THE COMMISSIONER OF INCOME TAX-12 MUMBAI. vs. M/S.MONIKA INDIA.

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ITXA/1105/2008HC Bombay16 April 2016Author: HON'BLE SHRI JUSTICE M.S. SANKLECHA, HON'BLE SHRI JUSTICE A. K. MENON6 pages
AI SummaryRemanded

What did the High Court hold?

The High Court found that the Tribunal failed to consider the vital factual differences between the Assessment Year 1985-86 and the current Assessment Year 1986-87. Firstly, the clauses of the agreements were different. The agreement for the subject Assessment Year 1986-87 explicitly excluded court expenses related to disputed customs duties from the cost to be considered. Secondly, in the present case, the assessee had filed a civil suit disputing its liability to pay the additional customs duty of Rs. 91.54 lakhs, meaning the amount payable had not crystallized during the assessment year. This fact was absent in the proceedings for Assessment Year 1985-86. Because the Tribunal overlooked these distinctions and relied solely on its prior order, its impugned order was quashed and set aside. The appeal was restored to the Tribunal for fresh disposal, considering the distinct factual situation for Assessment Year 1986-87. The substantial question of law was not answered at this stage, with all contentions kept open.

What were the facts?

The Revenue appealed against an order of the Income Tax Appellate Tribunal (Tribunal) for Assessment Year 1986-87. The Tribunal had allowed the assessee's appeal, directing the deletion of an addition of Rs. 91.54 lakhs. This amount was disallowed by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] on the grounds that the liability was unascertained and contingent. The assessee had entered into an agreement to purchase Synthetic Waste, and the seller was to import it and sell it at cost plus a profit. An increase in customs duty led to an additional liability of Rs. 91.54 lakhs, which the seller invoiced to the assessee. The assessee disputed this liability by filing a civil suit. Despite the dispute, the assessee debited the amount as expenditure, claiming deduction under the mercantile system of accounting.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the assessee's appeal by directing the deletion of the addition of Rs. 91.54 lakhs, which was disallowed by the AO on the ground that the liability was unascertained and contingent? (Question of law turning on Section 37 of the Income Tax Act, 1961). Assessee's Contention: The assessee argued that it followed the mercantile system of accounting and debited the amount as expenditure. The revenue contended that the liability was unascertained and contingent due to the civil suit filed by the assessee disputing the payment of Rs. 91.54 lakhs to M/s. Vinay Industries. The Tribunal, in its impugned order, allowed the assessee's appeal by following its earlier order for Assessment Year 1985-86.

Which sections of the Income-tax Act were involved?

Section 37,Section 260A

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
1 Itxa-1105-2008 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1105 OF 2008 The Commissioner of Income Tax­12 .. Appellant. v/s. M/s. Monika India  .. Respondent. Mr. P.C. Chhotaray, for the Appellant. Mr. S. P. Goyal, Partner of Respondent, present­in­person. CORAM:  M.S.SANKLECHA, &       A.K.MENON, JJ.        RESERVED ON  :  1st APRIL, 2016.   PRONOUNCED ON :16th APRIL, 2016. JUDGMENT ( Per M. S.Sanklecha,J.):­ This Appeal under Section 260­A of the Income Tax Act, 1961 (the Act), challenges the order dated 13th December, 2007 passed by the Income Tax Appellate Tribunal (the Tribunal)for the Assessment Year 1986­87. 2 This   appeal   was   admitted   on   12th  January,   2009   on   the following substantial question of law:­ “ Whether on the facts and in the circumstance of the case, the Tribunal is right in law  in allowing the appeal of the assessee  by  directing  to  delete  the  addition  of  Rs.91.54  lac disallowed  by  the  Assessing  Officer  on  the ground  that  the liability was not ascertained and is in the nature of contingent liability?”. At that time, the Court directed that this Appeal should be heard along with Income Tax Reference No.320 of 1998. S.R.JOSHI CNR No : HCBM020119772008 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:08:03 2 Itxa-1105-2008 3 We   have   on   1st  April,   2016   heard   both   –   Income   Tax Reference bearing No.320 of 1998 and the present appeal.  The question of law posed for our opinion in the Income Tax Reference No. 320 of 1998 reads as under:­ “ Whether on the facts and in the circumstances of the case, the Tribunal was right in law in setting aside the order of the Commissioner of Income Tax and restoring that of the Income Tax Officer allowing the liability on account of customs duty at Rs.1,78,83,846/­?”. 4 We find that the impugned order of the Tribunal has allowed the Respondent­Assessee's appeal by following the order dated 17th July, 1989   passed   by   it   in   respect   of   Assessment   Year   1985­86.   In   the meantime, pending the final disposal of the appeal for Assessment Year 1986­87, the Tribunal, at the instance of the Revenue sought our opinion in Income Tax Reference No.320 of 1998 in respect of Assessment Year 1985­86 (Tribunal Order dated 17th  July, 1989) on the question as re­ produced herein above in para 3. 5 Briefly, the facts are as under:­ (a) The   Respondent­Assessee   had   on   2nd  April,   1984   entered   into   agreement for purchase of 250 metric tonnes of Synthetic Waste   from one M/s. Vinay Industries. In terms of the above agreement  dated 2nd  April, 1984, M/s. Vinay Industries were to import the   Synthetic Waste from Taiwan and sell it to the Respondent­Assessee at   cost + Rs.1/­ per kg. The costs were to include all expenses   incurred by the seller from import and handing it over to the   Respondent­Assessee i.e. inclusive of Customs Duty, Octroi charges,  S.R.JOSHI Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:08:03 3 Itxa-1105-2008 Bank charges etc.  M/s.  Vinay   Industries,   consequent   to   the   agreement imported the Synthetic Waste.  At the time of import,   there was an increase in duties of customs on Synthetic Waste. M/s. Vinay Industries  challenged the increase in the duties of customs  in the Apex Court. This increase resulted on further amount of   Rs. 91.54 lakhs  being   payable as  Custom Duties. However,  M/s.   Vinay Industries issued an invoice for an amount of Rs.91.54 lakhs  (Addl. Customs duty liability) to the Respondent­ Assessee. (b) It  appears   that  M/s.  Vinay   Industries,   thereafter,   withdrew   its   challenge to the increase in the levy of Customs Duty filed before  the Supreme Court. This led the Respondent­Assessee to file a Civil  Suit in the Ludhiana Civil Court, disputing its liability to pay the  additional Customs Duty of Rs.91.54 lakhs to M/s. Vinay Industries. Nevertheless,   the   Respondent­Assessee   claiming   to   follow   a   Mercantile System of Accounting, debited an amount of Rs.91.54  lakhs as its expenditure towards purchase of Synthetic Waste from  M/s. Vinay Industries and sought a deduction.  (c) However, in view of the suit filed by the Respondent­Assessee   against M/s. Vinay Industries before the Ludhiana Civil Court, the  Assessing Officer during the Assessment Proceedings took a view   that   the   amount   of   Rs.91.54   lakhs   cannot   be   allowed   as   an   expenditure as the same was contingent in nature being the subject  of dispute before the Ludhiana Civil Court. On first appeal also, the  Commissioner of Income Tax (Appeals) [CIT(A)] upheld the view of the Assessing Officer and confirmed the  addition  done by  the   Assessing Officer. S.R.JOSHI Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:08:03 4 Itxa-1105-2008 (d) On further appeal, the Tribunal allowed the appeal by following its  order dated 17th July, 1989 for Assessment Year 1985­86. (e) Being aggrieved, the Revenue is in appeal before us.    6 We find that there are two vital differences in facts between those existing in Assessment Year 1985­86 and that existing in the subject Assessment Year 1986­87. 7 Firstly,   the   clauses   of   the   agreements   which   is   a   subject matter of dispute in both the Assessment Years are different.   (a) For the Assessment Year 1985­86 which led to ITR 320 of 1998, the clause of the agreement between the Respondent­Assessee and its  sellers reads as under:­ “ To avoid any misunderstanding and confusion at some later date, it is hereby stipulated that although the present state, C.V.D. which comes to Rs.36/­ per kg. is Auxiliary duty, not applicable in terms of Court Orders on the consignments being  imported   by  the  seller   which  the  seller,  in   turn,   has agreed to supply to the buyer, but in case at some later stage, any such liability occurs and any duty is required to be paid, the same too, will be the exclusive liability of the Buyer as the same will be nothing but a part of the cost and for this purpose, the buyer has undertaken to stand guarantee in any manner acceptable to the customs or the Bank to the effect that in case any such duty becomes payable at any stage,  the same will be the exclusive liability of the buyer and not that of the seller by virtue of this Agreement.” (b) While the clause of the agreement between the Respondent­ Assessee and its seller i.e. M/s. Vinay Industries which arises  for   consideration   in   the subject Assessment Year reads   as under:­ S.R.JOSHI Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:08:03 5 Itxa-1105-2008 “ Whereas, as a result of negotiations, the buyer has agreed to pay to the seller a net profit calculated @ Rs.1/­ per kg. On the supply of the said Synthetic Waste. All the expenses will be taken into consideration such as custom duties,   freight   octroi,   cartage,   bank   charges,   interest, demurrage   charges   and   clearance   charges,   which computing the cost except the court expenses with regards to CVD and Customs duties which are demanded in excess by the custom department.” The aforesaid clause as existing in the subject Assessment Year has not at all been considered by the Tribunal in the impugned order while allowing the Respondent­Assessee's appeal for the Assessment Year 1986­87. The distinction in facts has been ignored by Tribunal while

passing the impugned order. 8 Secondly, in the present facts, the Respondent­Assessee filed a   suit   against   its   sellers   M/s.   Vinay   Industries   in   the   Civil   Court   at Ludhiana, apparently disputing its liability to pay the additional Customs Duty   of   Rs.91.54   lakhs.   Thus,   the   amount   payable,   has   not   been crystallized during the subject Assessment Year according to the Revenue. This fact was absent in the proceedings leading to the order dated 17th July, 1989 passed in respect of Assessment Year 1985­86. The aforesaid distinction was also missed sight of by the Tribunal while passing the impugned order dated 13th December, 2007. 9 The aforesaid distinction in facts as brought in paragraphs 7 and   8   above   were   completely   overlooked.   The   Tribunal   passed   the impugned order dated 13th December, 2007 holding itself bound by  its order dated 17th July, 1989 passed in respect of Respondent­Assessee for the Assessment Year 1985­86. S.R.JOSHI Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:08:03

6 Itxa-1105-2008 10 We find that the Tribunal in passing the impugned order has not considered the different fact­situation in the Assessment Year 1986­87 from that existing in Assessment Year 1985­86. This difference is in the clauses of the agreements as well as the fact of the Respondent­Assessee disputing its liability to pay the Customs duty of Rs.91.54 lakhs to M/s. Vinay Industries by filing a Civil Suit in the Court of Ludhiana. This dispute between the seller and the Respondent­Assessee existing in the Assessment Year 1986­87 is totally absent during the Assessment Year 1985­86. 11 In the above view, the impugned order of the Tribunal dated 13th  December,   2007   is   quashed   and   set   aside.   The   appeal   of   the Respondent­Assessee is restored to the Tribunal for final disposal. This after   taking   into   account,   different   factual   situation   in   the   subject Assessment   Year   to   that   existing   in   the   Assessment   Year   1985­86. Therefore, at this stage, we do not answer the substantial question of law as it could appropriately arise only after the Tribunal has dealt with the appeal before it in the context of the fact situation as existing for the subject Assessment Year.  However, we request the Tribunal to decide the appeal as expeditiously as possible as it relates to Assessment Year 1986­

87.

All contentions kept open. 12 Accordingly, Appeal allowed in the above terms. No order as to costs. (A.K.MENON,J.) (M.S.SANKLECHA,J.) S.R.JOSHI Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:08:03 Powered by TCPDF (www.tcpdf.org)

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