Modvat Credit available to assessee on last day of previous year does not amount to payment of Central excise duty u/s. 43B

1.Whether deduction for tax, duty etc. is allowable u/s. 43B of the Income Tax Act, 1961, on payment basis before incurring the liability to pay such amounts?

The deduction for tax, duty etc. is allowable u/s. 43B of the Income Tax Act, 1961 on payment basis before incurring the liability to pay such amount.

2.Whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty u/s. 43B?

The Modvat Credit available to the assessee as on the last day of the previous year does not amount to payment of Central excise duty u/s. 43B.

IN THE INCOME TAX APPELLATE TRIBUNAL

SPECIAL BENCH, CHANDIGARH

I.T.A. No. 343/Chandi/2005

Assessment Year-2001-02

DCIT

V/s.

M/S. Glaxo Smithkline Consumer healthcare Ltd.,

(Formerly M/s. Smithkline Consumer Healthcare Ltd.)

O   R   D   E   R

Per DR O.K. NARAYANAN, AM

This appeal is filed by the Revenue. The relevant assessment year is 2001-2002. The appeal is directed against the order of the CIT(A) at Chandigarh dated 19-01-2005. It arises out of the assessment completed u/s. 143(3) of the Income Tax Act, 1961.

2.         The assessee-company is engaged in the business of manufacture and sale of food and Healthcare products. The assessee is brand owner of “Horlicks”. The assessee-company has returned an income of Rs. 132,15,75,339/- for the impugned assessment year 2001-02. While completing the assessment, the assessing Authority has made certain disallowance/additions and thereby the assessment was finally concluded on an income of Rs. 147,29,65,974/-.

3.         The total Central Excise deposits in the Account-Current of the assessee and the unutilised Modvat Credit on 31^st March 2001, the last day of the previous year relevant to the assessment year under appeal was Rs. 10,99,72,355/-. The balance on the last day of the immediately preceding previous year, as on 31.03.2000 was Rs. 9,96,24,284/-. The difference amount of Rs. 1,03,48,071/- represented the excess amount of credit available for adjustment as and when the payments of Excise duty become due. In its computation of income, the assessee-company has deducted this differential amount of Rs. 1,03,48,071/- as excise duty payments. The contention of the assessee before the Assessing authority was that this balance available to the credit of the assessee amounted to payment of Central excise duty, which should be allowed as deduction u/s. 43B of the Income Tax Act, 1961.

4.         But the Assessing Authority held that the contentions of the assessee-company could not be accepted. She found that for the immediately preceding assessment year 2000-01 also, the assessee had made such a claim, which was not accepted by the department. She also found that the department has accepted the decision of ITAT Chandigarh Bench in the case of Raj & Sandeep Ltd. Vs. ACIT. She accordingly disallowed the deduction of Rs. 1,03,48,071/- and added the same to the income of the assessee-company.

5.         The assessment order was taken in appeal before the CIT(A). Among other grounds, the ninth ground raised by the assessee in its appeal before the CIT(A) was that Assessing authority has erred in not accepting the claim of the assessee that the incremental balance of Central excise duty lying in PLA and RG.23 [Accounts Register prescribed by Central Excise Rules] should be allowed as deduction u/s. 43B, on the basis of the Appellate orders passed for the earlier assessment years. The CIT(A) observed that the same issue had come up for consideration before him in the matter of the same assessee for an earlier assessment year 1998-99. The issue was decided in favour of the assessee for the said assessment year 1998-99 vide his order sated 27.02.2004 in Appeal No. 316/P/2001-02. The finding of the CIT(A) for the said assessment year has been referred to in the following extract:

“I have carefully considered the submissions of the assessee and the arguments of the Assessing Officer. The appellant has claimed deduction u/s. 43B in respect of balance in PLA and RG-23 accounts, which represents payment made to the excise authorities, which can be used by the assessee to off set payment of duty on the final product. The Hon’ble Chandigarh Bench of ITAT in the case of Raj & Sandeep (supra), Delhi Bench of ITAT in the case of Modipon and Honda Siel (supra) held that balance in PLA/RG-23 qualifies for deduction u/s. 43B of the Act. My predecessor has also accepted the claim of the appellant. Consideration the legal and factual situation, I direct the Assessing Officer to allow claim of the assessee u/s. 43B of the Act. This ground of appeal is allowed”.

6.         The CIT(A), following the order for the earlier assessment year 1998-99 accepted the contention of the assessee-company and directed the Assessing Authority to give deduction for the amount of Rs. 1,03,48,071/-, u/s. 43B of the Act towards payment of Central excise duty.

7.         The Revenue is aggrieved by the above decision and therefore filed the second appeal before the Tribunal. The only issue raised in the present appeal is whether the CIT(A) is justified or not in accepting the contention of the assessee for deduting the incremental balance in assessee’s Account-Current in PLA and RG-23, u/s. 43B of the Act as payments of Central Excise duty. The grounds raised by the Revenue are the following:

“1.         On the facts and circumstances of the case, the ld. CIT(A) vide appellate order No. 326/P/2003-04 dated 19.01.2005 has erred in law and on the facts of the case in allowing deduction u/s. 43B of the Act, being incremental balance with Excise Authorities in PLA and RG-23.

2.         It is prayed that the order of the Ld. CIT(A) be cancelled and that of the Assessing Officer may be restored.

3.         The appellant craves leave to add or amend any grounds of appeal before the appeal is heard or disposed off.”

8.         When this appeal was posted for hearing and disposal before the Regular Division Bench at Chandigarh, the Bench found that divergent views have been expressed by the Co-ordinate Benches of the Tribunal on this issue and there is no judgment of any Superior Court so as to settle the divergent views expressed by different Benches of the Tribunal. The Bench found that the Chandigarh Bench of the Tribunal in the case of M/s. Raj & Sandeep Vs ACIT in ITA no. 1853/Chandi/92 dated 18.2.1993, has held for the assessment year, 1989-90 that excise duty which is deposited in the Account-Current by way of advance excise duty qualifies for deduction u/s. 43B of the Act. The Tribunal further observed hat in distinction to the above decision, the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. Vs. DCIT 92 ITD 119 (Del) has held that advance payment in cash of taxes or duties without incurring liability to pay such taxes or duties can not be allowed as a deduction u/s. 43B of the Act. The Tribunal observed that the first decision supports the case of the assessee whereas the second decision supports the case of the Revenue. In view of the above divergent views, the Bench referred the question before the Hon’ble President of the Income Tax Appellate Tribunal for considering the constitution of a Special Bench to decide the issue.

9.         On the recommendation of the Regular Bench of the Tribunal at Chandigarh dated 26^th December, 2006, the Hon’ble President passed an order u/s 253(4) constituting There Member Special Bench to hear and decide the following issue:

“Whether deduction for tax, duty etc. is allowed on payment basis without incurring of prior liability to pay such amount u/s. 43B of the Act?”

10.       The matter was thus placed before the Special Bench consisting of there Members. When the Bench was in session and preliminary arguments were placed before it, the Bench found that apart from the decisions of Regular Benches of the Tribunal which have resulted in divergent views, there are Special Bench decisions too on the issue. There instance of Special Bench decision have been observed by the Bench. Those Special Benches consisting of there Member each, had considered the following cases:

            KCP Ltd. Vs ITO 38 ITD 15 (Hyd)(SB)

            Indian Communication Network (P) Ltd. Vs. IAC 49 ITD 56 (Del)(SB)

            DCIT Vs CWC Wines (P) Ltd-89 ITD (Hyd)(SB)

 11.       As the above mentioned Special Bench decisions also need to be considered while adjudicating the issue placed before this Bench, it was suggested by the Bench that it would be appropriate if the case is heard by a Larger Bench comprising of at least 5 Members. This suggestion was placed before the contending panics also, The Revenue as well as the Assessee agreed that the suggestion for a Larger Bench is proper and acceptable. The matter was thus again placed before the Hon’ble President, Income tax Appellate Tribunal The Hon’ble President, on the recommendation stated above, reconstituted the Special Bench with Five Members to consider and decide the issue placed before it.

12.       In the course of preliminary hearing of the issue, the Three Member Bench, which was constituted al the first instance, had also an occasion to consider the exact nature of t he issue to be considered and decided especially in the light of the facts of the case involved in the present appeal. In the present case, the assessee-company has sought for deduction u/s. 43B, two kinds of amounts, as advance payments of Central Excise duty. The one is the actual amount of Central excise duty remitted by the assessee in the Treasury to the credit of the Central Excise Department and reflected in the Account-Current. It is a case where the assessee-company has actually made cash payments as advance payments of Central excise duty. The second one is the Modvat Credit available to the assessee as on the last day of the entitled for claiming Modvat Credit while discharging its liabilities towards the payment of Central Excise duties. The assessee-company was having certain amount of Modvat Credit available for future set off in its Modvat account. Such Modvat Credit balance available as on 31.3.2001, according to the assessee-company amounted to payment of Central Excise duty and therefore the Modvat Credit also should be treated at par with advance payment of Central excise duty for considering the deduction available u/s. 43B. Therefore, it has been stated before the Special Bench in the course of the preliminary hearing, that the issue referred before it needs to be considered in two segments as one relating to the cash payment of advance duty and the second relating to the Modvat Credit available to the assessee.

13.       In the above scenario, the issue referred to before the Five-Member Special Bench has been fine-tuned by the Hon’ble President, in the following questions:

“1.     Whether deduction for tax, duty etc. is allowable u/s. 43B of the Income Tax Act, 1961, on payment basis before incurring the liability to pay such amounts?

2.      Whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty u/s. 43B?

 14.       The above questions were placed before the Revenue and the Assessee to seek suggestions and also objections if any. The ld. Commissioner of Income tax appearing for the Revenue and the ld. Counsel appearing for the Assessee fairly that the above split questions do reflect the exact nature and dimension of the issue placed before the Special Bench.

15.       Shri R.K. Goyal, the ld. Commissioner of Income Tax appeared for the Revenue and opened the case. He argued at length on the various factual and legal propositions relied on by the Revenue. He stated that, basically the ground raised by the Revenue in this appeal is that the CIT(A) has erred in allowing deduction u/s. 43B of the Income tax Act, 1961 of the incremental balance maintained with the Central Excise authority in PLA RG-23. On the question whether deduction for tax, duty etc. is allowable u/s. 43B on payment basis but before incurring the to pay such amounts, the ld. CIT brought out the contentions and arguments in the following manner:

1.          That Section 43B permits certain deductions only on actual payment of the corresponding amount Section 43B is a non-obstinate clause. The section provides for deduction of the prescribed sums are “otherwise allowable under this Act”. This rider embodied in Section 43B clarifies the legal position that an assessee cannot by way of expenditure, the payments of taxes and duties only for the fact that the assessee has made the payments of those taxes and duties. In addition to the payment of such taxes and duties, it is also necessary that those expenses should be “otherwise allowable” under the provisions of the Income tax Act, 1961, in computing the business income.

2.         That the law is very clear on this subject that the deduction of the prescribed sums would be available to an assessee only on the basis of payment, either in the relevant assessment year or in the subsequent assessment year but no deduction would be available on such payment s where the corresponding liability was not incurred by the assessee.

3.         That before introduction of Section 43B, if an assessee maintained the accounts on accrual basis, the computing of the prescribed sums would be available in computing the business income if those liabilities were accrued during the previous year relevant to the assessment year, without the actual payment thereof. Even when Section 43B has been introduced, the rule of accrual of liabilities has not been dispensed with. The accrual of liability has still been retained. Section 43B has made an additional to the accrual of liability, only on actual payment of the sums. Therefore, it is not proper in law to argue that advance payment of taxes and duties made by an assessee even before accruing the corresponding liability is eligible for deduction u/s. 43B.

4.         That Section 43B has increased the number of conditions from one to two for the deduction of the prescribed sums. Instead of the erstwhile single condition of accrual of liability, Section 43B has brought out dual condition viz., accrual of liability as well as actual payment against the liability.

5.         That this position is very clear in the words used in Section 43B in the following manner:

“….Notwithstanding anything contained in any other provisions of this Act, a deduction otherwise allowable under this Act in respect of……”

 6.         That a deduction “otherwise allowable under this Act”, means a deduction qualified to be allowed before considering the question of payment. The item must be permissible as a deduction under any of the enabling provisions; the expenses must be incurred or liability must be incurred. That, only for the restriction brought in by Section 43B that cash must be actually paid, it does not mean that the remaining and existing conditions provided in law have been dispensed with. All such conditions are still retained. The further condition of actual payment is an addition to the existing conditions, which determine the allowability of deduction in computing the business income of an assessee.

7.         That six items have been provided in Section 43B to which the restriction contained in that section regarding actual payment of cash before claiming the deduction, do apply. The six items are provided in Clauses (a) to (f). Clause (a) rends that 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, 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 Section 28 of that previous year in which such sum is actually paid by him. The sum actually to be paid by the assessee is specified in law as “….any sum payable by the assessee by way of tax…….”. It means a sum which 15 no payable by the assessee pertaining to the previous year relevant to the assessment year will not be allowed as a deduction even if the sum was paid in the previous year. Any sum payable” is one of the most important limbs of the statutory expression provided in Section 43B. The expression “any sum payable” pre-supposes the incurring of a prior liability on the assessee to make such payment. Unless the liability to pay is incurred, it is not possible to say that any sum is payable by the assessee. Therefore, incurring of the liability before making the payment is the sine equation for claiming deduction u/s. 43B.

8.         The provide to Section 43B allows an assessee to claim the deduction even if the designated payment was made after the close of the relevant previous wear, but before the due date of filing of the return u/s. 139(1). While extending the time to the benefit of the assessee as stated above, the law has inserted the provision the following manner:

“Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of Section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee alongwith such return.”

The expression “…… in respect of the previous year in which the liability to pay such sum was incurred as aforesaid……” is the speaking expression to be market. The law has made it very clear in simple terms that what is to be paid and for which evidence has to be furnished is in respect of the previous year. This shows atht incurring of prior liability in a previous year is essential in claiming a deduction governed by the provisions of Section 43B. The additional requirement of making actual payment has not obliterated any other remaining requirements embodied in the law relating to deduction of expenses in computing income from business.

9.         That further, the position has been explicitly made clear in the statute by providing Explanation-2 to Section 43B. Explanation-2 reads that, for the purposes of clause (a), as in force at all material time, “any sum payable means sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.” The factum that the liability should be incurred during the previous year has been reiterated in the above Explanation which rules out any other interpretation to the contrary.

10.        Nowhere in the scheme of Section 43B is there any whisper of a situation where an assessee can make advance payment of taxes or duties in the previous year, even before incurring of the liability and claim deduction in computing the income from business.

16.       In support of his arguments and contentions, the ld. Commissioner of Income Tax has relied on the following decisions:

.1.     Srikakollu Subha Rao & Co. & Other Vs. Union of India & Others 173 ITR 708(AP)

        The AP High Court has held that in order to apply the provisions of section 43B, not only should the liability to pay tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year.

.2.     IAC Vs Tata Press Ltd. 35 ITD 470.

In this case, the assessee-company has claimed deduction in respect of the payment of gratuity fund, superannuation fund, provident fund etc. for the assessment year 1984-85. The deduction was claimed on payment basis in view of the newly inserted Section 43B. The assessee’s claim was notwithstanding the fact that the part of the payments related to the liabilities accruing not in the relevant previous year but in the subsequent previous year. The claim of the assessee was that the payments relating to liabilities accrued in the previous year and for the liabilities accruing in the subsequent year both should be allowed as deduction. The Tribunal held that the payments made against liabilities accruing in the subsequent year cannot be allowed as deduction. The provision contained in Section 43B is essentially restrictive in nature and not an enabling one.

 .3.     KCP Ltd. vs ITO 38 ITD 15 (Hyd)(SB).

In this case the very same issue was considered by the Special Bench and has held that prepaid taxes where no demand has been raised or liability incurred could not be allowed as deduction.

.4.     DCIT Vs Amforge Industries Ltd. 79 ITD 49

In this case the Tribunal has again considered the deductibility of excise duty and sales tax paid in advance. The Tribunal held that in order to claim u/s. 43B, assessee must first incur liability of the nature mentioned therein and only thereafter the year of allowability would be determined on the basis of the year of actual payment. The Tribunal held that taxes paid in advance before incurring the liability would not be allowed as deduction u/s, 43B.

.5.     DCIT Vs CWC Wines (P. Ltd. 89 ITD 01 (Htd)(SB)

        The Special Bench has held that countervailing excise duty paid in advance for importing liquor cannot be allowed as deduction u/s. 43B Where goods have not been received during the relevant previous year, which means advance payment of duty cannot be allowed as deduction before actually incurring the corresponding liability.

 .6.     Maruti Udyog Ltd. Vs DCIT 92 ITD 119 (Del)

 In this case, the Tribunal has examined the issue and ahs came to a finding that advance payment of taxes of duties without incurring liability to pay such taxes or duties cannot be allowed as deduction u/s. 43B.

17.       In addition to the above judicial pronouncements, the ld. Commissioner has also placed reliance on Circular No. 550 issued by CBDT on 1.1.1990, providing Explanation Notes on the provisions relating to Direct Taxes contained in the Finance Act, 1989. It has been clarified therein that Explanation-2 has been provided in Section 43B to nullify the rigors of certain judicial pronouncements [Srikakollu Subha Rao & Co. Others Vs Union of India & Others 173 ITR 708 (AP)] where the courts have held that in addition to the incurring of liabilities, the amount also should be statutorily payable in the previous year itself. The Circular has clarified that “any sum payable” shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable.

18.       The ld. Commissioner of Income Tax explained that the scheme of Section 43B has to be understood both in text and context and a harmonious interpretation has to be followed in order to arrive at a rightful proposition. On the Rule of interpretation, he relied on the decision of Dunlop India Ltd. Vs. ACIT 41 ITD 582 where the Tribunal has held that in every interpretation both text and context are important. He has also made reference to the decision of the Supreme Court in the case of Allied motors Pvt. Ltd. Vs. CIT 224 ITR 677 and the decision of Punjab & Haryana High Court in the case of CIT Vs Madanlal & Bros. 276 ITR 571. He has also relied on the decision of the Special Bench rendered by ITAT, Chennai Bench in the vase of Kwality Milk Foods Vs ACIT 100 ITD 199 where in paragraph 15 of its order, the Special Bench has held that if the language of the statute is plain, obvious meaning is to be applied; rules of interpretation are to be applied only to resolve the ambiguities.

19.       In the light of the above arguments and contentions, the ld Commissioner of Income tax submitted that taxes and duties paid by an assessee before incurring the liability to pay such amount are not allowable as deductions u/s. 43B as held by ITAT Hyderabad Special Bench in the case of KCP Ltd. Vs ITO 38 ITD 15 (Hyd)(SB).

20.       Shri Ajay Vohra, the ld. Counsel appearing for the assessee on the other hand contended that Section 43B does not stand in the way of claiming deductions in respect of taxes and duties paid in a particular previous year but otherwise payable in the subsequent assessment year. He explained that Section 43B is not a restrictive or prohibiting section as sought to argue by the Revenue but on the other hand it is equally an enabling provision where deductions are allowed on the basis of actual payments of taxes and duties. The detailed arguments and contentions placed by the ld. Counsel are summarized in the following manner:

.1.         Section 43B provides a departure from the method of accounting followed by an assessee in as much as deduction of statutory liabilities in the year of payment is introduced notwithstanding the fact that the liability in respect thereof nay have accrued in another year. In effect Section 43B overrides the method of accounting consistently following by an assessee and direct that deduction of statutory liabilities will be available only in year of payment.

.2.         The assessee has claimed deduction u/s. 43B in respect of the balance on the Personal Ledger Account (PLA) maintained with the Excise authorities. As the amounts have irretrievably gone out of the hands of the assessee-company, those payments are allowable deduction as contemplated in Section 43B. Section 43B provide that any sum payable on account of tax, duty etc. which is otherwise allowable, shall be allowed only in the year of actual payment, irrespective of the year which the liability to pay the same was incurred. Consequently, where the liability to pay excise duty may be incurred in a later date, the amount actually paid by the assessee has to be allowed as deduction in year of payment itself.

.3.         The statutory provisions of Section 43B and the PLA and RG-23 maintained under the Central Excise Rule clearly pont out the pre-dominance of actual payment of duty as the sole consideration while granting deduction in the computation of income compared to the year accrual or the incurring of liability or raising of the demand.

.4.         Section 145(1) of the Income-tax Act recognizes two method of accounting, either cash or mercantile system, to be regularly employed by an assessee for the purpose of computing income-chargeable under the head “profit and gains of business or profession” or “income from other sources”. The assessee is given a choice to select either of the two. The assessee-company being by the provisions of the Companies Act, 1956. Section 209(3) of the Companies Act mandated that a company shall maintain its accounts in mercantile system/accrual system. In the Income Tax Act, the assessee has an option, in the companies Act, the assessee has no option. The assessee therefore being a company is following mercantile/accrual system of accounting.

.5.         The impact of Section 43B is that the above method of accounting regularly employed by the assessee is overturned and the deduction for the payment of tax, duty etc. is given only on payment basis. This means, in respect of deducting those sums, the Income Tax Act provides only one method of accounting; i.e. cash method. Therefore the accrual system and consequently the accrual of liability or incurring of liability all are ignored by the provisions of Section 43B and in the light of non obstante clause, the mandate of cash accounting provided u/s. 43B prevails over any other consideration.

.6.         Section 43(2) defines the term “paid”‘. It means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head “pro1its and gains of business or profession”.

.7.         Reading of Section 145( 1) and Section 43(2) alongwith Section 438 brings out a unique situation as follows:

That the method of accounting for deducting taxes, duty etc. while computing the business income is cash accounting as a result of the impact of the Section 438. Therefore, the method of accounting for the purpose of Section 43(2) is none other than cash accounting. When Section 43(2) and 438 are read together, the method of accounting for the computation of business profit in respect of sums like taxes, duties, cess etc. is cash accounting and no other consideration should prevail in deducting those items other than the consideration whether those sums have actually been  paid by the assessee. In other words Section 43B overrides all the rules regarding method of accounting and decides the issue of deducting the prescribed sums only on. Actual payment without any conflict to Section 43(2). Cash system of accounting invariably means deduction of expenses in the year of payment.

.8.         Section 438 provides that the items enumerated there under shall be allowed on actual payment 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. The expression “irrespective” infact removes any reference to time. The expression “irrespective” means regardless of lime Therefore the insistence that the incurring of liability must be referred to a particular previous year is uncalled for in the administration of Section 438.

.9.         A careful reading of Section 438 does not bring out any sequence or order of events in which the matters like incurring of liability, raising of demand, actual payment of the duty or taxes should occur. The screening of the entire provisions contained in Section 43B does not bring out any rule that the liability to pay such duty or tax must incur first and only thereafter the payment of such duty or tax must be made/deducted. There is no such sequence of events that one particular event should alone happen at the first instance and then only the other event should follow. The statute does not prescribe any proposition that pre-incurring of liability is a condition to claim deduction of duty, taxes etc. where those items were paid by the assessee.

.10.       The Revenue authorities have given a lot of importance to the expression contained in Section 438 as “……………..a deduction otherwise allowable under this Act,…………..” The contention of the Revenue authorities that the expression “otherwise allowable under this Act” means deduction available only for the year of incurring liability is without any basis. The correct interpretation of the expression “otherwise allowable” is that the item claimed as deduction needs to be an expenditure allowable under the provisions of the Income Tax Act in computing the income. It does not mean that it should be attributable to a particular assessment year. The real implication of the expression is that those Hems of expenditure which are not usually deductible in computing the income of an assessee cannot be claimed as deduction even if the assessee has made actual payments of those items. The expression “a deduction otherwise allowable” is used in a general and permissive manner as explained above.

.11.        The Revenue has also relied on the proviso to Section 43B. The text of the proviso is that deduction shall be allowed u/s. 43B even though the payments were made after the close of the relevant previous year but before the due date of filing of the return u/s. 39(1). The law stated in the proviso does not in any way alter the character of Section 43B wherever payments have been made by the assessee. The proviso applies in a case where the liability has incurred but the assessee has not paid the amounts in the said year and wants to claim the deduction on making the payment after the close of the previous yen:. Such situations happen in matter of sales tax. Sales might be made in the month of March. The liability to pay the sales tax arises only in the following month of April; after the close of the previous year. What is paid by the assessee by way of sales tax in the month of April of the succeeding previous year is the liability actually incurred in the month of March falling within the immediately preceding previous year. before the introduction of the proviso, Courts have held that in order to apply the provisions of Section 43B, not only should the liability to pay the tax or duty be incurred in the accounting year, but the amount also should be statutorily payable in the accounting year. [Sri Kakollu Subba Rao & Co. And Others Vs Union of India and Others 173 ITR 708(AP)]. It is to take care of such marginal situations and to mitigate the genuine hardships of the assessee as a result of High Court judgment that the proviso has been added to Section 43B. It. is not in the nature as argued by the Revenue that payment should succeed incurring of liability.

.12.       The Revenue has also placed much reliance on Explanation-2 to Section 43B. Explanation-2 provides that for the purposes of clause (a), any sum payable means, a sum for which the assessee has incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. By making reference to clause the items covered by Explanation-2 are tax, duty, cess or fee. This should be read alongwith the proviso already mentioned above. The proviso to Section 43B and Explanation-2 go together. The operation of an Explanation is always governed by the main provisions of law contained in the relevant section. Explanation cannot overtake the section as such. In the present case Explanation-2 does not cover all sorts of payments. They cover only those payments within clause(a) and also to be read alongwith the proviso to Section 438.

21.       The Id. Counsel further argued in the following lines relying on the respective judgment referred, thereto:

.1.         Consequence of Section 438 in the matter of method of accounting has been succinctly explained by ITAT Delhi ‘B’ Special Bench in the case o! Indian Communication Net Work (P) Ltd. Vs IAC 49 ITD 56 {Del)(SB}. In paragraph 22 of the decision (at page 66 of the report), the Tribunal has stated that Section 43B was no doubt introduced to curb the practice adopted by the assessees to retain substantial funds by not depositing amounts into the Govt. account and claiming deductions at the same time; but it also brought out a change in the “method of accounting” regularly followed by an assessee. This happened due to certain deductions being allowed on “actual payment” basis although earlier the claim was allowed on “accrual” basis.

.2.         The intention of the Legislature is to allow deduction in respect of any tax or duty in computing u/s. 28, the income of that previous year in which such sum is actually paid by the assessee. This is considered by the Gujarat High Court in the case of Lakhanpal National Ltd Vs ITO 162 ITR 240. The Court has held that Section 438 opens with a non obstinate clause which means that irrespective of other provisions, Section 43B will have overriding effect. The court observed that the lI1tention is made more specific by providing that it would be so 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 the assessee.

.3.         The judgment of the Gujarat High Court in Lakhanpal National Ltd 162 ITR 240 is in favour of the arguments advanced by the assessee on the question of true intent, purpose and implication of Sec on 43B. The said judgment of the Gujarat High Court ‘as not challenged by the Revenue before the Supreme judgment of the Gujarat  high court thereby accepting the Court. The interpretation placed on Section 43B in the case of Lakhanpal National Ltd.’s case 162 ITR 240 (Guj) vas directly followed by the judgment of the Bombuy’ High Court in CIT Vs Bharat Petroleum Corpn. Ltd. 252 ITR 43 and also by Madras High Court in the case of Chemicals & Plastics India Ltd. Vs CIT 260ITR 193.

.4.         The above decisions of three High Courts have been considered by the Supreme curt in the case of Berger Paints India Ltd. Vs CIT 266 ITR 99. The Supreme Court observed that the above three judgements rendered by three different High Courts have been accepted by the department which has brought in a consistency of approach on the issue involved u/ s. 43B. The Court held that the said consistency of view has to be followed and tl1erefore the judgement of the Calcutta High Court in CIT Vs berger Paints (India) Ltd. 254 ITR 498 was liable to be disapproved. The uniform view reflected in the decisions of three High Courts has been held by the Supreme Court as a valid reason to endorse the said view and not to disturb the consistency. Referring to the Supreme Court judgements in Union of India Vs Kaumudini Narayan Dalal 249 ITR 219; CIT Vs Narendra Doshi 254 ITR 606 and CIT Vs Shivsagar Estate 257 ITR 59, the Court reiterated the principle of consistency to be followed in matters of adjudication. If the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, it is not open to the Revenue to challenge the correctness in the case of other assessees without just cause. In the matter of Section 43B there being no such cause approved, the decisions of the three High Courts where the principle has been upheld that the deductions of tax, duty should be allowed u/s. 43B in the year of payment, irrespective of the previous year are to be followed. The decision of the Supreme Court in Berger Paints India Ltd. 266 ITR 99 settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed u/s. 43B irrespective of the previous year to which the corresponding liability related to.

.5.         The case of the Revenue is that the Explanation has stated that the sum deductible an payment u/s. 43B is the sum for which the liability has already been incurred. This is not a correct interpretation of the Explanation. The Explanation was brought ill the statute boo. to tide over the judgement of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao & Co. and Others Vs Union of India. and Others 173 ITR 708(AP). In the said case the court has held that deduction u/s.438B would be available to an assessee not only if the amount has been paid in the previous year, but also if the mount become payable in the very same previous year. The intention of the law was to give deduction on the basis of the payment of the sum irrespective of the fact whether the sum has. actually become payable or not in the previous year. According to the relevant law governing the payment of tax, duty, cess or fee, the amount would be payable only after the close of the previous year; but the decision of the Andhra Pradesh High Court adversely , effected even such payments made in the previous year but which became payable only after the close of the previous year. This anomaly has to be overcome. It is for that purpose Explanation-2 has been inserted. Explanation is to be governed by the section in the statute. It cannot override the intended purpose of the law stated in the concerned section. I t enables to explain a situation arising from the implementation of the law stated In a Section. It does not bring any interpretation over and above the spirit ‘of the law contained in a particular section. In the present case, Explanation-2 needs to be read alongwith the proviso which enables an assessee to claim deduction even if made after the close of the previous year, but if made before the due date of filing of the return. Explanation-2 is the expression of the proviso meant for undoing the after effect of the judgement of Andhra Pradesh High Court. The proviso is the means provided by the statute, to accomplish the objective of the Explanation. Therefore they should be read together.

.6.         The above position has been explained by the Supreme Court in the case of Allied Motors (P) Ltd. Vs CIT 224 ITR 677. The Court has observed in the said judgement that the first proviso to Section 43B and Explanation-2 have to be read together as giving effect to the true intention of Section 43B. Explanation-2 being retrospective, the first proviso has also to be so construed. Without the first proviso, Explanation-2 would not obviate the hardship or unintended consequence of Section 438. The proviso supplies an obvious omission. But for this proviso, the ambit of Section 43B become unduly wide bringing within its scope those payments, which were not unintended to be prohibited from the category of permissible deductions, The Court has held therein that the rule of reasonable construction must be applied while construing a statute,

.7.         The Calcutta High Court in the case of Associated Pigments Ltd., Vs CIT 234 ITR 589 has considered this question of twin conditions argued by the Revenue that payment also should be made and liability also should be incurred in the previous year relevant to the assessment year in which deduction is sought by the assessee u/s. 43B. In that case the question placed before the Hon’ble Court related to admissibility of deduction of two sums paid by the assessee on account of purchase tax during the assessment year in question but those sums being relatable to an earlier accounting and assessment year. While considering the case, the Court held that no part of Section 43B or Income Tax Act itself requires that when deduction is claimed on the basis of Section 438, the assessee must satisfy the twin test of both proving actual payment of duty, tax, cess in the previous year in question its well as satisfying the department that due provision had been made in the books in regard to such duty or tax for which payment was made latter on. The Court held that to introduce this double test would be writing words into the section. The arguments of the Revenue in the light of the first proviso and Explanation- 2 to Section 438 that both the conditions of liability as well as payment must be satisfied before claiming a deduction u/s. 43B is erroneous in the light of the above judgement of the Calcutta High Court.

 .8.         The Allahabad High Court in the case of CIT Vs C.L. Gupta & Sons 259 ITR 513 has considered the very same issue in a more realtime and direct manner. In that case, the assessee paid the Customs duty in March 1987, but goods delivered and entered in the accounts in April 1987. The payment fell in the previous year ending 31^st  March 1987 relating to the assessment year 1987-88 and the liability accrued in the previous year ending on 31.3.1988 relevant to the assessment year 1988-89. The assessment year in which the payment was made proceeded to the assessment year in which the liability vas incurred. The Court held that for the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee etc., the year of payment alone is relevant and is to be taken into account. The Court categorically held that the year in which the assessee incurred the liability to pay such taxes, duties etc. has no relevance and cannot be linked with the manner of giving benefit of deduction u/s 43B. The above decision of the Allahabad High Court clearly endorses the argument of the assessee that incurring of liability mentioned in Section 43B. the First proviso thereto and Explanation-2 thereunder are reflecting the general liability of an assessee carrying on the business where liability arises for duties and taxes and the expression does not meal, an outstanding liability as construed by the Revenue. In the light of the general liability already stated, the actual payment alone is the sole criteria of deciding the admissibility of deduction u/s. 43B.

.9.         In order to get the refund of excise duty from the Account-Current1 it is necessary for the assessee to make a formal claim and the excise authority has to pass appropriate orders after recording the reasons in writing. Cash refunds are made only under specified circumstances; otherwise refund due to the assessee is always treated as a credit available for future set off and adjustment of Central excise duty. From the nature of the account-current maintained with Central Excise department the frequency of payments made by the assessee and the lifting of goods from the factory on a continuous basis, it is very clear that the money  even if characterised as advance deposits paid by an assessee to Central excise through PLA and RG-23 in the account-current, retain all the characteristics of payment of actual Central Excise duty and therefore the advance deposits cannot be treated as an advance for future liability as construed in the ordinary commercial sense.

.10.       The Supreme Court has considered an instance of money lying to the credit of an assessee but nevertheless not belonging to it, in the case of CIT Vs New Horizon Sugar Mills 269 ITR397. The Court held that the Molasses amount transferred to the Molasses Reserve fund would not be the income of the assessee, as it had no control over that.

22.       The ld. Counsel further referred to various decisions rendered by different Benches of ITAT in favour of the assessee.

.1.         The ITAT Chandigarh ‘B’ Bench has considered the issue in the case of M/s. Raj & Sandeep Ltd. Vs ACIT in ITA No. 1853/Chandi/92 through their order dated 18.2.1993. The Tribunal decided the matter in the following manner:

……… “We, therefore hold that excise duty which is deposited in the account-current by way of  advance excise duty and is actually paid in the Treasury qualifies for deduction! u/s. 438……..”

.2.         ITAT Chandignrh Bench follow d the above decision in the case of ACIT-l Vs Happy Forging Ltd. through their order dated 8.8.2005.

.3.         ITAT Delhi Bench in the case  Modipon Ltd. Vs Inspecting Asstt. Commissioner 52 TTJ 477 has held that excise duty paid as advance by way of deposit in Personal Ledger Account (PLA)cannot be disallowed u/s. 43B.

.4.        ITAT Agra Bench through their order dated 18.12.2000 in ITA No. 283/Del/92 in the case of M/s. Hind Lamps Ltd, Vs DCIT has followed the above decision and held that similar advance deposit made in account-current are allowable as deduction u/s. 43B.

23.       The ld. Counsel thereafter tried to explain that how the various judgements relied on by the Ld Commissioner of Income tax are not really applicable to the issue raised before us.

.1.         The ITAT Mumbai Bench in the case of IAC Vs Tata Press Ltd. 35 ITD 470 has held that advance payment of excise duty cannot be allowed as deduction u/s. 43B. But the decision does not consider how the accrual of liability, one of the basic rules of mercantile system of accounting, would be still valid in allowing deduction u/s. 43B once the system has been statutorily shifted to cash basis.

.2.         The Revenue has relied on the Special Bench decision of ITAT Hyderabad Bench in the case of KCP Ltd. Vs ITO 38 ITD 15 (Hyd)(SB), The said decision of the Special Bench is no longer good law in the light fir the decision of the Gujarat High Court in the’ case of Lakhanpal National Ltd Vs ITO 162 ITR 240 where the Court has held that the assessee shall be entitled to get the benefit of deduction u/s. 43B on actual payment, irrespective of the year of payment and by virtue of the overriding effect of Section 43B.

.3.         The reliance placed by the Revenue on the decision of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao & Co. and Others Vs Union of India and Others 173 ITR 708(AP) is also misplaced. It is not a decision which interprets the provisions of law contained in Section 43B.

.4.         The decision of ITAT Mumbai Bench ‘E’ in the case of DCIT Vs Amforge Industries Ltd. 79 ITI) 49 also does not flow from the language used in Section 43B.

.5.         The decision of ITAT Hyderabad Special Bench in the case of DCIT Vs CWC Wines (P) Ltd. 89 I1’D 01 (Hyd)(SB) has placed reliance on the decision of Andhra Pradesh High Court in the case of Gopi Krishna Granites India Ltd. Vs DCIT 251 ITR 337. The issue raised before us in clause (a) of Section 438 is to be considered. It is quite different from clause (d) considered by the High Court in the said decision. The sums payable under clause (a) and sums payable under clause (d) are different and distinct in nature and character. The reference made to matching principle in the said decision has no relevance once cash system is adopted for Section 43B.

.6.         The Delhi Bench in the case of Maruti Udyog Ltd. Vs DCIT 92 ITD 119. while considering he issue has misdirected in its discussion regarding the expression “incurring of liability”. The Tribunal has construed the meaning of the expression “liability incurred” equivalent to a demand raised by the Department as payable and outstanding at the close of the relevant previous year. The Tribunal has given an instant meaning to the express on “incurring” whereas infact the expression implies the 1iability running alongwith the business of manufacturing carried on by the assessee and thereby becoming liub1e to pay excise duty.

24.       The ld. Counsel further relied on the following in support of his contentions:

.1.         In SLP (Sr. 2766 of 1933), in the case of CIT Vs South India Research Institute, the Supreme Court has considered the judgement of Andhra Pradesh High Court in the matter of Section 43B in the context of special account maintained by an assessee to pay excise duty while dismissing the special petition filed by the Revenue in appeal against the order dated 27.2.1991 of Andhra Pradesh High Court in ITC No. 126 of 1990, the Supreme Court held as follows:

“…………….In view of the clear finding of fact to which reference has been made in the impugned order of the High Court, that the assessee claimed deduction in respect of the amount representing the actual duty paid and so adjusted, there can be no doubt that the High Court is right to taking the view that no question of taw arises out of the Tribunal’s order. There is thus no ground to interfere. The special leave petition is dismissed………….”

The matter considered by the Supreme Court was the dismissal of a Reference Appellation by the High Court on the question whether amounts in a special account maintained by the assessee to pay excise duty as and when the goods were removed, would partake the character of the excise duty and would hence be al1owable u/s. 43B of the Income Tax Act, 1961. This is a straight decision of the Apex Court on the subject matter considered here.

.2.         The ITAT Delhi Bench ‘D’ in the case of Honda Sie1 Power Products Ltd. Vs DCIT 77 ITD 123 has considered the nature of advance payments of Central Excise duty for the purpose of deduction u/s. 43B.

.3.         The Central Excise & Cold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the nature of the PLA in the case of F. Fibre Bangalore Pvt. Ltd. Vs Commissioner of Central Excise Bangalore 120 ELT 579 (Tribunal). In that case “the assessee debited the duty in PLA for acquiring under Rule 57F(2) and took the credit back in PLA rather than taking the same in RG-23A Part-II. As such. the lower authorities directed the assessee to pay the duty in PLA and take the credit back in RG-23A part-II. This direction could Dot be adhered to since as on that date, the unit was not functioning. The revival also could not be done. The contention of the assessee before the Tribunal was that as there was no loss of Revenue, the demand raised against it to make the credit in PLA be set aside. The Tribunal held that the prayer of the assessee was not acceptable. Rule 173G(lA) provides that where any amount is to be withdrawn from the PLA account, then the assessee has to make an application to the Commissioner and only by obtaining permission from h tm, the said amount can be withdrawn. Rule 173G( 1) also prescribes that periodical credit in the account-current can be made only by cash payment to the Treasury. Thus the Rule clearly lays down that credit of duty can be taken in the PLA only either through cash deposit under T.R.6 Challan in the Treasury or by written permission to take credit by the proper officer. In this case, the appellant took credit back in the PLA on their own clearing goods under Rule 57F(2) which was wrong. When the lower authorities directed the assessee to rectify the mistake by making debit entry in the PLA and taking the credit back in RG-23A Part-II, the assessee did not follow the same on the ground that the unit was not functioning. Even if the unit was not functioning, i.e, it was not producing excisable goods, it was still under excise control and the relevant account-current and RG-23A Part-II were available with the assessee. There was no merit in the prayer raised by the assessee”,

The above decision of the Tribunal explains the true and strict nature of account-current maintained by the assessee with excise authorities. Once payments are made in the Treasury to the credit of assessee’s account-current, even if those payments were advance payments, the money ceased to be the money of the assessee, The assessee cannot withdraw any credit from the account-current without the permission of the concerned authorities,

25.       After concluding the arguments on the first question of advance payments of excise duty, arguments were made on the second question whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty u/s, 43B.

26.       Shri Ajay Vohra, the Id, Counsel brought out his arguments on the above issue in the following manner:

i)          Modified Value Added Tax (Modvat) introduced from 1^st March 1986 by incorporating Rules 57 A to 57 J in the Central Excise Rule,1944, provides for the credit of duty of Central Excise or additional duty of Customs (countervailing duty), usually referred to as “input duty” paid on the goods used in the manufacturer of final products can be utilised towards payment of duty of excise on the final products. Before the introduction of the above scheme, wherever applicable, duty of Central Excise had to be paid at every point thereby the cascading effect of the multiple levy of duty would be burdened by the ultimate consumer who consumes the goods. In order to avoid the escalation effect of the multiple point levy, the Modvat has brought a scheme whereby the excise duty paid by an asssessee on the input goods would be available as credit to set off against the excise duty payable on the output goods.

ii)         The input credit available to an assessee under Modvat is as goods as payment of excise duty as it ultimately reduce the net liability of the assessee to pay Central Excise duty on the finished goods. If such credit is not available by way of Modvat, the assessee has to pay Central Excise duty to that extent also, by cash which means that availing of Modvat Credit in Pari material amounts to payment of Central Excise duty by way of cash.

iii)        As the Modvat Credit availed by an assessee is de-facto  payment of Central Excise duty, the setting off Modvat Credit  must be treated as payment of Excise duty in cash. The consequence of the above proposition is that the unutillised credit balance of Modvat available to an assessee on the last day of the previous year will be equivalent to advance payment of Central Excise duty and all the argument advanced in support of the deductibility of advance payment of Central Excise duty will be mutatis mutandis apply to Modvat Credit as well. That is the unexpired Modvat Credit is nothing but the advance payment of Central Excise duty and as the advance payment of excise duty needs to allowed as deduction u/s. 43B for the elaborate reasons already explained, Modvat Credit also should be entitled be deducted u/s. 43B.

27.       On the true character of the Modvat Credit, the ld. Counsel in. our attention to the decision of the Supreme Court in the case Collector of Central Excise, Pune and Others Vs Dai Ichi Kar Karia & Others 7SCC 448. The Court held that Section 4(4) of the Central Excise  Act, 1944, interalia, provides that the value of exciseable goods does not include the amount of the duty of excise payable on such goods. Modvat scheme is the part of the Central Excise Rule. It is to be held that determining the cost of the exciseable product covered by the Modvat scheme, the excise duty paid to raw material also covered by Modvat scheme is not to be included. The ld. Counsel submitted that the Court has declared that Modvat credit available to an assessee is an indefeasible right in favour of the manufacturer and it is not contingent I and it partake the character of excise duty itself. According to him therefore, unexpired Modvat credit is nothing but excise duty paid by the assessee and to be set off against the running liability of Central Excise duty.

 28.       The ld. Counsel relied on the decision of the Supreme Court in case of Eicher Motors Ltd. Vs Union of India 106 ELT 03. The ld. Counsel pointed out that in the said case the Supreme Court has held that the ·facility of Modvat Credit is as good as tax paid. Therefore, unexpired Modvat credit available to an assessee is to be treated as good as Central Excise duty paid by the assessee on account. The ld. Counsel hereafter referred to the decision of ITAT Delhi Bench ‘D’ in the case Honda Siel Power Products Ltd. Vs DCIT 77 ITD 123. The Id. Counsel has also relied on the decision of ITAT Agra Bench in the case of Hind Lamps Ltd. in ITA No. 283/Del/93 dated 18.12.2000.

29.       Shri R.K. Goyal, the ld. Commissioner of Income Tax also argued in a forceful presentation [that unexpired credit of Modvat account is no way similar to the advance payment of Central Excise duty. The ld. Commissioner again reiterated that even the advance payment of Central Excise duty through actual payment of cash in the Treasury does not qualify the deduction u/s. 43B ‘unless cutTespondll1g liability is incurred in the previous year. He submitted therefore that even if the unexpired credit in the Modvat account is if at all treated as similar to advance payment of Central Excise duty. still it is not deductible for the reason that the advance payment of excise duty per se is not deductible u/s. 43B.

30.       Without prejudice to the above contention, the lei. Commissioner submitted that Modvat is a scheme whereby the law exempts an assessee from payment of Central Excise duty on final products to the extent duty was paid on the raw material, if any. Therefore: t does not amount to actual payment. It is only an entitlement t of the assessee for claiming exemption from the excise liability that may arise in future. The unexpired Modvat Credit cannot be equated to advance payment of excise duty by cash. The Modvat credit is not corning out of the payment of Central excise duty per se. It is coming out of the purchase of the raw materials. Where raw materials are exciseable, the purchase cost also includes excise duty. In order to avoid a cascading effect of excise duty the duty paid on earlier points are given as deductions in subsequent points. Therefore, it could be seen that it is a case of exemption and not a case of payment as construed by the ld. Counsel appearing for the assessee.

31.       The ld. Commissioner referred to tile decision of the Supreme Court in the case of Eicher Motors Ltd. Vs Union of India 106 ELT 03 which has been relied on by the assessee’s counsel. The ld. Commissioner pointed out that what the Supreme Court has observed in the said case was that the facility of Modvat credit is as good as tax paid. The court has not stated that Modvat credit is nothing but payment of excise duty. The observation of the Supreme Court is to be seen in the context of an assessee setting of the Modvat credit against the demand of excise duty. In such circumstances, the Modvat credit becomes as good as tax paid once the set off is made. At the point of time before setting of the Modvat credit, it is not possible to hold that the Modvat credit is as good as tax paid. It becomes as good as tax paid only when the credit is set off against Central Excise liability. But in the case of unexpired credit of Modvat, there is no question of set off on the last day of the previous year and therefore there is no question of treating such unexpired credit as good as tax paid. It is only a future entitlement of the assessee and not a payment of advance which could be used in future. This difference is obvious and has to be taken note of while appreciating the scheme of Modvat credit.

32.       On hearing both sides in a detailed manner, we may now proceed to consider the issues raised before us. We shall first look into the question, “whether deduction for tax, duty etc. is allowable u/s. 43B  of the Income Tax Act, 1961 on payment basis before incurring the liability to pay such amounts?”

33.       In order to cover the Central Excise duty attributable to those goods lifted by the assessee out of the facto  on a continuous basis, it is necessary that the assessee should keep sufficient credit balance in the account-current so that every such remove is noted in Account-Current for debiting the appropriate duty amount The nature of account- current, therefore, is that of a running account in the light of .the that the activities carried on by an asst see are also incessant and continuous. They both run together. As the assessee has to meet the Central Excise liability on a continuous h is without any interruption the assessee has to maintain a running account in the form of account-current. It is to be seen that the excess amount reflected in the account- current amounts to nothing but payment of excise duty. The credits available in such account-cannot be considered “advances” as construed in the ordinary commercial accounting sense.

34.       A similar issue was considered by Supreme Court in the case of CIT Vs New Horizon Sugar Mills (269 ITR397). In that case the assessee was required to set apart specific amounts towards Molasses Storage Reserve Fund, which could be utilise only for the purpose of constructing Molasses Storage Tank. This appropriation was mandatory. in the light of Molasses Control Order as the assessee was a manufacturer of sugar, While examining the nature of the said money blocked in the Molasses Storage Reserve Fund, the Supreme Court held that the money would not be the income of the assessee, as the assessee had no control over that. The deposits made by the assessee in the Accounts-Current for making payments of Central Excise Duty are analogous to the case considered by the Supreme Court and the ratio laid down in the above judgement, we think, should apply to the present case.

35.       The Central Excise and Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the’ nature of PLA in the case of F, Fibre Bangalore Pvt. Ltd. Vs Commissioner of Central Excise, Bangalore 120 ELT 579 (Tribunal). In that case the assessee debited the duty in account-current and thereafter reversed the debit by crediting back the duty amount in the very same PLA whereas the assessee should have taken the credit through RG-23A Part-II. As there was no revenue effect prejudicial to the Government, the assessee pleaded that the adjustment, even if improper may be condoned. But the Tribunal held that any appropriation can be made only’ on the permission of the concerned authorities. Normally, the money paid into those accounts are irretrievable. In effect, for all practical purposes, the deposits made by an assessee in accounts-current amount to actual payment of Central Excise duty.

36.       In the light of the nature and character of the payments discussed in paragraphs above and also in the light of the decisions referred to therein, it is to be seen that, as far as an assessee is concerned, the payments made to the credit of the accounts-current are nothing but substantial/actual payments of Central Excise Duty. The assessee has no option to pay or not to pay such deposits in that running-account to meet the liability of Central Excise Duty arising from time to time. The payments of advance deposits in the accounts-current are necessitated by the mandate of law and not by the option of the assessee. The advance payments of Central Excise Duty, therefore, satisfy the Character of exaction by the sovereign under Authority of Law.  In the circumstances, it is very difficult to accept the contention of the Revenue that advance payments of excise duty are not to be treated as actual payments of duty for the purpose of deduction under Section 43B.

37.       Section 43B has, brought in a change in the normal Rule of deduction of expense based on the accounting method followed by an assessee. The normal principles and practices are done away. Accordingly, there is no force in the argument of the Revenue that the deduction can be granted only if the liability has incurred during the previous year, even when the payment was made by the assessee. The point coming out of the above discussion is that the Rule of deduction u/s 43B is the actual payment of the liability. The nature of the account-current already examined brings home the point that the advance payments of excise duties are actual payments of duties. Therefore, when the payments are understood as actual payments, those payments even if mentioned as advance payments need to be allowed as deduction u/ s 43B.

38.       The above position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (1), only if actually paid; but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in Section 43B, that the deduction in respect of tax or duty, which was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability. The Gujarat High Court has examined the true meaning of the above statutory language in the case of Lakhanpal National Ltd. Vs ITO 162 ITR 240. The Court has held that deduction of tax or duty paid by an assessee has to be allowed as deduction in the year of payment, irrespective of the previous year in which the liability to pay such sum was incurred according to the method of accounting regularly employed by the assessee.

39.       As argued by the ld. Counsel appearing for the assessee, the expression “irrespective of the previous year” dispenses with the concept of previous year, in the mattter of the sums covered by Section 43B. The expression “Irrespective” means lacking relation, regardless of what is mentioned here the subject mentioned is “previous year”. It means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the liability is dispensed with by the statute, while concentration is made on the point of actual payment of the sum to the Treasury of the Government.

40.       The Supreme Court had an occasion to consider the very same issue of payment of duty vis-a-vis deduction u/s. 43B in Berger Paints (India) Ltd Vs CIT 266 ITR 99. The Court observed that the judgements delivered by three High Courts viz-. Gujarat Bombay and Madras in the case of Lakanpal National Ltd., Bharat Petroleum and Chemicals & Plastics, respectively have been accepted t the Income Tax Department by not challenging those decisions before .he Supreme Court, and by accepting a series of there judgements on the very same issue, the department has accorded a consistency of approach on this issue involved u/s 43B. The Supreme Court held that the Courts has to follow the principle of consistency in tilt matter of adjudication and further held that the uniform view reflected in the decisions of three High Courts has to be endorsed as otherwise it would be disturbing the consistency without u reasonable provocation. The Supreme Court held in the above case that the deductions of tax duty should be allowed u/s. 43B in the year of payment, irrespective of’ e previous year in which the liability was incurred.

41.       In fact the decision: of the Supreme Court in the case of Berger Paints (India) Ltd Vs CIT 266 ITR 99 settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed u/s. 43B irrespective of the previous year to which the corresponding liability related to. The Supreme Court has approved the judgements of the High Courts of Gujarat, Mumbai and Madras not only on the Rule of consistency but also on the merits of the, issue. The Supreme Court has held that the entire amount of excise duty customs duty paid by the assessee in a particular accounting year is allowable u/s. 43B of the Income Tax Act, 1961, as a deduction in respect of that year, irrespective of the amount of excise duty/customs duty included in the valuation of the assessee’s closing stock at the end of the accounting year. It is not that the Supreme Court has considered the issue in the case of Berger Paints India Ltd Vs CIT 266 ITR 99 alone. The Revenue had taken up the decision of Andhra Pradesh High Court rendered on this issue before the Supreme Court in Special Leave Petition (SLP -SR.2766 of 1993), in the case of CIT Vs South India Research Institute. The Supreme Court has examined the judgement of Andhra Pradesh High Court in the matter of Section 43B in the context of a special account maintained by the assessee to pay the Central Excise duty. The Supreme Court upheld the finding of the High Court that the claim of the assessee for deduction of payments made to such special account has to be allowed as it represented actual duty paid by the assessee. The SLP of the department was dismissed:

42.       The Gujarat High Court in the Lakhanpal National Ltd. Vs ITO 162 ITR 240 has considered the scope of Section 43B in a case where the assessee had claimed deduction for the Customs and Excise duties paid in respect of raw materials imported and goods manufactured in the accounting year. The Bombay High Court in the case of CIT Vs Bharat Petroleum Corpn. Ltd. 252 ITR 43 has followed the decision of the Gujarat High Court and considered Section 43B in a case where the assessee has claimed deduction of excise and custom duty paid on the closing stock The Madras High Court in the case of Chemicals. & Plastics (India) Ltd. Vs en 260 ITR 193 followed the decision of Bombay High Court in the case of Bharat Petroleum Ltd. while examining the case where the assessee has not charged the duty paid by it to the profit and loss account but at the same time claimed the deduction u/s. 43B. The assessee in that case did not claim the item in the profit and loss account fur the reason t that a pan of the Custom duty paid was in respect of raw materials which remained with the assessee at the end of the year. In all the above three cases, the facts considered by the High Courts arc marginally different from the facts of the present case. In those cases, the Courts were examining the nature of Excise Duty and Customs duty paid by the assessees, but embedded in the stock of goods not consumed and/or cleared. In the present case, the issue is that of advance payment of Excise duty, per sc. The Courts while examining the issues before them in those cases, have infact examined the law on the subject in its entire perspective and have clearly held that advance payments of Excise Duty are deductible u/s. 43B.

43.       The Gujarat High Court in the case of Lakhanpal National Ltd. 162 ITR 240 has infact considered the entire scheme of Section 43B and after long discussion, has held that “…………………. there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee……………..” (page 247). The Supreme Court in the case of Berger Paints has also considered the Special Bench decision of the ITAT Delhi in the case of Indian Communication Network Pvt. Ltd. Vs IAC 206 ITR (AT) 96 (Del)(SB). The said decision of the Special Bench has been approved by the Supreme Court. The Court has reproduced the relevant portion of the order of the Special Bench (Page 103 & 104 of the report) and endorsed the view of the Special Bench that Excise duty payments must be deducted in the year of payment irrespective of the year of incurring of liability. What we find is that the Supreme Court has considered the decision of the Delhi Special Bench dealing with the very same issue and has approved the decision that advance payment of excise duties need to be deducted in the year of payment u/s. 43B. Therefore, the proposition argued by the assessee-company has not only been approved by the various High Courts but also by the Supreme Court and the issue is squarely covered by the decision of the Supreme Court in the case of Berger Paints 266 ITR 99.

44.       We may also examine the relevance of the case laws cited by the ld. CIT (DR) at the time of haring. He has placed reliance on the decision of Andhra Pradesh High Court in the case of Srikakollu Subha Rao & Co & Others Vs Union of India & Others 173 ITR 708 (AP)]. In that case the Andhra Pradesh High Co un has held that the assessee should pay the amount in the previous year so also he amount should become payable in the very same year, for claiming deduction u/s. 43B. It is thereafter, the proviso to Section 43B was inserted, to alleviate the consequent difficulties. But it is to be set that the principal question placed before the High Court in t his case v s the constitutional vires of the provisions of Section 43B, In fact, it  was not a decision which interprets the provisions of law contained in Section 43B on its substantial merit. Anyhow the applicability of the said decision has been undone by inserting of proviso to and Explanation-2 under Section 43B. Therefore that decision is not relevant in deciding the present issue. Another decision  relied on by the Revenue is the decision of ITAT Mumbai Bench ‘D’ in the case of LAC Vs Tata Press Ltd. The observation of the Tribunal in the said asessee is that Section 43B is restrictive in nature and not an enabling one. But this observation does not bring out the true intent and purpose of Section 43B. An expense becomes deductible or non deductible in the light of the enabling provisions like Sections 32, 36, 37 etc. Section 43B per se does not decide or otherwise restrict the deduction of an expense. Section 43B alone is not determinative of the deductibility of expenditure. The said section does not deal with deductibility, eligibility or restriction of expenses, as such. What exactly Section 43B deals with is the question of actual deduction. It is not a restrictive section but a qualifying section. Restriction or otherwise: of an expenditure is prescribed in the relevant section itself. Take for example Section 32. It appears that allowance are granted in computing business profits of an assessee on satisfaction of prescribed conditions. The deductibility of expenditure is one thing and the actual deduction something different. This distinction has not been considered in the decision of Tata Press Ltd.

45.       In the said case, the Tribunal has treated the advance payment as “contingent liability”. According to the Tribunal, the liability to pay duty mayor may not happen in future. The above observation of the Tribunal has not taken into consideration one of the basic postulates of accounting principle, viz., the concept of “wing concern”. Accounting principles, practice and standards all are framed on the above basic concept that a business will run for quite a long time and is not going to terminate its operation in a near future. If the concept of continuity is not there, one will have to consider every receipt as income and every payment as expenditure” irrespective of the nature of the receipt and payment. The whole frame of accountancy is made on the principle of “going concern”. Accountancy provides the Rules for working out, profit and loss of an entity. These principles are incorporated in Taxation Law, as well. That is why Section 32 allows an assessee to write off a specified percentage in a staggered manner as successive deduction of depreciation allowances; Section 35D provides for expenses to be written off for a period of 10 years. Various deductions under Chapter-VIA provide for deduction for more than one assessment year, sometimes 5 assessment years to 10 assessment year. When that is the case, the basic rule is that the business will continue for years to come and the assessee will have to claim the deduction on a regular basis from assessment year to assessment year. When there is the regularity of payment, it is not possible to hole that the excise duty payable in the month of April would be “contingent” m nature In the immediately preceding month of March.

46.    Another concern expressed by the Tribunal in the above case is that it will open floodgates for the assesseses, to make advance payments of such liabilities for any number of subsequent years and claim deduction thereto in an earlier year, if doing so proves advantageous to them. Whether an assessee would misuse Section 43B for the above purpose, is a question of remote chance. Usually, all tax avoidance schemes are practiced by the assessees without paying any money towards tax. If not impossible. it is highly improbable to presume that  an assessee would indulge in tax avoidance by actually paying money towards duties and taxes,. Any such benefit arising to an assessee is only incidental.

47.       Another case relied on by the Revenue is the decision of ITAT Hyderabad Special Bench in the case of KCP Ltd Vs ITO 38 ITD15 {Hyd)(SB}, As argued by the Id, Counsel for the assessee, we find that the said decision may not be valid any more, in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Vs ITO 162 ITR 240, wherein the Court has held that the assessee shall be entitled to get the benefit of deduction u/s. 43B or actual payment, irrespective of the year of payment by virtue of the overriding effect of Section 43B. Likewise, the decision of ITAT Mumbai Bench ‘E’ in the case of DCIT Vs Amforge Industries Ltd. 79 ITO 49 is also not relevant.

48.       Another Special Bench decision relied on by the Revenue is the decision of Hyderabad Special Bench in the case of DCIT Vs CWC Wines Pvt. Ltd. 89 ITD 01 (Hyd)(SB). The said decision has been taken by the Special Bench by placing reliance on the decision of Andhra Pradesh High Court in the case of Gopi Krishna Granites India Ltd. Vs DCIT 251 ITR 337 wherein the High Court has considered the payments covered by clause (d). In the present case clause (a) of Section 43B is to be considered, It is quite different from clause (d) considered by the High Court in the said decision. The sums payable under clause (a) and the sums payable under clause (d) are different in nature and character.

 49.       The Revenue has also relied on the decision of ITAT Delhi Bench in the case of Maruti Udyog Ltd Vs DCIT 92 ITD 111. In that case also, the Tribunal has overwhelmingly discussed l he effect of the expression “incurring of liability”. While considering the above, the Tribunal has not read the proviso to Section 438 together with Explanation-2 and also it has completely overlooked the prominent expression of “irrespective of the previous year.” The decision also has relied on various decisions mentioned above and which were held not relevant.

50.       The ld. CIT has also relied on the Circular No. 550 dated 1.1.1990 issued by CBDT in the context of Explanation-2 to Section 43B. The Finance Act 1989 has brought in the Explanation -2 to Section 43B according to which” any sum payable” shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable. In fact the circular deals with the short question of the distinction between liability incurred and payment due It clarifies that even if the sum is not due for payment during the previous year deduction would be available if payment was made, There was a judicial view that for claiming deduction, the amounts also must be payable within the previous year [Srikakollu Subha Rao & Co & Others Vs Union of India & Others 173 ITR 708 (AP)]. It created a difficult situation for assessecs; especially like payments of sales tax etc. In order to remove the difficulties, Explanation-2 was brought in, alongwith proviso to Section 43B. Proviso has made the Explanation practicable and workable by stating that the payments made even after the dose of the previous year but made before the due date of filing of the return, will be deductible. It could be seen that the circular deals with the extended period of time by which certain be1aled payments could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof.

51.       We have considered in detail the arguments of both sides and the authorities relied on by them; considered the statutory provisions as well; examined the exact nature of the advance payment of excise duty, etc. We have found that generally those payments are not provisional or refundable. They are actually payments of Central Excise duty. We have examined the legislative intent and purpose of Section 43B. The assessees in the past were not paying taxes, duties and other dues to the Government in time. At the same time, they were booking those items as expenses in their accounts on accrual basis on the ground that they are following mercantile system of accounting. By doing so, they were claiming deduction and reducing the taxable Income. Concurrently in any cases, the assessees were challenging the very liability itself before the courts and Tribunals, finally resulting the payments belated, deferred, and sometimes never made. In order to stop such exploitation practiced by the assessees, Section 43B has been brought in the statute declaring that “well you claim the deduction, but only on actual payment.” The law has made it clear that such payments are to be allowed as deductions in the year of payment. Section 43B does not lay down any sequence or order of events in which the liability has to be incurred und the payment has to be made by the assessee. Section 43B docs not laid down any rule that the liability to pay the duty must incur first and only thereafter the payment of such duty to be made so as to claim the deduction u/s. 43B. But the Revenue tries to make out a case that the statute has prescribed such an order of events. In fact there is no such prescription in the statute. We have seen that the expression “otherwise allowable” refers to a declaration or permission in law that which are available as deduction an payment u/s. 43B, are those expenses which are usually allowed by the Income Tax Act for the purpose of computing income. We have seen that the expression “any sum payable” does not mean “payment outstanding”. In the light of the decision of the Supreme Court in the case or Allied Motors Vs CIT 224 ITR 677, we have held that for the purpose of Section 43B the proviso there under and Explanation-2 have to be read and construed together.

52.       Therefore, we hold that the deduction for tax, duty etc. is allowable u/s. 43B of the Income Tax Act, 1961 on payment basis before incurring the liability to pay such amount. Accordingly, the first question is answered in affirmative and in favour of the assessee.

53.       The next question to be considered is whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty u/s. 43B.

54.       The forceful argument of the Id. Counsel appearing for the assessee is on the basis of the Supreme Court decision in the case of Eicher Motors Vs Union of India 106 ELT 03. The argument of the ld. Counsel is that the Supreme Court has held that the facility of Modvat Credit is as good as tax paid. He argued that the unexpired Modvat credit available to an assessee is to be treated as good as Central Excise duty paid by the assessee on account. Bur we find that the context in which the observation was made by the Supreme Court has to be noted of. The observation of the Supreme Court has been made in a case where the assessee has set off the Modvat Credit against the demand of excise duty. When the unexpired Modvat credit is set off against the excise duty payable and thereby the liability has been extinguished/reduced, that the Supreme Court has held that setting off Modvat credit is as good as tax paid. The above observation of the Supreme Court become operative only when the unexpired Modvat credit has actually been set off against the Central Excise duty payable by the assessee. The unexpired Modvat Credit available in the bands of the assessee on the last day of the previous year is the amount, which has not so far been set off against payment of excise duty. There is a distinction between unexpired Modvat credit available in the hands or the assessee as well as the set off of the credit balance against actual liability. The time lag between the two points cannot be ignored. On actual set off of the unexpired Modvat Credit against the liability towards the payment of duty may be as good as tax paid but, the unexpired Modvat credit before the point of such set off cannot be treated, is tax paid. Therefore, the contention of the ld. Counsel that unexpired Modvat credit must be treated as advance payment of excise duty is not tenable in law.

55.       In the case of unexpired Modvat Credit, there is no question of set off, on the last day of the previous year and therefore there is no occasion to treat the unexpired credit as equivalent to the tax paid.

56.       In fact the unexpired tl.1odvat credit available to an assessee is in the nature of a future entitlement which cannot be considered as equivalent u advance payment of duty.

57.       In a case of advance payment of Central Excise duty, there is a defacto payment of duty· by cash in the Government Treasury. The payment is made towards the Central Excise account; which we have already held as actual payment of excise duty itself. But in the scheme of Modvat, there is no such payment of excise duty. The credit is available to an assessee under the scheme of Modvat in order to minimise the escalation effect of payment of excise duty by successive Manufacturers. Therefore, the excise duty paid at the earlier point is set off against the Central Excise liability at the next point. Till the set off is availed at the next point, the duty available for set off by the assessee, is nothing but part of the cost of the materials purchased by him. That is not a payment per se made towards excise duty but it was infact a payment made towards the purchase cost.

58.       Section 43 of the Income Tax Act 1961 has provided the definition of certain terms relevant to the computation of income from profits and gains of business or profession. Sub-section (2) of that section defines the term “paid”. Section 43(2) reads as below:

“(2)      “paid” means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains arc computed under the head “Profits and gains of business or profession”

59.       The definition states that “paid” means money actually paid by an assessee or incurred by the assessee and not anything else. In Section 43B, the deduction is given only for those slims “actually paid” by the assessee. A conjoint reading of Section 43(2) and Section 43B support the argument of the ld. Commissioner of Income Tax that un-expired Modvat Credit does not amount to actual payment of Central Excise duty.

60.       The credit balance, as such does not amount payment. The credit balance becomes equivalent to the payment only at the point of time the assessee exercises his option to set off the credit balance against the Central Excise liability and not before.

61.       Therefore we hold that the Modvat Credit available to the assessee as on the last day of the previous year does not amount to payment of Central excise duty u/s. 43B. The second question is answered in negative and against the assessee.

62.       The only two issue raised by the Revenue in this appeal are the questions considered and answered by us Regarding the first issue of advance payment of excise duty, we hold against the Revenue and accordingly uphold the order of the CIT{A) in directing the Assessing Officer to deduct such advance payment u/s. 43B. Regarding the second question of unexpired Modvat credit, we hold that the assessee is not entitled for claiming the same as deduction u/s. 43B. Accordingly the order of the CIT(A) on the issue of unexpired Modvat credit is set aside and the disallowance if any made by the Assessing authority ‘is restored.

63.       In result, this appeal filed by the Revenue is treated as partly allowed.

NF