Court Upholds Deletion of Excise Duty Addition, Favoring Taxpayer in Reimbursement Case

Case Name**: COMMISSIONER OF INCOME TAX VS UNITED ENGG. (P) LTD.

**Key Takeaways**:

1. Reimbursements of excise duty may not be considered taxable income if properly accounted for.

2. The court emphasized the importance of considering the net effect of transactions rather than isolated entries.

3. The judgment reinforces the principle that tax authorities should look at the substance of transactions over their form.

**Issue**: 

Was the Income Tax Appellate Tribunal (ITAT) justified in deleting the addition of Rs. 10,31,279/- made by the Assessing Authority on account of excise duty receivable?

**Facts**:

1. The case pertains to the Assessment Year 1986-87.

2. The Assessing Authority had added Rs. 10,31,279/- to the assessee's income, considering it as excise duty receivable.

3. The assessee (United Engg. (P) Ltd.) claimed that this amount was not debited in their Profit & Loss Account and was only a balance sheet entry.

4. The assessee used to be reimbursed by the concerned Government Department for the central excise duty paid earlier.

5. The Commissioner of Income Tax (CIT) appealed against the ITAT's decision to delete this addition.

**Arguments**:

Assessee's Arguments:

1. The amount in question was not debited in the Profit & Loss Account.

2. It was only a balance sheet entry reflecting the amount.

3. The assessee was reimbursed by the Government Department for excise duty paid earlier, resulting in no net receipt.

Revenue's Arguments:

The specific arguments of the revenue are not explicitly stated in the judgment. However, it can be inferred that they believed the excise duty receivable should be considered as income and added to the assessee's taxable income.

**Key Legal Precedents**:

The revenue cited the following cases, though the court found them not relevant to the question of law raised in this appeal:

1. Commissioner of Income Tax Vs. Narang Ram Chiranji Lal [(1999) 235 ITR 11]

2. Commissioner of Income Tax Vs. Chaudhary and Co. [(1996) 217 ITR 431]

3. Commissioner of Income Tax Vs. Ram Agya Shyam Narain [(1991) 189 ITR 470]

**Judgement**:

1. The High Court dismissed the Income Tax Appeal, ruling in favor of the respondent-assessee (United Engg. (P) Ltd.).

2. The court found no error in the ITAT's reasoning that the assessee was reimbursed by the Government Department for excise duty paid earlier, resulting in no net receipt.

3. The court agreed that the Assessing Authority was not justified in making the addition of Rs. 10,31,279/-.

4. The question of law raised in the appeal was decided against the revenue and in favor of the respondent-assessee.

**FAQs**:

1. Q: What was the main issue in this case?

  A: The main issue was whether the addition of Rs. 10,31,279/- made by the Assessing Authority on account of excise duty receivable was justified.

2. Q: Why did the court rule in favor of the assessee?

  A: The court agreed with the ITAT's reasoning that the assessee was merely reimbursed for excise duty paid earlier, resulting in no net receipt of income.

3. Q: What principle does this judgment reinforce?

  A: This judgment reinforces the principle that tax authorities should consider the substance of transactions over their form, and look at the net effect rather than isolated entries.

4. Q: Does this mean all reimbursements are non-taxable?

  A: Not necessarily. This case specifically dealt with excise duty reimbursements that were properly accounted for. Other types of reimbursements may be treated differently depending on their nature and accounting treatment.

5. Q: What should businesses learn from this case?

  A: Businesses should ensure proper accounting of reimbursements and be prepared to demonstrate the net effect of such transactions if questioned by tax authorities.

We have heard Sri Govind Krishna for the appellant. Sri R.R. Agarwal appears for the respondent-assessee.

This Income Tax Appeal under Section 260-A (of Income Tax Act, 1961), 1961 is directed against the order of the Income Tax Appellate Tribunal, Delhi Bench, Delhi dated 22.09.2003, relevant for the Assessment Year 1986-87, by which the Tribunal confirmed the appellate order.

The appeal was admitted on the following question of law:-

"(1) Whether the ITAT is justified in deleting addition relying on the finding of Ld. CIT (A) and holding that when the amount of Central Excise Duty was received on account of reimbursement and also because this amount was not debited in the profit and loss account inasmuch as the Excise duty account wherein the amount has been credited as receivable in an integral part of profit and loss account and balance sheet.?"

We have gone through the order of the Tribunal and found that valid reasons have been given by the Tribunal in holding that the Assessing Authority was not justified in making the addition of Rs.10,31,279/-, on account of excise duty receivable. The reasoning given by the Tribunal are as follows:-

"6. Ground No.2: This ground is directed against deletion of addition of Rs.10,31,279/- made on account of excise duty receivable. The version of the assessee in this regard was that this amount has not been debited in the P & L A/c, and it was only balance sheet entry which reflected this amount. The learned CIT (A) has considered the submissions of the assessee and has reproduced the same in the appellate order on pages 5 & 6. He has also observed that the assessee used to reimburse from the concerned Government department in lieu of the central excise duty paid earlier and thus in the net result the assesee was not in receipt of any amount from the government department to whom the goods were sold. The relevant facts and findings have been recorded by the learned CIT (A) in para 3.1 of his order which are as under:-

"3.1 From the detailed explanation of the appellant, it is seen that the Excise Duty was never charged from the Govt.

Department to whom the goods were supplied by the appellant. However, on the removal of goods from the premises of the appellant, Excise duty was kept by the appellant as per the requirement from the concerned Government Department in lieu of Central Excise Duty paid earlier. Thus, in the net result, the appellant was not in receipt of any amount from the Government Department to whom goods were sold. This becomes clear from entries in its books of a/c as mentioned above. It is also surprising to note that the Export Incentive of Rs.4,05,777/-, which was exempt u/s 80 (of Income Tax Act, 1961) HHC of the I.T.Act was also added to the income of the appellant in the wake of Excise Duty refunded to the appellant. After due consideration of the total facts on the issue, there remains no confusion and I am of the clear opinion that no addition of Rs.10,31,279/- was called for in this case, because, what the appellant received during the relevant period was only a reimbursement of what was paid by the appellant on behalf of the Govt. Department at the time of removal of goods for being supplied to the Government Deptt. I, therefore, delete the addition of Rs.10,31,279/- made by the AO in this regard. The appellant will get relief accordingly."

7. After going through the appellate order, I do not find any scope to interfere as, in my view, the AO was not justified in making the addition particularly when the amount of central excise duty was received on account of reimbursement and also because this amount was not debited in the P & L a/c by the assessee itself. Ground fails."

Sri Govind Krishna has relied upon decisions in Commissioner of Income Tax Vs. Narang Ram Chiranji Lal [(1999) 235 ITR 11]; Commissioner of Income Tax Vs. Chaudhary and Co. [(1996) 217 ITR 431]; and Commissioner of Income Tax Vs. Ram Agya Shyam Narain [(1991) 189 ITR 470].

We do not find that any judgment cited above is relevant to the question of law raised in this appeal.

We do not find any error in the reasoning given by the Tribunal that the assessee used to reimburse from the concerned Government Department in lieu of the central excise duty paid earlier, and thus in the net result, the assessee was not in receipt of any amount from the Government Department, to whom the goods were sold.

The question of law raised in this appeal is thus decided against the revenue and in favour of the respondent- assessee.

The Income Tax Appeal is dismissed.

Order Date :- 9.8.2012