2011 (7) TMI 34 - HC - Income Tax

Disallowance u/s 43B - Loss from speculation business - The object of the legislature is to give the benefit of deduction of tax, duty, etc. only on payment of such amount liability of which the assessee had incurred and not otherwise - It was never the intention of the legislature to deprive an assessee of the benefit of deduction of tax, duty etc. actually paid by him during the previous year, although in advance, according to the method of accounting followed by him - Held that Tribunal below committed substantial error of law in denying the benefit of Section 43B (a) of the Act to the appellant only on the ground that the tax was paid in advance in accordance with the mercantile system of accounting - Decided in favour of the assessee and directing the Assessing Officer to give benefit of the provision of Section 43B (a) of the Act in respect of the amount of Rs. 322.46 lakh paid by the assessee

Issues Involved:

1. Deduction of excise duty under Section 43B of the Income Tax Act, 1961.
2. Interpretation of the explanation to Section 73 of the Income Tax Act.
3. Applicability of Section 43(5) of the Income Tax Act to transactions involving the purchase and sale of shares.
4. Treatment of loss from the decrease in the value of shares held as stock in trade under the explanation to Section 73 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deduction of Excise Duty under Section 43B of the Income Tax Act, 1961:

The appellant, a public limited company, paid Rs. 322.46 lakh on account of excise duty during the previous year relevant to the Assessment Year (AY) 1996-97. This payment was made for a liability incurred in the previous year relevant to AY 1997-98. The appellant claimed a deduction for this amount under Section 43B of the Act.

The Assessing Officer disallowed this deduction on the grounds that the liability was not incurred during the relevant previous year. The Commissioner of Income-tax (Appeals) allowed the deduction, but the Income-tax Appellate Tribunal reversed this decision, leading to the present appeal.

The court examined Section 43B, which allows deductions only on actual payment, irrespective of the year in which the liability was incurred. Explanation 2 to Section 43B clarifies that "any sum payable" means a sum for which the liability was incurred in the previous year, even if not payable within that year.

The court found that the appellant had paid the duty in the previous year and incurred the liability in that year, satisfying the conditions of Section 43B(a) and Explanation 2. The court emphasized that the legislative intent was to allow deductions based on actual payment, even if the payment was made in advance under the mercantile system of accounting.

The court referenced the Supreme Court case of Allied Motor (P) Ltd vs. Commissioner of Income Tax and departmental Circular No. 550 to support its interpretation. The court concluded that denying the deduction would be contrary to the legislative intent and would result in an absurd outcome.

The court held that the Tribunal erred in denying the deduction and directed the Assessing Officer to allow the deduction of Rs. 322.46 lakh under Section 43B(a) of the Act.

2. Interpretation of the Explanation to Section 73 of the Income Tax Act:

The appellant did not press this issue, as it was covered by a previous decision of the Division Bench of the same court in the case of Paharpur Cooling Tower Ltd. vs. CIT, IV, Calcutta. Consequently, this issue was answered against the appellant.

3. Applicability of Section 43(5) of the Income Tax Act to Transactions Involving the Purchase and Sale of Shares:

Similar to the second issue, the appellant did not press this issue, as it was also covered by the same previous decision. Therefore, this issue was answered against the appellant.

4. Treatment of Loss from the Decrease in the Value of Shares Held as Stock in Trade under the Explanation to Section 73 of the Income Tax Act:

The appellant did not press this issue either, as it was covered by the same previous decision. Consequently, this issue was answered against the appellant.

Conclusion:

The court allowed the appeal on the first issue, directing the Assessing Officer to allow the deduction of Rs. 322.46 lakh under Section 43B(a) of the Act. The other issues were not pressed by the appellant and were answered against them based on a previous decision. No order as to costs was made.

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