Hyderabad v. Prasad

THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No.111 OF 2001 & I.T.T.A No.7 OF 2002 % 22.07.2014 R.C.No.111 of 2001 Commissioner of Income Tax, A.P. – II, Hyderabad .. AppellantAnd $ M/s. Ampro Products Limited, Hyderabad .. Respondent !Counsel for the Appellant : Sri J. V. Prasad Counsel for Respondent : Sri Y. Ratnakar < Gist : > Head Note : ? Citations: THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No.111 OF 2001 & I.T.T.A No.7 OF 2002 COMMON JUDGMENT:(per Hon’ble Sri Justice L. Narasimha Reddy) Theappeal and reference are interrelated and are in relation tothe same assessee and for the same period, but covering two differentassessment years. Hence, they are disposed of through a commonjudgment. Both the proceedings are at the instance of the Revenue. The respondent is a Company, undertaking the activity ofmanufacturing and marketing of food products. It has a sister concern,by name, M/s. Ampro Industries Private Limited. The respondent usedto supply the raw-material to its sister concern and get manufacturedcertain brands of biscuits. For that purpose, it used to pay conversioncharges in terms of the agreement entered into between them on30.06.1982. The products manufactured by or on behalf of therespondent are subject to excise duty. For the activity undertakenbetween 27.09.1982 and 30.09.1985, there existed some dispute, asto the extent of excise duty. While according to the JurisdictionalCommissioner of Central Excise, the duty was leviable on the cost ofthe product, arrived at by taking into account, the value of the raw-material supplied by the respondent, the Conversion Unit insisted thatit must be only on the basis of conversion charges paid to it. Asprovided for under Rule 9-B of the Central Excise Rules, the productswere cleared at the relevant period, on payment of the undisputed rateof duty, however, subject to execution of the bond in Form B-13,undertaking to pay the differential duty, as may be determined by thecompetent authority. According to the agreement between the respondent and theConversion Unit, the former is under obligation to compensate or paythe duty component suffered by the latter. In the returns submitted bythe respondent, deductions were claimed to the extent of excise duty,actually paid. So far as the differential amount covered by the bonds isconcerned, provision was made in the books of account, to the tune ofRs.1,66,62,866/-. After about two rounds of litigation initiated by theConversion Unit, it ultimately emerged that it is not under obligation topay any further amount towards excise duty for the correspondingperiod over and above what was already. On the other hand, it washeld to be entitled for refund of Rs.12,70,649/- for Conversion Unit Iand Rs.5,03,316/- for Conversion Unit vide, the order, dated19.05.1993, passed by the Superintendent of Central Excise. In the returns filed for the assessment year 1992-93, thededuction of Rs.1,66,62,866/- was claimed. For the subsequent yearsthe claim was dropped on the ground that there was neither anycessation nor any accrual on account of the order, dated 19.05.1993,passed by the Superintendent of Excise. The assessing authority,however, took view that there was no cessation on the basis of orderpassed by the Superintendent of Excise and the correspondingamount being Rs.1,66,62,866/- is liable to be assessed for theassessment year 1992-93. A separate order was passed in respect ofthe refund of about Rs.18,00,000/-. Since that refund came only inMay, 1993, benefit thereof was extended for the assessment year1994-95. In the returns filed for the assessment year 1992-93, thededuction of Rs.1,66,62,866/- was claimed. For the subsequent yearsthe claim was dropped on the ground that there was neither anycessation nor any accrual on account of the order, dated 19.05.1993,passed by the Superintendent of Excise. The assessing authority,however, took view that there was no cessation on the basis of orderpassed by the Superintendent of Excise and the correspondingamount being Rs.1,66,62,866/- is liable to be assessed for theassessment year 1992-93. A separate order was passed in respect ofthe refund of about Rs.18,00,000/-. Since that refund came only inMay, 1993, benefit thereof was extended for the assessment year1994-95. The respondent carried the matter in appeal before theCommissioner of Income Tax (Appeals). The appellate authorityupheld the view taken by the assessing authority. Further appeal inI.T.A.No.63/Hyd/1996 was filed in relation to the assessment year 1992-93 before the Hyderabad Bench ‘B’ of the Income Tax AppellateTribunal regarding the benefit under Section 41(1) of the Income TaxAct, 1961 (for short, ‘the Act’). Through its order, dated 25.04.1996, theTribunal took the view that there was no cessation or remissionreferable to Section 41 of the Act, as a result of the order, dated19.05.1993, passed by the Superintendent of Excise; and that thecorresponding amount is not liable to be brought under income tax.The Revenue filed R.A.No.462/Hyd/1996 under Section 256 (1) of theAct with a prayer to refer certain questions to this Court. The requestwas not acceded to. Therefore, the Revenue approached this Court byfiling the I.T.C.No.27 of 1997. The same was allowed by this Court on09.08.2001 and accordingly the following questions were referred tothis Court by the Tribunal through a detailed statement of case. 1. “Whether on the facts and in the circumstances of the case,the Tribunal was correct in law in deleting the addition ofRs.1,66,62,866/- for the assessment year 1992-93.” 2. “Whether on the facts and in the circumstances of the case,the Tribunal was correct in holding that a sum ofRs.1,66,62,866/- is a contractual liability in terms of agreementbetween the assessee company and the conversion unit, eventhough the liability to assessee company arises only when theconversion unit pays the amount to the Central ExciseDepartment.” 3. “Whether on the facts and in the circumstances of the case,Tribunal was right in holding that there was no cessation ofliability when in fact the liability as claimed by the assesseeceased by virtue of the order dated 16.07.1992 of the Collectorof Central Excise (Appeals) setting aside the demands raisedby the lower authorities.” The same is subject matter of R.C.No.111 of 2001. It has been already mentioned in the preceding paragraphs thatthe benefit of refund of duty was extended to the Conversion Unit through an order, dated 19.05.1993. The effect thereof was not shownin the returns filed for the assessment year 1993-94. According to therespondent, it is only in the subsequent assessment year i.e., 1994-95that the amount can be adjusted or dealt with. In his order ofassessment, dated 13.03.1996, the assessing officer took the view thatthe amount should have been dealt with in the assessment year 1993-94 itself. Aggrieved thereby, the respondent filed an appeal before theCommissioner of Income Tax (Appeals). The appeal was allowedthrough order, dated 31.07.1998, and the contention of the respondentwas accepted. The said order was challenged by the Department inI.T.A.No.1803/Hyd/1996. The appeal was dismissed. The same ischallenged in I.T.T.A.No.7 of 2002. through an order, dated 19.05.1993. The effect thereof was not shownin the returns filed for the assessment year 1993-94. According to therespondent, it is only in the subsequent assessment year i.e., 1994-95that the amount can be adjusted or dealt with. In his order ofassessment, dated 13.03.1996, the assessing officer took the view thatthe amount should have been dealt with in the assessment year 1993-94 itself. Aggrieved thereby, the respondent filed an appeal before theCommissioner of Income Tax (Appeals). The appeal was allowedthrough order, dated 31.07.1998, and the contention of the respondentwas accepted. The said order was challenged by the Department inI.T.A.No.1803/Hyd/1996. The appeal was dismissed. The same ischallenged in I.T.T.A.No.7 of 2002. Sri J.V. Prasad, learned counsel for the appellant, submits thatthe view taken by the Tribunal that there was no remission orcessation of the liability in favour of the respondent, cannot besustained in law. He contends that the respondent claimed deductionin the preceding years of assessment at a time when the dispute waspending before the authorities under the Central Excise Act, and oncethe competent authority held that the liability, to that extent, no longerexists, the amount ought to have been brought under the purview ofthe tax. He further submits that the conclusions recorded in paragraphNo.22 of the order of the Tribunal in I.T.A.No.62/Hyd/1996 do notreflect the actual area of controversy nor does it according to law. Sri Y. Ratnakar, learned counsel for the respondent, submits thatthough the Assistant Collector passed an order on 19.02.1992, theactual determination of the liability had taken place only on19.05.1993, when the Superintendent of Excise passed theconsequential order. He contends that the cessation of liability couldnot be reflected in the returns for the assessment year 1993-94 on account of the fact that the clear picture did not emerge and therespondent was entitled in law, to mention the same in the assessmentyear 1994-95. He further submits that the refund of the amount ofabout Rs.18,00,000/- has also taken place in the same assessmentorder and the Tribunal has taken the same into account. Learnedcounsel submits that all the questions framed in the order of referenceas well as substantial question framed in the appeal deserve to beanswered against the Revenue. Before proceeding further, it becomes necessary to take note of the last paragraph of the order passed by the Tribunal inI.T.A.No.63/Hyd/1996. It reads: “22. Considering totality of facts and circumstances of thecase and the legal position that emerges from the abovediscussion, we are of the considered opinion that there wasneither cessation nor remission of the assessee’s liabilityunder its contract with the Conversion Unit with regard toCentral Excise duty payable by the Conversion Unit, andnotwithstanding the entries made by the assessee in thebooks of its account, the lower authorities were not justifiedin brining to tax the said liability of Rs.1,66,62,866/- underSection 41 (1) of the Income Tax Act. We accordinglydelete this addition of Rs.1,66,62,866/- made by theassessing officer and sustained by the CIT (A) in theimpugned order.” If this is read in isolation, it gives an impression that the amountof Rs.1,66,62,866/- cannot be brought into the purview of Section 41(1) of the Act at all. In all fairness, learned counsel for the respondentsubmitted that the dispute is only about the order of assessment andnot the total liability as such. Both the proceedings arose as a consequence of thedetermination of the actual quantum of the excise duty, payable on theproducts manufactured by the Conversion Unit, for and on behalf of the respondent. Though the liability to pay the excise duty is not directlythat of the appellant, it assumed the liability in terms of the agreement,dated 30.06.1982, entered into between itself and the Conversion Unit. If this is read in isolation, it gives an impression that the amountof Rs.1,66,62,866/- cannot be brought into the purview of Section 41(1) of the Act at all. In all fairness, learned counsel for the respondentsubmitted that the dispute is only about the order of assessment andnot the total liability as such. Both the proceedings arose as a consequence of thedetermination of the actual quantum of the excise duty, payable on theproducts manufactured by the Conversion Unit, for and on behalf of the respondent. Though the liability to pay the excise duty is not directlythat of the appellant, it assumed the liability in terms of the agreement,dated 30.06.1982, entered into between itself and the Conversion Unit. The uncertainty as to the quantum of excise duty payableprevailed in the assessment year 1992-93. It has already beenmentioned that pending final adjudication, the manufacturer i.e., theConversion Unit was permitted to pay the undisputed excise duty forclearance of the goods, subject to the execution of the bond, for thedifferential amount. The Assistant Commissioner of Central Excise has, no doubt,passed an order, dated 19.02.1992. That, however, did not result inactual determination of the excise duty. He has only stipulated thebroad guidelines, according to which, the excise duty must bedetermined. The working out part of it was entrusted to theSuperintendent of Central Excise. He, in turn, completed that exerciseon 19.05.1993. The effect of the order, dated 19.05.1993, was two fold. The firstwas that the Conversion Unit, and thereby the respondent were held tobe not under obligation to pay any amount covered under bonds, andthereby the bonds stood discharged. The second was that a sum ofabout Rs.18,00,000/- was to be refunded from out of the excise duty,already paid by the commission unit. The benefit of this has alsoaccrued to the respondent, since it has claimed deduction on accountof payment of excise duty. Notwithstanding the uncertain, nature of the claims that weremade before the assessing authority and appellate authority, the actualarea of controversy was about the year of assessment, in which both the components referred to above must be adjusted or reflected. Theassessing authority took the view that the date of order passed by theAssistant Commissioner of Central Excise constitutes the basis andaccordingly the assessment of those components must be for theassessment year 1992-93. The appellate authority also has taken thesame view. Section 41 (1) of the Act gets attracted in the facts of the present case. The provision reads: Profits chargeable to tax “1) Where an allowance or deduction has been made in theassessment for any year in respect of loss, expenditure ortrading liability incurred by the assessee (hereinafterreferred to as the first-mentioned person) and subsequentlyduring any previous year,– (a) the first-mentioned person has obtained, whether incash or in any other manner whatsoever, anyamount in respect of such loss or expenditure orsome benefit in respect of such trading liability byway of remission or cessation thereof, the amountobtained by such person or the value of benefitaccruing to him shall be deemed to be profits andgains of business or profession and accordinglychargeable to income-tax as the income of thatprevious year, whether the business or professionin respect of which the allowance or deduction hasbeen made is in existence in that year or not; or(b) the successor in business has obtained, whether incash or in any other manner whatsoever, anyamount in respect of which loss or expenditure wasincurred by the first-mentioned person or somebenefit in respect of the trading liability referred to inclause (a) by way of remission or cessation thereof,the amount obtained by the successor in businessor the value of benefit accruing to the successor inbusiness shall be deemed to be profits and gains ofthe business or profession, and accordinglychargeable to income-tax as the income of thatprevious year. The gist thereof is that if an assessee has made any deductiontowards any liability in the earlier assessment years and such liabilityhas either ceased or any remission was made, the same must bebrought under the net of the income tax in the subsequent assessmentyear. Part of the discussion undertaken by the Tribunal as well as theCommissioner, gives an impression that the respondent was objectingto the very application of Section 41 of the Act in relation to the benefitthat accrued to it on account of the order, dated 19.05.1993, passed bythe Superintendent of Excise. However, on a close analysis, itbecomes clear that the effort made by the respondent was only toconvince the authorities under the Act to permit it to reflect that in theassessment year 1994-95 and the earlier year. The emphasis of the Income Tax Officer as well as theCommissioner of Income Tax (Appeals) was on the date of the order,passed by the Assistant Collector i.e., 27.04.1992. It may be true thatthe adjudication, as such, under the Central Excise Act vis-à-vis theConversion Unit has taken place only in the hands of the AssistantCommissioner. Had it been a case where the Assistant Commissionerdetermined the quantum of excise duty, the view taken by the IncomeTax Officer could have been accepted. It has also been mentionedthat the Assistant Commissioner, Central Excise, did nothing morethan indicating the parameters for determining or reckoning the exciseduty. To be precise, he directed that the nearest comparable unit mustbe taken as the basis for determining the excise duty for the productsmanufactured by the Conversion Unit. Barring that, he did notundertake any calculation or reckoning. It was only theSuperintendent of Central Excise that had undertaken the entire exercise. He identified M/s. Super Food Products, as the comparable unit and passed order on 19.02.1995, indicating the exact amount of excise duty payable onthe products manufactured by the Conversion Unit. The resultantfigures not only lead to waiving of the amount covered by the bonds,but also refund of the amount to a tune of Rs.18,00,000/-. Once the respondent is relieved of the liability to pay theamount covered by bonds, Section 41 (1) of the Act gets attracted andthe liability can be said to have ceased. As a consequence, therespondent had to pay the tax on the amount, regarding which hecleared exemption in the returns for the earlier assessment years. Theonly difference would be that since the actual determination emergedonly in May, 1993, it shall be under obligation to reflect the same in thereturns for the year 1994-95. So is the case with the amount ofRs.18,00,000/-, which was ordered to be refunded. Therefore,Question No.1 in R.C.No.111 of 2001 is answered against theRevenue and in favour of the 2[nd] respondent. Question No.2 is answered expressing the view that the amountof Rs.1,66,62,866/- is liable to be dealt with under Section 41 (1) of theAct, however, for the assessment year 1994-95. Question No.3 neednot be answered in view of the answers given to Question Nos.1 and2. For the same reasons mentioned above, I.T.T.A No.7 of 2002 isdismissed, subject, however, to condition that the amount of exciseduty refunded through order, dated 19.05.1993, passed by theSuperintendent of Central Excise, shall be dealt with in the returns forthe assessment year 1994-95. There shall be no order as to costs. The miscellaneous petitions filed in the reference case and theappeal shall stand disposed of. _______________________ 22.07.2014Note:- L.R. Copy to be marked. (B/o) KH/gk L. NARASIMHA REDDY, J ________________________ CHALLA KODANDA RAM, J