Holding

A liability to pay excise duty becomes deductible in the year it accrues, even if disputed, provided the assessee follows a mercantile system of accounting.

Summary

Bharat Carbon and Ribbon Manufacturing Co. manufactured carbon paper, which was later classified as coated paper under Item 17(2) of the Central Excise Tariff, leading to a demand for excise duty for the years 1976-77, 1978-79 and 1979-80. The company challenged the levy by filing a writ petition but claimed a deduction for the demanded amount in its income‑tax return for AY 1981‑82, following a mercantile system of accounting. The Income Tax Officer disallowed the deduction, deeming the liability contingent, while the Commissioner allowed it; the Tribunal dismissed the appeal and the High Court refused to refer the legal questions. The Supreme Court held that the liability arose on the date of the demand notice, was not contingent, and is deductible in the year it accrues under mercantile accounting, rejecting the applicability of the Indian Molasses precedent and affirming the Kedarnath principle. Consequently, the appeal was dismissed and the deduction upheld.

Issues considered

Whether a liability to pay excise duty that is disputed and pending a writ petition constitutes a contingent liability and is therefore ineligible for deduction under the Income Tax Act.
Whether the principles laid down in Indian Molasses Co. (P) Ltd. (1959) 37 ITR 66 apply, or the case is governed by the Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 precedent.

Legislation cited

Income Tax Act, 1961s. 256, s. 36

Subjects

excise dutycontingent liabilitymercantile accountingdeductionincome taxdemand noticeclassificationcentral excise tariffwrit petitionassessment year

Judgment

:.¢..
A COMMISSIONER OF INCOME TAX, DELHI
v.
BHARAT CARBON AND RIBBON MFG. CO. (P) LTD.

AUGUST 17, 1999 ..-
B [D.P. WADHWA AND M.B. SHAH, JJ.]

Income Tax Act, 1961-Levy of Excise duty under Item 17(2) of Central
Excise Tariff-Liability challenged by way of Writ Petition-Such disputed
and unpaid Excise Duty-Whether a permissible deduction over same
....
c accounting period or contingent liability not incurred-HELD, where
mercantile system of accounting is adopted, amount is deductible when
liability accrues though discharged at a later date. ,-
j,

The Respondent-Assessee was manufacturing Carbon Papers which
was not liable to Excise Duty till 28th February, 1975. Later on, duty was
D levied on Carbon Papers. The Collector issued a general trade notice making
Carbon Papers liable to duty as coated paper under Item 17(2) of the Central
Excise Tariff. Prior to that, the Respondent-Assessee was required to clear
the carbon paper under residuary Item 68. However, the Respondent-Assessee
did not accept this classification of carbon appear as Coated-paper. Thereafter,
E the Assessee received a demand notice for payment of Excise Duty for the
years 1977-78, 1978-79 and 1979-80. The Assessee challenged the levy of
Excise Duty by way of a Writ Petition, during the pend ency of which he filed <.'
a revised return, claiming the excise levy as deduction.

- The Income Tax Officer rejected the claim of the Assessee for deduction
F for the Assessment Year 1981-82 because the Assessee was maintaining
mercantile system of accounting. He further stated that, the claim could be
allowed if the liability was in prasenti and as the dispute was pending, it was
contingent liabilit~. However, the Commissioner allowed the claim of the
Assessee. Tribunal dismissed the Appeal as well as the application for
referring the questions to the High Court. High Court also dismissed the
G
application holding that the answer to the question raised is self-evident in
view of the earlier decision in Kedarnath Jute Manufacturing Co. Ltd v.
Commissioner of Income Tax (Central), Calcutta, (1971) 82 ITR 363. Hence,
-
--
this Appeal.

H It was contended for the Appellants that the liability of the Assessee
492
C.I.T. v. BHARAT CARBON AND RIBBON MFG. CO. 493
was contingent and the decision in Kedarnath does not apply to the liability A
to pay the Excise Duty relating to previous Assessment Years 1976-77 to
1978-80; therefore, deductions were rightly not granted in 1981-82.

Dismissing the Appeal, this Court

HELD: 1. The obligation to pay Excise Duty arose in the Assessment B
Year 1981-82, although the liability to pay the amount might not have been
enforced pending petition. The liability had been quantified and the demand
thereof had been made under the demand notice dated 21st April, 1980.

- There was nothing uncertain, tentative, provisional or contingent in the
matter of Assessee's liability to pay the Excise Duty. The Assessee was
bound to pay the same till the order directing the Assessee to pay the same
was set aside or modified. (496-A-B)
C

Indian Molasses Co. (P) ltd v. C.l T. West Bengal, (1959) 37 ITR, 66,
distinguished.

Kedarnath Jute Manufacturing Co. Ltd v. Commissioner ofIncome Tax D
(Central), Calcutta, (1971) 82 ITR 363 and Pope the King Match Factory
v. Commissioner of Income Tax, (1963) 50 ITR 495, referred to.

2. The liability accrued over the accounting period because of demand
notice issued by the Excise Department. The said demand notice was issued E
after the show-cause notice and on the basis of the trade notice issued by the
Collector of Customs in October, 1979 providing that coated paper would be
liable to be classified under tariff item 17(2). The obligation under the law
to pay 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 demand F
notice was not incurred. (497-D-E)

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 16688 of
1996.

From the Judgment and Order dated 20.2.91 of the Delhi High Court in G
l.T.C. No. 70of1990.

K.N. Shukla, Ms, Neera Gupta, K.C. Kaushik, S.D. Sharma and S.K.
Dwivedi for the Appellant.

V.U. Eradi, Gauri Rasgotra, Ms. Purnima and Sumant J. Khaitan for the H
494 SUPREME COURT REPORTS [1999] SUPP. I S.C.R.

A Respondent.
The Judgment of the Court was delivered by

SHAH, J. The Commissioner of Income Tax, Delhi sought reference of
the following two questions by filing an application before Delhi High Court
B under Section 256 (2) of the Income Tax Act, 1961 (hereinafter referred to as
"the Act"):-

I. Whether on the facts and in the circumstances of the case the
. ITAT was correct in law in confirming that a contingent liability
which is not acknowledged even as a debt by the assessee
...
c qualifies for deduction under the l.T. Act?

2. Whether on the facts and in the circumstances of the case the
ITAT was correct in law in holding that the principles laid down
by the Supreme Court in the case oflndian Molasses Co.(P) Ltd.
37 ITR 66 are not applicable to this case and the case is covered
D under the principles laid down in Kedar Nath Jute Mfg. Co. Ltd
(1971) 82 ITR 3~3 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 accounts?"
E
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 Kedarnath Jute
Manufacturing Co. Ltd v. Commissioner of Income Tax (Central), Calcutta
( 1971) 82 ITR 363. Against that order Revenue .has filed this appeal. It was
F · the case of the assessee-respondent company that company was
manufacturing carbon paper which was not liable to excise duty till 28th
February, 1975. By the Finance Act of 1975, duty @ 10% ad valorem was
levied on by items not otherwise specified therein which included carbon
papers. On 29th October, 1979, the Collector of Central Excise issued a general
G trade notice stating that 'carbon paper' would be liable to be classified as
coated paper under item 17(2) of the Central Excise Tariff. Prior to that, carbon
paper was subjected to excise duty under residuary item 68. Hence, the
respondent-assessee was required to clear the goods under the ·said item
17(2). However, the assessee did not accept this classification and contended
that carbon paper was not coated paper at all. On 11th March, 1980 a notice
H was issued requiring the assessee to show cause as to why the approval of
C.I.T. v. BHARAT CARBON AND RIBBON MFG. CO. [SHAH, J.] 495

· the classification of carbon paper under item 68 should not be withdrawn with A
effect from 16"' March, 1976. Thereafter, the assessee received a demand letter
dated 21st April, 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 17(2) by filing Civil Writ Petition No. 634 of
1980. Pending the writ petition, the assessee filed a revised return claiming B
the amount of Rs. 92,98,805 as deduction. The Income Tax Officer disallowed
the claim of the assessee for the assessment year 1980-8 l on the ground that
only a show cause notice was issued in the said assessment year. In respect
of 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 C
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 liability was in present and not in future as
the dispute was pending in a writ petition and hence, it was contingent
liability. In appeal, the Commissioner of Income Tax allowed the claim of the D
assessee on the basis of the decision of this Court in the case of Kedar Nath
(supra). 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, the learned counsel for' the
appellant submitted that the High Court ought to have raised the questions E
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 Kedar Nath (supra) does not deal with
a situation where the liability had arisen in 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, F
therefore, deductions were rightly not granted in assessment year 1981-82.

In the present case, the liability to pay excise duty had arisen on 21st
""·
of April, 1980 when the Excise Department issued demand notice asking the
assessee to pay the basic excise duty and special excise duty for the said G
years on the basis of trade notice issued in October 1979. The assessee
admittedly was following 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
68, It is true that he has objected to the said demand and has filed writ petition H
496 SUPREME COURT REPORTS [1999] SUPP. I S.C.R.

A 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 petition. The liability had
been quantified and the demand thereof had been made under the demand
notice dated 21st April, 1980. There was nothing uncertain, tentative, provisional
B or contingent in the matter of 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 the Kedarnath case
(supra), this Court negatived the similar contention by holding thus:

"it is not possible to comprehend how the liability would cease to be
c 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
D High Court in the case of Pope The King Match Factory v. Commissioner
of Income Tax, (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 en.deavour 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 by the
E competent excise authority.

The learned counsel for the appellant further submitted that in the
books of accounts 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
F by this Court in the Kedarnath 's case by holding thus:

"Whether the assessee in 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 c
G
absence of entries in the books of account be decisive or conclusive
in the matter. The assessee who was maintaining accounts on the
t
I
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."

The learned counsel for the appellant, however, relied upon the decision
H of this Court in the case of Indian Molasses Co. (P) Ltd v. C.I. T., West Bengal,
C.I.T. v. BHARAT CARBON AND RIBBON MFG. CO. [SHAH, J.) 497

( 1959) 3 7 ITR 66 for contending that the expenditure would be deductible for A
income tax purpose which is towards a liability existing at the time, but putting
aside the money may become expenditure on the happening of a 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:- B

"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 to deduct such sums
~~~ c
The Court after discussing various contentions finally held:-

"Expenditure which is deductible for income tax purpose 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 D
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 the Collector of Customs in October, 1979 providing that E
coated paper would be liable to be classified under tariff item 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 ground for holding that liability to pay the
excise duty as per the demand notice was not incurred.
F
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
j stated above. In the result, the appeal is dismissed with no order as to costs.

S.S. Appeal dismissed.

,4