Cit vs Ganga Glass Works (P) Ltd.

JUDGMENT R.K. Agarwal, J.

The Income Tax Appellate Tribunal, New Delhi has referred the following two questions of law under section 256(2) of the Income Tax Act, 1961, hereinafter referred to as the Act, for opinion to this Court.

"1. Whether on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the assessee's claim representing sales tax liability relating to earlier years were an allowable deduction in the years under consideration, viz,, assessment years 1976-77, 1977-78, 1978-79 and 1979-80?

2. Whether the Tribunal was correct in allowing the assessee's claim for a sum of Rs. 82,077 as liability raised against him by an order of the Regional Director, E.S.I. by his order dated 29-10-1975 for the years other than the assessment year 1976-77?"

2. The present reference relates to the assessment years 1976-77 (sic) to 1979-80.

3. Briefly stated the facts giving rise to the present Reference are as follows:

The respondent-assessee is a private limited company enjoying income from manufacture of glass articles. During the course of assessment for the years 1976-77 to 1979-80, the Income-tax Officer declined the assessee's claim of additional sales tax liability on the ground that it was following the mercantile system of accounting and the amount related to the earlier assessment years and not for the assessment year in which the deduction is being claimed. The details of the said amount are given below:-

Rs.

1976-77 7,988 1977-78 7,470 1978-79 24,138 1979-80 19,790 In respect of the assessment year 1976-77, the respondent-assessee had further claimed deduction of Rs. 82,077 as liability raised against it by an order dated 29-10-1975 passed by the Regional Director, Employees State Insurance Corporation. This deduction was also disallowed. The CIT(A) had upheld the disallowance of both the amounts. However, in the appeal filed by the respondent-assessee before the Tribunal, the Tribunal has allowed the deduction towards the sales tax liability as also E.S.I.

4. We have heard Sri Dhananjay Awasthi, the learned Standing counsel appearing for the revenue. Nobody has appeared on behalf of the respondent-assessee.

5. It may be mentioned here that the respondent-assessee had been paying the sales tax regularly and claiming for deduction for the year it pertained. However, for the assessment years 1976-77 to 1979-80, the additional demands on account on completion of sales tax assessment under that Act which happened to be during the accounting period relevant to these assessment years was created which the respondent-assessee had claimed as deduction. In respect of the amount of payrnent to the Director, Employees State Insurance Corporation it may be mentioned here that the factory was closed in June, 1968 on account of continuous losses and serious labour problems. It remained closed upto August, 1969 when the same was re-started after amicable settlement with the workers. The dispensary also remained closed. However, it was reopened on 1-2-197 1. As the factory did not function from June, 1968 and no services were rendered, the workers resisted deduction on account of E.S.I. and accordingly the respondent did not provide in its books of account any liability on that account. After the re-start there was no proper functioning of dispensary, as there was only skeleton staff. The demand towards Employees State Insurance contribution was disputed by the assessee. However, the liability came to be settled during the accounting period relevant to the assessment year 1976-77 vide order dated 29-10-1975, which had been claimed as legitimate business deduction.

6. It is not in dispute that the respondent-assessee had been claiming deduction of sales tax liability in the year in which it had accrued as it. had been following the mercantile system of accounting. The additional amount towards sales tax liability has been created by virtue of the assessment orders passed during the previous year relevant to the assessment years in question.

7. In the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 the Apex Court has held as follows:

"Now, under all sales tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceeding, the liability for the payment of tax is independent of the assessment. It is significant that in the present case, the liability had even been quantified and a demand had been created in the sum of Rs. 1,49,776 by means of the notice dated 2 1 -11 -1957, during the pendency of the assessment proceedings before the Income Tax Officer and before the finalization of the assessment. It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of business such liability, which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sales tax had accrued during the year of assessment even though it had to be discharged at a future date. In Pope The King Match Factoiy v. CIT (1963) 50 ITR 495 (Mad.), a demand for excise duty was served on the assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed, he debited that amount in his accounts on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court had no difficulty in holding that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. In our judgment, the above decision lays down the law correctly." (p. 366) The aforesaid decision has been followed by the Apex Court in the case of CIT v. Kalinga Tubes Ltd. (1996) 218 ITR 164 and the Apex Court has held that when the assessee is following the mercantile system of accounting in the case of sales tax payable by the assessee, the liability to pay sales tax would accrue the moment the dealer made the sales which are subject to sales tax. At that stage, the obligation to pay the tax arises. The raising of a dispute in this connection before the higher authorities would be irrelevant.

8. The Apex Court in the case of CIT v. Bharat Carbon and Ribbon Mfg. Co. P. Ltd. (1999) 239 ITR 505 has held that where the liability accrued over the accounting period because of the demand notice issued by the excise department after the show-cause notice and on the basis of tile trade notice issued by the Collector in October, 1979 the obligation under. the law to pay the excise duty arose at that stage. Raising of the dispute by the assessee by filing writ petition for quashing or deduction of the said liability would not be a ground for holding that liability to pay the excise duty as per the demand notice was not incurred. The Apex Court has held that the amount was to be allowed as a deduction when the demand notice was issued i.e. 21-4-1980 relating to the assessment year 1981-82.

9. Applying the principle laid down by the Apex Court in the aforesaid case, we find that the demand of additional tax liability had been created for the first time in all these four assessment years during the relevant previous years and, therefore, they were liable to be allowed as deduction.

10. The same principle would be applicable towards deduction/ contribution to be made under the E.S.I. Act and, therefore, the liability for contribution of E.S.I. would accrue in the earlier assessment year and not during the assessment year 1976-77 when the Regional Director, E.S.I. had passed the order on 29-10-1975.

11. So far as the question of the amount paid towards E.S.I. is concerned, we find that under section 39(4) of the Employees State Insurance Act, 1948 the contribution payable fell due on the last day of the wage period even though the respondents had been disputing their liability. Merely because the respondent-assessee had been disputing the liability and was finally settled vide order dated 29-10-1975 during the accounting period relevant to the assessment year 1976-77 it cannot be said that the said liability had accrued when the final order had been passed. In view of the principle laid down by the Apex Court in the aforementioned cases, we are of the opinion, that the Tribunal was not justified in allowing the deduction of Rs. 82,077 during the assessment year 1976-77 as it related to the liability which had accrued in the previous years relating to the earlier assessment years and not in the assessment year in question.

12. In view of the foregoing discussion, we answer the first question of law in the affirmative i. e. in favour of the assessee and against the revenue and the second question in the negative i.e., in favour of the revenue and against the assessee. However, there shall be no order as to costs.