VAT liability for earlier years was allowed as a deduction where payment met section 43B and the balance crystallised later.

VAT demand payments relating to earlier years were treated as deductible where the amount was paid before the due date for filing the return, satisfying section 43B for that part. The remaining balance was also allowed under section 37(1) because the records showed it had not been claimed in an earlier year and the liability had crystallised in the relevant year. On those facts, the disallowance was deleted and the expenditure was allowed as a business deduction.

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Issues: Whether VAT demand payments relating to earlier years, made in instalments and claimed in the relevant assessment year, were deductible under section 43B or section 37(1) of the Income-tax Act, 1961.

Analysis: The demand notices and challans showed that the liability pertained to earlier financial years and not to the year in which the lower authorities had treated it as arising. The payment of the amount made before the due date for filing the return satisfied the requirement of section 43B for the portion so paid. The remaining payment was also not found to have been claimed in the earlier year, as the financial statements showed only a limited deduction in that year, and the director's affidavit supported that position. On these facts, the liability was treated as having crystallized for the relevant year and as an allowable business expenditure.

Conclusion: The deduction was allowable for both components, one under section 43B and the other under section 37(1), and the disallowance was set aside in favour of the assessee.

Ratio Decidendi: A VAT or tax liability relating to earlier years is deductible when it is actually paid within the statutory time under section 43B, and where such payment had not been claimed earlier, it may also be allowable as business expenditure under section 37(1) once the liability is shown to have crystallized in the relevant year.

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