BABY MARINE EXPORTS VS COMMISSIONER OF INCOME-TAX
1999 P T D 844
[225 I T R 631]
[Kerala High Court (India)]
Before V. V. Kamat and P. A. Mohammed, JJ
BABY MARINE EXPORTS
Versus
COMMISSIONER OF INCOME-TAX
I. T. Rs. Nos. 130 to 132 of 1991, decided on 10/07/1996.
Income-tax---
----Business expenditure---Mercantile system of accounting---Purchase tax-- Provision made for purchase tax---Liability ascertained ---Assessee claiming exemption of purchase tax in respect of purchase of prawns---Sales tax assessments pending ---S.T.O. not giving exemption till date of Tribunal's decision---Liability for purchase tax continues to exist---Provision made for purchase tax is allowable deduction ---Kerala General Sales Tax Act, 1963; S.5(3)---Indian Central Sales Tax Act, 1956, S.5(3).
The assessee was engaged in the purchase of sea foods. For the assessment years 1980-81, 1981-82 and 1982-83, it claimed deduction of provision made for purchase tax which it had to pay on purchase of prawns under the Kerala General Sales Tax Act. The original assessments of the assessee were completed by the Income-tax Officer treating these provisions as allowable deductions. However, in view of the decision of, the Kerala High Court in Dy. C.S.T. v. Neroth Oil Mills Co. Ltd. (1982) 49 STC 249, which held that prawns and fish purchased and exported after processing were one and the same commodity and that, therefore, the assessee could get exemption from purchase tax under section 5(3) of the Central Sales Tax Act, 1956, the Income-tax Officer withdrew the deductions already allowed by reopening the assessments under section 147(b). The reassessments were confirmed by the Commissioner of Income-tax (Appeals). On appeal to the Tribunal, the assessee contended that since the sales tax assessments were still pending, the liability to pay purchase tax still continued to exist. The Tribunal held that there was no reason to believe that the Sales Tax Officer would refuse exemption and that there was no valid purchase tax liability during the relevant accounting years. On a reference:
Held, (i) that the liability to pay purchase `tax continued to exist even though the assessee had filed a return claiming exemption in respect of the turnover relating to the purchase of prawns in the course of export. The filing of returns was a statutory obligation under the provisions of the Central Sales Tax Act as well as the General Sales Tax Act of the State.
(ii) Though the processed or frozen shrimps, prawns and lobsters were commercially the same commodity as raw shrimps, prawns and lobsters and, therefore, the purchase of those commodities for the purpose of fulfilling the existing contracts for export was exempt from purchase tax by reason of the deeming provision contained in section 5(3) of the Central Sales Tax Act, yet what was provided under section 5(3) of the Central Sales Tax Act was not a total or general exemption. The grant of exemption was dependent on the fulfilment of the conditions and till the authorities under the sales tax statutes allowed such exemption, the liability to pay the tax subsisted.
(iii) That the assessee had acted as a prudent businessman while dealing with the state of affairs with regard to the liability to pay purchase tax. It was justified in making a provision for purchase tax liability in the accounts maintained under the mercantile system of accounting. The liability continued to exist till it was finally effaced by the process known to law.
(iv) That, therefore, the Tribunal was not right in holding that the assessee was not entitled to deduction of the amount of the provision of purchase tax in computing its taxable income.
Abad Fisheries v. C.I.T. (1995) 213 ITR 694 (Ker.) fol.
A. L. A. Firm v. C.I.T. (1991) 189 ITR 285 (SC); C.I.T. v. Royal Boot House (1970) 75 ITR 507; 25 STC 243 (Cal.); Dy. CST v. Neroth Oil Mills Co. Ltd. (1982) 49 STC 249 (Ker.); Jute Corporation Of India Ltd. v. C.I.T. (1991) 187 ITR 688 (SC); Kedarnath Jute Mfg. Co. Ltd. v. C.I.T. (1971) 82 ITR 363; 28 STC 672 (SC); Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53; (1969) 39 Comp. Cas. 410; 35 FJR 181 (SC); Sterling Foods v. State of Karnataka (1986) 62 STC 238 (Ker.) and Sterling Foods v. State of Karnataka (1986) 63 STC 239 (SC) ref.
C. Kochunni Nair and Dale P. Kurian for the Assessee.
P.K.R. Menon and N. R. K. Nair for the Commissioner.
JUDGMENT
P. A. MOHAMMED, J.---These income-tax references under section 256(1) of the Income Tax Act, 1961 (hereinafter called "the Act"), are coming up at the instance of the assessee, Baby Marine Exports, Quilon. The assessment years involved in these references are 1980-81, 1981-82 and 1982-83. The assessee is a partnership firm engaged in the business of export of see foods. For the accounting years relevant to the assessment years 1980-81, 1981-82 and 1982-83, the assessee had purchased prawns and it had to pay purchase tax under the Kerala General Sales Tax Act. Therefore, the assessee-firm made a provision for Rs.25,19,758, Rs.24,44,046 and Rs.36,51,036, respectively, for the aforesaid assessment years. The original assessments were completed by the Income-tax Officer respectively on October 18, 1982, December 31, 1982, and March 17, 1983, treating these provisions as allowable deductions. However, on August 20, 1981, this Court in Deputy CST v. Neroth Oil Mills Co. Ltd. (1982) 49 STC 249, held that prawns and fish purchased and exported after processing are one and the same commodity and that therefore the assessee could get exemption from purchase tax under section 5(3) of the Central Sales Tax Act, 1956. The above decision was brought to the notice of the Income-tax Officer by the audit department after the original assessments were completed. In that background, the officer reopened those assessments under section 147(b) of the Act and withdrew the deductions already allowed. The reassessments passed by the officer were confirmed by the Commissioner of Income-tax (Appeals). Being aggrieved by the said assessments, the assessee filed appeals before the Income-tax Appellate Tribunal. Two contentions were mainly canvassed by the assessee before the Tribunal. The first contention was that the reopening was bad inasmuch as no information had been received subsequent to the assessment. Secondly, it was urged that since sales tax assessments are still pending the liability to pay purchase tax continues to exist. ,As far as the first contention is concerned, the Tribunal observed that it was concluded against the assessee in view of the decision of the Supreme Court in A. L. A. Firm v. C.I.T. (1991) 189 ITR 285. As far as the second contention is concerned, the Tribunal held that there was no reason to believe that the Sales Tax Officer would refuse exemption and that there was no valid purchase tax liability during the relevant accounting years. Being aggrieved by the decision of the Tribunal, two questions of law were sought to be referred to this Court by the assessee. Inasmuch as the validity of the reopening of the assessment was concluded as aforesaid the Tribunal found that the said question need not be referred.
The question the Bench marked to this Court for decision is as follows:
"Whether the Tribunal is right in holding that considering the sales tax statute was a whole and the conduct of the assessee there is no valid purchase tax liability for the assessment years 1980-81, 1981-82 and 1982-83 in a case where the sales tax assessments are pending and the Sales Tax Officer has not given any exemption till the date of the Tribunal decision?"
In view of the nature of the question referred to us for decision, it is necessary to examine the liability of the assessee for payment of purchase tax. Article 286(1)(b) of the Constitution places a ban on the power of the States to tax export and import sales and purchases. Section 5 of the Central Sales Tax Act, 1956, lays down the principles for determining when a sale or purchase takes place in the course of import or export. The assessment in the case of the assessee was reopened by the Income-tax Officer on the ground that it could get exemption from payment of purchase tax under sub section (3) of section 5. The said, subsection lays down that the penultimate sale preceding the last sale that occasioned the export of goods out of the territory of India will also be considered to be a sale in the course of export of goods out of the territory of India only if the three requirements laid down therein are fulfilled. Those requirements are: (i) the transaction of such last sale or purchase takes place after the agreement or order received by the exporter from his foreign buyer, (ii) the last purchase must have been taken place after the agreement with the foreign buyer was entered into, and (iii) the transaction of such last sale or purchase was entered into for the purpose of complying with the agreement or order received by the exporter from foreign buyer: This would sufficiently indicate that the exemption under section 5(3) will be available only on fulfilment of the aforesaid conditions. In other words, the exemption provided under the said subsection is not absolute or unqualified.
The liability to pay purchase tax continues to exist even though the assessee files a return claiming exemption in respect of the turnover relating to the purchase of prawns in the course of export. The filing of returns is a statutory obligation under the provisions of the Central Sales Tax Act as well as the General Sales Tax law of the State. In this context, the following observation of the Calcutta High Court in C.I.T. v. Royal Boot House (1970) 75 ITR 507 is appropriate (at page 511):
"It is obligatory for such dealer to file returns either annually or quarterly or monthly, as the case may be, and the tax has to be paid prior to the filing of the returns and the sales tax authorities are entitled to make assessment and demand the balance sum from the dealer. There is also provision for enforcing payment and realisation of sales tax in case returns are not filed or payments not made in accordance with the returns filed. It appears, therefore, that the liability to pay sales tax is not dependent upon assessment or demand. The obligation is to pay the sales tax either annually, quarterly or monthly,, as the case may be, under the particular rule guiding a particular dealer."
It cannot be said that there is no obligation to file the returns when the turnover is exempted generally or under specified circumstances. In other words, the liability to pay the tax subsists even in such circumstances till such time it is finally wiped out in the process known to the statute under the provisions of which the obligation to file the return arose.
A Division Bench of this Court in Deputy C.S.T. v. Neroth Oil Mills Co. Ltd. (1982) 49 STC 249 observed to the following effect (headnote): .
"Commercially prawns which were purchased by the assessee and prawns exported after processing for the purpose of such export were one and the same commodity as rightly held by the Tribunal."
In that view of the matter, exemption from payment of tax allowed by the Tribunal was upheld by this court. That was a case where prawns were purchased by the assessee locally and were cleaned, peeled, processed and packed as prawns for sale by export outside India. The purchases by the assessee were purchases preceding the sale occasioning the export of the goods. On the approach that the goods purchased by the assessee were not the same goods as were exported the sales tax authorities sought to tax the purchases. But the Sales Tax Appellate Tribunal negatived the contention of the Department that the identity of the goods was lost by reason of the ` process to which the goods were subjected.
In view of the above decision it was contended by the Revenue that there is no liability for payment of purchase tax. An identical question came up for decision before a Division Bench of this Court in Abad Fisheries v. C.I.T. (1995) 213 ITR 694. The Division Bench while dealing with Neroth Oil Mills Co.'s case (1982) 49 STC 249 (Ken.), observed at page 699:
"It was not in dispute before us that the State of Kerala has taken up the matter in appeal to the Supreme Court and that the appeal is pending. "
That means, at the time of the above judgment, that is to say, on November 3, 1994, the appeal against the decision of this Court in Neroth Oil Mills Co.'s case (1982) 49 STC 249 was pending before the Supreme Court. It indicates that the liability to pay the tax did not come to an end.
Counsel for the Revenue brings to our notice that the decision of the Karnataka High Court in Sterling Foods v. State of Karnataka (1986) 62 STC 238 (Kar.) has been reversed by the Supreme Court in Sterling Foods v. State of Karnataka (1986) 63 STC 239. Now, the resultant position is that the processed or frozen shrimps, prawns and lobsters were commercially the same commodity as raw shrimps, prawns and lobsters. Therefore, the purchase of those commodities for the purpose of fulfilling the existing contracts for export was exempt from purchase tax by reason of the deeming provision contained in section 5(3) of the Central Sales Tax Act. Can it be said that the liability for payment of purchase tax has totally been obliterated by reason of the aforesaid decision of the Supreme Court? No. Because what is provided under section 5(3) is not a total or general exemption. The grant of exemption is dependent on the fulfilment of conditions and till the authorities under the sales tax statutes allow such exemption the liability to pay the tax subsists.
The reassessments were completed in this case by the Income-tax officer in view of the fact that this Court had held that no purchase tax is payable on the purchase of fish or prawns for the purpose of export in view of the decision in Neroth Oil Mills Co.'s case (1982) 49 STC 249 (Ken). In respect of the assessee's claim, the Officer has also pointed out that the assessee had been disputing the liability to pay the purchase tax in appeal before the sales tax authorities and finally this Court had decided in favour of the assessee. Thus, the Revenue argues that the assessee had no existing liability for payment of purchase tax. As observed earlier, it is against the said decision of this Court, the appeal is pending before the Supreme Court. In fact, before the Commissioner of Income-tax (Appeals), the assessee had pointed out this position and argued that the liability to pay the tax had not come to an end. While dealing with the contentions raised by the assessee as well as the Revenue, the Commissioner of Income-tax (Appeals) observed: "It is not necessary to consider this question now as I am concerned with only the allowance of a mere provision for payment of purchase tax as deduction for this year. The fact is that the liability claimed by the appellant has not arisen at all during this year or subsequent years. It is a mere provision made by the assessee and not an ascertained liability." The following observation of the Tribunal is also relevant in this context: "The conduct of the party in this regard would be a relevant factor in this case, even though several years have lapsed and no demand has been raised by the sales tax authorities against the assessee. No doubt, our attention in the course of appellate proceedings is drawn to a communication received by the assessee on June 17, 1989. This merely required the assessee to clarify certain things mid to produce the books and other documents which could enable the sales tax authorities to assess the correct sales tax liability. This cannot be taken as an indication that the sales tax authorities are going to deny the assessee the exemption as claimed by it or that the issue regarding exemption is only kept in a state of suspended animation".
As observed earlier, the liability to pay tax arises when there is a statutory duty or obligation to file returns under the provisions of the Act. Every registered dealer is legally bound to disclose in his monthly or annual returns the entire turnover either exempted or non-exempted. Even if the turnover comes under the exempted category, the dealer is not absolved front his obligation to file the returns under the provisions of the Act. Thus the liability to pay tax is fastened with duty or obligation, but it is not an enforceable liability when it is so accrued. The enforceability is the final stage, which is dependent on the facts of each case. Here we are concerned with the question whether the provision made for purchase tax liability is an ascertained liability or not. The case of the Revenue all along is that it is not an ascertained liability because no demand has been made. The Income-tax Officer at the time of the original assessment, as could be seen from Annexures A-I to A-3, found that the provision for payment of purchase tax on the purchase of fish for the purpose of export was an allowable deduction. The amount so payable for the three years in question has been ascertained and quantified in the original assessment order. Because of this ascertained character of the provision for payment of purchase tax, deduction was originally allowed. That would indicate, what is available in this case is an ascertained liability and not a contingent liability. Of course this is distinct from the liability for unliquidated damages arising from breach of contract. In a claim for such damages, unless the amount is quantified through the process known to law, we cannot say there is an ascertained liability. As far as the present case is concerned, at the time whets the original assessments were passed by the Income-tax Officer, the liability to pay the purchase tax was ascertained and quantum of tax was fixed with some precision.
However, the intricate nature of the trade or business activities may sometimes suggest the liability as immature or uncertain. But in such circumstances what is required to be looked into is the sum total of the obligation arising out of statutory provision and its resultant position in fixing the liability with some precision. In this context, the following observation of Lord Radcliffe is apposite:
"Where you are dealing with a number of similar obligations that arise from trading, although it may be true to say of each separate one that it may never mature, it is the sum of the obligations that matters to the trader, and experience may show that, while each remains uncertain, the aggregate can be fixed with some precision.
These principles have been accepted by the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53.
The Supreme .Court in Kedarnath Jute Mfg. Co. Ltd. v. C.I.T. (1971) 82 ITR 363, AIR 1971 SC 2145, while dealing with the question of sales tax liability as an item of business expenditure under the Act, observed at page 2147 (at page 367 of 82 ITR):
"Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs.1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or Courts which failed."
The above decision was subsequently followed by the Supreme Court in Jute Corporation of India Ltd. v. C.I.T. (.1991) 187 ITR 688 and the case remanded to the Appellate Assistant Commissioner to consider the question of the assessee's claim for deduction towards the liability to pay purchase tax.
The Division Bench of this Court in Abad Fisheries v. C.I.T. (1995) 213 ITR 694, after placing reliance on the decision of the Supreme Court in Kedarnath's case (1971) 82 ITR 363 held (at page 703):
"The principle emanating from the above discussion is that a provision in the accounts trade by an assessee following the mercantile system of accounting, for liability to sales tax, (though disputed) is yet liable to be allowed as business expenditure, 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 fanciful claim, based on the ipse dixit of the assessee that could form the basis of any claim for deduction of such liability. But if the assessee had a genuine ground, or reasonable basis, for apprehending that the liability may be cast on it, having regard to the view adopted by the concerned Sales Tax Department, or having regard to the case of the assessee himself or other similar assessees or otherwise, the claim cannot be rejected merely because it is disputed. It could not then 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 assessee was placed at the time the provision was made."
The above case arose in a similar set of facts available in the present case. We respectfully agree with the reasonings and conclusions of the Division Bench in the aforesaid case.
In view of the above decision, what this Court can say is that the assessee in this case has acted as a prudent businessman while dealing with the state of affairs with regard to the liability to pay purchase tax. He is justified in making a provision for purchase tax liability in the accounts maintained under the mercantile system of accounting. In view of the ascertained character of the liability as we have found hereinbefore, it cannot be said to have been obliterated by keeping it in "a suspended animation". The liability continues to exist till it is finally effaced by the process known to law.
Before parting with this case, we feel it necessary to reiterate the following observation of the Division Bench contained in the decision in Abad Fisheries' case (1995) 213 ITR 694, 704 (Ker):
"The Department is not without its remedies in case it is ultimately found that the purchase tax was not payable. Section 41(1) enables assessment of such amounts to tax in any subsequent year in which the liability ceased to exist."
In view of the discussion hereinbefore, we have no hesitation to hold that the Tribunal has acted erroneously in deciding that the assessee was not entitled to deduction of the amount in question in computing the taxable income of the assessee. In the result, the question referred to us is answered in the negative, that is to say, against the Revenue and in favour of the assessee. No order as to costs.
A copy of this judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
C.M.A./1751/FC Reference answered.