2020 (9) TMI 332 - HC - Income Tax

Court upholds disallowance of STT deduction under Income-Tax Act

The Court upheld the order of assessment under Section 43B of the Income-Tax Act, 1961, disallowing the deduction of Security Transaction Tax (STT) due to ... Section 43B - Certain deductions allowable only on actual payment - Mercantile system of accounting - Non-obstante clause and overriding effect - Bank guarantee not substitute for actual payment - Lib eral construction in favour of Revenue to prevent fraud upon the RevenueSection 43B - Certain deductions allowable only on actual payment - Security Transaction Tax (STT) - Mercantile system of accounting - Bank guarantee not substitute for actual payment - Deduction claimed for Security Transaction Tax not paid to authorities is not allowable and was rightly disallowed under Section 43B. - HELD THAT: - The Court held that Section 43B is an exception to the mercantile system of accounting and operates by way of an additional condition that certain deductions are allowable only upon actual payment. Legislative intent and binding decisions of the Supreme Court establish that Parliament enacted Section 43B to prevent taxpayers from claiming accrual-based deductions while deferring statutory payments, and that its non-obstante clause gives it overriding effect in its sphere. The petitioner's case admitted non-payment of the STT to the authorities and there was no case of refund to the payee; accordingly the claimed deduction could not be allowed. The Court also noted that furnishing a bank guarantee does not amount to actual payment for purposes of Section 43B. Reliance by the Revenue on Chowringhee Sales Bureau was distinguished as not dealing with the specific provision; binding precedents including Exide Industries Limited and McDowell confirm the correctness of treating Section 43B as permitting disallowance where the specified payment is not actually made. In view of these principles, the assessing officer's disallowance of the STT and the Commissioner of Income-Tax's affirmation were held not to be illegal or perverse. [Paras 10, 11, 12, 14, 15]The order disallowing the STT under Section 43B and including it in the assessee's income was upheld.Final Conclusion: The writ petition is dismissed and the assessment order dated 26.12.2008 as affirmed by the Commissioner of Income-Tax is maintained. Issues:Challenge to order of assessment under Section 43B of the Income-Tax Act, 1961.Analysis:Issue 1: Challenge to the order of assessment under Section 43BThe petitioner challenged the order of assessment dated 26.12.2008, which disallowed an amount of Rs. 17,87,530/- deducted as Security Transaction Tax (STT) against trading transactions. The Income Tax Officer applied Section 43B as the STT amount was not deposited with the authorities. The Commissioner of Income Tax affirmed this order. The petitioner relied on various court decisions to argue against the order's legality and perversity.Issue 2: Interpretation of Section 43BSection 43B mandates deductions only on actual payment, overriding other provisions. The legislative intent behind Section 43B was to prevent taxpayers from claiming deductions without paying statutory liabilities. The Court affirmed the constitutional validity of Section 43B in Union of India v. Exide Industries Limited. The provision is an exception to the mercantile accounting system, ensuring taxes due are actually paid.Issue 3: Application of Section 43BThe Court held that Section 43B operates as an additional condition for deductions, not limiting the autonomy of the assessee in choosing an accounting method. It prevents fraud on revenue by ensuring actual payment of specified liabilities. The Court emphasized that bank guarantees do not fulfill the payment requirement under Section 43B.ConclusionBased on the binding precedents of the Apex Court, the Court dismissed the writ petition challenging the assessment order. The petitioner's failure to deposit the STT amount and the application of the mercantile accounting system were not sufficient reasons to interfere with the orders. The Court found no grounds to accept the petitioner's contentions, given the legal principles discussed and the precedents cited.This detailed analysis covers the issues raised in the judgment, providing a comprehensive understanding of the Court's reasoning and decision.