MODVAT credit set-off against excise duty before return due date constitutes actual payment for deduction under section 43B.

MODVAT credit actually set off against an excise duty liability before the return-filing due date was treated as actual payment for section 43B purposes, because the liability stood extinguished by the adjustment before the due date under section 139(1). Section 145A was read as requiring inventory valuation to include duty incurred in bringing goods to their location and condition, while section 43(2) and section 43B were applied to link deductibility to payment in substance. The Special Bench ruling on unexpired credit was distinguished on the basis that the credit here had been utilised against the duty liability. The deduction was therefore allowable and the disallowance deleted.

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Issues: Whether adjustment of MODVAT credit against central excise duty liability before the due date for filing the return amounted to actual payment so as to allow deduction under section 43B, read with section 43(2), and in the context of section 145A.

Analysis: Section 145A requires inventory valuation to include tax or duty incurred in bringing goods to their location and condition, and excise duty is incurred on manufacture even if payable on later removal. Section 43(2) defines "paid" to include sums actually paid or incurred according to the method of accounting, while section 43B allows deduction only on actual payment. The adjustment of MODVAT credit against the excise liability in April-May 2005 was treated as the functional equivalent of payment, because the liability stood extinguished by set-off before the due date under section 139(1). The unexpired credit situation discussed in the cited Special Bench ruling was distinguished because, here, the credit had actually been utilised against the duty liability.

Conclusion: The MODVAT credit adjustment amounted to actual payment, and the deduction was allowable. The disallowance was rightly deleted.

Ratio Decidendi: Where MODVAT credit is actually set off against an excise duty liability before the return-filing due date, such set-off constitutes actual payment for the purposes of section 43B.

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