MODI REVLON PVT. LTD. vs. COMMISSIONER OF INCOME TAX

This appeal is under Section 260-A of the Income Tax, 1961 (hereinafter referred to as the I.T. Act ) where the assessee challenges the order dated 13. 11.2013 (Annexure-VI) in the ITA No.356/Gau/2013, whereby the learned Income Tax Appellate Tribunal, Guwahati Bench held against the assessee, on their claim to deduction, in respect of the provision of Central Excise Duty, for the assessme nt year 2009-2010. Thus the assessment of tax in respect of the provision, made by the Assessing Officer and the confirmation thereof by the CIT (Appeals), was upheld by the Tribunal.

This appeal was admitted on 13.06.2014 on the following substantial ques tion of law. Whether the learned Tribunal was justified in not permitting the assessee to cl aim deduction of Rs.3,43,18,499 towards the Central Excise refund during the ass essment year in question? 

The appellant was previously known as Kamakhya Cosmetics & Pharmaceutica ls Pvt. Ltd. and the unit was setup in Guwahati’s Bamunimaidam Industrial area, in pursuant to the new industrial policy resolution of the Central Government, n otified on 24.12.1997. Under the Notification NO.32/99-CE and 33/99-CE, both dat ed 08.07.1999, the new industries setup in the designated tax free zones, were g ranted various tax exemption and concession, for a period of 10 years from the d ate of commercial production. The unit was setup in 2002 and was granted the Eli gibility Certificate for refund of excise duty. As per the incentive mechanism, hundred percent refund of duty was given to the assessee until 31.03.2008 under the new industrial policy.

However the Government of India then issued the curtailment notification No.17/2008 on 27.03.2008 whereby, the refund entitlement was co-related to the value edition  made by each industry and suffices is to note that the percentag e of excise exemption benefit was thus reduced to 56% for the assessee, as compa red to 100%, prior to the curtailment notification of 27.03.2008. 6. The aggrieved units including the appellant challenged the curtailment o f benefits and the assessee’s WP(C) NO.1707/2008 was allowed by the learned Sing le Judge and the impugned notification of 27.03.2008 was quashed and the Court h eld that the assessee is entitled to 100% excise duty exemption, as per the orig inal notification dated 08.09.2009, prior to its amendment by the quashed curtai lment notification of 27.03.2008. 7. However the Court verdict was not acceptable to the Excise Authorities a nd they filed the WA No.243/2009 and thus finality on the litigation on the exte nt of central excise exemption, is yet to be reached. Our Division Bench passed the first interim order on 11.08.2009, whereby the refund in terms of the verdic t in the WP(C) No.1707/2008 was directed to be limited, to the amount offered by the excise authorities or in other words, the judgment of the learned Single Ju dge was rendered inoperative, during the pendency of the Appeal.

However in similar litigations emanating from the Gujrat High Court, the Supreme Court on 13.01.2012 in the SLP(C) Nos.28194 - 28201/2010 passed a diffe rent type of interim order on the following terms:- We have heard learned counsel for the parties on the question of stay of the im pugned judgment. Having done so, we direct that operation of the impugned judgme nt shall remain stayed till further orders, subject to the petitioners’ releasin g to the respondents 50% of the amount due to them in terms of the impugned judg ment on the respondents’ furnishing solvent surety to the satisfaction of the ju risdictional Commissioner, within four weeks of their furnishing the said surety . 

When the assessee pressed for similar interim order in the WA No.243/200 9, this Court on 14.08.2012 modified its earlier order of 11.08.2009, in terms o f the order of the Apex Court passed in the Gujarat cases.

The assessee filed their return of income for the assessment year 2009-2 010 on 22.09.2009 showing total income of Rs.1,09,79,095/- and also made provisi on for central excise duty, to the tune of Rs.3,43,18,499/-. However the Assessi ng Authority on 15.11.2011 issued show-cause-notice as to why, the provision for the central excise duty, should not be disallowed for the assessment year 2009- 2010. In their reply, the assessee submitted that since the litigation regarding entitlement to 100% exemption of duty has not attained finality, provision was made for the central excise duty liability, as a prudent assessee, who is follow ing the mercantile system of accounting.

Thereafter the Deputy Commissioner, Income Tax under the assessment orde r dated 23.12.2011 computed the total income but in the process, disallowed the provision for central excise duty, for the claimed amount. Aggrieved by the asse ssment order, an Appeal was filed before the Commissioner of Income Tax (Appeals ), Guwahati. However the Appeal was rejected on 10.04.2013 (Annexure-V). Then th e matter was taken to the Appellate Tribunal but the Tribunal under its impugned verdict of 13.11.2013 (Annexure-VI), declared that the assessee is disentitled to claim deduction in respect of provision for central Excise duty and thus the order of assessment was affirmed.

It is important to note here that the company claimed refund of Basic Ex cise Duty paid from PLA, in terms of the notification No.32/99 but the refundabl e duty was restricted to maximum 56% by the subsequent notification No.27.03.200

The assessee was successful with their challenge to the curtailment notificat ion, before the learned Single Judge but the departmental challenge to the learn ed Single Judge’s order is now awaiting the final decision in the SLP(Civil) No. 11878/2015 (Union of India Vs. Kamakhya Cosmetics & Pharmaceuticals Pvt. Ltd.).

In the notes to the accounts, the assessee was claiming refund of basic excise duty from PLA, in terms of the govt. notification No.32/1999, but because of the curtailment notification of 27.03.2008, the refundable amount was reduce d to 56% of the total duty payable, w.e.f. 01.04.2008. Thus resulting in lower r efund of Rs.3,43,18,499/- for the assessment year under consideration. The asses see had made provision in their accounts, to take care of the excise tax liabili ty in the event the departmental challenge is upheld by the higher Court. This w as perceived by the assessing officer to be only provisional and not ascertained liability and thus the show-cause notice was issued on 15.11.2011 to seek expla nation as to why, the claim on account of provision for central excise duty for Rs.3,97,62,512/-, should not be disallowed, for the assessment year 2009-10. 14. In their reply letter of 23.11.2011 the assessee mentioned about the dep artmental challenge to the decision of the learned Single Judge, who in the WP(C ) No.1707/2008 had quashed the curtailment notification of 27.03.2008 and hence Metal Stampings & Pressing (P) Ltd. reported in (2007) 290 ITR 295 (Guj) to cont end that deduction can be allowed under the Income Tax law only for tax already paid and not for un-finalised tax liability.

The submission made by the rival counsel has received due consideration of the Court.

In the mercantile system of accounting, tax liability for the accounting period cannot be ignored by the assessee even if the liability is disputed in a legal forum and the provision for excise duty through entries in the books of a ccounts can be said to be a conservative practice of a prudent assessee. In Keda rnath Jute MFG. Co. Ltd. Vs. Commissioner of Income-Tax reported in (1971) 82 IT R 363 (SC), the Supreme Court opined that the assessee maintaining accounts on t he mercantile system, was fully justified in claiming deduction of the tax amoun t, for which it became liable under the law during the relevant accounting year and the situation is no different even when the issue of tax liability is litiga ted, in the higher forum.

The Andhra Pradesh High Court in Commissioner of Income-Tax Vs. Investig ation and Security Service (India) P. Ltd. reported in (1990) 182 ITR 358 was ex amining the business expenditure claim in the accounts of the assessee, where th e liability issue of the assessee under the ESI Act was pending in the Court. In that context, the Division Bench opined that when the appeal is pending and fin ality is not reached on the liability of the assessee, the provision made toward s the statutory liability during the assessment year under consideration, is ent itled to deduction of the sum kept aside by the assessee.

For another assessee following the mercantile system of accounting, the Kerala High Court in Abad Fisheries Vs. Commissioner of Income-Tax reported in ( 1995) 213 ITR 694, held that the provision, made towards purchase tax liability the payability of which is disputed, is deductible for the relevant assessment y ear as the Court considered the provision made for payment of duty to be an act of prudent business habit. Thus the assessee’s claim to deduction for the provis ional amount in the accounts was found to be entertainable, in the following wor ds:-  & & & &. The principle emanating from the above discussion is that a provision in the acc ounts made by an assessee following the mercantile system of accounting, for lia bility to sales tax, (though disputed) is yet liable to be allowed as business e xpenditure, if there was a bona fide reasonable apprehension on the part of the assessee that the amount will become payable. Of course, it is not every fancifu l claim, based on the ipse dixit of the assessee that could form the basis of an y claim for deduction of such liability. But if the assessee had a genuine groun d, or reasonable basis, for apprehending that the liability may be cast on it, h aving regard to the view adopted by the concerned Sales Tax Department, or havin g regard to the case of the assessee himself or other similar assessees or other wise, the claim cannot be rejected merely because it is disputed. It could not t hen be said that the assessee had acted unreasonably or fancifully on misplaced apprehensions in making the provision. The court has to consider what a prudent businessman would have reasonably done in the state of affairs in which the asse ssee was placed at the time the provision was made. We do not find anything in t he decision of the Supreme Court in CWT v. K.S.N. Bhatt [1984] 145 ITR 1 on whic h standing counsel for the Revenue relied, militating against what we have state

In the same line, the Allahabad High Court in Commission of Income-Tax V s. J.K. Synthetics Ltd. reported in (1983) 143 ITR 771 also declared that even w hen the assessee is resisting the claim of the Excise Authorities, it is not deb arred from claiming deduction on account of excise duty liability, as it follows the mercantile system of accounting and it was held that such assessee can legi timately claim deduction in respect of its tax liability even if such liability have not been quantified finally and the liability is being disputed in a court of law.

While the above decisions support the case projected by the appellant, t he Revenue relies on Ideal Sheet Metal Stampings & Pressing (P) Ltd.(supra), whe re the Gujarat High Court opined that only when the tax amount is paid by the as sessee, the same becomes deductible and keeping aside the taxable amount for the disputed liability, will not entitle the assessee to claim deduction. On scruti ny of facts of the cited case, we find that, the disallowance of business expend iture under Section 43B of the IT Act was under consideration, where the assesse e collected the excise duty but had not paid the same to the govt. treasury. Thu s the recovery of excise duty was considered to be trade receipts in the hands o f the assessee, but since the amount was not paid to the Government Treasury, th e unpaid amount was found to be disallowable to deduction, under Section 43B by the Court. But the Gujarat case in our considered opinion is distinguishable in as much as, the decision there was in the context of the claim under Section 43B of the IT Act. It was not a case of making provision for un-finalised tax liabi lity, which is what we are concerned with in the present litigation. Therefore, according to us, the decision in Ideal Sheet Metal Stampings & Pressing (P) Ltd. (supra) cannot help us answer the substantial question of law, framed in the pre sent case.

The extent of liability of central excise duty payable by the assessee f or the assessment year 2009-10, will flow from the final verdict on the legality of the curtailment notification No.17/2008-Central Excise dated 27.03.2008 and although the notification was quashed in the WP(C) No.1707/2008, the consequenti al departmental challenge to the verdict of the High Court, is awaiting finality in the Supreme Court. Thus the precise amount of excise duty payable in the con cerned year has remained inconclusive and therefore the reflection of the disput ed amount in the books of accounts cannot be said to be an unreasonable act. In our understanding, a prudent assessee following the mercantile system, can certa inly make provision for expenditure towards tax liability, even though the asses see may dispute the departmental claim but when the litigation is not yet finali zed, it cannot be said with authority that the provision made will never be cate gorized as expenditure for the concerned assessment year.

That apart, if the Supreme Court finally declares that the curtailment n otification of 27.03.2008 is legally unsustainable, the revenue will not suffer any prejudice since the department can bring the provisional amount to tax, unde r Section 41(1) of the IT Act. Therefore we are of the considered opinion that t he substantial question of law framed in this proceeding has to be answered in f avour of the assessee and against the revenue. Having answered thus, we set asid e the respective impugned order(s) dated 13.11.2013, 10.04.2013 and the assessme nt order dated 23.12.2011, in so far as the disallowance of the central excise p rovision made in their books of accounts by the assessee. The appeal stands allo wed in these terms.

With the above order, the case is disposed of by leaving the parties to bear their respective cost.