Calcutta H.C : Whether the Tribunal was right in holding that the commission payment to the directors and other senior management staff were required to be considered for the purposes of s. 40(c) and s. 40A(5) of the IT Act, 1961 ?

High Court Of Calcutta

Peico Electronics & Electricals Ltd. vs. CIT

Sections 32A(2)(b)(iii), 36(1)(iv), 37(1), 40(c), 40A(5)

Asst. Year 1979-80

Ajit K. Sengupta & Bhagabati Prasad Banerjee, JJ.

IT Ref. No. 127 of 1989

1st March, 1991

Counsel AppearedDr. D. Pal, P. K. Pal & Miss M. Seal, for the Assessee : S. K. Mitra, for the Revenue

AJIT K. SENGUPTA J.:

This reference under s. 256(1) of the IT Act, 1961, relates to the asst. yr. 1979-80. The following questions of law have been referred to this Court at the instance of the assessee :

“1. Whether the Tribunal was right in holding that the commission payment to the directors and other senior management staff were required to be considered for the purposes of s. 40(c) and s. 40A(5) of the IT Act, 1961 ?

Whether the Tribunal was right in holding that the liability to tax under the Companies (Profits) Surtax Act, 1964, was not an admissible deduction in computing the assessee’s income under the head ‘Profits and gains of business or profession’ ?

Whether the Tribunal was right in holding that investment allowance under s. 32A of the Act is not admissible in respect of new canteen equipments purchased and used during the relevant previous year ?

Whether the Tribunal was right in holding that the provision of Rs. 65,76,148 representing differential excise duty and consequent increase in sales tax which would be payable in the event of the Excise Department succeeding in its claim that the excise duty payable by the manufacturers was to be computed with reference to the assessee’s selling price and not with reference to the price at which the manufacturers sold their goods to the assessee was not allowable as deduction ?”

2. The following question has been referred at the instance of the Department :

“Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 36(1)(iv) r/w the IT rr. 87 and 88 and the Board’s Notification No. S.O. 3433 dt. 21st Oct., 1965, the Tribunal was correct in law in allowing the assessee’s appeal holding that the assessee is entitled to the entire amount of Rs. 50,79,655 being the initial contribution made to the approved superannuation fund as a deduction as against Rs. 8,12,745 allowed by the ITO ?” A few of the questions are admittedly concluded by the decision of the Supreme Court or of this Court as the case may be and we do not propose to deal in detail with the facts relating to such questions. It is not in dispute that the first question in the reference at the instance of the assessee is concluded by the decision of the Supreme Court in the case of Gestetner Duplicators P. Ltd vs. CIT (1975) 8 CTR (SC) 371 : (1979) 117 ITR 1 (SC). Following the said decision, we answer the first question in this reference in the affirmative and in favour of the Revenue.

The second question at the instance of the assessee is concluded by the decision of this Court in the case of Molins of India Ltd. vs. CIT (1983) 35 CTR (Cal) 254 : (1983) 144 ITR 317. Following the said decision, we answer the second question in the affirmative and in favour of the Revenue.

The only question at the instance of the Department is concluded by the decision in IT. Reference No. 113 of 1985, CIT vs. Union Carbide India Ltd., where the judgment was delivered on 5th Feb., 1990. Following the said decision, we answer the said question in the affirmative and in favour of the assessee. We shall now deal with the two other questions referred at the instance of the assessee.

The facts relating to the third question are that the assessee claimed investment allowance under s. 32A of the IT Act, 1961, in respect of new canteen equipment purchased and used by the assessee during the relevant previous year. The ITO negatived the claim of the assessee which, on appeal, was upheld by the CIT (A.). The assessee preferred an appeal before the Tribunal. The Tribunal, after hearing both the parties, concluded the matter as hereunder :

The finding given by the CIT (A.) on this issue and the argument of Sri Pal, the Departmental Representative, are correct. The investment allowance can be granted provided the assessee fulfils the conditions laid down in s. 32A of the Act. Merely on the fact that the assessee is an industrial concern, the investment allowance cannot be granted. The assessee could not prove that it was having plant and machinery within the meaning of s. 32A of the Act in the canteen. Consequently, the finding of the CIT (A.) is correct and the same is maintained.”

At the hearing before us, Dr. Pal, appearing for the assessee, contended that the assessee is engaged in the manufacture and production of electrical goods and is an industrial company. The canteen has to be maintained for the purposes of providing facilities for food to the employees who are engaged in such establishment. Dr. Pal contends that the canteen undoubtedly is for the purposes of the business which the assessee is carrying on, viz., the business of manufacture and production of articles and things. If a computer is installed for the purposes of monitoring the business of the company, investment allowance is allowed to such computer. Labourers are employed in the business. The canteen has to be provided for them which is for the purposes of the business. According to learned counsel, the plant and machinery used in the canteen is for the business of manufacture or production. He has also submitted that the expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide : it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation.

He has also relied on an unreported decision of a Division Bench of this Court in CIT vs. Sky Room Pvt. Ltd.— since reported in (1992) 106 CTR (Cal) 265 : (1992) 195 ITR 763 (Cal) (IT. Reference No. 114 of 1981), where this Court allowed investment allowance on the equipment used in the restaurant. In view of the aforesaid decision, Dr. Pal contends that the investment allowance should be granted on the new equipment used in the canteen which is necessarily to be maintained for the purpose of manufacture or production of articles or things in the factory. Under the welfare scheme and labour laws, such factory is necessarily to maintain a canteen for the effective carrying on of its production.

Dr. Pal has relied on a decision of the Madras High Court in CIT vs. Engine Valves Ltd. (1980) 19 CTR (Mad) 274 : (1980) 126 ITR 347 (Mad), where it has been held that a canteen building forms part of the factory premises.

We are, however, unable to persuade ourselves to accept the contention raised by Dr. Pal. It has no merit apart from its novelty. s. 32A(2)(b)(iii) is very clear. It provides for investment allowance in respect of plant and machinery which is new and which is installed after 31st March, 1976, for the purpose of business, inter alia, of manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. The assessee may be an industrial undertaking but that does not by itself make the assessee eligible for investment allowance unless the plant and machinery are installed for the purpose of manufacture or production of any article or thing. That apart, the assessee could not produce any evidence to show that the plant and machinery is used for the purpose of production of any article or thing within the meaning of s. 32A(2)(b)(iii). It may be that the assessee may maintain a canteen for providing facilities for tea or tiffin, lunch or refreshment to the employees who are engaged in such establishment, but that does not make the canteen an industrial undertaking engaged in the manufacture or production of any article or thing. The unreported decision in Sky Room—since reported in (1992) 195 ITR 763 (Cal)—cannot have any bearing on the question posed before us. Sky Room is engaged in the business of catering food to the customers. The articles or things which are served to the customers are produced by Sky Room by the machinery and plant installed thereat. It is the business of Sky Room to run the restaurant.The canteen which is run by the assessee-company cannot be said to be for the purpose of the business of the assessee of producing articles or things. The assessee is engaged in the manufacture of electronic goods and equipment and by no stretch of imagination can it be said that running of the canteen for its employees is for the purpose connected with the assessee’s business of manufacture and production of electronic articles and equipment. In our view, the plant and machinery which are eligible for investment allowance must be such plant and machinery which are being used for the purpose of manufacture or production of any article or thing, which is the business of an assessee. Even if a factory has to maintain a canteen, it cannot be said that it is an integral part of manufacture or production carried on by the assessee. The canteen building may be part of the factory for the purpose of claiming depreciation but because the canteen building is held to be part of the factory, it does not follow that the equipment used in the canteen must necessarily be eligible for investment allowance.

For the reasons aforesaid, we answer the third question in the affirmative and in favour of the Revenue. So far as question No. 4 raised by the assessee is concerned, the relevant facts are that the assessee-company purchased goods from M/s Electric Lamps Manufacturing Co. (India) Ltd. and M/s Hind Lamps Ltd. These companies, being manufacturers, claimed that the excise duty should be charged on the basis of “manufacturing cost plus manufacturing profits”. The excise authorities, on the other hand, were of the opinion that the excise duty was chargeable on the price at which the goods were sold by the assessee-company. Consequently, a demand of Rs. 65,76,148 was raised against the said two companies. It was stated in the course of arguments that the manufacturers were passing on all the liabilities of excise duty to the assessee-company. The manufacturers challenged the levy of additional excise duty in the Calcutta High Court and the Court directed the two manufacturers that they should furnish bonds to the satisfaction of the Excise Department till the case was disposed of. The assessee’s counsel, while arguing the case, indicated that the matter was still subjudice before the High Court. The AO did not allow the claim on the ground that the liability did not relate to the assessee-company and that further it was in the nature of a contingent liability. On appeal, the CIT (A.) upheld the order of the ITO. Aggrieved, the assessee went up in appeal before the Tribunal. The assessee’s counsel urged before the Tribunal that it was a statutory liability which existed along with the manufacture and, therefore, even though the matter was disputed in the Court, it was an allowable expenditure. Elaborating his argument, he indicated that this was the liability of the assessee though the additional excise duty was demanded from the manufacturers. The liability belonged to the assessee because there was an understanding between the assessee and the manufacturers that the excise duty shall be passed on to the buyers. The Departmental Representative, on the other hand, very strongly supported the order of the CIT (A.) on this point and urged that the liability did not relate to the assessee and, moreover, it was in the nature of a contingent liability.

After hearing both the parties, the Tribunal confirmed the orders of the lower authorities and dismissed the assessee’s appeal by observing that the liability claimed by the assessee is only a contingent liability. The Tribunal took into consideration the balance sheet of M/s Electric Lamps Mfg. Co. (India) Ltd. for the year 1977-78, where it has been shown that there is a contingent liability for excise duty and it has further been indicated that, in the event of the liability actually materialising, depending upon the outcome of the suit now pending, the said amount will be paid by the company and thereafter recovered from the customers, pursuant to specific agreements with them. Therefore, it is clear that this statutory liability was of the manufacturers and it was recoverable only from the assessee-company.

At the hearing before us, Dr. Pal contended that the differential excise duty which may be realised from the assessee-company in the event it is imposed on the manufacturers is a statutory liability ; it is not a contingent liability even though it was disputed by the manufacturers before the Court. He has also contended that there was an agreement between the assessee-company and the manufacturers to the effect that the assessee would bear the excise duty. The Tribunal, however, observed, that no agreement to that effect was produced even though asked for. Dr. Pal, however, has sought to rely on two letters of the assessee-company, one dt. 19th Nov., 1973, to Electric Lamp Manufacturing Co. (India) Ltd. and the other undated to Hind Lamps Ltd. which, according to him, contained the agreement. These letters were produced before the Tribunal in the course of the hearing. These letters are not included in the paper book. Since counsel for the Revenue did not object to the letters being produced before this Court, we directed that copies of the letters be kept on record. It is also the contention of Dr. Pal that, in view of the demand having been raised against the manufacturers, the liability cannot be said to be a contingent one merely because the manufacturers were contesting the liability.

It is the contention of learned counsel for the Revenue that the liability in this case is a contingent liability. It is not known whether the liability would be imposed on the assessee company. The primary liability is of the manufacturer and, accordingly, the question of this liability being an ascertained liability cannot arise. He has also submitted that the letters relied on by the assessee-company would only show that the excise duty, if levied upon the manufacturer, would be recoverable by the manufacturer. There was no liability or obligation of the assessee- company to the Excise Department.

We have considered the rival contentions. We may refer to the decisions relied on by Dr. Pal in support of his contention.

In CIT vs. Century Enka Ltd. (1981) 130 ITR 267 (Cal), the assessee made a provision for the liability of excise duty for the asst. yrs. 1971-72 and 1972-73 in its accounts which were maintained on the mercantile system and claimed the sum as business expenditure. There, this Court held that the provision for excise duty was allowable as deduction for the aforesaid assessment years. This system of accounting would bring into credit what was legally due immediately before it was actually received and it would bring into debit expenditure the amount for which legal liability had been incurred before it was actually disbursed. Therefore, applying that principle, if the legal liability had accrued under the provisions of the Central Excises and Salt Act, 1944, the assessee was entitled to deduction in computing its income as it was maintaining its accounts on the mercantile system of accounting.

In CIT vs. J. K. Synthetics Ltd. (1983) 33 CTR (All) 221 : (1983) 143 ITR 771 (All), the assessee had made a provision for payment of excise duty in the asst. yr. 1967-68. It, however, disputed the liability before the Allahabad High Court which decided the dispute in favour of the assessee. The Excise Department went up in appeal before the Supreme Court and the dispute was pending before the Supreme Court at the time of assessment of the assessee’s income for the said asst. yr. 1967-68. The ITO held that, as it had been decided by the High Court that the assessee was not liable for payment of excise duty, no deduction was allowable in respect of the provision made for payment of excise duty in computing its income. On appeal to the AAC, the assessee contended that as the excise authorities had taken the matter in appeal before the Supreme Court, the assessee was entitled to claim the deduction in respect of the provision made in the asst. yr. 1967-68. The AAC accepted the contention of the assessee and allowed its appeal. On further appeal, the Tribunal affirmed the order of the AAC. The Allahabad High Court held that, notwithstanding the decision of the High Court, the assessee was entitled to claim the deduction in respect of the provision made for payment of excise duty in the relevant assessment year, inasmuch as the Excise Department had gone up in appeal to the Supreme Court and questioned the correctness of the decision of the High Court.

In CIT vs. Tata Chemicals Ltd. (1986) 52 CTR (Bom) 293 : (1986) 162 ITR 556 (Bom), the assessee received a demand notice for excise duty on carbon dioxide at the rate of Rs. 25 per tonne. It filed a writ petition in the Supreme Court contending that it was not a manufacturer of carbon dioxide and that to the said item, the Central Excises and Salt Act did not apply. The Supreme Court held in February, 1968, that the assessee was not liable to pay the said excise duty and quashed the demand notice. The assessee had collected excise duty on carbon dioxide from the purchasers of its soda ash after July, 1962. For the years ended 30th June, 1963, and 30th June, 1964, it had collected the sums which were credited to an account called “Carbon Dioxide Deposit Account” but were not paid to the Central Government in view of the pending writ petition. After the Supreme Court delivered its judgment thereon, these sums were credited as miscellaneous income in the profit and loss account of the assessee for the year ended 30th June, 1968, and taxed in the asst. yr. 1969-70. In the assessment for the asst. yr. 1965-66, the ITO included the sum collected for the year ended 30th June, 1964, in the assessable income of the assessee. The AAC allowed it as a deduction. The Tribunal held that there had been a standing liability for excise duty until the Supreme Court set it aside and, therefore, the AAC rightly allowed the sum as a deduction. There, the Bombay High Court held that the assessee followed the mercantile system of accounting. It had received a demand for payment of excise duty. It was entitled to deduct from the profits and gains of its business its liability on account of excise duty in the relevant previous year. That liability remained a liability until extinguished by the Supreme Court’s decision on the assessee’s writ petition on 5th Feb., 1968.

24. We have considered the arguments. The balance-sheet of Electric Lamp Manufacturing Co. (India) Ltd. as on

22nd June, 1978, has been shown to us. The following note appears under Schedule ‘A’ to the said balance sheet : “1. Contingent liability for (b).”

25. It appears that a letter was written by the assessee-company to Electric Lamp Manufacturing Co. (India) Ltd. on 19th Nov., 1973, to the following effect : “We refer to your letter of 23rd Oct., 1973, and would confirm that in the event of your becoming liable to pay Central excise duty on products sold to us at amounts higher than what you have charged on your bills, we will pay you the differential amount within seven days of the receipt of your demand.”

26. The assessee-company also wrote a letter to Hind Lamps Ltd. to the following effect : “During the period 1st Oct., 1975, to 30th June, 1979, we Peico Electronics and Electricals Ltd., have purchased from you electric lamps. On these purchases, you have paid excise duty on the basis of your selling prices to us. In the event, the excise authorities levy and call upon you to pay higher duty for the aforesaid purchase of electric lamps made by us during the period 1st Oct., 1975, to 30th June, 1979, we hereby agree to indemnify and keep you indemnified for the differential duties which may be levied and charged subject to the maximum amount of Rs. 70,42,195 (Rupees seventy lakhs forty-two thousand one hundred ninety-five only) irrespective of the actual amount of excise duty payable or to be paid by you on account of such supplies during the aforesaid period.

27. The undertaking given hereunder supersedes any undertaking given by us earlier in this behalf.”

28. The assessee has not produced the balance-sheet of Hind Lamps Ltd. nor the letters which were alleged to have been received from the aforesaid two manufacturers in reply whereto the aforesaid two letters were written by the assessee-company. In our view, even the manufacturer treated the liability as a contingent liability as would appear from the balance-sheet of Electric Lamp Manufacturing Co. (India) Ltd. extracted hereinbefore.

29. These letters are not agreements. What led the assessee to write those two letters has not been disclosed. It is clear from one of the letters of the assessee-company that it is only in the event of the assessee-company being liable to pay excise duty on products sold to them at amounts higher than what was charged in the bills, that the assessee-company would pay the differential amount within seven days of the receipt of the demand. This letter does not contain any present liability at all. It is only if the manufacturer becomes liable, that the question of payment by the assessee would arise, that too upon the demand notice being served upon the assessecompany. The other letter to Hind Lamps Ltd. is only a form of indemnity and it does not convey any present liability at all. This indemnity is in respect of duties differential which may be levied and charged subject to a maximum of Rs. 70,42,195. Even the amount is also not certain. The Tribunal commented upon this letter saying that its authority was not proved. In the case of Electric Lamp Manufacturing Co. (India) Ltd. no amount has been mentioned. Having regard to the facts and circumstances of this case, we are of the view that no statutory liability existed as far as the assessee-company is concerned, and if there is any liability that was between the manufacturer and the Excise Department. The assessee had no legal liability in so far as the levy of excise duty was concerned at the material time. Even if it is assumed that there is an agreement on the part of the assessee to share the liability, it was only when it will be levied upon the manufacturer that the excise duty can be recovered from the assessee- company. There was no liability or obligation of the assessee-company to the Excise Department for the excise duty. It is not a statutory liability of the assessee. Unless the liability for differential excise duty was co-existent with that of the manufacturer, it cannot be treated as accrued liability of the assessee. Even if it is a contractual liability of the assessee arising out of the transactions which the assessee had with the aforesaid two manufacturers, such contractual obligation will be dischargeable by the assessee only if the manufacturers are liable to bear the liability and demand it from the assessee-company. The manufacturers are responsible to the Excise Department for payment of differential excise duty, if any, levied. That is precisely the reason why the High Court directed the manufacturers to furnish bonds to the satisfaction of the Excise Department till the matter was decided. However, in the case of Electric Lamp Manufacturing Co. (India) Ltd., it did not claim such disputed liability as an accrued liability in its balance- sheet and had shown it as a contingent liability. In the event the liability actually materialises, depending upon the outcome of the writ proceeding, the amount would be paid by the manufacturers and thereafter it may be recovered from the customers. It is, therefore, clear that the statutory liability was of the manufacturers and it is recoverable only from the assessee-company. Liability of such nature can be the liability of the assessee-company only when the manufacturers serve notices upon the assessee to pay the additional duty consequent upon the payment of such additional duty by the manufacturers to the credit of the Excise Department. The matter is still pending before the High Court and, accordingly, no liability has accrued so far as the assessee is concerned in respect of the additional excise duty.

30. Dr. Pal has contended that it cannot be said that the additional excise duty liability is not an accrued liability in the hands of the manufacturer, in view of the decision to which reference has already been made. The said liability is also an accrued liability in the hands of the assessee company being a purchaser inasmuch as the additional excise duty is recoverable from the purchaser. He, therefore, contends that, when the manufacturers have assailed the demands by way of writ petitions in the High Court which are still pending, the assessee-company, as a purchaser-company from whom such additional excise duty is recoverable, has also locus standi to contest the levy as, ultimately, the liability will be recoverable from the assessee- company. He has relied on a decision of the Gujarat High Court in the case of Navjivan Mills Co. Ltd. vs. Union of India (1982) 10 E.L.T. 155, where it has been held that the customer or the purchaser can contest the liability for excise duty which may be levied upon the manufacturer. Under s. 64A of the Sale of Goods Act, excise duty is payable by the purchaser in addition to the stipulated price and, if there is increase in duty, the purchaser is to pay it even subsequently and, if there is decrease in duty, he is entitled to recover it from the manufacturer.

31. In that case, the consumers who were utilising viscose staple fibre manufactured by Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. asked for a declaration that notifications levying additional duty equivalent to excise duty on articles imported into India are violative of Arts. 14, 19(1)(g) and 265. They also claimed refund. The Gujarat High Court held that the writ petitioner cannot be said to be strangers although no refund as prayed for could be granted to the petitioner. This decision does not lay down that a consumer is liable to pay the additional levy directly. The Excise Department has to proceed against the manufacturer for recovery of the additional duty, if legally levied. Whether the manufacturers, in turn, will be able to recoup it from the purchaser is a matter which will depend on the agreement by and between the manufacturer and purchaser. It cannot be a levy on the purchaser.

Dr. Pal has also referred to the case of Hind Lamps Ltd. vs. Union of India (1978) 2 E.L.T. J-78. There the central excise authorities raised the plea that Hind Lamps Limited is a company under the complete control of the customer companies. One of the six customer companies is the assessee in the present reference, the customer amongst others (i.e., the assessee-company in the present reference), would be a manufacturer and they alone would be the manufacturer and they alone would, in law, be liable to pay excise duty. This case also has no relevance to the points at issue. The contention which was raised was that Hind Lamps Ltd. was in fact not the manufacturer, but the six customer companies which included the assessee-company are the manufacturers. That contention was rejected. There, the Allahabad High Court observed as follows : “Assuming that it is the true and correct legal position, then the petitioner could not be called upon to pay excise duty as the manufacturer. The several customer companies would then be manufacturers and they alone would then be the manufacturer and they alone would, in law, be liable to pay excise duty. The fact that the Department is treating the petitioner-company as the manufacturer and making it liable for excise duty precludes it from taking the plea that the petitioner is a dummy company or a benamidar for the customer companies. It may be borne in mind that the customer companies are not shareholders of the petitioner company, they are alleged to be subsidiaries of the shareholder companies.”

In our view, under ss. 3 and 4 of the Central Excises and Salt Act, 1944, and r. 9 of the Rules framed thereunder, the liability to pay excise duty rests only on the manufacturer or the producer of the goods and not on the purchaser. On the facts and in the circumstances of this case, the liability claimed by the assessee is a contingent liability which cannot be allowed as a deduction.

For the reasons aforesaid, we answer the fourth question in this reference in the affirmative and in favour of the Revenue.

There will be no order as to costs.

Bhagabati Prasad Banerjee J.:

I agree.

[Citation : 201 ITR 477]

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