Miss. M. Iswarya and Sri S. Vivek Chandra Sekhar V. Mrs. M. Kiranmayee

ITTA/645/2006

AI Insights

The case involves an appeal by a wholesale distributor of liquor against the order of the Income Tax Appellate Tribunal, which disallowed deductions claimed on account of excise duty and advertisement expenses for the assessment year 1991-1992. The distributor argued that the excise duty paid for importing liquor, which was reflected as prepaid expenses, should be deductible in the year it was paid. The Tribunal and the court found that the duty was part of the cost of goods sold and not deductible in the year paid. Regarding the advertisement expenses, the court upheld the Tribunal's decision that the expenses were not incurred for the purpose of business as they promoted liquor, which is not a permissible deduction under Section 37 of the Income Tax Act.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 812542 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 12-09-2022
• Assessment Year: misc
• Other Referred Cases: Maddi Venkataratnam and Co. Pvt. Ltd. V. CIT, Saraswathi Industrial Syndicate Ltd v. Union of India, CIT vs. CL Gupta and Sons, Hindustan Sugar Mills v. State of Rajasthan and others
• Laws Referred To: Income Tax Act, 1961, Andhra Pradesh Excise Act, 1968, Foreign Liquor and Indian Liquor Rules, 1970, A.P. Intoxicating Liquors (Prohibition of Advertisements) Act, 1978
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Advertisement expenditure; Countervailing Duty; Excise Duty; Income tax deduction; Pre-paid Expenses
• Section: 43B; 21; 260-A

Judgement Text

"THE HONOURABLE SRI JUSTICE C.PRAVEEN KUMAR AND THE HONOURABLE SRI JUSTICE A.V.RAVINDRA BABU I.T.T.A.No.645 of 2006 JUDGMENT:- (Per Hon’ble Sri Justice C.Praveen Kumar) Heard Miss. M. Iswarya and Sri S. Vivek Chandra Sekhar, learned counsel for the appellant, and Mrs. M. Kiranmayee, learned Senior Standing Counsel for Income Tax appearing for the respondent, and perused the record. 2. The present appeal is filed under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) assailing the order, dated 14.11.2003, of the Income Tax Appellate Tribunal, Hyderabad Bench ‘A’ (Special Bench), Hyderabad (for short, “the Tribunal”) passed in I.T.A.No.167/H/1993, relating to the assessment year 1991-1992. 3. Before proceeding further, it would be appropriate to refer to the facts. The assessee is a wholesale distributor for products manufactured by UB Limited and its group companies for number of districts in the coastal region of Andhra Pradesh. The assessee procures liquor from outside the State of Andhra Pradesh by obtaining permit by paying the “countervailing duty” in terms of Section 21 of the Andhra Pradesh Excise Act, 1968 2 (for short, “the Act”). The amounts relatable to the goods which have been intended to be purchased, but not received, are reflected in the balance sheet under the head ‘pre-paid expenses’. Such pre-paid expenses on account of countervailing duty stood as Rs.58,44,632/- for the assessment year 1991-92. This amount was separately claimed as deduction in the year 1991-92, in the computation of income. The claim for the deduction of this amount in the said year was based on the provisions of Section 43B of the Act. Under Rule 4 of the Foreign Liquor and Indian Liquor Rules, 1970, framed under the said Act, a holder of wholesale licence for the sale of foreign or Indian liquor desiring to import from outside the state shall apply to the Collector in Form No.FL-1 for grant of an import permit. Under Rule 6, the Collector, after making such enquiries as he deems fit, and subject to the following conditions, may issue the permit:- “(i) The applicant has paid and produced the challan in original in token of having credited into Government Account the entire countervailing duty leviable on the liquor to be imported at the rates in force. (ii) The applicant has paid and produced the challan in original in token of having credited into Government Treasury import fee at the following rates…..” 3 After paying the countervailing duty, the amounts were not debited to the purchases account but they were debited from a separate account and at the end of the year, the amounts relatable to the goods received from outside the state were transferred to the trading account. The return of income filed on 31.12.1991 shows an income of Rs.11,68,174/-. A notice was issued, which was contested by the assessee. By an order, dated 30.03.1992, the assessing authority held that the appellant has to pay tax at Rs.48,83,104/-. Challenging the same, the company preferred an appeal before the Commissioner of Income Tax, Vijayawada. 4. After considering the arguments advanced, the appeal filed by the assessee was allowed vide order, dated 23.10.1992, holding that the expenditure incurred towards advertisement is taken as a business expenditure mainly on the ground that no action has been taken by the State Government against the assessee under the provisions of Sections 2 and 3 of the A.P. Intoxicating Liquors (Prohibition of Advertisements) Act, 1978. Further, it was observed that it has to be presumed that the appellant has not violated the provisions of Sections 2 and 3 of the Act and accordingly, allowed the expenditure as business expenditure. 4 5. The second aspect on which the appeal was allowed is that when the appellant has not received the goods, there is no question of taking the goods to the closing stock. It has claimed the deduction of an amount which it was required to pay. Hence, the claim has to be allowed in terms of Section 37 of the Income Tax Act. The view taken by the assessing authority is that by making the order of consignment, the appellant has not entered into an unconditional contract and accordingly, the claim was allowed. Challenging the same, the revenue preferred the appeal. 6. Two issues came up for consideration before the Tribunal. The same are as under:- “1. The CIT(A) has erred in deleting the addition made on account of Excise Duty paid. 2. The CIT(A) has erred in deleting the addition made on account of disallowance of expenditure on “Advertisement.” 7. Insofar as the first issue is concerned, the matter was referred to a Special Bench. By an order, dated 14.11.2003, the Special Bench Officer answered the question in favour of the Revenue and against the assessee. It appears that no appeal is preferred against the said order. The second issue was 5 answered by regular Bench and the claim was disallowed. Against this issue, the present appeal is filed. 8. Learned counsel for the appellant mainly submits that the order under challenge warrants interference for various reasons. It is stated that whether under the facts and circumstances of the case and having regard to the statutory provision of Section 43 B of the Income Tax Act, the expenditure incurred by the appellant on on the countervailing duty paid in terms of Section 21 of the Excise Act, which is a pre-condition to obtain permit from other states, is not allowable for the issue in question and whether the Tribunal is right in holding that the expenditure incurred by the appellant on advertisement, is not a permissible deduction in view of explanation to Section 37(1) of the Income Tax Act. 9. Mrs. M. Kiranmayee, learned Senior Standing Counsel for Income Tax appearing for the respondent, opposed the same contending that when the advertisement is made for promoting liquor in the brand name of the liquor, the appellant cannot say that it was not for the promotion of that brand of liquor. In the absence of any material to show that the appellant is also manufacturing soda in the said brand name, she would contend that the order of the Tribunal warrants no interference. Coming 6 to the second issue viz., whether the excise duty paid in advance for importing liquor can be allowed under Section 43B of the Income Tax Act irrespective of the fact that the goods have been received during the year under consideration or not, she would contend that the Special Bench of Income Tax Tribunal, after referring to the issues involved, and the authorities on the subject, has dealt with the same in detail and as such, the same does not require any interference. 10. Before dealing with the first issue, it would be just and proper to extract Section 37 and explanation (1) to Section 37 of the Income Tax Act. A plain reading of the explanation (1) to Section 37 of the Income Tax Act makes it clear that any expenditure incurred by an assessee for any purpose, which is an offence or which is prohibited by law, shall not be deemed to have incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. In the instant case, the claim of the appellant appears to be that since no prosecution was initiated by the A.P. Intoxicating Liquors (Prohibition of Advertisements) Act, 1978 in respect of advertisements made, the authorities erred in disallowing the claim made. But merely because no prosecution has been initiated under the provisions of a special statute, does 7 not, by itself exempt the expenditure incurred towards the said advertisement from the purview of taxable income. Explanation (1) to Section 37 of the Income Tax Act, as referred to us earlier, clearly explains the same. It is not the case of the appellant, that at any point of time, the advertisement so made for sale of soda or any other product was manufactured by the appellant. When a particular advertisement is made, more particularly, in the form of soda or mineral water, the same has to be presumed that it was made soliciting the use of liquor and that it is general only to boost the use of the product. The finding of the Tribunal that these advertisements were not issued in public interest cannot be found fault with. 11. Issue identical to the case on hand came up for consideration before the Apex Court in Maddi Venkataratnam and Co. Pvt. Ltd. V. CIT1, wherein it is held as under:- “In the instant case, the assessee had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act. The assessee was expected to carry on the business in accordance with law. If the assessee contravenes the provisions of the FERA to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act 1 229 ITR 534 (SC) 8 and also the penalty levied for such evasion cannot be allowed as deduction. The expenditure in this case cannot, in any way, be allowed as wholly and exclusively laid out for the purpose of the assessee’s business.” 12. In view of the judgment referred to above and findings recorded, we do not see any grounds to interfere with the order of the Tribunal. 13. Coming to the second issue, it is to be noted that the countervailing duty has been paid in compliance with the statutory requirements as a precondition for importing the goods from outside the State. A liability in its strict sense represents an amount due for payment, for the economic benefit already received. When goods are purchased or other expenses directly referable to the goods are incurred, it is not correct to describe it as a liability incurred. Stock in trade is an asset acquired and subsequently, becomes business expenditure when it is sold. As said by the Special Bench, if there is a credit purchase, the same gives rise to a liability. Any direct expenses relatable to the acquisition of stock in trade also partakes the same character. The Full Bench categorically held that it may not be correct to term all statutory levies as liabilities. Some of the statutory levies, whether termed as liabilities or not, are really business expenses. Income Tax is a statutory liability 9 whereas a levy like excise duty, customs duty and sales tax paid by the purchaser are allowable business expenditure. Dealing with the above, the Tribunal, after referring to a guidance note on accounting treatment for excise duty issued by the Institute of Chartered Accountants of India in 1979 and modified from time to time, observed as under:- “From the above, it may be seen that excise duty, though admittedly an indirect tax, and a statutory levy, is no different from other business expenses. It arises as a consequence of manufacturing excisable goods or, as in the present case, by import of excisable goods i.e., liquor from another State, and constitutes an element in the inventory valuation. It stands on a different footing from income-tax, which is a statutory levy, but not a business expenditure. Excise duty or countervailing duty or import duties or octroi duty all stand on the same footing in the sense that they are all elements of inventory valuation.” 14. In the case of Saraswathi Industrial Syndicate Ltd v. Union of India2, the Apex Court held as under:- “…. Excise duty is really imposed on goods when they have come into existence in the manufactured form. It could more properly be taken into consideration in determining net profits than in calculating cost of manufacture.” 15. In the Special Bench decision of the Tribunal in ITO vs. Food Specialities Ltd.,3 wherein claim for deduction of excise 2 A.I.R. 1975 SC 160 3 (49 ITD 21) 10 duty relatable to the goods sold was involved, it was observed as under:- “Excise duty is a levy on the 'manufacture' or 'production' of goods and not related to a stage prior to the completion of the manufacturing or production process, but to a stage thereafter, viz. Post-manufacture and on coming into existence of a marketable commodity. The very basis of quantification of excise duty is related to the value to be placed on the commodity (i.e. the selling price) and if that be so, then the levy itself cannot enter into the said value but has to remain outside, although for the ultimate consumer both the value and the quantum of excise duty together with the quantum of profit and other incidental items such as packing, forwarding, freight, octroi, sales tax, etc. would constitute his cost of the commodity. In the case of Saraswati Industrial Syndicate Ltd. V/s. Union of India AIR 1975 SC 460, the Supreme Court observed that excise duty is really imposed on goods when they have come into existence in the manufactured form it could more properly be taken into consideration in determining net profits than in calculating the cost of manufacture. This decision of the Apex Court was direct on the subject and was binding. Though the Supreme Court deals with one of marketable items, namely, sugar, it had to deal with 'cost of production', as to what it would mean and include, and in that context laid down unequivocally the principle that excise duty would more properly be taken into account in determining net profits and not in ascertaining the cost of manufacture. This principle is general in nature and would apply to all items manufactured. No exception can be taken to the enunciation of the principle on the ground that the Supreme Court was dealing with sugar. The point to be noted is that the Supreme Court was dealing with the meaning of the expression 'cost of manufacture' which is of universal application. Thus, the change in the method of 11 accounting effected by the assessee in the assessment year under appeal by excluding excise duty on the unsold goods from the figure of closing stock was a bona fide one, finding support from a direct decision of the Supreme Court as aforesaid, and there being no specific prohibition laid down by the Institute of Chartered Accountants of India and its guidelines being recommendatory in nature. However, in the succeeding assessment year 1985-86, the assessee would not get the benefit of the amount in question and the same would become a part of its income in case it was claimed as a deduction in any manner.” 16. In the case of CIT vs. CL Gupta and Sons4, the Allahabad High Court observed as under:- “In the case in hand, admittedly, the amount of customs duty of Rs.3,56,451/- was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it is deductible only in the year in which it is actually paid, i.e. for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of the method of accounting regularly adopted by him. Section 43B in clear terms provides that the deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty, etc, has no relevance and cannot be linked with the matter of giving benefit of 4 (259 ITR 513) 12 deduction under section 43B of the Act. In this view of the matter, the appeal deserves to be allowed.” 17. Therefore, it can be said that excise duty relatable to the goods purchased is not on par with the other statutory levies like property tax. The so called liability for excise duty arises because of the assessee’s business operations. 18. Section 43B of the Income Tax Act only enables the Income Tax Officer to disallow the claim for deduction of the provision made in the profit and loss account, if the expenditure relates to certain taxes and other statutory levies which have not been actually paid. The case on hand is not one such case. The ground position in the case is that certain taxes and dues which have been paid by the assesses and which cover a period beyond the previous year have been apportioned by the assessee itself such that the amount relating to the previous year have been taken to the profit and loss account and the amount relating to the period beyond the previous year have been taken to the balance sheet as pre-paid taxes. Therefore, the question is whether any part of the pre-paid taxes could be allowed as a deduction. It is further held in the said order as under:- “Even though the taxes paid have been apportioned on time basis with reference to the previous year, the assessee would be entitled to the deduction of the entire amount 13 without such an apportionment in certain cases. The decision of the Allahabad High Court in the case of Hindustan Commercial Bank Ltd. (supra) to hold that if the amount was laid out and expended wholly and exclusively for the purpose of a business, it has to be allowed as a deduction because for the purpose of a business, it has to be allowed as a deduction, because the Act does not recognize deferred revenue expenditure. In the list of the taxes paid above, it is seen that items such as property tax have been, incurred during the previous year and because the demand raised relates to a period of six months, part of which falls in this previous year and part falls in the next year, the assessee has apportioned it and taken the part of it to the Balance Sheet; as prepaid tax. But for income-tax purposes such an apportionment is not required. So in the case of the levies such as property tax for a period spilling beyond the previous year and for which the demand has been raised in the previous year and has been met by the assessee in the previous year, the deduction has to be allowed. However, with reference to the excise duty paid in respect of raw materials which have not entered into the computation of the value of stock sold during the previous year the apportionment made by the assessee will have to stand. This is because, if such prepaid taxes are to be taken into account then valuation of closing stock has to be revised as a consequence, with the result that only will it meet an unnecessary recomputation but the result may, not also be significantly different. In the circumstances, we direct the ITO to verify the above expenditure and allow such expenditure as have been incurred in the previous year and apportioned on time basis. But prepaid taxes apportioned on the basis of stock valuation need not be considered for such deduction. The ITO is directed to recompute the total income.” 14 19. The decision of the Apex Court in the case of Hindustan Sugar Mills v. State of Rajasthan and others5 also seems to support the stand of the Revenue. Commenting on what is a sale price as defined in Rajasthan Sales Tax Act, 1954 and Central Sales Tax Act, 1956, the Apex Court observed in that case as under:- “The definition of 'sale price' is given in section 2(p) and according to that definition, it means: “…the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in case where such cost is separately charged\". This definition is in two parts. The first part says that 'sale price' means the amount payable to a dealer as consideration for the sale of any goods. Here, the concept of real price or actual price retainable by the dealer is irrelevant. The test is, what is the consideration passing from the purchaser to the dealer for the sale of the goods. It is immaterial to enquire as to how the amount of consideration is made up, whether it includes excise duty or sales tax or freight. The only relevant question to ask is as to what is the amount payable by the purchaser to the dealer as consideration for the sale and not as to what is the net consideration retainable by the dealer. 5 1978 A.I.R. 1496 15 Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily it is not shown as a separate item in the bill, but it is included in the price charged by him. The ‘sale price' in such a case could be the entire price inclusive of excise duty because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But even so, it would be part of the 'sale price' because it forms a component of the consideration payable by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability statutory or otherwise under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the 'sale price'. 20. In the light of the above remarks, it has to be held that excise duty is a part of sale proceeds or turnover of the vendor irrespective of the fact whether the excise duty is separately reflected in the sale bill or included in the sale price itself. For the purchaser like the assessee, the excise duty should form part of the cost of the goods sold, whether paid by the vendor and recovered from the assessee or paid by the assessee separately. If it is paid by the vendor and is recovered by the 16 vendor, it becomes part of purchase price to the vendee. If the vendee has paid on his own behalf, it may not be part of purchase price but it forms part of the cost of goods sold, as a direct expenditure relatable to the purchase of the stock. Therefore, it becomes an allowable deduction only when relevant goods are reflected in the trading account. Therefore, as observed from the facts of the case, the countervailing excise duty has been reflected as prepaid expenses. Hence, the same does not require any adjustment in the computation of income. The adjustment claimed by way of deduction for the prepaid tax is on an apprehension that it cannot be allowed in subsequent years because of the provisions of Section 43B. The same, in our view, may not be correct since the scope of Section 43B is to disallow deduction for an otherwise allowable liability on the ground of non-payment, but when the payment has already been made and transferred to the trading account in the following year, it becomes allowable as part of cost of goods sold and no separate deduction can be called for. Therefore, the finding of the Special Bench that an amount of Rs.25,36,671/- disallowed in the first year has to be taken to the assessment year 1991-92 as part of the cost of the goods sold in that year cannot be found fault with. Similarly, is with regard to Rs.58,44,632/- involved in the second year i.e., in the 17 assessment year 1991-92, with which we are now concerned. Having regard to the above, this appeal fails and is liable to be dismissed. 21. Accordingly, this appeal is dismissed. There shall be no order as to costs. Miscellaneous petitions pending, if any, in this appeal shall stand closed. _______________________________ JUSTICE C.PRAVEEN KUMAR ________________________________ JUSTICE A.V.RAVINDRA BABU Date : 12.09.2022 AMD 18 19 THE HONOURABLE SRI JUSTICE C.PRAVEEN KUMAR AND THE HONOURABLE SRI JUSTICE A.V.RAVINDRA BABU I.T.T.A.No.645 of 2006 Date : 12.09.2022 AMD "