Commissioner Of Income-Tax v. Indian Smelting And Refining Co. Ltd.

Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion:

“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in holding that the assessee is entitled for deduction on the provision made in the books amounting to Rs. 90,22,783 merely on the strength of receipt of a show-cause notice from the excise department?”

2. The assessee is a public limited company engaged in the manufacture of ingots, billets and castings. The assessee was liable to pay excise duty on the manufacture of ingots and billets, which it was paying regularly. The accounting year of the assessee is the calendar year. This reference pertains to the assessment year 1980-81, the relevant previous year being the calendar year 1979. In this year, the excise authorities felt that the excise duty paid by the assessee had not been correctly calculated. Accordingly, two show-cause notices were issued asking the assessee to show cause as to why demand should not be made for payment of a further sum of Rs. 66,80,096 by way of excise duty. Another show-cause notice was issued on May 7, 1980. The amount mentioned therein was Rs. 23,42,687. The total amount mentioned in the three show-cause notices was Rs. 90,22,783. The assessee did not admit any liability and showed cause accordingly. No adjudication was made during the relevant previous year nor any demand was raised against the assessee. The adjudication was made much later in December, 1982, when the cause shown by the assessee was accepted and the proceedings initiated by the above three show-cause notices were dropped. However, the assessee made a provision for a sum of Rs. 90,22,800 in its accounts of the accounting year 1979 itself on the basis of the show-cause notices and claimed deduction in respect thereof in the computation of its income. The Income-tax Officer allowed deduction for a sum of Rs. 66,80,096 and rejected the claim for the balance amount of Rs. 23,42,687 on the ground that the show-cause notice in respect of the said amount had been received by the assessee after the end of the accounting year. The assessee appealed to the Commissioner of Income-tax (Appeals) against the above disallowance. The Commissioner of Income-tax (Appeals), on examination of details of the claim, found that the assessee had merely been served with show-cause notices asking it to explain why certain demand should not be raised. He referred to rule 10 of the Central Excise Rules and observed that the notices in question only resulted in the initiation of proceedings for raising additional demand. He was of the opinion that no liability had accrued by the issue of the show-cause notices. The Commissioner (Appeals) took note of the fact that the cause shown by the assessee was later accepted and the proceedings initiated pursuant thereto were dropped by the excise authorities. He also observed that there was no demand in this case at any point of time. In view of the above, he not only rejected the assessee's claim for deduction of Rs. 23,42,687, but also enhanced the assessment by the amount allowed by the Income-tax Officer, i.e, Rs. 66,80,687. The assessee appealed to the Income-tax Appellate Tribunal against the order of the Commissioner of Income-tax (Appeals). The Tribunal held that having made a provision for a sum of Rs. 90,22,800 on the basis of the show-cause notices the assessee was entitled to claim deduction of the said amount in the computation of its income. The Tribunal, accordingly, allowed the appeal of the assessee and directed the Income-tax Officer to allow deduction of Rs. 90,22,783. Aggrieved by the above order of the Tribunal, the Revenue is before us with this reference under section 256(1) of the Act. We have heard Mr. T.U Khatri, learned counsel for the Revenue, who submits that the controversy in this case is squarely covered by the decision of this court dated March 21, 1997, in I.T Reference No. 95 of 1990, Standard Mills Co. Ltd. v. CIT, [1998] 229 ITR 366, wherein it has been held that show-cause notices would not give rise to any actual liability. Learned counsel pointed out to us that in the instant case, the assessee had been served with show-cause notices only. The assessee did not admit the liability or any part thereof and showed cause refuting the allegations made in the show-cause notices. Our attention was drawn to the fact that the cause shown by the assessee was accepted by the excise authorities and the proceeding initiated by the show-cause notices was later dropped in December, 1982. The question of claiming deduction in such a case, according to learned counsel, cannot arise.

3. Mr. S.J Mehta, learned counsel for the assessee, submits that though the assessee showed cause in pursuance of the notices in question and denied any liability, it also made a provision for the amounts mentioned in the show-cause notices. Learned counsel submits that according to the assessee it was a liability which was deductible in the computation of its income. Reliance is placed in support of this contention on the decision of this court in Shrikant Textiles v. CTT, [1971] 81 ITR 222. Mr. Mehta, however, does not dispute that the cause shown by the assessee was accepted by the excise authorities and in December, 1982, the proceedings initiated by issuance of the show-cause notices were dropped. He also did not dispute the fact that no demand had been raised against the assessee pursuant to the show-cause notices at any point of time. He, however, pointed out that on the proceedings being dropped by the excise authorities in December, 1982, the amount in question was added back under section 41(2) of the Act in the subsequent year to the income of the assessee. Learned counsel submits that, in that view of the matter also, the question referred to us should be answered in favour of the assessee.

4. We have carefully considered the rival submissions. The question referred to us for our opinion is whether the assessee is entitled to deduction of the amount in question as a liability merely on the strength of the show-cause notices issued by the excise authorities. This court had occasion to deal with identical controversy in Standard Mills Co. Ltd. v. CIT, [1998] 229 ITR 366. In that case also, the assessee claimed deduction for the amount mentioned in the show-cause notice issued by the excise authorities. The contention of the assessee before the court was that the fact that no order had been passed by the concerned authorities rejecting the cause shown by the assessee was not relevant in determining the allowability of the deduction on account thereof. Repelling the above contention, this court observed (page 370):

“Law is well-settled that expenditure which is deductible for income-tax purpose is towards a liability actually existing in the year of account. Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. The income-tax law makes a distinction between the actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter.”

5. It was further observed (page 371):

“The question to be decided in each case, therefore, is whether any present liability has accrued against the assessee which has to be decided by taking into account all the circumstances of the case. There may also be cases where the liability clearly exists under a statute. In such a case, as held by the Supreme Court in Kedamath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363, deduction cannot be denied on the ground that the assessee is disputing the liability. Similarly, where a demand of tax or duty is served on the assessee maintaining the mercantile system of accounting in the accounting year, the amount so demanded would be deductible as an accrued liability even though the assessee objects to it and seeks to get the order of the concerned authority reversed, subject, however, to any statutory provision to the contrary (viz., section 43B of the Income-tax Act, 1961, as inserted by the Finance Act, 1983, with effect from April 1, 1984, which provides that certain liabilities can be deducted only on actual payment ).”

(emphasis* supplied)

6. On consideration of the facts of that case, it was held that there was no actual liability in praesenti. It was observed (page 371):

“No demand was raised against the assessee of any amount. What was served on the assessee by the Collector was merely a show-cause notice. The assessee did not admit any liability and showed cause refuting the allegations made in the show-cause notice. Even according to the assessee there was no accrued liability… Obviously, there was no liability actually existing against the assessee in the year of account. It was merely a contingent liability, which might or might not arise. That being so, the amount in question cannot constitute expenditure for the purposes of income-tax.”

7. The ratio of the above decision squarely applies to the facts of the present case. In this case also there was no actual liability in praesenti no demand was raised against the assessee. What was served by the Collector on the assessee was merely a show-cause notice. The assessee did not admit any liability and showed cause refuting the allegations made in the show-cause notices. In fact, in the instant case, the cause shown by the assessee was accepted by the excise authorities and proceedings initiated by the show-cause notices were dropped. It is thus clear that the liability claimed by the assessee as a liability on account of excise duty was merely a contingent liability which cannot constitute expenditure for the purposes of income-tax.

8. Mr. Mehta, learned counsel for the assessee, referred to the decision of this court in Shrikant Textiles v. Commissioner Of Income-Tax, Bombay City Ii.*, [1971] 81 ITR 222. We have carefully considered the above decision. In that case, a demand notice was issued by the officers of the Central Excise Department under rule 9(2) of the Central Excise Rules, 1944, calling upon the assessee to pay the excise duty mentioned therein within 10 days from the date of the notice. That is not so in the case before us. As stated earlier, in this case, there was no demand notice. The claim of the assessee was based merely on show-cause notices which too were ultimately withdrawn. At no point of time was any demand, raised by the excise authorities nor was any payment made by the assessee.

9. There was no ascertained or crystallised liability. The entry in the accounts was based on a purely contingent liability. No deduction can be allowed in respect of such amounts. The above decision thus has no application to the facts of the present case. In fact, the ratio of the said decision goes against the assessee in this case which is clear from the following observation in that case (page 226):

“Where these entries relate to ascertained and/or crystallised liabilities, the amounts thereof must justly be allowed as deductions for computation of income. There was agreement that where these debit entries made are in respect of contingent liabilities, the amounts mentioned in the debit entries could not be allowed as expense.”

10. In view of the above, the question referred to us is answered in the negative and in favour of the Revenue. Mr. Mehta, learned counsel for the assessee, submits that the Revenue should be directed to revise the case of the assessee for the subsequent assessment year in which this amount had been added to its income under section 41(2) of the Income-tax Act. We do not think it necessary to give any such direction. The assessee may point out this fact to the Tribunal at the time of giving effect to the opinion of this court. Reference disposed of accordingly with no order as to costs.

11. Certified copy expedited.