TaxTMI 
TaxTMI 
2007 (7) TMI 334
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment year 2001-02. While completing the assessment, the Assessing Authority has made certain disallowances/additions and thereby the assessment was finally concluded on an income of Rs. 147,29,65,974. 3. The total Central Excise deposits in the Account-Current of the assessee and the unutilised Modvat Credit on 31-3-2001, the last day of the previous year relevant to the assessment year under appeal was Rs. 10,99,72,355. The balance on the last day of the immediately preceding previous year, as on 31-3-2000 was Rs. 9,96,24,284. The differential amount of Rs. 1,03,48,071 represented the excess amount of credit available for adjustment as and when the payments of excise duty become due. In its computation of income, the assessee-company has deducted this differential amount of Rs. 1,03,48,071 as excise duty payments. The contention of the assessee before the Assessing authority was that this balance available to the credit of the assessee amounted to payment of Central Excise duty, which should be allowed as deduction under section 43B of the Income-tax Act, 1961. 4. But the Assessing Authority held that the contentions of the assessee-company could not be accepted. She found ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 43B of the Act towards payment of Central Excise duty. 7. The Revenue is aggrieved by the above decision and therefore filed the second appeal before the Tribunal. The only issue raised in the present appeal is whether the CIT(A) is justified or not in accepting the contention of the assessee for deducting the incremental balance in assessee's Account-Current in PLA and RG-23, under section 43B of the Act as payments of Central Excise duty. The grounds raised by the Revenue are the following: "1. On the facts and circumstances of the case, the Ld. CIT(A) vide appellate order No. 326/P/2003-04 dated 19-1-2005 has erred in law and on the facts of the case in allowing deduction under section 43B of the Act, being incremental balance with Excise Authorities in PLA and RG-23. 2. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the Assessing Officer may be restored. 3. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard or disposed of." 8. When this appeal was posted for hearing and disposal before the Regular Division Bench at Chandigarh, the Bench found that divergent views have be....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Special Bench decisions also need to be considered while adjudicating the issue placed before this Bench, it was suggested by the Bench that it would be appropriate if the case is heard by a Larger Bench comprising of at least 5 Members. This suggestion was placed before the contending parties also. The Revenue as well as the assessee agreed that the suggestion for a Larger Bench is proper and acceptable. The matter was thus again placed before the Hon'ble President, Income-tax Appellate Tribunal. The Hon'ble President, on the recommendation stated above, reconstituted the Special Bench with Five Members to consider and decide the issue placed before it. 12. In the course of preliminary hearing of the issue, the Three Member Bench, which was constituted at the first instance, had also an occasion to consider the exact nature of the issue to be considered and decided especially in the light of the facts of the case involved in the present appeal. In the present case, the assessee-company has sought for deduction under section 43B, two kinds of amounts, as advance payments of Central Excise duty. The first one is the actual amount of Central Excise duty remitted by the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 43B of the Income-tax Act, 1961 of the incremental balance maintained with the Central Excise authority in PLA and RG-23. On the question whether deduction for tax, duty etc. is allowable under section 43B, on payment basis but before incurring the liability to pay such amounts, the ld. CIT brought out the contentions and arguments in the following manner: "1. That section 43B permits certain deductions only on actual payment of the corresponding amounts. Section 43B is a non obstante clause. The section provides for deduction of the prescribed sums on actual payment only if those sums are "otherwise allowable under this Act". This rider em bodied in section 43B clarifies the legal position that an assessee cannot claim by way of expenditure, the payments of taxes and duties only for the fact that the assessee has made the payments of those taxes and duties. In addition to the payment of such taxes and duties, it is also necessary that those expenses should be "otherwise allowable" under the provisions of the Income-tax Act, 1961, in computing the business income. 2. That the law is very clear on this subject that the deduction of the prescribed sums would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e been provided in section 43B to which the restriction contained in that section regarding actual payment of cash before claiming the deduction, do apply. The six items are provided in clauses (a) to (f). Clause (a) reads that any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee, according to the method of accounting regularly employed by him, only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. The sum actually to be paid by the assessee is specified in law as "...any sum payable by the assessee by way of tax.....". It means a sum which is not payable by the assessee pertaining to the previous year relevant to the assessment year will not be allowed as a deduction even if the sum was paid in the previous year. "Any sum payable" is one of the most important limbs of the statutory expression provided in section 43B. The expression "any sum payable" presupposes the incurring of a prior liability on the assessee to make s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s there any whisper of a situation where an assessee can make advance payment of taxes or duties in the previous year, even before incurring of the liability and claim deduction in computing the income from business." 16. In support of his arguments and contentions, the ld. Commissioner of Income-tax has relied on the following decisions: (i). Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708 (AP). The AP High Court has held that in order to apply the provisions of section 43B not only should the liability to pay tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. (ii). IAC v. Tata Press Ltd [1990] 35 ITD 470 (Bom.). In this case, the assessee-company has claimed deduction in respect of the payment of gratuity fund, superannuation fund, provident fund etc. for the assessment year 1984-85. The deduction was claimed on payment basis in view of the newly inserted section 43B. The assessee's claim was notwithstanding the fact that the part of the payments related to the liabilities accruing not in the relevant previous year but in the subsequent previous year. The claim of the as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ious year itself. The Circular has clarified that "any sum payable" shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable. 18. The ld. Commissioner of Income-tax explained that the scheme of section 43B, has to be understood both in text and context and a harmonious interpretation has to be followed in order to arrive at a rightful proposition. On the Rule of interpretation, he relied on the decision of Dunlop India Ltd. v. Asstt. CIT [1992] 41 ITD 582 (Cal.) where the Tribunal has held that in every interpretation both text and context are important. He has also made references to the decision of the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 and the decision of Punjab and Haryana High Court in the case of CIT v. Madanlal & Bros. [2005] 276 ITR 571. He has also relied on the decision of the Special Bench rendered by ITAT, Chennai Bench in the case of Kwality Milk Foods Ltd. v. Asstt. CIT [2006] 100 ITD 199 where in paragraph 15 of its order, the Special Bench has held that if the language of the statute is plain, obvious meaning is t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ominance of actual payment of duty as the sole consideration while granting deduction in the computation of income compared to the year of accrual or the incurring of liability or raising of the demand. 4. Section 145(1) of the Income-tax Act recognizes two methods of accounting, either cash or mercantile system, to be regularly employed by an assessee for the purpose of computing income chargeable under the head "Profit and gains of business or profession" or "Income from other sources." The assessee is given a choice to select either of the two. The assessee-company being a corporate body is fundamentally bound by the provisions of the Companies Act, 1956. Section 209(3) of the Companies Act mandates that a company shall maintain its accounts in mercantile system/accrual system. In the Income-tax Act, the assessee has an option; in the Companies Act, the assessee has no option. The assessee therefore being a company is following mercantile/accrual system of accounting. 5. The impact of section 43B is that the above method of accounting regularly employed by the assessee is overturned and the deduction for the payment of tax, duty etc. is given only on payment ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctual payment of the duty or taxes should occur. The screening of the entire provisions contained in section 43B does not bring out any rule that the liability to pay such duty or tax must incur first and only thereafter the payment of such duty or tax must be made/deducted. There is no such sequence of events that one particular event should alone happen at the first instance and then only the other event should follow. The statute does not prescribe any proposition that pre-incurring of liability is a condition to claim deduction of duty, taxes etc. where those items were paid by the assessee. 10. The Revenue authorities have given a lot of importance to the expression contained in section 43B as "...a deduction otherwise allowable under this Act,...". The contention of the Revenue authorities that the expression "otherwise allowable under this Act" means deduction available only for the year of incurring liability is without any basis. The correct interpretation of the expression "otherwise allowable" is that the item claimed as deduction needs to be an expenditure allowable under the provisions of the Income-tax Act in computing the income. It does not mean that it sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evant law. By making reference to clause (a), the items covered by Explanation 2 are tax, duty, cess or fee. This should be read along with the proviso already mentioned above. The proviso to section 43B and Explanation 2 go together. The operation of an Explanation is always governed by the main provisions of law contained in the relevant section. An Explanation cannot overtake the section as such. In the present case Explanation 2 does not cover all sorts of payments. They cover only those payments within clause (a) and also to be read along with the proviso to section 43B. 21. The ld. Counsel further argued in the following lines relying on the respective judgment referred, thereto: 1. Consequence of section 43B in the matter of method of accounting has been succinctly explained by ITAT Delhi 'B' Special Bench in the case of Indian Communication Net Work (P.) Ltd.. In paragraph 22 of the decision, the Tribunal has stated that section 43B was no doubt introduced to curb the practice adopted by the assessees to retain substantial funds by not depositing amounts into the Government account and claiming deductions at the same time; but it also brought out a chang....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot to disturb the consistency. Referring to the Supreme Court judgments in Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219; CIT v. Narendra Doshi [2002] 254 ITR 606 and CIT v. Shivsagar Estate [2002] 257 ITR 59, the Court reiterated the principle of consistency to be followed in matters of adjudication. If the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted in the case of one assessee, it is not open to the Revenue to challenge the correctness in the case of other assessees without just cause. In the matter of section 43B there being no such cause approved, the decision of the three High Courts where the principle has been upheld that the deductions of tax, duty, should be allowed under section 43B in the year of payment, irrespective of the previous year are to be followed. The decision of the Supreme Court in Berger Paints (India) Ltd. settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed under section 43B irrespective of the previous year to which the corresponding liability related to. 5. The case of the Revenu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has also to be so construed. Without the first proviso, Explanation 2would not obviate the hardship or unintended consequence of section 43B. The proviso supplies an obvious omission. But for this proviso, the ambit of section 43B becomes unduly wide bringing within its scope those payments, which were not unintended to be prohibited from the category of permissible deductions. The Court has held therein that the rule of reasonable construction must be applied while construing a statute. 7. The Calcutta High Court in the case of Associated Pigments Ltd v. CIT [1998] 234 ITR 589 has considered this question of twin conditions argued by the Revenue that payment also should be made and liability also should be incurred in the previous year relevant to the assessment year in which deduction is sought by the assessee under section 43B. In that case the question placed before the Hon'ble Court related to admissibility of deduction of two sums paid by the assessee on account of purchase tax during the assessment year in question but those sums being relatable to an earlier accounting and assessment year. While considering the case, the Court held that no part of section 43B ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the refund of excise duty from the Account-Current, it is necessary for the assessee to make a formal claim and the excise authority has to pass appropriate orders after recording the reasons in writing. Cash refunds are made only under specified circumstances; otherwise refund due to the assessee is always treated as a credit available for future set off and adjustment of Central Excise duty. From the nature of the account-current maintained with Central Excise Department, the frequency of payments made by the assessee and the lifting of goods from the factory on a continuous basis, it is very clear that the money even if characterised as advance deposits paid by an assessee to Central Excise through PLA and RG-23 in the Account-Current, retain all the characteristics of payment of actual Central Excise duty and therefore the advance deposits . cannot be treated as an advance for future liability as construed in the ordinary commercial sense. 10. The Supreme Court has considered an instance of money lying to the credit of an assessee but nevertheless not belonging to it, in the case of CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397. The Court held that the M....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... reliance placed by the Revenue on the decision of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao & Co. is also misplaced. It is not a decision which interprets the provisions of law contained in section 43B. 4. The decision of ITAT Mumbai Bench 'E' in the case of Amforge Industries Ltd. also does not flow from the language used in section 43B. 5. The decision of ITAT Hyderabad Special Bench in the case of CWC Wines (P.) Ltd. has placed reliance on the decision of Andhra Pradesh High Court in the case of Gopi Krishna Granites India Ltd. v. Dy. CIT [2001] 251 ITR 337. The issue raised before us in clause (a) of section 43B is to be considered. It is quite different from clause (d) considered by the High Court in the said decision. The sums payable under clause (a) and sums payable under the clause (d) are different and distinct in nature and character. The reference made to matching principle in the said decision has no relevance once cash system is adopted for section 43B. 6. The Delhi Bench in the case of Maruti Udyog Ltd., while considering the issue has misdirected in its discussion regarding the expression "incurring of liabili....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the duty in PLA for acquiring under rule 57F(2) and took the credit back in PLA rather than taking the same in RG-23A Part-II. As such, the lower authorities directed the assessee to pay the duty in PLA and take the credit back in RG-23A Part-II. This direction could not be adhered to since as on that date, the unit was not functioning. The revival also could not be done. The contention of the assessee before the Tribunal was that as there was no loss of revenue, the demand raised against it to make the credit in PLA be set aside. The Tribunal held that the prayer of the assessee was not acceptable. Rule 173G(1A) provides that where any amount is to be withdrawn from the PLA account, then the assessee has to make an application to the Commissioner and only by obtaining permission from him, the said amount can be withdrawn. Rule 173G(1) also prescribes that periodical credit in the Account-Current can be made only by cash payment to the Treasury. Thus the rule clearly lays down that credit of duty can be taken in the PLA only either through cash deposit under T.R. 6 Challan in the Treasury or by written permission to take credit by the proper officer. In this case, the appellant t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder Modvat is as good as payment of excise duty as it ultimately reduces the net liability of the assessee to pay Central Excise duty on the finished goods. If such credit is not available by way of Modvat, the assessee has to pay Central Excise duty to that extent also, by cash which means that availing of Modvat Credit in pari materia amounts to payment of Central Excise duty by way of cash. (iii) As the Modvat Credit availed by an assessee is de facto payment of Central Excise duty, the setting off Modvat Credit must be treated as payment of excise duty in cash. The consequence of the above proposition is that the unutilised credit balance of Modvat available to an assessee on the last day of the previous year will be equivalent to advance payment of Central Excise duty and all the arguments advanced in support of the deductibility of advance payment of Central Excise duty will be mutatis mutandis apply to Modvat Credit as well. That is the unexpired Modvat Credit is nothing but the advance payment of Central Excise duty and as the advance payment of excise duty needs to be allowed as deduction under section 43B for the elaborate reasons already explained, Modvat Credi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....advance payment of excise duty per se is not deductible under section 43B. 30. Without prejudice to the above contention, the ld. Commissioner submitted that Modvat is a scheme whereby the law exempts an assessee from payment of Central Excise duty on final products to the extent duty was paid on the raw material, if any. Therefore it does not amount to actual payment. It is only an entitlement of the assessee for claiming exemption from the excise liability that may arise in future. The unexpired Modvat Credit cannot be equated to advance payment of excise duty by cash. The Modvat credit is not coming out of the payment of Central Excise duty per se. It is coming out of the purchase of the raw materials. Where raw materials are exciseable, the purchase cost also includes excise duty. In order to avoid a cascading effect of excise duty, the duty paid on earlier points are given as deductions in subsequent points. Therefore, it could be seen that it is a case of exemption and not a case of payment as construed by the ld. Counsel appearing for the assessee. 31. The ld. Commissioner referred to the decision of the Supreme Court in the case of Eicher Motors Ltd which has been rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the ordinary commercial accounting sense. 34. A similar issue was considered by Supreme Court in the case of New Horizon Sugar Mills. In that case the assessee was required to set apart specific amounts towards Molasses Storage Reserve Fund, which could be utilised only for the purpose of constructing Molasses Storage Tank. This appropriation was mandatory in the light of Molasses Control Order as the assessee was a manufacturer of sugar. While examining the nature of the said money blocked in the Molasses Storage Reserve Fund, the Supreme Court held that the money would not be the income of the assessee, as the assessee had no control over that. The deposits made by the assessee in the Accounts-Current for making payments of Central Excise Duty are analogous to the case considered by the Supreme Court and the ratio laid down in the above judgment, we think, should apply to the present case. 35. The Central Excise and Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the nature of PLA in the case of Fibre Bangalore (P.) Ltd. In that case the assessee debited the duty in Account-Current and thereafter reversed the debit by crediting back the du....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ove position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid; but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in section 43B, that the deduction in respect of tax or duty, which was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability. The Gujarat High Court has examined the true meaning of the above statutory language in the case of Lakhanpal National Ltd. The Court has held that deduction of tax or duty paid by an assessee has to be allowed as deduction in the year of payment, irrespective of the previous year in which the liability to pay such sum was incurred according to the method of accounting regularly employed by the assessee. 39. As argued by the ld. Counsel appearing for the assessee, the expression "irrespective of the previous year" dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression "irre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....osing stock at the end of the accounting year. It is not that the Supreme Court has considered the issue in the case of Berger Paints (India) Ltd. 266 ITR 99 alone. The revenue had taken up the decision of Andhra Pradesh High Court rendered on this issue before the Supreme Court in Special Leave Petition (SLP-SR 2766 of 1993), in the case of South India Research Institute. The Supreme Court has examined the judgment of Andhra Pradesh High Court in the matter of section43B in the context of a special account maintained by the assessee to pay the Central Excise duty. The Supreme Court upheld the finding of the High Court that the claim of the assessee for deduction of payments made to such special account has to be allowed as it represented actual duty paid by the assessee. The SLP of the department was dismissed. 42. The Gujarat High Court in the case of the Lakhanpal National Ltd has considered the scope of section 43B in a case where the assessee had claimed deduction for the Customs and Excise duties paid in respect of raw materials imported and goods manufactured in the accounting year. The Bombay High Court in the case of Bharat Petroleum Corpn. Ltd has followed the decision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in the year of payment under section 43B. Therefore, the proposition argued by the assessee-company has not only been approved by the various High Courts but also by the Supreme Court and the issue is squarely covered by the decision of the Supreme Court in the case of Berger Paints (India) Ltd. 44. We may also examine the relevance of the case laws cited by the ld. CIT (DR) at the time of hearing. He has placed reliance on the decision of Andhra Pradesh High Court in the case of Sri. Kakollu Subba Rao & Co. In that case the Andhra Pradesh High Court has held that the assessee should pay the amount in the previous year so also the amount should become payable in the very same year for claiming deduction under section 43B. It is thereafter, the proviso to section 43B was inserted, to alleviate the consequent difficulties. But it is to be seen that the principal question placed before the High Court in this case was the constitutional vires of the provisions of section 43B. In fact, it was not a decision which interprets the provisions of law contained in section 43B on its substantial merit. Anyhow, the applicability of the said decision has been undone by inserting of proviso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er as successive deduction of depreciation allowances; section 35D provides for expenses to be written off for a period of 10 years. Various deductions under Chapter VI-A provide for deduction for more than one assessment year, sometimes 5 assessment years to 10 assessment years. When that is the case, the basic rule is that the business will continue for years to come and the assessee will have to claim the deduction on a regular basis from assessment year to assessment year. When there is the regularity of payment, it is not possible to hold that the excise duty payable in the month of April would be "contingent" in nature in the immediately preceding month of March. 46. Another concern expressed by the Tribunal in the above case is that it will open floodgates for the assessees to make advance payments of such liabilities for any number of subsequent years and claim deduction thereto in an earlier year, if doing so proves advantageous to them. Whether an assessee would misuse section 43B for the above purpose, is a question of remote chance. Usually, all tax avoidance schemes are practised by the assessees without paying any money towards tax. If not impossible, it is highly ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r irrespective of the date by which such sum is statutorily payable. In fact, the circular deals with the short question of the distinction between liability incurred and payment due. It clarifies that even if the sum is not due for payment during the previous year deduction would be available if payment was made. There was a judicial view that for, claiming deduction, the amounts also must be payable within the previous year. [Srikakollu Subba Rao & Co.]. It created a difficult situation for assessees; especially like payments of sales tax etc. In order to remove the difficulties, Explanation 2 was brought in, along with proviso to section 43B. Proviso has made the Explanation practicable and workable by stating that the payments made even after the close of the previous year but made before the due date of filing of the return, will be deductible. It could be seen that the circular/deals with the extended period of time by which certain belated payments could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof. 51. We have considered in detail the arguments of both sides and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... before incurring the liability to pay such amounts. Accordingly, the first question is answered in affirmative and in favour of the assessee. 53. The next question to be considered is whether Modvat Credit available to an assessee as on the last day of the previous year amounts to payment of Central Excise duty under section 43B ? 54. The forceful argument of the ld. Counsel appearing for the assessee is on the basis of the Supreme Court decision in the case of Eicher Motors. The argument of the ld. Counsel is that the Supreme Court has held that the facility of Modvat Credit is as good as tax paid. He argued that the unexpired Modvat Credit available to an assessee is to be treated as good as Central Excise duty paid by the assessee on account. But we find that the context in which the observation was made by the Supreme Court has to be noted of. The observation of the Supreme Court had been made in a case where the assessee had set off the Modvat Credit against the demand of excise duty. When the unexpired Modvat Credit is set off against the excise duty payable and thereby the liability has been extinguished/reduced, that the Supreme Court has held that setting off Modvat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ofits and gains of business or profession. Sub-section (2) of that section defines the term "paid". Section 43(2) reads as below: "(2) 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'Profits and gains of business or profession'." 59. The definition states that "paid" means money actually paid by an assessee or incurred by the assessee and not anything else. In section 43B, the deduction is given only for those sums "actually paid" by the assessee. A conjoint reading of section 43(2) and section 43B support the argument of the ld. Commissioner of Income-tax that unexpired Modvat Credit does not amount to actual payment of Central Excise duty. 60. The credit balance as such does not amount to payment. The credit balance becomes equivalent to the payment only at the point of time the assessee exercises his option to set off the credit balance against the Central Excise liability and not before. 61. Therefore we hold that the Modvat Credit available to the assessee as on the last day of the previous year does not amount to payment of Central Excise du....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Minister while presenting Finance Bill, 1983, stated as under: "Several cases have come to notice where taxpayers do not discharge the statutory liability such as in respect of excise duty, employer's provident fund, employees State Insurance scheme, for long period of time. For the purpose of their income-tax assessment, they nevertheless claim the liability as deduction even as they take resort to legal action, thus depriving the Government all its dues while enjoying the benefit of nonpayment. The curb such practices, I propose to provide that irrespective of the method of accounting followed by the taxpayers, a statutory liability will be allowed as a deduction in computing the taxable profit only in the year and to the extent it is actually paid." The purpose of the Legislation and the mischief it sought to check is abundantly clear and needs no elaboration. Only thing to be highlighted is that there is no reference to any condition to establish, "accrual of liability" for the claim of deduction. Only actual payment is insisted upon. 2.3 The memorandum explaining the provisions in the Finance Bill of 1983 is as under: "59. Under the Income-tax Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, or...shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return : Provided further...( Omitted w.e,f. 1-4-2004) Explanation 1.-...] Explanation 2.-For the purposes of clause (a) as in force at all material times, 'any sum payable' means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. Explanation 3.-... ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as under: "A reading of this section clearly shows that the deduction can be claimed only in the year in which the payment is actually made. In other words, the deduction cannot be allowed as per the principles of the mercantile system of accounting, namely, when the liability arises but now it can be allowed only in the year in which the tax is actually paid. In the present case, the tax having been paid on January 31, 1985, it would be in the case of the petitioner, in the accounting year ending January 31, 1985, and corresponding to the assessment year 1986-87, that the deduction can be claimed." 4.1 In the case of Indian Communication Network (P.) Ltd., the Special Bench held as under: "In accordance with the system followed all along by the assessee, customs duty and excise duty pertaining to goods unsold (raw materials and finished goods) were included as part of its closing stock. For the assessment year 1984-85 also, the assessee had adopted the same system and had included an amount of Rs. 26,98,713 being customs duty and excise duty (on raw materials and finished goods) as part of the closing stock. The assessee originally returned a total income of R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee is noted by their Lordship as under: "At the time of hearing, Mr. J.P. Shah, the learned advocate appearing for the petitioner, submits that any sum payable by an assessee by way of tax or duty under any law for the time being in force is allowable and as per the mercantile method of accounting, it would be allowable at the time when it becomes due and/or the assessee would be liable to pay the same and not on the actual payment of tax or duty, but as per the newly added provision of section 43B of the Act, it would be allowable only in computing the income referred to in section 28 of the previous year in which the sum is actually paid by the assessee irrespective of the previous year in which the liability to pay such tax was incurred by the assessee according to the method of accounting regularly employed. He, therefore, submits that the customs duty being paid in the year 1983 on the raw material imported during the year, though the raw material is consumed in the year 1984, the assessee would be entitled to get an allowable deduction for the assessment year 1984-85 (accounting year ending on December 31, 1983) in computing the taxable income of the petitio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id by him in case a deduction in respect of any such sum was allowed in the previous year. It is, therefore, clear that the assessee shall not be entitled to get the benefit twice, i.e., at the time when the liability arises and also at the time when the actual payment is made. In view of the specific language of the section that deduction of the amount as mentioned in clauses (a) and (b) of section 43B would be allowed in the previous year in which such sum is paid, there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee. There is no dispute on the point that the amount of import duty and excise duty are allowable deductions. What is disputed on behalf of the respondents that the amount of customs and excise duty on the value of the closing stock of the petitioner-assessee should not be permitted in the assessment year 1984-85 (accounting year ending on December 31, 1983), though actually paid in the year 1983, because the assessment of the closing stock of the year 1983 will be in the subsequent previous year which would be in 1984 and the relevant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the said goods was incurred by the petitioner-assessee. When that is so, it is also clear that the deduction of the said excise duty and import duty even on the closing stock was allowable in the accounting year 1983, but because of the specific language of section 43B of the Act which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made and, therefore, it is not allowable. Therefore, the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles are claimed as deductions merely because they are paid, cannot be accepted." 4.6 The learned Departmental Representative before us emphasized that in the case of Lakhanpal National Ltd. the liability to pay excise duty had accrued in the year 1983 and the sum was paid in the year 1983. The condition of accrual of liability as well as actual payment was proved. Therefore, the case supported the stand of the Revenue. It was also contended that their Lordship accepted that section 43B of the Act does not enlarge the sco....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... In the case of Bharat Petroleum Corpn. Ltd., Bharat Petroleum Corporation had claimed deduction of Rs. 12,62,47,225 under the head "Excise and customs duty paid" on the closing stock as on March 31, 1985. The amount was not debited in the Profit and Loss Account but shown in the balance sheet as "current assets" under the caption "Prepaid taxes". The Assessing Officer did not allow the claim for deduction as the amount was not debited in the profit and loss account in respect of goods falling in the closing stock nor the amount was included in the value of the closing stock. The first appeal of the assessee was rejected. It is noted in the report that the Tribunal allowed the appeal, "and held that the entire amount was an allowable deduction in view of the fact that the assessee had actually paid, during the year in question, Rs. 12,62,47,225." The High Court upheld the decision with the following finding: "Findings on question No.1: The facts brought on record show that during the financial year 1984-85 relevant to the assessment year 1985-86, the assessee actually paid a sum of Rs. 12,62,47,225. The said amount was a part of the closing stock as on March 31, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....products. The assessee had paid import duty of Rs. 35,09,826. According to the assessee the cost of the imported materials inclusive of duty was taken to the profit and loss account only on consumption basis. The balance of import duty of Rs. 11,58,833 paid on the raw materials held as closing stock, was taken into the balance sheet and shown as part of current assets. Schedule 15 of the balance sheet set out the current assets, loans and advances. In that Schedule, under the heading "Inventories" the value of raw materials held in stock was shown. The value of the raw materials stated therein, according to the assessee, includes this sum of Rs. 11,58,833. Similarly excise duty paid on finished goods held as closing stock was shown as part of the inventory under the current assets in the balance sheet. The assessee's claim under section 43B of the Act for deducting the actual customs duty and excise duty paid on the stock of raw material and finished goods was negatived by the Assessing Officer, the Commissioner and finally by the Tribunal, all of whom took the view that as the amounts paid towards customs duty and excise duty had not been shown separately in the profi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... view similar to the one taken by us has been taken by the Bombay High Court in the case of CIT v. Bharat Petroleum Corporation Ltd. [2001] 252 ITR 43. The assessee had filed before the Assessing Officer the necessary adjustment statement. The question referred to us is answered in favour of the assessee." It is clear from above that deduction was allowed to the assessee in respect of his claim under section 43B and their Lordship has elaborated as to how deduction is to be allowed only on actual payment irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. 7. The application of section 43B was again considered by their Lordship of Supreme Court in the case of Berger Paints India Ltd. Their Lordship noted that revenue had not challenged decision of Gujarat High Court in Lakhanpal National Ltd. 's case which was followed by Bombay High Court in Bharat Petroleum Corpn. Ltd 's case, Madras High Court in Chemicals & Plastics India Ltd 's case followed by Bombay High Court. The Special Bench decision of Appellate Tribunal in the case of Indian Communication Network (P.) Ltd. 's was also not challenged. Their....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned Departmental Representative argued that above decisions were distinguishable and not applicable to the facts of the case. In all the decisions, there was no dispute that liability to pay statutory amount had accrued and the amounts were payable and deductions rightly claimed on actual payment basis. The question involved before us was not involved in those cases. We do not find any substance in this argument of the learned Departmental Representative. Object, purpose and import of section 43B has been explained, emphasized and noted above. The same was clearly stated and admitted to be to allow deduction of six items mentioned in clauses (a) to (f) of the section in the year in which the amount is actually paid, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee, according to the method of accounting. In all the cases discussed above, despite difference in facts, the Courts noted the main thrust of section 43B of allow ability of deduction of tax liability in the year in which amount was actually paid and allowed the deduction on mere finding that amount was actually paid. That is the ratio of the decided cases. 8. Besides,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e in the books in regard to such duty or tax for which payment was made later on. To introduce this double test would be writing words into the section which neither the Tribunal nor the court is en titled to do. In other parts of the Act, where provision in the books is given a special status, and that is specifically called for but section 43B is not one such section." 8.2 The decision of Allahabad High Court in the case of C.L. Gupta & Sons is also direct On the point. Therein the Court held as under: "Held, that the amount of customs duty of Rs. 3,56,541 was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it was deductible only in the year in which it was actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of method of accounting regularly adopted by him and, therefore, in view of the clear provision of law, the deduction could not be allowed in the assessment year 1988-89." 9. The aforesaid decided cases have clearly laid down that deduction of items mentioned in section 43B is to be allowed on actual payment under section 28 in the previous year in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccepted by the Revenue in the memorandum explaining the provision of section 43B in the Finance Bill, 1983 (reproduced above), in these words: For the purpose of computation of profits and gains of business and profession, Income-tax Act define the word "paid" to mean "actually paid or incurred" according to the method of accounting on the basis of which the profits or gains are computed. 10.2 It is evident from above that "actually paid" is treated as equal to "incurred" i.e. incurring of a liability, according to method of accounting followed by the assessee for computing profits of business. It is further well known that under cash system, deduction is allowed when sum is "actually paid" whereas under mercantile system, it is allowed when liability is "incurred". It is clear from above discussion that mercantile system of accounting did not work well in respect of items, more particularly in respect of statutory liabilities and was abused. Therefore, provision of section 43B was introduced to check above abuse. The Scheme is that deduction would not be allowed on incurring of liability where mercantile system is followed but "shall be" allowed in the year in which th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....umar Das [1912] 84 ITR 351 (Orissa), (e) B.M. Kamdar, In re [1946] 14 ITR 10 (Bom.)(FB), (f) CIT v. E.A.E. T. Sundararaj [1975] 99 ITR 226 (Mad.), (g) CIT v. Amalgamated Development Ltd. [1967] 65 ITR 395 (SC). 12. Having seen that under cash system of accounting, the deduction is allowed only in the year of disbursement, we now proceed to consider the arguments of the revenue and first submission was that the assessee must show that amount actually paid is a deduction "otherwise allowable under the Act". In other words the assessee must show that it is a liability which is deductible. Only in such circumstances, where amount is shown as payable and is actually paid in respect of taxes, duties etc. the deduction can be allowed under section 43B. 13. We do not find any substance in the above submission. We have already noted the relevant observations from the case of Lakhanpal National Ltd., how under cash system of accounting, the deduction is allowed when amount is actually paid. It is not necessary that assessee must prove incurring of a specific liability under any Statute referred to in different clauses of section 43B. It must be an expenditure....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hardship to those taxpayers who had paid sales tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales tax had in fact been paid by the assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from. claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence, the first proviso was inserted in section 43B. The amendment which was made by the Finance Act of 1987 in section 43B by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provisions unworkable or unjust in a specific situation." The proviso is an exception to the general rule and has a limited application. If the amount is paid before the due date of f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....trong reliance on Explanation 2 to section 43B. The said Explanation was added to deal with a specific situation. The situation had arisen on account of the decision of the Hon'ble Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. wherein it was held as under: "In order to apply the provisions of section 43B, not only should be liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. Section 43B itself is clear to this extent. It refers to the "sum payable" in clauses (a) and (b). The amendment with effect from April 1, 1988, permitting the deduction of taxes and duties paid before the filing of income-tax returns makes this clear. Where writ petitions were filed against the disallowance of (i) market cess and (ii) disallowance of sales tax payable for the month of March, 1984, under section 43B. Held, (i) that the sales tax payable for the month of March, 1984, could not be disallowed under section 43B." 17. Above decision, according to CBDT, was contrary to intention of the Legislature. It was defeating very purpose of the section. Therefore to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich the assessee incurred liability in the previous year even though such sum might not have been payable within that previous year- Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him." [Portion (a) is going in different direction than the main section and it is not possible to reconcile them.] The very purpose of section 43B as discussed earlier, is to allow the deduction in the assessment year relevant to the previous year in which the amount is actually paid. Even Departmental Representative has not disputed that liability should be shown to have been incurred earlier than actual payment not necessarily in the same previous year. If Explanation 2 is read literally, it can lead to absurd results and hardships and in some case might become unworkable. It will therefore, be most reasonable to read Explanation 2 as governing a particular situation arising on account of the view taken by High Courts, as discussed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of the previous year in which such sum is actually paid by him." The aforesaid provision emphasizes the following points: (i) That deduction of sums covered by clauses (a) to (f) shall be allowed in computing income under section 28 of the previous year in which such sum is actually paid. (ii) This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to method of accounting regularly employed by him. There is therefore no justification to examine the previous year in which liability to pay the sum was incurred when mandate is "irrespective of the previous year in which liability was incurred" and claim is to be allowed on the basis of actual payment. To do otherwise would be to do violence to words "irrespective of the previous year" in which liability was incurred and disregard the mandate of the section. 19. In our considered opinion, only way to harmonise different parts of section 43B which according to the Supreme Court is not happily worded is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r which leads to absurdity, confusion or friction, contradiction and conflict between its various provisions, or undermines, or tends to defeat or destroy the basic scheme and purpose of the enactment. These canons of construction apply to the interpretation of our Constitution with greater force, because the Constitution is a living, integrated organism, having a soul and consciousness of its own. The pulse beats emanating from the spinal cord of its basic framework can be felt all over its body, even in the extremities of its limbs." 19.4 In the case of Smt. Laxmi Devi v. Sethani Mukand Kanwar AIR 1965 SC 934, the dispute was whether transfer in favour of an auction purchaser for a consideration without notice of charge was protected under second part of section 100 of Transfer of Property Act. It was held that in the light of provisions of section 2(d) of Transfer of Property Act, providing that nothing herein contained shall be deemed to affect save as otherwise provided by section 57 and Chapter IV of this Act, Auction purchase is "transfer" by operation of law or by any execution of a decree or order of a Court of competent jurisdiction. However, section 5 of the Transfer ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oid payment of income-tax. This contention can hardly be appreciated. We have not come across any case where device of payment of taxes, duties and cess was adopted to avoid payment of income-tax. Such device is neither practical nor possible. This can be illustrated with an example. 21.1 The income of the assessee is Rs. 1 crore and he is liable to pay tax @ 35% on total income. The assessee pays Rs. 1 lakh as excise duty to reduce its total income which thereafter is worked out at Rs. 99 lakhs. Now what the assessee has saved is 3596 of Rs. 1 lakh i.e. Rs. 35,000 after selling out Rs. 1 lakh. How assessee is benefited by payment of duty or tax? Therefore, the contention that payment of taxes, cess etc. can be adopted as a device, is required to be stated to be rejected. 22. The assessee is maintaining current account and is making payment as per statutory provision of rule 173G of Excise Rule read with section 37(ib) of Central Excise Act. It is a payment made as per requirement of the Statute and, therefore, we do not see how such a payment can be disallowed. In case payment made is refunded for any reason, the same can be brought to tax in accordance with provisions of se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tutory requirement to make deposit in the current account first and thereafter clear the goods. The Excise Department does not insist on adjustment of each clearance of goods with each deposit. The assessee has merely to show that aggregate amount of duty payable on goods taken out (cleared) is less than total amount credited in the current account and there is sufficient balance in the account. It is submitted that even for income-tax purposes, adjustment of entry to entry be not made as some goods for which duty was paid last year, were cleared in the period under consideration. Otherwise the entire claim relating to excise duty will have to be rewritten, resulting in lot of wastage of time and energy. Therefore, claim of deduction is pressed on account of actual duty paid in the relevant period in a bona fide manner. Above claim was not considered by the Assessing Officer. The CIT (Appeals) allowed entire claim and, therefore, did not go into the question of accrual of the liabilities qua the claim. But details would have to be examined and reworked if the stand of the Revenue is ultimately to prevail. We hold accordingly. For all the above reasons, question No.1 is answer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ucted at the source or paid in advance, where it is so deductible or payable under any provision of this Act." As is seen from section 4 quoted above, income-tax is a tax in respect of total income of the previous year of every person. 'Person' is defined under section 2(31) of the Act as under: "2. In this Act, unless the context otherwise requires,- (31) "person" includes- (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. Explanation.-For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;" Section 14 of the Act gives the heads of income which reads as under: "14....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are certain exceptions provided under section 145 when the Assessing Officer can reject the method of accounting or the book results reference to which at this stage is not relevant for the purpose of the controversy involved before us. When section 29 is read in conjunction with section 145, it becomes abundantly clear that whereas the income chargeable under the head "Profits and gains of business or profession" is to be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee, the same is subject to modification as provided under the provisions of sections 30 to 43D of the Act. Section 43B regulates the allowance of deduction in respect of certain items specified thereunder. Section 43B is reproduced hereunder: "43B. Certain deductions to be only on actual payment.-Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been payable within that year under the relevant law. Explanation 3.-For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3A.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996 or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hashikant Laxman Kale v. Union of India [1990] 185 ITR 104, Their Lordships of the Hon'ble Supreme Court held that it is permissible to look into the statement of objects and reasons of the bill for the limited purpose of appreciating the background and the antecedents and the factual matrix leading to the legislation. The Hon'ble Supreme Court in the case of Hemalatha Gargya v. CIT [2003] 259 ITR 1 held that speech of the Finance Minister while introducing the Bill can be relied upon to ascertain the intention behind the enactment. 7. The following passage from the decision of the Hon'ble Supreme Court in the case of RBI v. Pearless General Finance & Investment Co. Ltd. [1987] 61 Compo Cas. 663, 692, sums up the principle as under: "Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1983, has inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee. 35.4 The section also contains an Explanation for the removal of doubts. The Explanation provides that where a deduction in respect of any sum aforesaid is allowed in computing the income of any previous year, being a previous year relevant to the assessment year 1983-84, or any earlier assessment year in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under section 43B in respect of such sum on the ground that the sum has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a liability on account of tax o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce of the payment for the last quarter. 15.2 Certain courts have interpreted the provision of section 43B in a manner which may negate the very operation of this section. The interpretation given by these courts, revolves around the use of the words "any sum payable". The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Thus, the sales tax in respect of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and; therefore, by way of inserting and Explanation it has been clarified that the words "any sum payable" shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable." Finance Act, 1990 made yet another amendment in section 43B by virtue of which clause (d) of section 43B was amended. The said amendment is also not relevant for the purpose of the present controversy. 9. The Hon'ble Suprem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the date when section 43B became a part of the Income-tax Act, 1961 as it is intended to obviate unexpected hardships in the application of section 43B. To understand the circumstances in which section 43B came to be inserted in the Income-tax Act and the mischief which it sought to prevent, it is necessary to look at the memorandum explaining the provisions in the Finance Bill of 1983: "59. Under the Income-tax Act, profits and gains of business and profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting income and outgo are accounted for on the basis of accrual and not on the basis of actual disbursements or receipts. For the purposes of computation of profits and gains of business and profession, the Income-tax Act defines the word 'paid' to mean 'actually paid or incurred' according to the method of accounting on the basis of which the profits or gains are computed. 60. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....endment which was made by the Finance Act of 1987 in section 43B by inserting, inter alia, the first proviso, as remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation. Looking to the curative nature of the amendment made by the Finance Act of 1987, it has been submitted before us that the proviso which is inserted by the amending Finance Act of 1987, should be given retrospective effect and be read as forming a part of section 43B from its inception. This submission has taken support from decisions of a number of High Courts before whom this question came up for consideration. The High Courts of Calcutta, Gujarat, Karnataka, Orissa, Gauhati, Rajasthan, Andhra Pradesh, Patna and Kerala appear to have taken the view that the proviso must be given retrospective effect. Some of these High Courts have held that "sum payable" under section 43B(a) refers only to the sum payable in the same accounting year, thus excluding sales tax payable in the next accounting year from the ambit of section 43B(a). The Delhi High Court has taken a contrary view holding t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e effect of a non obstante clause in the provision of the Act. In the case of Woodward Governor India (P.) Ltd. v. CIT [2002] 253 ITR 745, Hon'ble Delhi High Court held that a clause beginning with "notwithstanding anything" is sometimes appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non obstante clause. Their Lordships further held that the true effect of a non obstante clause is that in spite of the provision or Act mentioned therein, the enactment following it will have full operation or that the provisions embraced in the non obstante clause will not be an impediment for the operation of the enactment. In the case of Bharat Hari Singhania v. CWT [1994] 207 ITR 1 (SC), the Hon'ble Supreme Court held that the scope and purport of a non obstante clause has to be ascertained by reading it in the context of the provisions and consistent with the scheme of the enactment. 11. With the above principle of law in mind, I continue to consider the language of section 43B which starts with the non obstante clause. It reads, "Notwithstanding anyth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ear in which such sum is actually paid by him. Section 43B mandates that deduction is permissible to the assessee in respect of "any sum payable" by the assessee by way of tax, duty, etc. in the previous year in which such sum is actually paid by him irrespective of the previous year in which the liability is incurred. 12. The contention advanced on behalf of the assessee before us is that section 43B provides for deduction of any sum referred to in various clauses of the Act to be deductible in the year of payment and that it is not necessary that such payment made should be towards the liability accrued under the mercantile system of accounting in any previous year. On the other hand, the stand of the department is that the incurring of the liability prior to payment is sine qua non for allowance of deduction under section 43B. In my considered view, the contentions advanced on behalf of both the parties on true interpretation of section 43B appear to be only partially correct. I have elsewhere reproduced the object and purpose behind incorporation of section 43B. It is seen that section 43B was incorporated to curb the general tendency of claiming deduction in respect of s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y for allowance of deduction in the year of payment is also not well founded. In my considered view, section 43B has got to be understood in the light of the legislative intent and the object enactment to give the true meaning of the words used in the section. Section 43B refers to a deduction otherwise allowable under the Act in respect of "any sum payable" by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force. So the subject-matter of deduction under section 43B is a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax etc. What is the meaning of "any sum payable" by the assessee by way of tax etc. was subject-matter of consideration before the Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. Their Lordships of the Andhra Pradesh High Court in that case held that section 43B would be attracted only in case of such deductions in respect of which assessee has incurred the liability in the previous year and were also payable under the relevant statute in the same year. Their Lordships further held that section 43B would be inapplicable in such cases wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ITR 77 (Kar.) and in the case of CIT v. Maschmeijer Aromatics (India) (P.) Ltd. [1995] 214 ITR 22 (Mad.), held that an Explanation is intended to either explain the meaning of certain phrases and expressions contained in a statutory provision or depending upon its language it might supply or take away something from the content of a provision. Their Lordships of Supreme Court in the case of CAIT v. Plantation Corpn. of Kerala Ltd. [2001] 247 ITR 155, held that an Explanation at times is added by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt. Their Lordships of the Supreme Court in the case of Dilip N. Shroft v. Jt. CIT [2007] 291 ITR 519 defined the object of an Explanation to a statutory provision as under:- "The object of an Explanation to a statutory provision is: (a) to explain the meaning and intendment of the Act itself; (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide additional support to the domi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the payment of the said duty is not made and, therefore, it is not allowed.This judgment, as pointed out earlier, has been followed by the Bombay High Court in the case of Bharat Petroleum Corpn. Ltd., and the Madras High Court in the case of Chemicals and Plastics India Ltd. and the Hon'ble Supreme Court in the case of Berger Paints India Ltd., has approved the above three judgments. 13. When the language of section 43B is read in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd., it becomes abundantly clear that deduction in respect of any tax etc. under section 43B is permissible in the year of payment in respect of the liability incurred by the assessee in any previous year. In my view, the allowance of deduction in respect of advance payment of tax, etc. without accrual of liability is not contemplated under section 43B. In the case before us, the assessee had made the payment in advance in PLA and RG (Accounts Register prescribed by Central Excise Rules) A/c to be adjusted against any future liability that may accrue to the assessee on the manufacture/removal of goods. It is not disputed that the amount paid in advance has bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....incurred in the subsequent assessment year, the deduction is permissible to the assessee in, the year of payment which in this case precedes the incurring of the liability. 14. A question may arise as to how the assessee can claim deduction pertaining to the previous year when the liability towards the excise duty is incurred in the subsequent assessment year? In my considered view, there is a mechanism provided under the said section 43B for claiming deduction. The assessee maintains books of account on mercantile system of accounting. Section 43B does not oblige the assessee to change the system of accounting regularly followed by him. On the other hand, section 43B mandates the adjustment at the time of filing of the return. As pointed out earlier, section 145 of the Act makes it obligatory upon the Assessing Officer to compute the profits and gains of business in accordance with the method of accounting regularly employed by the assessee unless the case falls under the exceptions provided thereunder. So, however, certain adjustments as provided under sections 30 to.43 D are to be made in the computation sheet to be attached with the return of income after making adjustments ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or example, in case of last quarter of sales tax liability, the liability accruing upto ending March of the previous year is generally payable within next month that would fall in the subsequent year. But for the above proviso, the assessee would get a deduction as per the provision of section 43B in the subsequent year and not in the previous year notwithstanding the fact that there was no default on the part of the assessee. The liability had been incurred in the previous year and the payment had been made by the assessee within the stipulated time under the statute. If section 43B were to operate without the aforementioned proviso inserted with effect from 1-4-1988 and held to be applicable retrospectively by the Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd., then the assessee would be deprived of the deduction in the previous year. Such was not the intention of the Legislature and that is why a proviso was inserted to obviate the unintended hardship faced by the taxpayers. The above proviso also supports the view that subject-matter for deduction under section 43B is accrued liability and the payment is the condition for deduction. 16. In the present case,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at extent has accrued in any previous year. Once the advance payment is adjusted against the accrued liability in any previous year, one of the conditions required to be satisfied under section 43B that deduction should be otherwise allowable under the Act in any previous year stands satisfied. The second condition to be satisfied for allowance of deduction under section 43B of actual payment is also satisfied. Though the condition of accrual of liability is satisfied in the subsequent previous year of the year of payment. Section 43B mandates that deduction would be permissible to the assessee, subject to the above two conditions being satisfied in the year of payment. In this case, mere payment of excise duty in advance would not be permissible as a deduction unless the amount is adjusted towards the liability incurred in any previous year not necessarily the year of payment (section 43B provides - irrespective of the previous year in which the liability is incurred). Once the liability has been incurred even in the subsequent assessment year, deduction is permissible to the assessee in the year of payment. 18. It is also pertinent to mention that the payment made by the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....so not expected. The contention of the assessee before the Tribunal was that as there was no loss of revenue, the demand raised against it to make the credit in PLA be set aside. The Tribunal held that the prayer of the assessee was not acceptable. It was held that Rule 173G(1A) provides that where any amount is to be withdrawn from the PLA account, then the assessee has to make an application to the Commissioner and only by obtaining permission from him, the said amount can be withdrawn. The Tribunal rejected the prayer of the assessee. In my view, the said decision of the CEGAT does not advance the case of the assessee that the amount paid in advance in PLA a/c is irretrievable. The Tribunal has explained that the assessee has to seek permission for transfer of the account from PLA. In my view, the mere fact that permission is required to be obtained from the concerned authorities for adjustment or refund or any advance payment of excise duty which is no longer required to be kept in the account does not support the contention of the assessee that the said advance is irretrievable and has got to be considered to be the payment towards the accrued liability. 20. It is pertinent....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the previous year in which sum is actually paid" cannot be stretched to be read as "on the basis of cash system of accounting". 22. It may also be pointed out that the definition of word 'paid' under section 43 is also not relevant for interpretation of section 43B. Firstly, the definition under section 43(2) of the word 'paid' is made applicable to sections 28 to 41 and section 43. The Legislature in its wisdom has consciously excluded section 43B from the applicability of the definition under section 43(2). Section 43(2) reads as under :- "Section 43 : In sections 28 to 41 and this section, unless the context otherwise requires.- (2) 'Paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits and gains are computed under the head 'Profits and gains of business and profession'." It is thus evident from the language of section 43(2) that the definition of "paid" has no role in interpretation of section 43B. I am conscious of the fact that in the memorandum explaining the provisions in the Finance Bill, 1983 with reference to section 43B, reference has been made to the defin....