1.7       Query

Whether excise duty collected will be treated as a trading receipt

1. ‘X’ and Company has obtained stay of court regarding its liability to pay excise duty in respect of goods manufactured by it. The company is collecting excise duty in the form of consolidated price from the customers but it is not paying it in view of the stay. The matter is still pending.

2. In the past two years, the company did not account separately for excise duty and merged it in its sales and accordingly, ascertained profit. In other words, it treated it as a trading receipt. It also did not make any provision for the liability. Only a note was given in the balance sheet as a contingent liability. The company now wishes to make provision for the same.

3. In this context, the querist has raised the following issues for the opinion of the Expert Advisory Committee:

          (i) Whether excise duty collected from customers will be taken as a trading receipt in view of the past accounting treatment and will it be liable to tax?

          (ii) If the company now starts crediting the excise duty to a separate account by means of a consolidated entry in the year and keeps it as a reserve till the decision of the court, will it be taxable?

                                 (iii) If the company makes a provision for excise duty liability whether section 43B will be attracted. In the view                                    of the querist, section 43B will not be attracted as no liability for excise duty has arisen.

           (iv) If the company creates reserve earmarking for big customers, stating that the same will be refunded to them, if it wins the case, will it be allowed under tax laws?

           (v) Should the company revise its earlier returns excluding excise duty from its Profit and Loss A/c which was earlier treated as a trading receipt? Whether doctrine of res judicata apply in this case. Kindly highlight it with case law.

           (vi) If the company pays certain amount towards excise duty under protest, whether deduction for the same will be available?

                                                                            Opinion                                      May 15, 1987

1. The Committee notes that it is well settled that excise duty which is collected by a dealer forms a part of the dealer’s trading receipts*.

2. The Committee further notes that section 43B of the Income-tax Act 1961, provides as below:

“Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of:

           (a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or

        (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or    superannuation fund or gratuity fund or any other fund for the welfare of employees, shall be allowed  (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according  to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in  which such sum is actually paid by him.

Explanation: For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1^st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section is respect of such sum in computing the income of the previous year in which the sum is actually paid by him.”

3. On the basis of above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 3 of the query is as below:

      (i) The excise duty collected from customers will be taken as a trading receipt and will be liable to tax.

      (ii) The excise duty will be taxable even if the company now starts crediting the excise duty to a separate account by means of a consolidated entry and keeps it as a reserve till the decision of the court.

      (iii) According to Section 43B, the deduction for excise duty is available in the year in which it is actually paid. Thus, in case the company has only created a provision for the excise duty and has not paid the same to the excise authorities, section 43B will be attracted.

      (iv) No.

      (v) In view of replies to (i) and (ii) above, this question does not arise.

      (vi) Yes.

_______________________________

* Kanga and Palkhivala’s, The Law and Practice of Income Tax, Vol. I, (7^th edition) p. 93. The relevant

cases cited in the said book are General Fibre Dealers Vs. CIT 77 ITR 23 (SC); Chowringhee Sales Bureau Ltd. Vs CIT 87 ITR 542 (SC); Badrinarayan Balakishan V. CIT 57 ITR 752, CIT Vs. Bijoy Kumar Das 84 ITR 351, CIT Vs Shiv Nath Parasad 93 ITR 282, CIT Vs Sundararaj 99 ITR 226. CIT v Bijli Cotton Mills Ltd. 76 ITR 625, CIT v Shiv Nath Prasad  77 ITR 378, etc.