High Court Of Calcutta
CIT vs. Berger Paints (I) Ltd.
Section 43B
Asst. Year 1986-87, 1987-88
Ajoy Nath Ray & Maharaj Sinha, JJ.
IT Ref. Nos. 122 & 137 of 1995
6th February, 2002
Counsel Appeared
Dr. Pal, for the Assessee
JUDGMENT
BY THE COURT :
Both these references at the instance of the Revenue for the two successive asst. yrs. 1986-87 and 1987-88 are taken up together and disposed of by this common judgment since both these raise the same legal issue. Instead of setting out the questions and the money figures in the beginning, we would like to set out a model of accounting are deduction which the assessee would like to succeed before us.
2. The model is to be considered with reference to s. 43B of the IT Act, 1961, introduced into the statute book on the 1st of April, 1984. The basic scheme of that section is well-known. The scheme is this that even for assessees following the mercantile system of accounting regularly from year to year, deductions in respect of tax liability (roughly speaking), like the liability for payment of Central excise chargeable on manufacture of goods, would be claimable by the assessee only in the assessment for the previous year in which the said tax is actually paid by the assessee.
The said section makes it abundantly clear that notwithstanding the liability to pay having arisen in some other earlier previous year, only the year of payment shall be material for the purpose of deduction in assessment.
Let us now examine the model advocated by Berger Paints. In the assessment year in question (i.e., in the previous year relating thereto), suppose they actually pay excise duty of Rs. 100. Suppose also, that on the last day of previous year, there is a closing stock of goods, manufactured but not until then sold. According to the assessee’s model, this closing stock of goods also caused some excise liability of the assessee, resulting in some payment of excise duty, which is also contained in the said aggregate excise duty paid i.e, in the said sum of Rs. 100. Let us suppose that this part of excise duty paid, relatable to the closing stock, is Rs. 10. Now, the assessee does not wish to deduct the full amount of Rs. 100 in the assessment year in question, wholly and completely. It would rather deduct a sum of Rs. 90 in the assessment year under review and, in regard to the balance sum of Rs. 10, it would like to add that to the value of the closing stock. This is the method of accounting which, according to the assessee, is permissible in law notwithstanding the presence of s. 43B in the IT Act.
3. In another Division Bench judgment in another reference matter in our Court, for the same assessee, but for a different assessment year [reported as Berger Paints India Ltd. vs. CIT (2002) 172 CTR (Cal) 439—Ed.], the decision has gone against it on the basis that adoption of this accounting procedure leads to a double benefit in favour of the assessee. Dr. Pal was at pains to point out before us that in adopting this accounting system, the assessee does not and cannot get a double benefit. We, however, point out on our part that if Dr. Pal is aggrieved by any decision of a co-ordinate Division Bench of our Court, we are unable to redress the grievances of his client and that redressal, if at all, must be had from elsewhere.
4. So far as we are concerned, we would not like to base our decision, as to the above contention of the assessee, on the ground of any double benefit. The accountants of the assessee have been very careful to set out that the balance of Rs. 10, being the amount of excise duty and customs duty actually paid but not charged in the P&L a/c, is added to the value of the stock-in-trade. They are very careful, at least impliedly, to point out, that whether or not they were permitted to knock off Rs. 100 fully from their gross income, in the assessment year in question, they were not doing so; they were only knocking off Rs. 90 and for the balance Rs. 10, which is certainly an outgoing of some sort, they treat it as an outgoing which goes to magnify the value of the goods, rather than an outgoing which goes towards the excise duty payment. There is probably no stark and staring double benefit here, as the assessee is careful to charge a deduction of Rs. 90 only for excise duty payment in the assessment year in question. But the legal issue is, does the wording of s. 43B permit this to be done? It is important to consider and answer this question without allowing different issues to confuse or cloud the field. The issue is not the benefit that the assessee might be getting by this different accounting procedure; the issue is not whether the assessee is trying to recoup itself for excise duty; the issue is not whether the assessee is trying to gain some tax benefit by the ingenuity of the business house or its retained accounts; the issue is, and the issue only is, is the assessee following the provision of s. 43B as correctly interpreted.
Under that section it is stated that tax payments “shall be allowed” irrespective of the year of accrual of liability “only in computing the income referred to in s. 28 of that previous year in which such sum is actually paid by him”. Therefore, the payment of Rs. 100 is only to be allowed in computing the income of the assessment year in question. It cannot be allowed for computing income of any subsequent or earlier assessment year.
In the manner the assessee has chosen to arrange its accounts, the assessee has caused an allowance of Rs. 90 only to be made in respect of the assessment year relating to the year of actual payment. If the assessee had stopped there, the Revenue would have no problem. If the assessee wishes to deduct less than it is entitled to, the Revenue would normally gladly welcome such an extra paying assessee. However, such assessees are not to be found in actual practice. What the assessee does here, is not stop at claiming the lesser deduction of Rs. 90, but in going further ahead and attaching the balance sum of Rs. 10 to another part of its balance sheet, relating to assets and also causes a change to the corresponding P&L a/c so as to bring down Rs. 100 to Rs. 90, so that the double benefit argument cannot be made against it.
8. In our opinion, this is clear accounting jugglery trying to get out of the wording of s. 43B. If the assessee does not wish to knock off the entire amount paid, as it must in the very year of payment, it is free to do; but if it is giving up partly its right of knocking off, it cannot thereby purchase, at perhaps, the advice of its own accountants, some other accounting benefit in its balance sheets or P&L a/c. This is the simple and solitary argument on which we would like to base our opinion.
9. Dr. Pal cited the most interesting and instructive (with due respect) case of Chainrup Sanpat Ram vs. CIT (1953) 24 ITR 481 (SC) : TC 2R.124 where the Hon’ble Chief Justice Patanjali Sastri speaking for the Supreme Court pointed out at p. 485 to the effect that the purpose of a P&L a/c is to represent the accurate picture of the profit and loss that actually occurred in the year in question. His Lordship said, “The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of year showing profit or loss actually realised on the year’s trading”. Basing on this argument, Dr. Pal submitted that since the stock-in- trade is not yet sold, the excise duty, which would have been absorbed in it as a liability in an ordinary mercantile system of accounting, is being compelled to be taken note of by the assessee, because of the wording of s. 43B. According to him, the said section distorts the mercantile system of accounting. We would agree with Dr. Pal that the said section creates a distortion in the pure mercantile system, but we are also of the opinion, that if the statute intends it by clear words, then the Court, and even more so the assessees, must honour such distortion and accept it as a fact of business life. Dr. Pal next gave us the case of Allied Motors Ltd. vs. CIT (1997) 139 CTR (SC) 364 : (1997) 224 ITR 677 (SC) : TC S19.2151 and showed us therefrom how the Supreme Court viewed Expln. 1 of s. 43B stating in clear terms that the section could not both compel the assessee to claim allowance in the year of actual payment and also at the same time cause the year in which the liability accrues to retain the same significance for tax purposes as it previously had.
Dr. Pal gave us other cases also, including the Division Bench judgment of the Gujarat High Court in the case of Lakhanpal National Ltd. vs. ITO (1986) 54 CTR (Guj) 241 : (1986) 162 ITR 240 (Guj) : TC 19R.701, he pointed out that in this case the assessee succeeded before the Division Bench which pointed out that in the matter of treating the closing stock with added value as here, the assessee was not at all taking a double benefit. We have already stated that we are not passing our judgment on the issue of double benefit, but since another Division Bench of ours have already pronounced in that regard, we do not say that the issue of double benefit can be freely decided upon by us either.
The question formulated by the Tribunal at the instance of the Department for our consideration for the asst. yr. 1987-88 is as follows :
“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing the ITO to allow the sum of Rs. 24,28,428 being Central excise and customs duty under s. 43B of the Act on the ground that the said amount has been included in the value of closing stock ?”
For the asst. yr. 1986-87 the formulated question is as follows : “Whether, on the facts and in the circumstances of the case and under Expln. 2 to s. 43B coming into force with effect from 1st April, 1984, the Tribunal was justified in law in directing to allow the amount of Rs. 77,81,948 under s. 43B of the IT Act, being Central excise and customs duty which had been included in the value of closing stock ?”
The Tribunal decided in substance in favour of the assessee in each of the two cases reversing the decision of the ITO and CIT(A). The Tribunal followed its own decision in the matter.
12. Dr. Pal tells us that the Tribunal’s decision has since received judicial approval by the Delhi Reference Bench. Be that as it may, for the above simple reason, i.e., the assessee not being permitted to adopt an accounting procedure of its own contrary to the express words of s. 43B, we answer the questions in both these references in favour of the Revenue and against the assessee. The Tribunal’s decision in both the cases was wrong. The consequent directions given to the subordinate Departments by the Tribunal shall be cancelled. The question referred are, therefore, both answered in the negative.
[Citation : 254 ITR 498]