Sabyasachi Mukharji, J. - (1.) In this reference, under Section 256(1) of the I.T. Act, 1961, for the assessment years 1971-72 and 1972-73, the following questions have been referred to this court: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the allowance of the provision of excise duty of Rs. 15,96,000 and Rs. 17,00,000 as deduction for the assessment years 1971-72 and 1972-73, respectively ?
(2.) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that nylon was petrochemical within the meaning of item (18) of the Vth Schedule to the Income-tax Act, 1961, and that the assessee was entitled to higher development rebate in respect of plant and machinery installed for the production of nylon for the assessment years 1971-72 and 1972-73 ?" 2. In order to deal with these questions, it is necessary to state that the assessee is a company which is engaged, inter alia, in the manufacture of nylon yarn. In 1969, the Inspector of Central Excise informed the assessee that it should apply for a licence for manufacture of polymer chips. Since the assessee, according to it, was engaged in the business of manufacturing nylon yarn, it explained to the Asst. Collector of Central Excise in November, 1969, that in the course of its manufacture of nylon-6 from caprolactum, production of polymer chips formed only an intermediate stage and could not be treated as independent products in the continuous and integrated process of manufacture of nylon yarn. The assessee, therefore, disputed its liability to pay excise duty on the production of polymer chips. In December, 1969, the Asst. Collector of Central Excise did not accept the assessee's plea and asserted that the production of polymer chips was liable to excise duty and the assessee's attention was invited to Section 3 of the Central Excises and Salt Act, 1944, and Rule 9 of the Rules made thereunder. On January 23, 1978, the Asst. Collector of Central Excise, Poona, issued a show-cause notice to the assessee on the ground that the assessee had contravened Rules 174, 173(B) and 173(C) of the Central Excise Rules, 1944. There, the Asst. Collector of Central Excise contended that the assessee was liable and required to pay central excise duty on the said product irrespective of the assessee's clearing the product for consumption outside the factory or using the same internally in the assessee's own factory for further manufacture of nylon yarn. The letter has been set out in the statement of case. For our present case, it is not necessary to set out the letter. In the light of the above facts, the assessee made a provision for liability of Rs. 14,96,000 by way of excise duty for the first year and Rs. 17,00,000 for the second year. Actually demand notice had not been issued by the central excise authorities and no coercive process had been started for recovering the same. It is also an admitted position that no penalty had actually been levied for non-payment of the duty.
(3.) In these circumstances, the ITO held that the liability had not accrued or become ascertained during the relevant accounting year. The AAC, on the other hand, accepted the contention of the assessee and allowed these two sums as deduction.;