(Appeal from the judgment and order, dated February 20, 1991, of the Delhi High Court in I.T.C. No.70 of 1990).

Income-tax---

----Business expenditure---Accounting---Mercantile system of accounting-- Excise duty ---Assessee manufacturing carbon paper which was not liable to excise duty till 28-2-1975---Excise duty levied on carbon paper by Finance Act, 1975---Demand notice for payment of excise duty issued by Collector in October, 1979---Obligation to pay excise duty arose at that stage---Fact that assessee contested demand was not relevant---Entries in account were not conclusive---Tribunal was justified in holding that amount demanded was deductible---No question of law arose for reference---Appeal dismissed-- Indian Income Tax Act, 1961, Ss.37 & 256.

The assessee-company was manufacturing carbon paper which was not liable to excise duty till February 28,1975. By the Finance Act, 1975. duty at 10 per cent. ad valorem was levied on items not otherwise specified therein which included carbon paper. On October 29, 1979, the Collector of Central Excise issued a general trade notice stating that "Carbon Paper" would be liable to be classified as coated paper under Item No.17(2) of the Central Excise Tariff. Prior to that, carbon paper was subjected to excise duty under residuary Item No.68. Hence, the assessee was required to clear the goods under the said Item No.17(2). However, the assessee did not accept this classification and contended that carbon paper was not coated paper at all. On March 11, 1980, a notice was issued requiring the assessee to show cause as to why the approval of the classification of carbon paper under Item No.68 should not be withdrawn with effect from March 16. 1976. Thereafter, the assessee received a demand letter, dated April 21. 1980. which was in the form of a demand notice for payment of basic excise duty and special excise duty for the years 1976-77, 1978-79 and 1979-80, in all demanding a sum of Rs.92,98,805. The assessee challenged the levy of excise duty. Pending the writ petition, the assessee filed a revised return claiming the amount of Rs.92,98,805;as deduction. The Income-tax Officer disallowed the claim of the assessee for the assessment year 1980-81 on the ground that only a show-cause notice was' issued in the said assessment year. In respect of the subsequent assessment year 1981-82, the claim of the assessee was rejected by the Income-tax Officer on the ground that as the assessee maintained mercantile system of accounting, the claim for earlier years was inadmissible. The Commissioner of Income-tax (Appeals) allowed the claim of the assessee. The Tribunal dismissed the appeal as well as the application under section 256(1) of the Income Tax .Act, 1961, for referring the questions to the High Court. The High Court dismissed the application for directing a reference. On appeal to the 'Supreme Court:

Held, dismissing the appeal, that, in the present case, the liability accrued over the accounting period because of the demand notice issued by the Excise Department. The said demand notice was issued after the show- cause notice and on the basis of the trade notice issued by the Collector in October, 1979, providing that coated, paper would be liable to be classified under tariff Item No.17(2). 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. In this view of the matter, the High Court rightly rejected the application filed by the Revenue for raising and referring -the questions whether the amount was deductible.

CIT v. Bharat Carbon and Ribbon Mfg. Co. (P.) Ltd. (1991) 192 ITR 221 affirmed.

Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363; (1971) 28 STC 672 (SC) applied.

Indian Molasses Co.(P.) Ltd. v: CIT-(1959) 37 ITR 66 (SC) and Pope The King Match Factory v. CIT (1963) 50 ITR 495 (Mad.) ref.

K. N. Shukla, Senior Advocate (Ms. Neera Gupta, K.C. Kaushik, S. D. Sharma and S. K. Dwivedi, Advocates with him) for Appellant.

V. U. Eradi, Gauri Rasgotra, Ms. Purnima and Sumant J. Khaitan, Advocates for Respondent.

JUDGMENT

M. B. SHAH, J.---The Commissioner of Income-tax,' Delhi, sought reference of the following two questions by filing an application before the Delhi High Court (see (1991) 192 ITR 221) under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") (page 222):

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in confirming that a contingent liability which is not acknowledged even as a debt by the assessee qualifies for deduction under the Income-tax Act?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the principles laid down by the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. (1959) 37 ITR 66, are not applicable to this case and the case is covered by the principles laid down in Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 by ignoring the material fact that excise duty in this case is neither determined nor owed as a debt by the assessee but is merely a contingent liability not provided for in, the books of account?"

The High Court dismissed the said application by holding that the questions of law raised are academic and the answer to the same is self -evident in view of the decision of this Court in the case of Kedernath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363. Against that order, the Revenue has filed this appeal. It was the case of the assessee-respondent company that the company was manufacturing carbon paper which was not labile to excise duty till February 28, 1975. By the Finance Act of 1975, duty at 10 per cent. ad valorem was levied on items not otherwise specified therein which included carbon paper. On October 29, 1979, the Collector of Central Excise issued a general trade notice stating that "carbon paper" would be liable to be classified as coated paper under Item No.17(2) of the Central, Excise Tariff. Prior to that, carbon paper was subjected to excise duty under residuary Item No.68. Hence, the respondent-assessee was required to clear those goods under the said item No.17(2). However, the assessee did not accept this classification and contended that carbon paper was not coated paper at all. On March 11, 1980, a notice was issued requiring the assessee to show cause as to why the approval of the classification of carbon paper under Item No.68 should not be withdrawn with effect from March 16, 1976. Thereafter, the assessee received a demand letter, dated April 21, 1980, which is in the form of a demand notice for payment of basic excise duty and special excise duty for the years 1976-77 1978-79 and 1979-80, in all demanding a sum of Rs.92,98,805. The assessee challenged the levy of excise duty under Item No.17(2) by filing Civil Writ Petition No.634 of 1980. Pending the writ petition, the assessee filed a revised return claiming the amount of Rs.92,98,805 as deduction. The Income-tax 'Officer disallowed the claim of the assessee for the assessment year 1980-81 on the ground that only a show-cause notice was issued in the said assessment year. In respect of the subsequent assessment year 1981-82, the claim of the assessee was rejected by the Income-tax Officer on the ground that as the assessee maintains the mercantile system of accounting, the claim for earlier years was inadmissible. He further observed that the liability had arisen in that year, but the same would have been allowed if the 71.:bility was in present and not in future as the dispute was pending in a writ petition and hence, it was a contingent liability. In appeal, the Commissioner of Income-tax allowed the claim of the assessee on the basis of the decision of this Court in the case of Kedamth (1971) 82 ITR 363. The Tribunal dismissed the appeal as well as the application under section 256(1) for referring the questions to the High Court.

At the time of hearing of this appeal, learned counsel for the applicant submitted that the High Court ought to have raised the questions and directed them to be referred because questions of law were required to be decided. He submitted that the liability of the assessee was contingent and the decision rendered by this Court in Kedarnath's case-(1971) 82 ITR 363 does not deal with a situation where the liability had arisen in a subsequent assessment year It is his further submission that the so-called contingent liability to pay the excise duty related to previous assessment years 1976-77 to 1979-80 and, therefore, deductions were rightly not granted in the assessment year 1981-82:

In the present case, the liability to pay excise duty had arisen on April 21, 1980, when the Excise Department issued demand notice asking the assessee to pay the basic excise duty and special excise duty for the said years on the basis of trade notice issued in October, 1979. The assessee admittedly was following the mercantile system of accounting and, therefore; he claimed deduction for the said amount for the assessment year 1981-82 Prior to that assessment 'year, there was no demand as, for the excise duty, the carbon paper manufactured by the assessee was classified under tariff Item No.68. It is true that, he has objected to the said demand and has filed writ petition challenging the said demand, but, at the same time, obligation to pay the said excise duty arose in that assessment year, although the liability to pay the said amount might not have been enforced pending the petition. The liability had been quantified and the demand therefore had been made under the demand notice, dated April 21, 1980. There was nothing uncertain, tentative, provisional or contingent in the matter of the. assessee's liability to pay the excise duty. Under the law, the assessee was bound to pay the same till the order directing the assessee to pay the same was set aside or modified. In Kedarnath's case (1971) 82 ITR 363, this Court negatived the similar contention by holding thus (page 366):

"It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before 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."

Further, in that case, the Court has approved the decision of the Madras High Court in the case of Pope The King Match' Factory v. CIT (1963) 50 ITR 495 where it was held 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 by the competent excise authority.

Learned, counsel for the appellant further submitted that in the books of account the respondent had not debited the said amount and no entries are made acknowledging the said liability. In our view, this contention also does not require much consideration as similar contention was negatived by this Court in Kedarnath's case (1971) 82 ITR 363, by holding thus (page 367):

"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."

Learned counsel for the appellant, however, relied upon the decision of this Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT (1959) 37 ITR 66 for contending that the expenditure would be deductible for Income -tax purpose which is towards a liability existing at the time, but putting aside the money which may become expenditure on the happening of an event is not expenditure. He submitted that the liability of the assessee in the present case was only contingent and not actual liability in praesenti. It is not necessary to discuss in detail the said decision because in that case itself the Court has observed (page 76;)

"Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any .sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits."

The Court after discussing various contentions finally held (page 80):

"Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. "

In the present case, the liability accrued over the accounting period because of demand notice issued by the Excise Department. The said demand notice was issued after the show-cause notice and on the basis of the trade notice issued by Collector of Customs in October, 1979, providing that coated paper would be liable to be classified under the tariff Item No.17(2). The obligation under the law to pay the excise duty arose at that stage. Raising of the dispute by the assessee by filing the 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.

In this view of the matter, in our view, the High Court rightly rejected the application filed by the Revenue for raising and referring the questions stated above. 1n the result, the appeal is dismissed with-no order as to costs.

M.B.A./4252/FCAppeal dismissed.