Excise duty liability on withdrawal of wrongly granted proforma credit accrues in the year of demand and is deductible then.

Where wrongly granted proforma credit under Rule 56A of the Central Excise Rules, 1944 was later withdrawn and a fresh excise demand was raised, the liability was treated as crystallising in the year of demand. The deduction was therefore linked to the year in which the statutory liability became fastened, not to the earlier period to which the underlying duty related. The excise duty liability was accordingly allowable as a deduction in the year under review.

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Issues: Whether the excise duty liabilities arising from the withdrawal of wrongly granted proforma credit under the Central Excise Rules, 1944 were allowable as a deduction in the year in which the demand was raised.

Analysis: Rule 56A of the Central Excise Rules, 1944 governed the grant and adjustment of proforma credit on duty-paid inputs used in the manufacture of finished excisable goods. The record showed that credit had been initially allowed and had reduced the duty actually recovered from the assessee. When the Excise Authorities later discovered the mistake and issued a fresh demand, the liability became fastened in that year. The deduction was therefore linked to the year of demand and not to the earlier period to which the underlying duty related.

Conclusion: The liability was held allowable as a deduction in the year under review, and the assessee succeeded on this issue.

Ratio Decidendi: Where a statutory excise liability is freshly demanded in a later year on discovery that proforma credit was wrongly granted, the liability accrues in the year of demand and is deductible in computing income for that year.

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