2014 (2) TMI 1079 - HC - Income Tax

Deduction u/s 43B of the Act Basis of valuation Held that - The claim was made on the basis of a valuation which was disputed by the assessee - it was a factual dispute which needed adjudication - Once the claim was adjudicated, the assessee had the option to prefer an appeal, but before the time to prefer an appeal ran out the assessee chose to put an end to the controversy and paid the amount adjudicated and correspondingly claimed deduction The decision in CIT vs. Orient Supply Syndicate 1981 (2) TMI 33 - CALCUTTA High Court followed - the Division Bench took the view that the question whether the liability of the earlier years discharged subsequently can be allowed to be deducted is a question which would depend on the facts and circumstances of the case and the statutory provisions - the payment was made after adjudication and not during the relevant year - even before introduction of Section 43B, it could not have been said that in all cases the assessee, maintaining books of accounts in a mercantile system, could not be permitted to deduct the amount paid in respect of liability which was incurred in the earlier years Decided in favour of Assessee.

Summary

Issues:
1. Interpretation of Section 43B for allowing deductions.
2. Disputed excise duty payment and deduction claim.
3. Application of mercantile system of accounting for deduction eligibility.

Interpretation of Section 43B for allowing deductions:
The appeal challenged a Tribunal order allowing the Revenue's appeal regarding the deduction of excise duty not provided in the books of accounts for the relevant assessment year. The Tribunal held that Section 43B does not act as a gateway for allowing deductions for expenses not accounted for in earlier years. The appellant argued that the payment was made after the introduction of Section 43B, emphasizing a Division Bench judgment supporting the deduction claim. The Revenue contended that the Division Bench judgment did not favor the appellant, citing judgments from the Madras and Kerala High Courts. The High Court analyzed the facts and statutory provisions, concluding that the Tribunal erred in disallowing the deduction claimed by the assessee. The High Court upheld the deduction claim based on the circumstances and statutory interpretation, setting aside the Tribunal's order.

Disputed excise duty payment and deduction claim:
The case involved a disputed excise duty payment made by the assessee after adjudication, leading to a deduction claim during the assessment year. The appellant argued that the payment was made following adjudication and within the statutory framework, justifying the deduction claim. The High Court distinguished the case from previous judgments by highlighting the factual disputes and the timing of payment in relation to the appeal period. The Court emphasized the importance of factual circumstances and statutory provisions in determining the eligibility of deductions for past liabilities discharged subsequently. Ultimately, the High Court allowed the appeal in favor of the assessee, setting aside the Tribunal's decision and restoring the order of the CIT (Appeal).

Application of mercantile system of accounting for deduction eligibility:
The dispute also involved the application of the mercantile system of accounting in claiming deductions for liabilities incurred in earlier years. The Revenue relied on judgments affirming the principle that liabilities of past years cannot be considered for computing income in subsequent years under the mercantile system. The High Court analyzed the precedents cited by the Revenue and distinguished the case at hand, emphasizing the factual disputes and the timing of payment in relation to the adjudication process. The Court highlighted the need to consider facts, circumstances, and statutory provisions in determining the eligibility of deductions under the mercantile system. Ultimately, the High Court allowed the appeal, emphasizing the specific circumstances of the case and statutory interpretation in favor of the assessee.