Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMIT SHUKLA
The captioned appeal by the Revenue and Cross-objection by the assessee are directed against the order of CIT(A)-3, Mumbai dated
2 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 16.09.2008, pertaining to the Assessment Year 2004-05, which in turn has arisen from the order dated 30.10.2006 passed by the Assessing Officer, Mumbai under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, Revenue has raised the following Grounds of appeal :-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.255.685 crores being the discount given by Karnataka Government as loan payable by the assessee from the sales tax collected by it ignoring the decision of Apex Court on similar issue in the case of CIT Vs. T.V. Sundaram Iyangar & Sons (222 ITR 344).
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in treating the interest received from Oil Coordination Committee as business income as against income from other sources held by the Assessing Officer.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in treating the disallowance of Rs.40,36,741/- being payment to MRPL Education Trust and MRPL Janaseva Trust without appreciating the fact that such deduction is not allowable u/s 40A(9) of the Act.
4. On the facts and in the circumstances of the case and in law, the Ld. CITA erred in allowing higher depreciation consequent to deletion of the depreciation for A.Y 2001-02 which is disputed by the department.
5. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”
In brief, the relevant facts are that the assessee before us is a company incorporated under the provisions of Companies Act, 1956
3 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 and is, inter-alia, engaged in the business of refining of crude oil, selling of petroleum products and captive generation & distribution of electric power. For the assessment year under consideration, it filed a return of income wherein a loss of Rs.60,29,17,798/- was computed under the normal provisions of the Act while the tax was paid on book profit of Rs.31,61,94,360/- determined in terms of Sec. 115JB of the Act. The return of income so filed by the assessee was subject to a scrutiny assessment whereby the total income under the normal provisions of the Act was determined at Rs.7,35,65,980/- whereas the book profit in terms of Sec. 115JB of the Act was determined at Rs.244,63,94,360/- and as a consequence, the final tax liability was determined in terms of Sec. 115JB of the Act. The aforesaid assessment was carried in appeal before the CIT(A) who has allowed partial relief. Insofar as the reliefs allowed by the CIT(A) are concerned, Revenue is in appeal before us on the abovestated Grounds of appeal challenging the reliefs allowed by CIT(A). On the other hand, assessee-company has filed a cross- objection wherein the addition of Rs.40,41,81,196/- sustained by the CIT(A) on account of Provision for Customs Duty has been assailed on various facets which are contained in the following Grounds raised in the cross-objection :-
“1. On the facts and circumstances of the case and in law, Hon'ble Commissioner of Income Tax (Appeals) - III, Mumbai ["the CIT(A)"] erred in treating the provision for Customs Duty of Rs. 40,75,50,184/- as contingent liability. The Hon'ble CIT(A) ought to have held that the same is an ascertained liability.
2. Hon'ble CIT(A) further ought to have held that out of total provision for customs duty amounting to Rs. 40,75,50,184/-, an amount of 4 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 Rs.40,41,81,196/- is to be allowed u/s. 43B of the Income Tax Act, 1961 ("the Act") being customs duty paid by way of utilization of the Advance License upon fulfillment of export obligation till the due date for filing the return of income.
3. In any event, Hon'ble CIT(A) erred in not allowing a sum of Rs.40,41,81,196/- which has been offered and assessed as a part of the total income of the subsequent year i.e. A.Y. 2005-06. Hon'ble CIT(A) failed to appreciate that the disallowance of Rs. 40,41,81,196/- in A.Y. 2004-05 i.e. the assessment year under consideration would amount to double-taxation.
Further, if the disallowance of provision for customs duty amounting to Rs. 173,35,28,049/- in A.Y. 2003-04 is upheld, then an amount of Rs. 75,99,01,495/- which already forms part of the total income of the current year i.e. A.Y. 2004-05 by way of reversal out of the said provision on the completion of export obligations should not be charged to tax, else it would amount to double taxation.”
4. First, we shall take up the appeal of Revenue wherein the Ground of appeal no. 1 relates to an addition of Rs.255.685 crores made by Assessing Officer by invoking provisions of Sec. 41(1) of the Act.
In this context, the brief facts are that the assessee company was granted incentive by the Government of Karnataka whereby assessee company availed sales tax deferment repayable in a period of 11 years in respect of Phase-I of its refinery and 14 years in respect of Phase-II of its refinery. Accordingly, the sales tax deferment loan outstanding as on 29th February, 2004 was Rs.517.113 crores. The Government of Karnataka vide its Notification Nos. FD345CSL 2003(1) and FD345CSL 2003(2) both dated 31.03.2004, allowed the pre-payment of the sale tax deferment loan as on 29.02.2004 at the Net Present-Value (i.e. NPV)
5 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 before the expiry of the deferred period of 11 years or 14 years for Phase-l and Phase- II respectively. In accordance with the above Notifications, the assessee company paid the deferred Sales tax loan at the NPV of Rs.261.445 crores against the outstanding amount as on 29.02.2004 of Rs.517.113 crores, thereby resulting in a surplus of Rs.255.685 crores, which was credited to the Profit & Loss account as ‘other income’. However, in the return of income filed, the assessee company treated the aforesaid income as a ‘capital receipt’ arising out of a loan liability and was not offered as a taxable receipt. The Assessing Officer, however, took the view that the source of the surplus was the sales tax collected by the assessee, which was considered to have been paid by virtue of its conversion into loan, and on that count, the assessee company had availed deduction u/s.37(1) r/w section 43B of the Act. As per the Assessing Officer, sales tax loan was a trading liability and the remission or cessation of a part of the same is taxable u/s 41(1) of the Act. According to him, the surplus of Rs. 255.685 crores arising in this year on account of pre-payment of deferred sales tax loan was a remission or cessation of a trading liability, which was liable for assessment u/s.41(1) of the Act.
The CIT(A) has differed with the Assessing Officer and has held that the said amount was not liable to be taxed as 'income' in terms of section 41(1) of the Act. In coming to such decision, he has relied upon the decision of CIT(A), C-II, Mumbai in the case of Associated Capsules (P.) Ltd. for the A.Y 2004-05 in Appeal No. CIT(A)C-II/IT-358/DCCC- 43/2006-07 dated 30.04.2008. The CIT(A) noted that in the case of Associated Capsules (P.) Ltd. (supra), similar issue had arisen, wherein it
6 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 was held that on such-like surplus, the provisions of Section 41(1) of the Act were inapplicable. Against such a decision of the Id. CIT(A), the Revenue is in appeal before us.
At the time of hearing, the Id. Representative for the respondent assessee pointed out that an identical controversy has been adjudicated by the Hon'ble Bombay High Court in the case of CIT vs. Sulzer India Ltd. (369 ITR 71) in favour of the assesee. In particular, it was also pointed out that in the bunch of cases adjudicated by the Hon'ble High Court, the decision relied upon by the CIT(A) in the case of Associated Capsules (P.) Ltd. (supra) was also decided by the Hon'ble High Court. The Hon'ble High Court, considering the scheme of the Government of Maharashtra with respect to the premature repayment of deferred sales tax loan, had upheld the contention that the surplus arising on such repayment was not an amount falling for consideration in terms of section 41(1) of the Act. It was, therefore, contended that the impugned matter has been correctly decided by the CIT(A) inasmuch as the incentives granted by the Government of Karnataka by way of sales tax deferment to the assessee company are pari materia to those considered by the Hon'ble Bombay High Court in the case of Sulzer India Ltd. (supra).
The ld. DR has not contested the aforesaid factual matrix brought out by the learned representative for the respondent-assessee. So, however, it was argued that the sales tax collected forms a part of the trading receipt as held by the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 42 (SC), and 7 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 therefore any cessation or remission in payment of such liability would invite the provisions of Section 41(1) of the Act.
We have carefully considered the rival submissions and find that the conclusion drawn by the CIT(A) on this aspect is fully covered by the judgment of the Hon'ble Bombay High Court in the case of Sulzer India Ltd. (supra). The point argued by the Id. DR, based on the judgment of the Hon'ble Supreme court in the case of Chowringhee Sales Bureau P. Ltd. (supra), is untenable inasmuch as the same has already been considered by the Hon'ble Bombay High Court in its judgment. There is also no dispute to the assertions made by the learned representative for the assessee that the sales tax deferred scheme under the Package Scheme of 1983 and the Package Scheme of incentive, 1985 notified by Government of Maharashtra, which was considered by the Hon'ble Bombay High Court in the case of Sulzer India Ltd. & Others (supra) is pari materia to the scheme availed by the assessee herein, as notified by the Government of Karnataka. Having regard to the aforesaid, we find that the judgment of the Hon'ble Bombay High Court in the case of Sulzer India Ltd. (supra), squarely covers the controversy before us, and the CIT(A) made no mistake in holding that the surplus arising on prepayment of deferred sales tax loan at NPV is a Capital receipt, which cannot be termed as remission or cessation of a trading liability so as to invite Section 41(1) of the Act. The order of the CIT(A) is hereby affirmed and Revenue fails in its Ground of appeal no.1.
Now, we may take up Ground of appeal no. 2 in the appeal of Revenue wherein it is contended that CIT(A) erred in treating the 8 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 interest received from Oil Coordination Committee as ‘business income’ as against ‘income from other sources’ treated by the Assessing Officer.
At the outset, it was canvassed before us that the said Ground of appeal raised by the Revenue is misconceived as it does not arise from the orders of authorities below. In order to appreciate the aforesaid plea, we may refer to the following fact-position. As per the discussion in para 5 of the assessment order, it transpires that the interest income of Rs.7,35,70,000/- earned by the assessee was taxed by the Assessing Officer under the head ‘income from other sources’ as against the stand of assessee that the said income is a part of ‘business income’. The assessee carried the aforesaid dispute before the CIT(A) who in para 4 of the order has allowed part relief. It is clear that so far as the income relating to interest on bank deposits, interest from New Mangalore Port Trust, interest and discount charges received from customers, interest on contractors’ advances and interest on housing loans given to employees is concerned, it has been held to be taxable as ‘business incomes’. Our attention has also been drawn to page 10 of the Statement of Facts filed before CIT(A), which also enumerates the detail of interest income of Rs.7,35,65,982/-, which was considered by the Assessing Officer to be taxed as ‘income from other sources’. It is clear that neither in the details of such interest income and nor in the reliefs allowed by CIT(A) there is any reference to interest received from Oil Coordination Committee and, therefore, the plea of assessee that the aforesaid Ground of appeal raised by Revenue is misconceived is emerging from record. The aforesaid factual matrix has also not been controverted by the ld. DR appearing for the Revenue. Be that as it may,
9 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 we dismiss the Ground of appeal no. 2 raised by the Revenue as being misconceived.
Insofar as Ground of appeal no. 3 is concerned, the same relates to disallowance of Rs.40,36,741/- made by Assessing Officer representing payment made to MRPL Education Trust and MRPL Janaseva Trust. Although in this Ground of appeal, the amount stated is Rs.40,36,741/-, but in effect the disallowance is to the extent of only Rs.31,72,704/-, as is evident from the orders of the authorities below.
13. In this context, the brief facts are that the Assessing Officer noted that payment of Rs.19,28,798/- was made to MRPL Janaseva Trust towards periodic deficit of their MRPL Hospital, which was in violation of Sec. 40A(9) of the Act. Similarly, payment of Rs.12,43,906/- made to MRPL Education Trust to cover the periodic deficit caused due to routine expenditure of MRPL school was also held to be in violation of Sec. 40A(9) of the Act. Hence, the disallowance of Rs.31,72,704/-. In the appeal before CIT(A), assessee canvassed that Sec. 40A(9) of the Act was not attracted to the impugned payments. The CIT(A) has since deleted the addition by following the order of his predecessor in the assessee’s own case for earlier assessment years. Against such a decision, Revenue is in appeal before us.
14. Before us, the only plea advanced by the ld. DR is to the effect that the payments have been made to an entity covered by Sec.40A(9) of the Act and, therefore, CIT(A) erred in deleting the disallowance.
10 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009
On the contrary, the stand of assessee is that the impugned payments are made to the respective entities to cover their expenses of running school and hospital respectively and, therefore, it is not for the purpose of ‘setting-up or formation of or as contribution’ so as to come within the purview of disallowance u/s 40A(9) of the Act.
We have carefully considered the rival submissions. A perusal of the orders of authorities below reveal that the payments of Rs. 12,43,906/- and Rs.19,28,798/- to MRPL Education Trust and MRPL Janaseva Trust respectively have been made in order to make good the periodic deficit caused to such entities on account of expenses incurred by them in running school and hospital respectively. No doubt, the two trusts have been set-up by the assessee-company, but the impugned payments are not for ‘setting-up’ or for ‘formation’ of or as ‘contribution’ to the trusts so as to fall within the mischief of Sec. 40A(9) of the Act. The phraseology of Sec. 40A(9) of the Act itself clearly suggests that only sums paid by the assessee as employer towards ‘setting-up’ or ‘formation’ of or as ‘contribution’ to any trust, fund, society, etc. is to be disallowed whereas the expenses in question are not of the nature covered by Sec. 40A(9) of the Act and are instead incurred by assessee wholly and exclusively for the welfare of its employees and same is deductible u/s 37(1) of the Act. At the time of hearing, the learned representative for the assessee had also relied upon the judgment of Hon'ble Bombay High Court in the case of Bharat Petroleum Corporation Ltd, 252 ITR 43 (Bom), which also clearly supports the proposition that such like expenses which are incurred not for ‘setting-up’ or for ‘formation’ of or as ‘contribution’ to any trust, etc.
11 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 are not covered within the scope of Sec. 40A(9) of the Act. Therefore, under these circumstances, we hereby affirm the ultimate conclusion of CIT(A) in deleting the addition. As a consequence, Revenue fails in its Ground of appeal no. 3 also.
Insofar as Ground of appeal no. 4 is concerned, the same relates to the direction of CIT(A) contained in para 6 of his order whereby he has directed the Assessing Officer to allow depreciation based on the opening WDV of assets, calculated without reducing the depreciation thrust upon the appellant in Assessment Year 2001-02.
18. In this context, the relevant facts are that in the course of assessment proceedings, the Assessing Officer recalculated the depreciation allowable to assessee by reworking the WDV of assets. In the earlier Assessment Years of 2000-01 and 2001-02, assessee had not claimed depreciation but the same were allowed in the assessment order. As a consequence, the Assessing Officer reworked the WDV of the assets and scaled down the allowance of depreciation in the instant year. The CIT(A) noted that the earlier order of Assessing Officer for Assessment Year 2001-02 was reversed as depreciation could not be thrust upon the assessee and based on such precedent, he set-aside the action of Assessing Officer of reworking the WDV in the instant assessment year. Against such a decision of CIT(A), Revenue is in appeal before us.
19. At the time of hearing, it has been pointed out that the order of Assessing Officer for Assessment Year 2001-02 wherein assessee was 12 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 allowed depreciation inspite of the fact that it was not claimed in the return of income, has since been reversed by the CIT(A) and even the appeal of Revenue against such an order has been dismissed by the Tribunal for want of requisite permission from COD. It is sought to be emphasised that the order of the CIT(A) for Assessment Year 2001-02 on this point has since become final. The aforesaid factual matrix has not been disputed by the ld. DR and in this view of the matter, we find no reason to find fault with the directions of CIT(A) that the adjustment of WDV done by Assessing Officer in order to recalculate the depreciation is untenable. As a consequence, the order of CIT(A) on this aspect is upheld and Revenue fails.
Apart from the aforesaid Grounds raised by the Revenue in the Memo of Appeal, it has also raised additional Grounds of appeal, which read as under :-
“2. The Revenue had filed appeal for to A.Y 2004-05 vide appeal No. ITA 6835/M/08. Following additional ground of appeal is authorized by the CIT-3, Mumbai vide Authorisation Memo No. J-3/IT-217/2008-09 dated 30-11-2009.
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that interest u/s 234B & 234C cannot be charged when income is taxable u/s 115JB of the Act.
2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.
3. The appellant craves to amend or alter any ground or add a new ground which may be necessary.”
13 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009
In terms of the aforesaid Grounds, what is sought to be challenged is the decision of CIT(A) in holding that interest u/s 234B & 234C of the Act is not chargeable where the tax liability has been determined in terms of the ‘book profits’ calculated u/s 115JB of the Act. It is notable that the CIT(A) has relied upon the judgment of Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd., 243 ITR 519 (Kar) and the judgment of Hon'ble Madras High Court in the case of Revathi Equipment (ITA No. 49 of 2007) in deleting the levy of interest u/s 234B & 234C of the Act.
On this aspect, the only plea of the ld. DR is that the charging of interest u/s 234B & 234C of the Act is mandatory in nature and reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Rolta India Ltd., 330 ITR 470 (SC) to say that interest u/s 234B & 234C of the Act is chargeable even where the tax liability is determined in terms of Sec. 115JB of the Act.
On the other hand, the plea of respondent-assessee is in support of the ultimate decision of CIT(A) in holding that no interest u/s 234B & 234C of the Act is chargeable in the present case. The conclusion of CIT(A) is sought to be defended on the ground that during the relevant period under consideration it was the judgment of Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra) which was available and, therefore, under these circumstances, assessee was not expected to pay advance tax in respect of tax leviable on the book profits determined u/s 115JB of the Act. It has been canvassed that since the entire exercise of computing the book profits could be done
14 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 only at the end of the financial year, and in view of the then prevailing judgment of the Hon'ble Karnataka High Court to the effect that assessee was not required to pay advance tax in respect of Minimum Alternate Tax (MAT), therefore, non-payment of advance tax with respect to the liability under MAT would not attract levy of interest u/s 234B & 234C of the Act.
We have carefully considered the rival submissions. Before we proceed to test the efficacy of the stand of Revenue for charging interest u/s 234B & 234C of the Act in the instant case, the brief relevant facts are to be appreciated which are as follows. In the instant case, in the return of income filed, tax liability was determined on the ‘book profits’ in terms of Sec. 115JB of the Act. Even in the assessment finalised u/s 143(3) of the Act, the final tax liability was determined by Assessing Officer based on the book profits determined u/s 115JB of the Act. During the previous year relevant to the assessment year under consideration, the relevant dates for payment of advance tax were – 15.6.2003, 15.9.2003, 15.12.2003 and 15.3.2004. In the assessment order passed u/s 143(3) dated 30.10.2006, Assessing Officer charged interest u/s 234B & 234C of the Act with respect to the tax liability u/s 115JB of the Act. At the time of the relevant dates for payment of advance tax, judgment of the Hon'ble Karnataka High Court dated 30.11.1999 in the case of Kwality Biscuits Ltd. (supra) was prevailing, according to which interest u/s 234B & 234C of the Act was not chargeable with respect to tax liability determined under MAT. Under these circumstances, it is quite clear that at the relevant point of time assessee had a justifiable and plausible reason to believe that no 15 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 advance tax was payable by it, being a corporate entity, with respect to the liability u/s 115JB of the Act. No doubt, the judgment of Hon'ble Supreme Court in the case of Rolta India Ltd. (supra) prescribes that interest u/s 234B & 234C of the Act is leviable even with respect to the liability determined on the MAT, so however, the said decision is of a later date, i.e., 7.11.2011. The judgment of the Hon'ble Supreme Court in the case of Rolta India Ltd (supra) being a subsequent decision would not discredit a bona fide reason entertained by the assessee in not depositing advance tax on MAT in view of the then prevailing judgment of the Hon'ble Karnataka High Court. Therefore, under these circumstances, we find no reason to uphold the plea of the Revenue for levy of interest u/s 234B & 234C of the Act in the present case. During the relevant assessment under consideration, the available legal position, manifested by the judgment of the Hon'ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra), reflected that no advance tax was payable with respect to MAT liability. The plea of Revenue before us that charging of u/s 234B & 234C of the Act is mandatory, in our view, is not germane to decide the impugned controversy inasmuch as the levy can be said to be mandatory only if its payment is attracted per se as per the prevailing legal position. As we have seen in the present case, during the relevant assessment year under consideration, the position regarding payment of MAT in advance was governed by the judgment in the case of Kwality Biscuits Ltd. (supra) which ruled non-payment of MAT in advance and, thus interest for such a default was not chargeable. Under these circumstances, we hereby affirm the ultimate decision of CIT(A) in deleting the levy of 16 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 interest u/s 234B & 234C of the Act, albeit on a different ground. Thus, on this aspect also, Revenue fails.
In the result, appeal of Revenue is dismissed.
Insofar as the Cross objection filed by the assessee is concerned, we have already reproduced hereinabove the various Grounds raised by the assessee. In this context, it is notable that the Cross objection was initially filed by the assessee on 12.6.2009, which was accompanied by a solitary Ground of cross objection. Subsequently, on 6.5.2013 the assessee filed a Memorandum of Additional cross objections. In para 3 of our order, we have reproduced the Revised/Consolidated and Additional cross objections filed by the assessee. At the time of hearing, the ld. DR raised a preliminary point that the Memorandum of Additional cross objections filed by the assessee on 6.5.2013 be not admitted as it is filed belatedly without any justifiable reasons. In this context, the learned representative for the assessee pointed out that the original Memorandum of cross objections and the Memorandum of Additional cross objections filed on 6.5.2013 have been consolidated and the Memorandum of Revised/Consolidated and Additional cross objections have been filed so as to have a better clarity on the dispute. It has also been pointed out that no new plea has been raised in the subsequent Memorandum of cross objections and, therefore, the revision in the Memorandum of cross objections cannot be considered as a delay in filing of the cross objection. In our considered opinion, in the original Memorandum of cross objection filed by the assessee, the challenge was with respect to the disallowance of Rs.40,41,81,196/-
17 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 being provision on account of Customs duty. Even in the Revised and Additional cross objections, the challenge remains the same although different facets of the dispute have been brought out. Therefore, the stand of the ld. DR to assail the filing of Revised/Consolidated and Additional cross objections, as being delayed, is based on a wrong perspective and is hereby rejected.
Now, we may take up the merits of the disallowance of Rs.40,41,81,896/- made by the Assessing Officer, which is sought to be challenged by the assessee on various limbs. In order to appreciate the controversy, the following background of the dispute is relevant. The appellant-company procures a portion of its raw material (i.e. crude oil) through imports. A significant portion of the imports is against the Advance licences obtained for import of raw material for manufacture of products meant for exports. The Customs duty on the import of crude oil is provided on all imports and Provision to the extent of Rs.40,75,50,184/- was outstanding as on 31.3.2004 towards Customs duty on crude oil imported against Advance licences pending completion of export obligations. Subsequently, upto 30.9.2004 assessee fulfilled export obligations with respect to Customs duty amounting to Rs.40,41,81,896/-. The assessee-company adjusted the said amount of Rs.40,41,81,896/- against the Provision for Customs duty outstanding on 31.3.2004 and claimed it as a deduction u/s 43B of the Act. The Assessing Officer has disagreed with the assessee on the ground that there was no actual payment of Customs duty and, therefore, the said amount was not deductible in terms of Sec. 43B of the Act. According to the Assessing Officer, provision of Sec. 43B of the 18 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 Act categorically states that the deductions thereof are to be allowed only on the basis of actual payment only. The assessee carried the matter in appeal before CIT(A) contending that the action of Assessing Officer was erroneous inasmuch as assessee-company had fulfilled its export obligations before the due date of filing of return of income thereby complying with the conditions laid down in Sec. 43B of the Act to claim the deduction of Rs.40,41,81,196/- comprised in the liability for Customs duty outstanding as on 31.3.2004. The CIT(A) has since affirmed the disallowance made by the Assessing Officer. In coming to his decision, the CIT(A) held that Sec. 43B of the Act was not applicable at all in the case of assessee because the liability for payment of Customs duty of Rs.40,41,81,196/- did not arise during the previous year relevant to the assessment year under consideration and, therefore, there was no question of considering the plea of assessee of having paid the said sum before the due date of filing of return of income in order to claim the benefit of deduction u/s 43B of the Act.
In this background of the matter, the learned representative for the assessee has made varied submissions by pointing out that CIT(A) was not correct in holding that the liability for payment of Customs duty of Rs.40,41,81,196/- did not arise during the year. According to the assessee, the Assessing Officer was correct in deducing that the provisions of Sec. 43B of the Act was applicable thereby implying liability arose in the year under consideration, but erred to the extent of holding that fulfilment of export obligations by 30.9.2004 did not amount to payment of Customs duty within the meaning of Sec. 43B of the Act. Further, it has been pointed out that having regard to the 19 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 manner in which assessee has treated the amount relating to the Customs duty in its books of account, the entire exercise is unnecessary and is tax neutral over the years. The learned representative has in detail argued on the aforesaid propositions, which we shall elucidate further in the subsequent paras.
On the contrary, the stand of the ld. DR appearing for the Revenue is in support of the orders of authorities below.
Pertinently, the entire controversy revolves around the provisions of Sec. 43B of the Act. Sec. 43B of the Act was inserted by the Finance Act, 1983 w.e.f. 1.4.1984 and prescribes for certain deductions to be allowed only on actual payment while computing the income chargeable to tax under the head ‘Profit and gains of business or profession’. Shorn of other details, insofar as it is necessary to appreciate the controversy in question, the salient features of Sec. 43B of the Act are as follows. Broadly speaking, Sec. 43B of the Act provides that deduction for any sums payable by the assessee by way of tax or duty, cess or fee or any other sum prescribed shall, irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which the said sum is actually paid. It is a non-obstante clause prescribing that notwithstanding anything contained in any other provisions of this Act, “a deduction otherwise allowable” under the Act in respect of the sums prescribed therein shall be allowed only in computing the income from profit and gains of business of that previous year in which such sum is actually paid irrespective of the previous year in which the liability to 20 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 pay such sum was incurred by the assessee according to the method of accounting regularly employed. In the instant, the case made out by CIT(A) is that Sec. 43B of the Act is not applicable in the present case for the reason that the amount of Rs.40,41,81,196/- is not a deduction otherwise allowable under this Act. According to the CIT(A), the liability for the impugned Customs duty does not arise because assessee has obtained clearance of the imported material without payment of Customs duty, and that the ultimate liability may or may not arise inasmuch as on a future date, if the assessee is able to meet the export obligations, the charge of Customs duty would not arise. For this reason, according to the CIT(A), the charge of Customs duty is only a contingent liability, happening of which is not certain and, therefore, a contingent liability cannot be considered to be an amount “otherwise allowable under this Act”. Therefore, he inferred that Sec. 43B of the Act is not applicable.
On this aspect of the matter, the stand of assessee is based on the provisions of Customs Act, 1962, which we shall refer to a little later. Before that, we may refer to the pertinent fact-situation. As noted earlier, assessee is importing a portion of its raw material, i.e., crude oil by utilizing the Advance licence benefits obtained for import of raw material for manufacture of products meant for export. As on 31.3.2004, assessee-company has made a Provision of Customs duty of Rs.40,75,50,184/- on crude oil imported against Advance licence pending completion of export obligations. Upto 30.9.2004, assessee has fulfilled the export obligations corresponding to the Customs duty liability of Rs.40,41,81,896/-. In its computation of income, assessee
21 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 adjusted the aforesaid amount of Rs.40,41,81,896/- against the Provision for Customs duty as on 31.3.2004 and claimed it as deduction u/s 43B of the Act. We may also briefly touch upon the accounting treatment accorded by the assessee to such transactions. At the time of import of raw material, assessee creates a ‘Provision of Customs duty’ on such imports by debiting ‘Customs duty on raw material’ account and crediting ‘Customs duty – Advance licence’ account. The ‘Customs duty Advance licence’ account is shown as a liability outstanding in the Balance-sheet and subsequently, on fulfilment of the export obligation, the ‘Customs duty Advance licence’ account is debited and ‘Export licence benefit received’ account is credited and is offered as income. In the context of the instant fact-situation, it may be appreciated that assessee had created a Provision of Rs.40,75,50,184/- in the year under consideration, being Customs duty payable on import of raw material and the same was debited to the Profit & Loss Account. Subsequently, by 30.9.2004, assessee fulfilled its export obligations to the extent of Rs.40,41,81,896/- and adjusted the same against liability, which was offered as income in the next year. Considering the fulfilment of export obligations to the extent of Rs.40,41,81,896/- as a payment/discharge of liability of the Provision of Customs duty as on 31.3.2004, in terms of the first proviso to Sec. 43B of the Act, assessee claimed a deduction.
The first question to be decided is as to whether the Provision of Customs duty of Rs.40,75,50,184/- created by the assessee as on 31.3.2004 is a liability which has arisen so as to fall within the expression “a deduction otherwise allowable under this Act” in Sec. 43B
22 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 of the Act. For the said purpose, the learned representative for the assessee referred to Sec. 12 of Customs Act, 1962 to emphasise on the timing of crystallisation of charge of Customs duty. The Customs duty is levied on goods imported into or exported from India. Sec. 143A of the Customs Act, 1962, which is relevant for the present purpose reads as under :-
“SECTION 143A : Duty deferment. –
(1) When any material is imported under an import licence belonging to the category of Advance Licence granted under the Imports and Exports (Control) Act, 1947 (18 of 1947), subject to an obligation to export the goods as are specified in the said Licence within the period specified therein, the Assistant Commissioner of Customs or Deputy Commissioner of Customs may, notwithstanding anything contained in this Act, permit clearance of such material without payment of duty leviable thereon.
(2) The permission for clearance without payment of duty under sub-section (1) shall be subject to the following conditions, that is to say –
(a) the duty payable on the material imported shall be adjusted against the drawback of duty payable under this Act or under any other law for the time being in force on the export of goods specified in the said Advance Licence; and (b) where the duty is not so adjusted either for the reason that the goods are not exported within the period specified in the said Advance Licence, or within such extended period not exceeding six months as the Assistant Commissioner of Customs or Deputy Commissioner of Customs may, on sufficient cause being shown, allow, or for any other sufficient reason, the importer shall, notwithstanding
23 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 anything contained in section 28, be liable to pay the amount of duty not so adjusted together with simple interest thereon at the rate of twelve per cent per annum from the date the said permission for clearance is given to the date of payment.
(3) While permitting clearance under sub-section (1), the [Assistant Commissioner of Customs or Deputy Commissioner of Customs] may require the importer to execute a bond with such surety or security as he thinks fit for complying with the conditions specified in sub-section (2).”
Sub-section (1) of Sec. 143A of Customs Act, 1962 prescribes that where any material is imported under an import licence belonging to the category of Advance licence, the competent authorities can permit clearance of such material “without payment of duty” leviable thereon. Sub-section (2) provides the conditions for grant of permission for clearance of goods without payment of duty. It is noteworthy that in terms of Sec. 12 of the Customs Act, 1962 the charge of Customs duty gets crystallised with the import of goods into India, which in the present case implies that the charge of Customs duty gets crystallised when assessee brings into India its raw material, i.e., crude oil from a place outside India. The competent authorities under the Customs Act, 1962 are empowered in terms of the specific provisions of Sec. 143A of the Customs Act, 1962 to permit clearance of such goods under Advance licence without payment of Customs duty leviable thereon, subject to certain conditions. Thus, the clearance obtained by the assessee of its imported raw material without payment of Customs duty leviable after complying with the conditions, as imposed by the competent authorities, does not imply that the charge of Customs duty
24 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 does not arise. Rather, the charge of Customs duty gets crystallised and is fastened to the imported goods once they are brought into India from a place outside India. Therefore, having regard to the said legal position under the Customs Act, 1962, it is wrong on the part of the CIT(A) to say that the liability of Customs duty in the context of the import of raw material, i.e., crude oil against the Advance licence benefit does not arise; rather, it is a case where though the charge of duty arises, but the goods have been permitted clearance without payment of duty subject to the conditions prescribed under the Customs Act, 1962. Ostensibly, the CIT(A) has obliterated the difference between arising of the liability of Customs duty and its payment. Before us, the learned representative for the assessee had justifiably placed reliance on the judgments of the Hon'ble Supreme Court in the case of Metal Box Company of India Ltd., 73 ITR 53 (SC) and Bharat Earth Movers, 245 ITR 428 (SC) to emphasise that the point of arisal of a liability is not the same as the point of time prescribed for its payment. Notably, in the present case, assessee, at the time of obtaining clearance of raw material without payment of duty complied with the conditions prescribed by the Customs Department by furnishing a Bond to the Customs authorities, which enabled the authorities to permit the assessee to clear the goods without payment of duty on the condition of fulfilling the export obligations, failing which the duty liable on such goods would be paid by the assessee together with interest. In fact, the learned representative pointed out that one of the conditions contained in Sec. 143A(2) of the Customs Act, 1962 prescribing paying of duty with interest if assessee was to default in meeting with export obligations itself would demonstrate that the liability for payment of Customs duty arises
25 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 during the year of the clearance of goods. At the time of hearing, reliance has also been placed on the decision of the Ahmedabad Bench of the Tribunal in the case of Pratibha Syntex Ltd. v. Jt. Commissioner of Income-tax, 81 ITD 118 where it has been observed under somewhat similar circumstances that the Customs duty liability is not to be regarded as a contingent liability.
Therefore, in view of the aforesaid discussion, it is reasonable to conclude that the liability represented by the Provision of Rs.40,75,50,184/- being Customs duty payable on import of raw material arises during the previous year relevant to the assessment year under consideration as assessee brought the requisite goods into India from a place outside India. Therefore, under these circumstances, CIT(A) erred in taking the view that Sec. 43B of the Act is not applicable in the case of assessee on an erroneous ground that the liability of Customs duty did not arise in the instant year.
The first proviso to Sec. 43B of the Act prescribes that the disallowance u/s 43B of the Act would not apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under Sub- section (1) of Sec. 139 of the Act in respect of the previous year in which the liability to pay such sum was incurred. On the strength of such proviso, the claim of assessee was that upto 30.9.2004, it has fulfilled export obligations amounting to Rs.40,41,81,896/- out of the total Provision for Customs duty outstanding as on 31.3.2004 and, therefore, claimed it as a deduction u/s 43B of the Act. The stand of the Assessing
26 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 Officer was that the provisions of Sec. 43B of the Act envisaged deduction of sum which is actually paid, whereas in the instant case there was no actual payment of duty. In other words, the discharge of obligation to export the finished products as per the terms of the Advance licence benefit undertaken by the assessee has not been understood to be a sum actually paid for the purpose of Sec. 43B of the Act. In this context, the assessee relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Pratibha Syntex Ltd. (supra) where it has been held that if the liability for payment of Customs duty in relation to imports of raw material is liquidated by performing an act, it would tantamount to payment thereof and deduction u/s 43B of the Act ought to be granted for the Customs duty liability in the year of export as it went to reduce the Customs duty liability.
Before us, the ld. DR appearing for the Revenue has emphasised on the stand of Revenue to point out that the benefit of the first proviso to Sec. 43B of the Act can be availed only if the amount is actually or physically paid, which is not the case herein.
In our view, the stand of Revenue is misconceived because fulfilment of export obligations by the assessee reduces the Customs duty liability of the assessee. In fact, if no export of finished goods was made by the assessee as required, then assessee would have to pay the Customs duty in monetary terms. Obviously, the payment of duty in monetary terms would have facilitated deduction u/s 43B of the Act in the year of payment. The moot question is could the legislature have 27 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 intended that an assessee who does not comply with the mandated export obligations would be able to avail the provisions of Sec. 43B of the Act, but not a performing assessee who complies with and discharges his obligation to make the mandated export? Be that as it may, in our view, the fulfilment of export obligations has resulted in reduction of a liability which is otherwise allowable under this Act and, therefore, in terms of the first proviso to Sec. 43B of the Act the amount of Rs.40,41,81,896/- is deductible in the instant assessment year, and the stand of the Assessing Officer in this context is legally misplaced.
Apart from the aforesaid, assessee had also made a plea that the accounting treatment accorded by the assessee was tax neutral and, therefore, the entire exercise undertaken by the Assessing Officer was unnecessary in the present case. In this context, it has been pointed out that assessee has claimed deduction of the liability for payment of Customs duty in the year of import, as reflected by the debit to the Profit & Loss Account of the Provision of Customs duty and has correspondingly offered for assessment, the credits made in the subsequent year by way of fulfilment of export obligations in order to comply with the terms of the Advance licence scheme. It was, therefore, pointed out that if one examines the position over a period of 2 to 3 years, the debits for Customs duty payable in the year of import would be equal to the credits made in the Profit & Loss Account in the subsequent years on the making of exports as per the Advance licence scheme. In fact, it was pointed out that the credits in the Profit & Loss Account in the next years have been offered for assessment and have been assessed and, therefore, disallowance of Customs duty in the 28 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009 year of making import was unjustified and would result in double addition. At this stage, it has also been pointed out that the liability for payment of Customs duty, claimed as debit to the Profit & Loss Account, is neutralised by the inclusion of the same in the closing stock, and if the view of CIT(A) is adopted that there was no liability for payment of Custom duty in the first year of import, then the closing stock will have to be reduced by the corresponding duty included therein. It is pointed out that the inclusion of the Customs duty in the valuation of closing stock is undoubtedly on the footing that such a definite liability exists. Before us, reliance has been placed on the judgment of the Hon'ble Bombay High Court in the case of Nagri Mills Co. Ltd., 33 ITR 681 (Bom.) for the proposition that where a debit/credit in one year is off-set by a credit/debit in the subsequent year, the Assessing Officer would not be justified in disturbing what the assessee has done, particularly in the case of corporate assessees’, where tax is attracted at a uniform rate. At the time of hearing, the aforesaid factual matrix was put across to the ld. DR who has not controverted the same, but merely reiterated the stand of the lower authorities.
In our considered opinion, even on the principle of tax neutrality, the impugned stand of the Revenue is misconceived. Having regard to the judgment of the Hon'ble Bombay High Court in the case of Nagri Mills Co. Ltd. (supra), on this aspect also we find no reason to uphold the disallowance of Rs.40,41,81,896/- made by the Assessing Officer.
In view of the aforesaid discussion, we hereby set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition of Rs.40,41,81,896/-.
29 M/s.Mangalore Refinery & Petrochemicals Ltd. & CO No.105/Mum/2009
Before parting, we may put on record that a plea has been raised on behalf of the assessee that in any event, the provisions of Sec. 43B of the Act were not attracted in the present case because Sec. 43B of the Act would apply in a case where it was contemplated that the Customs duty would be paid ultimately only in monetary terms and thus, would not apply where the liability was expected to be discharged by making an export and not in monetary terms. The aforesaid aspect of the matter is not being addressed and is kept open because the aforesaid plea is founded on the basis that fulfilling of export obligations in the present case is not equivalent to the payment of Customs duty for the purposes of Sec. 43B of the Act, which was a view taken by the Assessing Officer. Ostensibly, we have not accepted the aforesaid view of the Assessing Officer and necessary relief has been allowed in the earlier part of this order, therefore, the plea of the assessee is not being addressed and is kept open.
In the result, the Cross objection filed by the assessee is allowed, as above.
Resultantly, appeal of the Revenue is dismissed whereas cross objection filed by the assessee is allowed, as above.
Order pronounced in the open court on 23rd November, 2016.