2019 (1) TMI 1016 - HC - Income Tax

High Court allows deduction of unutilized MODVAT credit as payment of excise duty

M/s Glaxo Smithkline Consumer Healthcare Limited Versus Assistant Commissioner of Income Tax

The High Court ruled in favor of the appellant-assessee, allowing the deduction of unutilized MODVAT credit under Section 43B of the Income Tax Act, 1961. ... Treatment of unutilised MODVAT credit, balance as at the end of the year as payment of excise duty - Deduction u/s 43B - actual payment of duty or not - Excise duty paid in advance in the Personal Ledger Account (“PLA”) - accrual of expenses - whether amount of advance deposit did not represent actual payment of duty so as to entitle an assessee to the benefit of deduction under Section 43B? - Held that:- In view of the law laid down by the Apex Court in Modipon Limited’s case (2017 (11) TMI 1429 - SUPREME COURT OF INDIA) holding that the advance deposit of Central Excise duty constitutes actual payment of duty within the meaning of Section 43B of the Act and that the assessee would be entitled to benefit of deduction of the said amount, the substantial questions of law raised in these appeals are answered in favour of the assessee and against the respondent-revenue. Issues Involved:1. Disallowance of Rs. 6,19,34,656 representing unutilized MODVAT credit under Section 43B of the Income Tax Act, 1961.2. Treatment of unutilized MODVAT credit as payment of excise duty under Section 43B.3. Application of judicial pronouncements regarding MODVAT credit as tax paid.Issue-wise Detailed Analysis:1. Disallowance of Rs. 6,19,34,656 Representing Unutilized MODVAT Credit under Section 43B:The appellant-assessee, a public limited company engaged in manufacturing consumer healthcare products, filed its return of income for the assessment year 1997-98, declaring an income of Rs. 61,07,86,140. The assessee claimed a deduction of Rs. 11,94,97,875 under Section 43B of the Act, which included Rs. 6,19,34,656 of unutilized MODVAT credit. The Assessing Officer disallowed this deduction on the grounds that advance deposits with excise authorities did not amount to payment of duty under Section 43B. The CIT(A) reversed this decision, allowing the deduction. However, the Tribunal remanded the matter back to the Assessing Officer, confirming the disallowance of Rs. 6,19,34,656. The High Court, referencing the Supreme Court's decision in Modipon Limited, concluded that advance deposits of Central Excise Duty constitute actual payment within the meaning of Section 43B, thus ruling in favor of the assessee.2. Treatment of Unutilized MODVAT Credit as Payment of Excise Duty under Section 43B:The key argument was whether unutilized MODVAT credit at the end of the year could be treated as payment of excise duty for deduction under Section 43B. The appellant argued that the MODVAT credit, being irretrievably paid to the excise authorities, should be deductible. The Supreme Court in Modipon Limited held that advance deposits in the Personal Ledger Account (PLA) are considered actual payments of duty under Section 43B, supporting the appellant's stance. The High Court applied this principle, affirming that the unutilized MODVAT credit should be treated as payment of excise duty, thus entitling the assessee to the deduction.3. Application of Judicial Pronouncements Regarding MODVAT Credit as Tax Paid:The appellant cited various judicial pronouncements, including those from the Supreme Court, asserting that MODVAT credit is equivalent to tax paid and should not be considered as part of the purchase cost of raw materials. The High Court referenced the Supreme Court's judgment in Modipon Limited, which emphasized that the legislative intent of Section 43B was to ensure timely payment of duties and taxes. The Court noted that the consistent practice followed by the assessee and accepted by the Revenue, along with the decisions of other High Courts, supported the view that advance deposits of excise duty are actual payments. Consequently, the High Court ruled that the principles laid down in previous judicial pronouncements were applicable, and the unutilized MODVAT credit qualified as a deductible payment under Section 43B.Conclusion:In conclusion, the High Court ruled in favor of the appellant-assessee on all substantial questions of law, setting aside the Tribunal's orders and allowing the deduction of unutilized MODVAT credit under Section 43B. The judgment emphasized the interpretation that advance deposits of excise duty constitute actual payments, aligning with the legislative intent and judicial precedents.