Commissioner of Income Tax vs Poyilakkada Fisheries Pvt. Ltd.

K.S. Paripoornan, J.—At the instance of Revenue, the Income Tax Appellate Tribunal has referred the following three questions of law for the decision of this court :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner of Income Tax (Appeals) who held that purchase tax of Rs. 2,86,436 was allowable as a deduction in the assessment?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner of Income Tax (Appeals) who held that the entire business of the assessee was eligible for the allowance u/s 80J ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner of Income Tax (Appeals) who held that the assessee was entitled to investment allowance on the diesel generator and transformer?"

The respondent/assessee is a private limited company having the business of catching and purchasing fish, processing them and exporting them. We are concerned with the assessment year 1977-78, for which the accounting period ended on February 28, 1977. During the assessment year, the assessee debited a sum of Rs. 12,01,787 as provision for purchase tax and surcharge. Out of this, a sum of Rs. 2,86,436 admittedly related to purchase tax and surcharge on cashew kernels in which the assessee was dealing and related to the assessment year 1975-76. The assessee made the claim for allowance of this amount even for the assessment year 1975-76. The claim was rejected. That prompted the assessee to renew the claim in the assessment year 1977-78. It was so done on the ground that the Income Tax Officer agreed to allow this amount in the year in which the payment was obligatory. But, when the plea was put forward in the succeeding assessment year 1977-78, the Income Tax Officer relied on the decision of the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, and held that a liability can be allowed in the year to which the liability related and since in the present case the liability related to the assessment year 1975-76, it could not be allowed in the assessment year 1977-78. But, in appeal, the Commissioner of Income Tax (Appeals) held that the disallowance made on this score by the Income Tax Officer was not justified. In second appeal before the Appellate Tribunal, counsel for the Revenue fairly stated that the law permitted the allowance or deduction only for the assessment year 1975-76, the year in which the liability arose or accrued, and if the assessee were to make an application to the Department, the Department would certainly look into the matter. This was recorded by the Appellate Tribunal. Even so, the Appellate Tribunal considered the claim of the assessee on merits and came to the conclusion that the assessee''s claim for allowance is allowable, even on merits, in the assessment year 1977-78 and upheld the decision of the Commissioner of Income Tax (Appeals). Apart from the above, the assessee claimed deduction u/s 80J of the Income Tax Act on the capital employed in its business. The assessing authority held that the assessee''s business consisted of catching fish, maintaining a cold storage, processing of fish and export of the same. The assessing authority held that deduction u/s 80) of the Act is allowable only in respect of the cold storage or the freezing plant of the assessee. The assessee was directed to file a balance-sheet showing the assets and liabilities of the cold storage. It was not done. The claim was rejected by the Income Tax Officer. In appeal, the Commissioner of Income Tax (Appeals) held that the assessee was processing fish and marine products as an industry, that it has a cold storage, that even if the assessee could not be treated as a manufacturer, it was a producer of frozen fish and other marine products and so is entitled to the deduction claimed. The assessee''s plea for deduction was allowed. A direction was given to the Income Tax Officer to look into the claim and determine whether the deduction u/s 80J of the Act on the basis that the assessee produced processed marine products and was running an industrial undertaking required examination. The Revenue took up the matter in appeal before the Tribunal. The Appellate Tribunal held, on a review of the entire facts, that the assessee is entitled to the relief u/s 80J of the Income Tax Act as the producer of goods or Articles and as one who operates one or more cold storage plant or plants. The Appellate Tribunal relied on the expression "processed" in items (28) and (30) of the Fifth Schedule to the Income Tax Act, in paragraphs 31 and 32 of its order, and upheld the order passed by the Commissioner of Income Tax (Appeals). In the light of its reasoning regarding availability of the relief u/s 80J of the Act, the Appellate Tribunal held that the assessee is also entitled to the relief u/s 32A of the Act and upheld the order of the Commissioner of Income Tax (Appeals) on this score. It is thereafter at the instance of the Revenue that the Income Tax Appellate Tribunal has referred the questions of law formulated hereinabove for the decision of this court.

We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the respondent/assessee, Mr. P. Balachandran. Though there are three questions, they relate only to two aspects. The points involved are (1) whether the assessee is entitled to deduction for the provision made for payment of purchase tax in the sum of Rs. 2,86,436 which related to the assessment year 1975-76, and (2) whether the assessee can be considered to be an industrial undertaking, manufacturing and producing an Article and so entitled to the relief u/s 80) and Section 32A of the Income Tax Act.

It is common ground that the assessee is following the mercantile method of accounting. A Full Bench of this court in Commissioner of Income Tax Vs. K.A. Karim and Sons and Others, has categorically held that in a case where the assessee''s method of accounting is "mercantile", the liability to purchase tax accrues or arises in the year the transactions liable to tax took place. The assessee effected purchases during the previous year 1975-76. They were liable to tax under the law as it stood then. The liability to tax arose under such law at that time. In such circumstances, the liability for payment of tax, which is independent of the proceedings taken in enforcing the said liability, accrued during the year when the purchases were made. This court held so, relying on the decision of the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, and approved an earlier Bench decision of this court in L.J. Patel and Company Vs. Commissioner of Income Tax, . It was made clear that the liability of a past year cannot be taken into account for computing the income of a subsequent year. As admittedly the sum of Rs. 2,86,436, the provision made for payment of purchase tax and surcharge, related to the assessment year 1975-76 and the assessee is maintaining its accounts on the mercantile basis, the deduction therefore cannot be claimed or allowed in the subsequent assessment year 1977-78. This seems to be clear in the light of the Full Bench decision of this court in Commissioner of Income Tax Vs. K.A. Karim and Sons and Others, . The Appellate Tribunal noticed the decision of the Supreme Court and also the Full Bench decision of this court aforesaid. But, even so, it held that it is open to the assessee to claim deduction in the subsequent year 1977-78. We are unable to appreciate the reasoning and conclusion of the Appellate Tribunal aforesaid. The Appellate Tribunal noticed the fact that the liability arose during the assessment year 1975-76 and the assessee made a proper claim during the assessment for that year. The Income Tax Officer rejected the claim (para 6 of the appellate order). But, the Appellate Tribunal proceeded to state that the assessment year 1977-78 was almost the first year of the business of the assessee and the company itself came into existence during the assessment year 1975-76, that the decision in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, and similar decisions refer to cases where there is a specific liability and if the assessee was under the honest impression that there was no purchase tax on goods to be exported, he could certainly not have made an entry for the year 1975-76 and the Supreme Court decision does not also require him to do so. We are unable to appreciate what the Tribunal meant in stating the above. The Appellate Tribunal was candid in stating that the assessee itself made a proper claim for deduction in the assessment year 1975-76, but it was rejected. The claim could have been made only if the assessee was aware of the liability. If so, we are unable to appreciate the reasoning of the Appellate Tribunal when it states that the assessee was under the honest impression that there was no purchase tax on goods to be exported and so it did not make an entry for the year 1975-76. The reasoning of the Appellate Tribunal in paragraphs 5 to 7 of its appellate order is inconsistent. The reason adopted by the Appellate Tribunal to uphold the order of the Commissioner of Income Tax (Appeals) holding that the deduction claimed is permissible militates against the Full Bench decision of this court in Commissioner of Income Tax Vs. K.A. Karim and Sons and Others, . Sitting in Division Bench, we are bound by the decision of the Full Bench of this court.

Counsel for the assessee, Mr. Balachandran, submitted that though the liability for the purchase tax accrued in the previous year 1975-76, it is open to the assessee to make a provision or to make the claim even in the subsequent year 1977-78, since the assessee was under the honest impression that no purchase tax was exigible on goods to be exported and there was complete ignorance of the existence of any liability. Counsel also submitted that so far as the claim for purchase tax is concerned, it is open to the assessee to follow the method of making the provision in the year in which the demand notice is received and in this case, the assessment for the year 1977-78 was made only on September 30, 1976 (sic), and the demand notice was issued only on that day. These aspects which are germane to the enquiry were borne in mind by the Appellate Tribunal to hold in favour of the assessee that the provision made in the subsequent assessment year 1977-78 is permissible. Counsel for the assessee, in effect, pleaded that apart from the year in which the transactions took place and the liability arose or accrued, alternatively the assessee may claim a deduction in the subsequent year in which the tax is assessed or the demand is made. Counsel for the assessee pressed into service certain observations in Kanga and Palkhivala''s The Law and Practice of Income Tax, Volume I (7th edition) page 870 and also the following decisions in support of his plea : Commissioner of Income Tax Vs. Royal Boot House, ; L.J. Patel and Company Vs. Commissioner of Income Tax, ; Commissioner of Income Tax, Madhya Pradesh Vs. Central Provinces Manganese Ore Co. Ltd., ; Commissioner of Income Tax Vs. Brijmohan Das Laxman Das, ; Commissioner of Income Tax Vs. Orient Supply Syndicate, ; Commissioner of Income Tax Vs. East India Corporation Limited, (Mad) and Kalinga Tubes Ltd. Vs. Commissioner of Income Tax, .

We are afraid that in the light of the admitted or proved facts in this case and also in the light of the Full Bench decision of this court in Commissioner of Income Tax Vs. K.A. Karim and Sons and Others, which is binding on us, the plea advanced by counsel for the assessee cannot hold good. The deduction claimed is for a statutory liability for payment of purchase tax which arose in the period relevant to the assessment year 1975-76. The assessee made a claim for deduction in the said year, but it was rejected. The Income Tax Officer held that it can be allowed in the year in which the payment was obligatory. That aspect is beside the point, since no plea of estoppel on that score was pleaded or made out or is in issue at this stage. The fact is that the claim was made for the assessment year 1975-76 and it was rejected. It cannot be said that the assessee was unaware of the liability or that he bona fide thought that it will not be liable to pay purchase tax or did not know of it and hence did not make a provision in that behalf. In the light of the categoric finding of the Tribunal that for the assessment year 1975-76, the assessee properly made a claim, but it was rejected by the Income Tax Officer, the other pleas regarding the non-accrual of the liability or ignorance of the accrual of the liability or bona fide or honest impression of the assessee that it will not be liable for purchase tax etc., are all unsustainable and against facts. When it is evident that the liability accrued or arose during the period relevant to the assessment year 1975-76 and the assessee did make a claim for deduction, if the claim was rejected wrongly, the assessee should have taken up the matter in appeal. That apart, when once the liability had accrued by virtue of the provisions of the statute and the assessee itself was aware of it, it should have claimed the deduction and pursued it in the assessment year 1975-76 itself. In that year alone, deduction is permissible, in the light of the Full Bencn decision of this court in Commissioner of Income Tax Vs. K.A. Karim and Sons and Others, . In this perspective, we need not embark upon the further plea advanced before us, viz., whether it is open to the assessee, in the alternative, to claim the deduction in a subsequent year in which the tax is assessed and the demand is made, though the transactions may relate to the earlier year during which period the assessee did not make any provision or claim in that behalf. We are of the view that the Appellate Tribunal was in error in upholding the order of the Commissioner of Income Tax (Appeals) to the effect that the disallowance for provision towards purchase tax and surcharge in the sum of Rs. 2,86,436 was justified. The assessee was not entitled to claim deduction in this assessment year 1977-78.

We are of the view that the Appellate Tribunal was in error in upholding the order of the Commissioner of Income Tax (Appeals) that purchase tax was allowable as a deduction in the assessment year 1977-78. We answer question No. 1 in the negative, against the assessee and in favour of the Revenue.

The second point that falls to be considered is whether the assessee is eligible for allowance u/s 80J and Section 32A of the Income Tax Act. In the case of the very same assessee the matter came up before us for the assessment years 1976-77 and 1978-79 at the instance of the Revenue in ITR Nos. 124 and 125 of 1986 Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., ). An identical question was considered therein. Following the earlier Bench decision of this court in Commissioner of Income Tax Vs. Marwell Sea Foods, , this court held in ITR Nos. 124 and 125 of 1986 (see Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., ), that ''processing of prawns will amount to production of Articles and so it is an industrial undertaking for the purpose of Section 80J of the Income Tax Act. This court further held "that the Tribunal was justified in affording relief to the assessee herein u/s 80] "of the Act."

In the light of the earlier Bench decision in the case of the very same assessee in ITR Nos. 124 and 125 of 1986 (see Commissioner of Income Tax Vs. Poyilakada Fisheries (P.) Ltd., ), we answer question No. 2 in the affirmative--against the Revenue and in favour of the assessee. The Appellate Tribunal was justified in holding that the entire business of the assessee is eligible for the allowance u/s 80J of the Act. As a sequel to our answer to question No. 2, we answer question No. 3 also in the affirmative, against the Revenue and in favour of the assessee. We hold that the assessee is entitled to investment allowance on the diesel generator and transformer u/s 32A of the Income Tax Act.

Question No. 1 is answered in favour of the Revenue and against the assessee. Questions Nos. 2 and 3 are answered against the Revenue and in favour of the assessee.

The reference is answered, as above.