Actual payment rule under section 43B: excise duty deposits qualify, but unutilised Modvat credit does not.

Section 43B allows deduction of specified statutory dues on actual payment basis, overriding the mercantile method under section 145(1), so advance deposits made into the excise account-current were treated as real payment because the funds were paid into the Government treasury and were not freely available to the assessee. Unutilised Modvat credit, however, was held to be only a future entitlement and not payment of Central Excise duty until it is actually adjusted against duty liability. The legal position is that statutory dues are deductible only on actual payment, while mere availability of credit does not satisfy section 43B.

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Issues: (i) Whether deduction for tax, duty etc. is allowable under section 43B of the Income-tax Act, 1961 on payment basis before incurring the liability to pay such amounts; (ii) Whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty under section 43B.

Issue (i): Whether deduction for tax, duty etc. is allowable under section 43B of the Income-tax Act, 1961 on payment basis before incurring the liability to pay such amounts

Analysis: Section 43B was construed as requiring actual payment for the specified statutory dues, with the non obstante clause overriding the normal mercantile method under section 145(1). The provision was read in the light of its object, the meaning of "paid" in section 43(2), the phrase "irrespective of the previous year in which the liability to pay such sum was incurred," and the proviso and Explanation 2. The majority held that advance deposits made into the excise account-current, though described as advance, were in substance actual payments of duty because the money was paid into the Government treasury and was not available for unrestricted use by the assessee.

Conclusion: Yes. Deduction is allowable under section 43B on payment basis even where the liability to pay the amount arises later. This issue is decided in favour of the assessee.

Issue (ii): Whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty under section 43B

Analysis: Modvat credit was held to be a future entitlement and not actual payment of duty until it is set off against an excise liability. The Court distinguished between cash payment into the excise account-current and unutilised Modvat credit, and relied on the statutory meaning of "paid" to hold that mere availability of credit does not amount to discharge of duty. The credit becomes equivalent to payment only when actually adjusted against excise duty payable.

Conclusion: No. Unutilised Modvat Credit as on the last day of the previous year does not amount to payment of Central Excise duty under section 43B. This issue is decided against the assessee.

Final Conclusion: The appeal succeeds only in part. Deduction is sustained for the excise duty paid into the account-current, but disallowance is restored for the unutilised Modvat credit.

Ratio Decidendi: Under section 43B, statutory dues are deductible on actual payment irrespective of the year of accrual of liability, but unutilised credit is not equivalent to payment until it is actually adjusted against the relevant duty liability.

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