- (1.) The Commissioner of Income-tax, Delhi sought reference of the following two questions by filing an application before Delhi High Court under Section 256 (2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") :- 1. 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 qualifies for deduction under the I.-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 of Indian Molasses Co. (P) Ltd. , 37 ITR 66 : (AIR 1959 SC 1049) are not applicable to this case and the case is covered under the principles laid down in Kedar Nath Jute Mfg. Co. Ltd. , (1971) 82 ITR 363 : (AIR 1971 SC 2145 : 1971 Tax LR 1380) 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 - 2. 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. Commr. of Income-Tax (Central) , Calcutta, (1971) 82 ITR 363 : (AIR 1971 SC 2145 : 1971 Tax LR 1380). Against that order Revenue has filed this appeal. It was the case of the assessee-respondent company that company was manufacturing carbon paper which was not liable to excise duty till 28/02/1975. By the Finance Act of 1975, duty @ 10 Per Cent ad valorem was levied on by items not otherwise specified therein which included carbon papers. On 29/10/1979, the Collector of Central Excise issued a general 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 11/03/1980 a notice was issued requiring the assessee to show cause as to why the approval of the classification of carbon paper under item 68 should not be withdrawn with effect from 16/03/1976. Thereafter, the assessee received a demand letter dated 21/04/1980 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 the amount of Rs. 92,98,805 as deduction. The Income-tax Officer disallowed the claim of the assessee for the assessment year 1980-81 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 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 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.
(3.) 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 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 (AIR 1971 SC 2145 : 1971 Tax LR 1380) (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, therefore, deductions were rightly not granted in assessment year 1981-82.;