Advocate Akhilesh Kumar Sah
The Supreme Court in the case CIT v. McDowell & Co. Ltd. [2009] 180 Taxman 514 (SC), has held, on the facts and circumstances of the case, that furnishing of bank guarantee cannot be equated with actual payment.
Section 43B of the Income Tax Act, 1961, allows certain deductions only on their actual payment by an assessee while computing his total income. Briefly, it incorporates subject to its proviso and Explanations that notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under the Act in respect of–
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, 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, or
(c) any sum referred to in clause (ii) of section 36(1); or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation in accordance with the terms and conditions of the agreement governing such loan or borrowing; or
(e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances; or
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee :
– 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.
Many a times assessee arranges bank guarantee for the payments enumerated as above (in section 43B) and question arises whether such bank guarantee fulfills the intention of legislation of actual payment. A similar type of question arose in a case before CIT Jaipur v. Rajasthan Patrika Ltd. (2003) 172 Taxation 82 (Raj).
Relevant facts and decision of Rajasthan Patrika Case (supra):
In the above case the assessee imported news prints, on which customs duty was payable. The assessee respondent disputed the rate of custom duty before Hon’ble Supreme Court and made a request for interimex-partestay order on payment of custom duty. The Hon’ble Supreme Court vide its order dated 8.4.1982 granted stay on the condition of giving an unqualified and categorical bank guarantee for the amount of custom duty payable by assessee. In pursuance of the direction of the Hon’ble Supreme Court, the assessee furnished bank guarantee for the amount in dispute and claimed deduction of that custom duty liability. Assessing officer allowed the claim of the assessee in the original assessment. Therefore, notice under section 148 for reopening of the assessment under section 147 of the Act was issued and after reopening of the assessment for abovementioned three years assessing officer disallowed the claim of the assessee for deduction of custom duty liability. The assessing officer held that the assessee is not entitled for any deduction in absence of actual payment of the custom duty as that is hit by the provisions of section 43B of the Act.
In appeal before the Commissioner (Appeals), the Commissioner (Appeals) confirmed the view taken by the assessing officer.
In appeal before the Tribunal, the Tribunal took the view that as material facts were disclosed for taxing the custom duty liability, therefore, the assessing officer was not justified in re-opening of the assessment under section 147 read with section 148 of the Act. Tribunal also took the view that once the assessee has furnished a bank guarantee as per direction of the Hon’ble Supreme Court, the assessing officer should not have disallowed the claim of the assessee, as furnishing of bank guarantee tantamounts to payment of custom duty.
Since the above were 3 appeals relating to assessment years 1984-85, 1985-86 and 1987-88 involved common questions, on appeal, the Rajasthan High Court disposed of these all three appeals by a common order holding that reopening of assessment in the assessment years 1984-85 and 1985-86 was bad and when the reopening of assessment was had there is no need to go into the merits whether the tax was allowable on the basis of furnishing of bank-guarantee and, therefore, no interference is needed in the assessment years 1984-85 and 1985-86 while reopening of assessment for assessment year 1987-88 was valid and furnishing of bank-guarantee did amount to actual payment of the customs duty as required under section 43B of the Act and Tribunal committed error in allowing the deduction of custom duty liability on the basis of bank guarantee furnished by the assessee.
Conclusion:
Furnishing of bank-guarantee does not amount to actual payment of a liability as envisaged under the Act. Also Rajasthan HC in CIT vs. Udaipur Distellery Co. Ltd. (2004) 180 Taxation 581 has held that payment by bank guarantee cannot be equated with actual payment.
However the guarantee commission itself paid to the bank is a revenue & deductible expenditure [CIT vs. Sivakami Mills Ltd. (1997) 227 ITR 465 (SC).
Observation of Rajasthan High Court while delivering judgment in the case Rajasthan Rajya Sahakari Spinning & Ginning Mills Federation Ltd. v. ITAT & Anr. (2003) 172 Taxation 92 (Raj) at page 99-
“It is true that while interpreting the provisions of the Act, meaning should not be given to the word which results in absurdity, hardship or injustice, but at the same time to infer the intention of the legislature, the plain language of the provision should not be ignored which born out from the plain language used in the provision”.
