Income‑tax‑‑‑

‑‑‑‑Business expenditure‑‑‑Mercantile system of accounting‑‑‑Customs duty of earlier assessment years claimed in assessment year 1983‑84‑‑‑Original demand for customs duty on 30‑10‑1980‑‑‑Nullified on appeal by Central Board on 28‑3‑1981‑‑‑Fresh demand, dated 27‑3‑1982‑‑‑Liability accrued in year of demand‑‑‑Deductible in assessment year 1983‑84‑‑‑Indian Income Tax Act, 1961, S. 37.

The assessee, a company engaged in the manufacture and sale of electronic components; followed the mercantile system of accounting and claimed deduction of a sum of Rs.70.56 lakhs for the assessment year 1983‑84 being the customs duty payable in respect of the assessment years 1975‑76 to 1983‑84. The Income‑tax Officer rejected the claim on the ground that the liability to pay duty had not arisen but the Tribunal upheld the claim on the ground that since the demand was subsisting the liability also subsisted and accrued during the relevant assessment year and hence the deduction was allowable. On a reference:

Held, that the original order of demand, dated October 30, 1980, passed by the customs authorities was nullified in appeal by order, dated March 28, 1981; of the Central Board of Excise and Customs. Therefore, the order dated October 30, 1980 had become non est. Thereafter, the original order of demand was made by the Collector of Customs on March 27, 1982, within the relevant assessment year 1983‑84. Therefore, the deduction of customs duty claimed was allowable in the assessment year 1983‑84.

Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363; (1971) 28 STC 672 (SC); Pope the King Match Factory v. CIT (1963) 50 ITR 495 (Mad.) and Salem Cooperative Central Bank Ltd. v. CIT (1993) 201 ITR 697 (SC) ref.

P. K. R Menon, Senior Advocate and N. R. K. Nair for the Commissioner.

C.N. Ramachandran Nair for the Assessee.

JUDGMENT

ARIJIT PASAYAT, C.J.‑‑‑Pursuant to the direction given in an application under section 256(2) of the Income Tax Act, 1961 (in short, "the Act"), the following question has been referred for opinion of this court by the Income‑tax Appellate Tribunal, Cochin ench (in short, "the Tribunal"), alongwith a statement of case:

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the customs duty in the assessment year 1983‑84?"

The factual position, as set out in the statement of case, is as follows:

The assessee is a company in which the public are substantially interested. It follows the mercantile system of accounting. For assessment year 1983‑84, corresponding to the accounting year ended on December, 31, 1982, returns were filed by the assessee on June 30, 1983, in respect of its income from manufacture and sale of electronic components. It claimed deduction of Rs.47,00,000 being the customs duty payable for the year 1982, consequent on the finding of the customs authorities to load the invoice value. Subsequently, a revised return was filed on August 2, 1985, claiming that a deduction amounting to Rs.70.56 lakhs being the liability on this account for the assessment years 1975‑76 to 1983‑84 should be allowed. After deducting the claim already allowed for the assessment years 1981‑82 and 1982‑83, the balance liability claimed for the assessment year in question amounted to Rs.58,21,218. The Assessing Officer rejected the claim on the ground that a liability to customs duty had not arisen at the point of time in consideration. On appeal, the Commissioner of Income‑tax (Appeals) (in short, "CIT (Appeals)"), held that the assessee was disputing the very levy of customs duty and, therefore, the claim was not allowable. The assessee preferred a second appeal before the Tribunal, which held that~ liability accrued the moment a demand was raised by the concerned authorities under the relevant Act and it was not permissible to contend that there was no accrued liability merely because the assessee had been disputing the liability. As the demand was still subsisting, the liability also subsisted and accrued during the relevant previous year. The Tribunal, therefore, directed the Assessing Officer to allow the claim in respect of the liability to customs duty. The application filed under section 256(1) of the Act by the Revenue was rejected by the Tribunal. Thereafter, an application under section 256(2) of the Act was filed. Direction was given for referring the case alongwith a statement of case and that is how the matter is before this Court.

Learned counsel for the Revenue submitted that the demand was not raised during the assessment year in question and in fact, the demand notice was served on October. 30, 1980. The order, on the basis of which the claim is made, was passed on March 27, 1982. That was merely an additional demand raised. The Tribunal was not justified in accepting the claim. Learned counsel for the assessee, on the other hand, contended that for the first time such a plea is being raised by the Revenue. Its stand all through has been that there being a dispute to the demand raised, the claim was not allowable.

A few dates are necessary to be noted for resolution of the controversy. Originally an order, dated October 30, 1980, was passed by the Customs Authorities. The same was annulled by the order dated March 28, 1981, of the Central Board of Excise and Customs. Thereafter, the original order of demand made by the Collector of Customs is, dated March 27, 1982. The stand of the Revenue, contrary to what was being taken before the authorities, is that the original demand was raised during the currency of assessment year 1981‑82 and, therefore, if at all any deduction was to be made, that was in respect of said assessment year. The demand raised on March 27, 1982, is an additional demand. Even in respect of such additional demand, the claim was to be made in respect of the assessment year during which the original demand was raised. Contrary to what has been urged presently, the stand of the Revenue all through was that the assessee having disputed the demand was not entitled to claim deduction. That plea is given up and what is urged at present is related to the demand which was raised by order, dated October 30, 1980, characterising the order, dated March 28, 1982, to be an additional demand.

Where the system of accounting is mercantile, the liability to pay tax accrues or arises in the year in which the relevant transactions took place. The decision of the apex Court. in Kedarnath Jute Mfg. Co. Ltd: v. CIT (1971) 82 ITR 363, elaborately deals with the position. It was held that under the mercantile system of accounting, the liability under a statute should be allowed as a deduction in the year in which the relevant transactions took place, although (i) the precise qualification of the liability in the form of an assessment and demand may come later; (ii) the assessee may contest the liability in appeal or other proceedings ; and (iii) the assessee may have made no provision for the liability in his books. Where the mercantile system of accounting is followed, the assessee is entitled to claim deduction even though the expenditure is not actually incurred and it is enough if the liability for such expenditure accrues. Though the liability could not be enforced till the quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The principle emanating from various decisions of the apex Court is that a provision in the accounts made by an assessee following the mercantile system of accounting for a fiscal liability though disputed is liable to be allowed as business expenditure, if there is a bona fide reasonable apprehension on the part of the assessee that the amount will be claimed. Of course, it is not every fanciful claim based on the ipse dixit of the assessee that forms the basis of a claim for the deduction of such liability.

In the case of sales tax or other duty, e.g.; excise or export duty, which is collected by a dealer from his customers as part of the consideration for sale of goods, the same is deductible as a business expenditure in the yea; in which liability to pay arises. This is so when the method of accounting followed by the assessee is mercantile. When an original demand or extra demand is raised during any assessment year, it can be claimed as a deduction in that year alone. This position prevailed prior to an enactment of section 43B of the Act. The said provision was introduced with effect from April 1, 1984. As observed in Pope the King Match Factory v. CIT (1963) 50 1TR 495 (Mad) the liability can be claimed in the year of demand. That view was again reiterated in Kedarnath Jute Mfg. Co. Ltd.'s case (1971) 82 ITR 363 (SC). It was strongly urged by learned counsel for the Revenue that though a departure in stand is taken by it, the same was permissible as the question was one of law. Reliance has been placed in the decision of the apex Court in Salem Cooperative Central Bank Ltd. v. CIT (1993) 201 ITR 697. There is no quarrel over this proposition. Such a plea can be entertained if new facts are not considered and on the accepted factual position, the plea can be examined. But even if the Revenue is permitted to take this stand, on the facts, its plea is clearly untenable. Emphasis on the order, dated October 30, 1980, is by overlooking the fact that the said demand was nullified in appeal. In fact, the order, on the basis of which the claim is made, is the original order and was passed on March 27, 1982, i.e., within the relevant assessment year 1983‑84. The same was not an additional demand as contended by learned counsel for the Revenue. On nullification by the appellate authority, the order, dated October 30, 1980, had no existence and had become non est. That being the position, the Tribunal was justified in accepting the claim.

The question referred is, therefore, answered in the affirmative, in favour of the assessee and against the Revenue.

Reference is disposed of accordingly.

M.B.A./644/FC?????????????????????????????????????????????????????????????????????? Reference answered.