Statutory set-off as deemed payment under tax law qualifies for deduction where the liability is legally discharged.

A sales tax liability adjusted under the Bombay Sales Tax Rules can be treated as actual payment for deduction under section 43B of the Income-tax Act when the statutory scheme creates a legal fiction of discharge. The adjustment under rule 41D read with rule 45(3) was regarded as a deemed payment made through the return itself, not a mere retention of tax, and therefore qualified as payment for section 43B purposes. The mechanism was treated as part of the statutory incentive structure and not as a case of double deduction, so the deduction was allowed in favour of the assessee.

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Issues: Whether sales tax liability adjusted or set off under the Bombay Sales Tax Rules can be treated as actual payment for deduction under section 43B of the Income-tax Act, 1961.

Analysis: Section 43B allows deduction only in respect of tax, duty, cess or fee payable, but the scheme permits deduction where the liability is treated as discharged by actual payment or by a legally recognised equivalent. Under rule 41D read with rule 45(3) of the Bombay Sales Tax Rules, the assessee was entitled to adjust the amount against tax payable in the return itself. That adjustment operated as a deemed payment by legal fiction and was not a mere retention of tax. The arrangement was part of the statutory incentive structure and did not result in double deduction, since the amount adjusted represented the discharge of a tax liability through the mechanism created by the sales tax rules.

Conclusion: The adjusted sales tax amount is deductible under section 43B of the Income-tax Act, 1961, and the answer is in favour of the assessee.

Ratio Decidendi: A tax liability discharged through a statutory set-off or adjustment that creates a legal fiction of payment is treated as actually paid for the purposes of section 43B.

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