Input Tax Credit (ITC) of GST should be claimed as tax actually paid in year of actual payment – discussion with reference to mandatory provisions and some judgments.

Provisions of S.43B

Relevant portions of section 43B, in so far relevant to GST (In category of tax, duty, cess or fee) are reproduced below with highlights added:

¹[Certain deductions to be only on actual payment.

     43B.Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

          ²[(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

xxx          

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

     ¹⁴[Provided that nothing contained in this section shall apply in relation to any sum ¹⁵[***] 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 along with such return.

Explanation¹⁷[1].-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]

               ¹⁸[Explanation 2.-For the purposes of clause (a), as in force at all material times, 'any sum payable' means a 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.]

----------------------------------Notes :-

1. Inserted by the Finance Act, 1983, w.e.f. 1-4-1984.

2. Substituted by the Finance Act, 1988, w.e.f. 1-4-1989.

14. Inserted by the Finance Act, 1987, w.e.f. 1-4-1988.

17. Inserted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. {Per author:  proviso so inserted  being curative to remove hardship has been held to be retrospective.

18. Inserted by the Finance Act, 1989, w.r.e.f. 1-4-1984.

Unquote:

Mandatory language:

We find that language used in S.43B is mandatory by use of  words and expressions like:

shall be allowed  …      only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

Therefore, section 43B mandates that in respect of specified sums , for computing business income cash basis of accounting shall be followed. This is however subject to some exceptions as provided in said section.

Operation of S.43B and past experience:

Broadly speaking, as per heading, provisions and purposes of S.43B sums specified in the section are to be allowed only in the year of actual payment and not in year of accrual.

Exception to allow deduction if a sum payable in a previous year is paid in next year, before due date u/s 139.1 was provided to remove hardship. Another exception is that prior to insertion of S.43B (and its extension for sum other sums), if any sum was allowed on accrual basis, then such sum shall not again be allowed in the year of actual payment. This is to avoid double deduction.

Therefore, year of accrual and year of accounting adjustment of such sums are not relevant.

The Assessing Officer can very well say that any sum which is not actually paid during the previous year, shall not be allowed except as per specific relaxation in the provision.

Therefore, if a sum is actually paid in say first year, but it is not claimed, then in second year it may not be allowed, as it is not actually paid during the second year, although accounting adjustment is made in second year in which liability is incurred.

Amount actually paid but not debited in P & L should be claimed:

As discussed above, any sum of tax, duty, fees or other sums covered by S.43B actually paid should be claimed in the previous year of actual payment although it is kept as advances in account and is not debited as expenses in the P & L account. Examples of such sums are:

1. Amount actually paid but included in value of closing stock,
2.  amount  actually paid or credited in Personal Ledger account (PLA) and not debited in P & L account.
3. Amount lying credited as un-availed CENVAT credit, MODVAT credit,
4. Amount remaining available as Input Tax Credit, which has not be charged as expenditure directly or indirectly in P & L account.

5. Amount actually paid but kept as advances as per method of accounting, or amount paid under protest,

Some judgments on these issues are as follows:

1. BERGER PAINTS INDIA LTD. VERSUS COMMISSIONER OF INCOME-TAX 2004 (2) TMI 4 - SUPREME COURTOther Citation: [2004] 266 ITR 99 (SC)

Tribunal was found justified in law in directing the Income-tax Officer to allow the amount being Central excise and customs duty under section 43B of the Act on the ground that the said amount has been included in the value of closing stock.

Per author:

There was no net debit in P & L account, amount of tax and duty was credited by way of inclusion in valuation of stock –in-trade. As tax and duty was actually paid during the previous year it was allowed as per mandate in S.43B.

2. COMMISSIONER OF INCOME TAX II VERSUS M/S MODIPON LTD. 2017 (11) TMI 1429 - SUPREME COURT

Deduction u/s 43B - excise duty paid in advance and kept as an assets item and found credited in the Personal Ledger Account (“PLA”) is allowable as actually paid during the year.

Under the scheme of  self removal procedure and payment of duty under the  C.E.Act and the Rules clearly shows that upon deposit in the PLA the amount of such deposit stands credited to the Revenue.

Consistent practice followed by the assessee and accepted by the Revenue; the decisions of the two High Courts in favour of the assessee which have attained finality in law; and no contrary view of any other High Court being brought to our notice, should lead us to the conclusion that the High Courts were justified in taking the view that the advance deposit of central excise duty constitutes actual payment of duty within the meaning of Section 43B of the Central Excise Act and, therefore, the assessee is entitled to the benefit of deduction of the said amount. - Decided in favour of assessee.

 3.  CIT VERSUS SHRI RAM HONDA POWER EQUIPMENT LTD. 2012 (10) TMI 150 - SUPREME COURT

Other Citation: [2013] 352 ITR 481

MODVAT credit is excise duty paid.

MODVAT Credit is excise duty paid and as excise duty payable estimated on finished goods held in factory are neither included in expenditure nor valued in such stocks but are accounted for on clearance of goods from factory this accounting treatment however has no impact on the profit for the year as decided in CIT Versus Indo Nippon Chemicals Co. Ltd.[2003 (1) TMI 8 - SUPREME COURT] - in favour of assessee.

4. COMMISSIONER OF INCOME-TAX VERSUS INDO NIPPON CHEMICALS CO. LTD   2003 (1) TMI 8 - SUPREME COURT

Other Citation: [2003] 261 ITR 275 (SC)

View of the AO that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act, is not acceptable.

5. ASSISTANT COMMISSIONER OF INCOME-TAX VERSUS TORRENT CABLES LTD. 2012 (11) TMI 190 - SUPREME COURT

Other Citation: [2013] 354 ITR 163 Dated: - 25 September 2012

Valuing of closing stock - exclusion or inclusion of excise duty - Held that:- As decided in Asstt. CIT v. Narmada Chematur Petrochemicals Ltd [2010 (8) TMI 263 - GUJARAT HIGH COURT] Excise duty not includible in valuation of closing stock of finished goods at end of accounting period.

Excise duty payable estimated on finished goods held in factory are neither included in expenditure nor valued in such stocks but are accounted for on clearance of goods from factory this accounting treatment however has no impact on the profit for the year as decided in CIT v. Shri Ram Honda Power Equipment Ltd. [2012 (10) TMI 150 - SUPREME COURT] - in favour of assessee.

CENVAT Credit:

CENVAT  credit lying unused as on closing day of previous year is also tax or duty actually paid during the previous year and is not debited in P & L account. This sum is also allowable in year of actual payment.

In this regard, in case of CIT Vs. Vishnu Sugar Mills Ltd in ITA no. 359 of 2006 for assessment year 2002-03 being appeal u/s 260A on issue fo CENVAT credit the following question was raised:

Quote:

1.  Whether, on the facts, and circumstances of the case the learned Income Tax Appellate Tribunal was  not justified in allowing CENVAT credit? As per the provisions of  S.43B a deduction otherwise allowable is allowed on actual payment basis. If it is outstanding CENVAT credit just like loans and advances given, it is not otherwise allowable. Hence, it is in nature of advances given against the future excise duty liability.

In judgment and order dated 20^th  November 2006 honorable Calcutta High Court held as follows: 

              “ The Court : We have perused the order passed by the Tribunal.  It appears that the Tribunal has extensively dealt with the matter.  We do not find that any substantial question of law is involved which is required to be decided by this Court.  We, therefore, do not find any reason to admit this application.

          Hence, this application is dismissed.”

Unquote:

In this case CENVAT credit was allowed by the Ld. CIT(A) and that was confirmed by the Ld. Tribunal and it stood confirmed by honorable High Court, as per above order dated  20th November, 2006.

Revenue has not appealed against the judgment of High Court and the issue has attained finality. The issue was a repetitive and amount involved was also substantial and tax effect was more than monetary limits prescribed at relevant time. Therefore, the order and judgment of Tribunal, confirmed by High Court has attained finality.

Input Tax Credit (ITC) of GST:

The development is that laws and procedures have changed. GST is a tax and various fees payable under GST laws are also fees to which provisions of S.43B apply.

In regime of GST also there is credit balances similar to PLA, MODVAT CENVAT, advance payments etc. There are also balances of late filing fees or additional fees which are reversed and can be availed in case any such or similar fees become payable in subsequent periods.

These sums are considered as advances in accounts or may be included in valuation of inventory as on last day of accounting period. Therefore, these sums are not claimed in P & L account, though these have been actually paid by the supplier.

ITC for GST is on account of GST actually paid which is not claimed as cost of goods sold or consumed or by capitalizing cost of fixed assets and amortization etc.

In view of mandatory provisions of S.43B and well settled legal position, such sums should be claimed in the year of actual payment.

Failing which deduction of the same can be denied in the year in which such sums are debited in P & L account, because these were not paid during the year in which these are debited in P & L account.

As per view taken by tax authorities, a claim is necessary in Return of Income or Revised Return of Income, otherwise the AO will not entertain the same and assesse will have to seek remedy by way of appeals or Writ Petitions. 

Large ITC for GST:

In many cases large amount of ITC is available due to various reasons like comparatively lower rate of GST on output supply, higher inventory carried, high investment in capital assets etc. Therefore, it is likely that in due course, Income Tax authorities will try to deny deduction of ITC of earlier year , if claimed in subsequent year, on ground that it was not actually paid in previous year in which it is claimed.

Refund and credits:

If a sum is allowed on basis of actual payment, and then any refund is received by way of adjustment against sums payable in subsequent year or actual refund, then such refund or adjustment may be treated as income by reducing allowable sums as the same was paid and allowed in earlier year or as income by way of refund u/s 41. This will be subject to situations in which such refund, remission or adjustment is allowed as capital grant or subsidy.