Case Law Details

Case Name : CIT Vs. M/s Modipon Ltd. (Supreme Court of India)
Appeal Number : Civil Appeal No. 19763 Of 2017
Date of Judgement/Order : 24/11/2017
Related Assessment Year :

Background

(a) The decision relates to deductibility of excise duty u/s 43B of the Income Tax Act, 1961. Section 43-B requires cumulative existence of following;

  • The deduction claimed by the Assessee must be “otherwise” allowable under the other provisions of the Act.
  • The deduction must relate to any sum payable by way of tax, duty, cess or fee.
  • The Assessee must have incurred liability in respect of such tax, duty, etc.

(b) On fulfilling these conditions, the Assessee’s claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term “liability to pay such sum was incurred by the Assessee”, together with the words “a sum for which the Assessee incurred liability” in Explanation 2, underline that payment must relate to the incurred liability to be called ‘any sum payable’.

(c) The decision says that if amount is paid into Personal Ledger Account [PLA], the same is deductible even if, there is no excise liability on the said date.

(d) It is a very short judgement running into 3-4 pages.

Relevant paragraphs

(f) Critical paragraphs of order of SC

Deposit of Central Excise Duty in the PLA is a statutory requirement. The Central Excise Rules, 1944, specify a distinct procedure for payment of excise duty leviable on manufactured goods. It is a procedure designed to bring in orderly conduct in the matter of levy and collection of excise duty when both manufacture and clearances are a continuous process. Debits against the advance deposit in the PLA have to be made of amounts of excise duty payable on excisable goods cleared during the previous fortnight. The deposit once made is adjusted against the duty payable on removal and the balance is kept in the account for future clearances/removal. No withdrawal from the account is permissible except on an application to be filed before the Commissioner who is required to record reasons for permitting an assessee to withdraw any amount from the PLA. Sub-rules (3), (4), (5) and (6) of Rule 173G indicates a strict and vigorous scrutiny to be exercised by the central excise authorities with regard to manufacture and removal of excisable goods by an assessee. The self removal scheme and payment of duty under the Act and the Rules clearly shows that upon deposit in the PLA the amount of such deposit stands credited to the Revenue with the assessee having no domain over the amount(s) deposited.

10. In C.I.T. v. Pandavapura Sahakara Sakkare Karkhane Ltd. 198 ITR 690 (Kar.) and C.I.T. v. Nizam Sugar Factory Ltd. 253 ITR 68 (AP) cited at the Bar, the High Courts of Karnataka and Andhra Pradesh respectively had occasion to consider as to whether the amounts credited to the Molasses Storage Fund out of the sale proceeds of molasses received by the assessee constitute taxable income of the assessee. Under the scheme, the assessee had no control over the amounts deposited in the fund and the assessee was also not entitled to withdraw any amount therefrom without the approval of the authorities. Further the amount deposited could be utilized only for the purpose specified. In those circumstances, the High Court held and in our view correctly, that the deposits made, though a part of the sale proceeds of the assessee, did not constitute taxable income at the hands of the assessee. We do not see why the same analogy would not be applicable to the case in hand.

11. The Delhi High Court in the appeals arising from the orders passed by it has also taken the view that the purpose of introduction of Section 43B of the Central Excise Act was to plug a loophole in the statute which permitted deductions on an accrual basis without the requisite obligation to deposit the tax with the State. Resultantly, on the basis of mere book entries an assessee was entitled to claim deduction without actually paying the tax to the State. Having regard to the object behind the enactment of Section 43B and the preceding discussions, it would be consistent to hold that the legislative intent would be achieved by giving benefit of deduction to an assessee upon advance deposit of central excise duty notwithstanding the fact that adjustments from such deposit are made on subsequent clearances/ removal effected from time to time.

(g) It will be interesting to note that many of the high courts like that of Bombay, P&H has taken a similar view with Calcutta High Court taking a divergent view. It will be appropriate to re-produce an observation of Supreme Court in the case of [2004] 135 Taxman 586 (SC)/[2004] 266 ITR 99 (SC)/[2004] 187 CTR 193 (SC) Berger Paints India Ltd. v. CIT – FEBRUARY  17, 2004

11. In view of the judgments of this Court in Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219, CIT v. Narendra Doshi [2002] 254 ITR 606 and CIT v. Shivsagar Estate [2002] 257 ITR 59, the principle established is that 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, then it is not open to the revenue to challenge its correctness in the case of other assessees, without just cause.

12. The judgment of the Gujarat High Court in Lakhanpal National Ltd.’s case (supra) was relied upon and followed by the Bombay High Court in Bharat Petroleum Corpn. Ltd.’s case (supra) as well as by the Madras High Court in Chemicals & Plastics India Ltd.’s case (supra). The Special Bench of the Tribunal also relied upon the judgment of the Gujarat High Court in Lakhanpal National Ltd.’s case (supra). The Revenue has attempted to distinguish the judgment of the Gujarat High Court on the facile ground that the judgment of the Gujarat High Court was one rendered in connection with a provisional assessment under section 141A and not in a regular assessment. In our view, this distinction is hardly acceptable. In any event, a reading of the Gujarat High Court’s judgment shows that the judgment is not based merely on the adjustments permissible under section 141A, as is contended by the revenue, but that the judgment proceeds on an analysis of section 43B and makes a finding that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year was an allowable deduction in respect of that year irrespective of the amount of excise duty/customs duty which was included in the valuation of the assessee’s closing stock at the end of the accounting year. After coming to this conclusion, the Gujarat High Court then proceeded to consider the impact of section 141A and granted appropriate relief there under. It is not possible for us to accept the contention of the revenue that the judgment of the Gujarat High Court in Lakhanpal National Ltd.’s case (supra) is distinguishable on the ground put forward.

13. The decision of Lakhanpal National Ltd.’s case (supra) which clearly laid down the interpretation of section 43B was followed by the judgments of the Madras High Court and Bombay High Court and was again followed by the decision of Special Bench of the Income-tax Appellate Tribunal, none of which have been challenged. In these circumstances, the principle laid down in Kaumudini Narayan Dalal’s case (supra), Narendra Doshi’s case (supra) and Shivsagar Estate’s case (supra) clearly applied. We see no ‘just cause’ as would justify departure from the principle. Hence, in our view, the revenue could not have been allowed to challenge the principle laid down in Lakhanpal National Ltd.’s case (supra), which was followed by the Inspecting Assistant Commissioner in the case of the assessee in the three assessment years in question. We are, therefore, of the view that the Commissioner, the Income-tax Appellate Tribunal and the Calcutta High Court erred in permitting the revenue to raise a contention contrary to what was laid down by the Gujarat High Court in Lakhanpal National Ltd.’s case (supra). This decision has been subsequently followed by the decisions of the Bombay High Court in Bharat Petroleum Corpn. Ltd.’s case (supra) and the Madras High Court in Chemicals & Plastics India Ltd.’s case (supra) as well as the decision of the Special Bench in Indian Communication Network (P.) Ltd.’s case (supra) , which have all remained unchallenged.

(h) Recently, Delhi HC in the case of DIT v Maruti Udyog Ltd dated 7-Dec-2017 [2017] 88 taxmann.com 98 (Delhi) IT APPEAL NO. 31 OF 2005 has followed decision of Modipon.

A poser for the Audience-

(i) Section 43-B being legislative enactment and various judicial pronouncements mentioned above are there for you. Now consider following example.

Particulars as at 31-3-2XXX

  • Excise Liability = Rs. 100/-
  • MODVAT credit = Rs. 100/-
  • Amount paid on 31-3-2XXX into PLA is Rs. 1,00,00,000/-

(j) The assessee exercises option of dis-charging excise liability against MODVAT credit. This concept of option 1 and 2 has been discussed in Maruti Udyog [supra] Delhi HC. Thus the excise liability as at 31-3-2XXX is NIL.

(k) Despite there being a NIL liability, in view of above decision, the assessee will be eligible to claim deduction of Rs. Rs. 1,00,00,000/- u/s 43B.

(l) Also it will not be treated as colourable device of tax planning as so many high courts and Supreme Court itself has upheld the same.

(m) It is a point to ponder for the audience as to whether this outcome is correct or otherwise.

(Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)
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