 arose only on 31st Aug., 1972. The Revenue’s appeal before the Tribunal was dismissed. Hence, the reference to the High Court.
The High Court while answering the said reference, took into account the peculiar facts, as there was no liability according to the assessee, which was even accepted by the High Court. But, subsequently, the Act was amended retrospectively creating the liability. Under those circumstances, there was no possibility of anticipating the liability as well as making a claim for deduction.
The Madras High Court after referring the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. (supra) observed : “The question as to in which year the sales-tax liability should be allowed to be deducted cannot in all cases be decided upon a general/proposition of law. The present case is a clear illustration that there may be exceptions to the rule that even though a liability statutorily arose in the year in which the sales were made, factually the liability never existed in law and it is only after the decision of the Supreme Court was given effect to by the CTO that the liability came to be crystallised.”
The High Court after referring various decisions, elaborately answered the question referred to it in favour of the assessee.
In CIT vs. Woodland Oil Co. (P) Ltd. (supra), the Calcutta High Court was considering a similar issue. In that case, the assessee claimed a sum of Rs. 2,21,386 in the asst. yr. 1975-76 on the ground that though the liability for sales-tax pertaining to the accounting years ending 31st Dec., 1970, and 31st Dec., 1971, the dispute was finally adjudicated by the decision of the Supreme Court as to the liability and demands came to be issued in December, 1974, and November, 1975. In that case, the assessee imported certain goods and supplied to the Director General of Supplies and Disposals and according to the assessee, as per the terms of the agreement between the parties, there was no sales-tax liability. This claim was accepted in the light of the decision of the apex Court in the case of K.G. Khosla & Co. (P) Ltd. vs. Dy. CCT (1966) 17 STC 473 (SC). But, the said view came to be reversed by the subsequent decision of the apex Court in the case of Binani Bros. (P) Ltd. vs. Union of India (1974) 33 STC 254 (SC). It is only after the said decision a liability was raised against the assessee for the disputed sum. Though the AO in the assessment proceedings negatived the claim of the assessee, but the AAC allowed it partly to the extent of the demand covered by the notice dt. 14th Dec., 1974. That was confirmed by the Tribunal and on a reference, the Calcutta High Court answered in favour of the assessee finding the peculiarity of the facts, under which the liability came to be made against the assessee only after the decision of the apex Court and not during the relevant year in which the sales had taken place.
In New Gujarat Cotton Mills Ltd. (supra), the Calcutta High Court, considered the claim of deduction of the additional sales-tax payable for the asst. yrs. 1961-62 to 1965-66, during the asst. yrs. 1978-79. In this case also, the additional sales-tax liability came to be raised at a later point of time that is during the relevant period covered by the asst. yr. 1978-79. The Calcutta High Court had expressed its opinion on the premise that the liability created was not a normal liability of paying sales-tax, but an additional sales-tax liability which was raised at a later point than the point of sale. Therefore, it answered the question referred to the High Court in favour of the assessee.
Coming to the decision of the apex Court in Kedarnath Jute Manufacturing Co. Ltd. (supra), where the sales were effected during the previous year ending 31st Dec., 1954, relevant for the asst. yr. 1955-56. The assessee filed its return of income on 13th Jan., 1956, without making any claim for deduction. But, the demand notice was served on 21st Nov., 1957. Therefore, it filed a revised return on 9th Nov., 1959, claiming deduction of the above demanded sales-tax amount. The ITO completed the assessment on 11th March, 1960, holding that the assessee was not entitled to claim deduction of the sales-tax amount inasmuch as it had denied its liability to pay that amount and had made no provision in its books with regard to the said liability, even though the assessee was following the mercantile system of accounting. The AAC confirmed the said order of assessment, as also upheld by the Tribunal. When a reference was made to the Calcutta High Court, the High Court was of the opinion that unpaid and disputed sales-tax liability could not form the basis of a claim for deduction for the purposes of income-tax. According to the High Court, mere legal liability was not enough. There had to be an expenditure in the first place and it must be laid out or expended wholly and exclusively for the purpose of such business.
On further appeal, the apex Court allowing the appeal observed : “An assessee, who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business, such liability which had accrued during the period for which the profits and gains were being computed. It can again, not be disputed that the liability to the payment of sales-tax had accrued during the year of assessment, even though it had to be discharged at a future date.”
The apex Court also negatived the stand of the Revenue that in order to claim deduction, the assessee has to make an entry in its books of account showing the liability. If we examine the present case in the light of the above referred decisions, the assessee except claiming that a demand was raised during the relevant previous year, none of the other relevant facts were brought on record. As already held in the above referred cases, unless there are peculiar circumstances where the assessee had genuinely entertained a doubt as to its liability and especially when the liability is not a liability of normal character, the assessee is not entitled for deduction in the year of demand as held in the earlier referred decisions instead of the year, in which the liability had accrued, when the assessee was admittedly following the mercantile system of accounting.
In the above circumstances, we do not find any merit in the claim of the assessee, and, accordingly, we answer the question in favour of the Revenue and against the assessee.
The reference is accordingly answered.
[Citation : 275 ITR 218]
