2007 (7) TMI 334 - AT - Income Tax

Interpretation of Section 43B - Allowance of deduction for tax, duty on payment basis before incurring liability - Treatment of Modvat Credit u/s 43B - mercantile system of accounting - manufacture and sale of food and Healthcare products - Difference of opinion between learned members - Whether deduction for tax, duty etc. is allowed on payment basis without incurring of prior liability to pay such amount u/s 43B of the Act ? - Whether Modvat Credit available to an assessee as on the last day of the previous year amounts to payment of Central Excise duty u/s 43B ? Per Dr. O.K. Narayanan, Accountant Member - 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. 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. 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 duty u/s 43B. The second question is answered in negative and against the assessee. The only two issues raised by the Revenue in this appeal are the questions considered and answered by us. Regarding the first issue of advance payment of excise duty, we hold against the Revenue and accordingly uphold the order of the CIT(A) in directing the Assessing Officer to deduct such advance payment u/s 43B. Regarding the second question of unexpired Modvat Credit, we held that the assessee is not entitled for claiming the same as deduction u/s 43B. Accordingly the order of the CIT(A) on the issue of unexpired Modvat Credit is set aside and the disallowance if any made by the Assessing authority is restored. In result, this appeal filed by the Revenue is treated as partly allowed. Per Vimal Gandhi, President - In the light of clear object of section 43B, found from its heading, its language, the mischief it sought to cover and various decisions of Courts, it has to be held that deduction in respect of statutory payment is to be allowed in the previous year in which the amount is actually paid. The section itself commands that actual discharge of liability is to be insisted upon irrespective of the previous year in which the liability to pay was incurred. It would be acting contrary to the purpose and spirit of section if we start examining the question as to in which previous year liability to pay was incurred. Therefore, in our considered opinion, section 43B allows deductions as are allowable in case of cash system of accounting and there is no need to establish incurring of the liability to pay the amount in question. 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 section 41(1) of the I.T. Act. However, if deduction is not allowed to the assessee, in the assessment year relevant to the previous year in which the amount is actually paid, the assessee would not be entitled to get deduction in any subsequent year on account of section 43B. Therefore, interpretation placed by the Revenue on provision of section 43B cannot be accepted for reasons given above. 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 answered in favour of the assessee. Per M.A. Bakshi, Vice President - HELD THAT - It is pertinent to mention that under the Central Excise Act, 1944 (1 of 1944), the liability towards excise duty accrues on manufacture of goods and the same is payable on removal of goods. Section 3 of the Central Excise Act, 1944 provides that(1) There shall be levied and collected in such manner as may be prescribed,-(a) a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods excluding goods produced or manufactured in special economic zones, which are produced or manufactured in India as and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986). Section 4 of the said Act provides for valuation of excisable goods for purposes of charging of duty of excise. It is, therefore, evident that unless goods are manufactured by the assessee, the liability to pay excise duty is not incurred. The mere fact that under the Excise Rules, an assessee is required to keep sufficient money in advance in PLA a/c to meet the liability towards the payment of excise duty on removal of goods does not justify the inference that such an advance takes the colour of accrued liability. It has earlier been mentioned that the mere fact that assessee cannot withdraw the advance payment of excise duty in PLA a/c without the permission of the excise authority also does not convert the advance kept by the assessee in PLA a/c into the accrued liability towards excise duty. In my considered view, there is also no merit in the contention advanced on behalf of the assessee that section 43B mandates deduction in respect of certain liabilities on the basis of cash system of accounting. If the Legislature intended so, it would have provided for the same in the statute. The words in section 43B in the previous year in which such sum is actually paid by him cannot be read to mean that deduction shall be allowed to the assessee on cash system of accounting. Hon'ble Supreme Court in the case of Grasim Industries Ltd. held that in interpreting a statute we should not concentrate too much on one word and pay too little attention to other words. No provision in the statute and no word in any section can be construed in isolation. Every statute is edict of Legislature. When words are clear, there is no scope for the court to take upon itself the task of amending or altering a statutory provision. Thus, in my view, the words in the previous year in which sum is actually paid cannot be stretched to be read as on the basis of cash system of accounting . 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 definition of word paid u/s 43. So, however, it merely explains the reasons for incorporation of section 43B because of the definition and it does not enlarge the scope of definition to be applicable to section 43B. In my considered view, the answer to the above questions on the basis of analysis and reasoning is as under - A. (1) Section 43B is not an enabling provision but a regulatory provision in regard to certain deductions specified therein. (ii) Existence of liability in any previous year either preceding or subsequent to the date of payment is the condition precedent for allowance of deduction u/s 43B. (iii) When the payment is made in advance of incurring liability, the deduction would be permissible in the year of payment only after the amount is adjusted against the liability incurred by the assessee. The deduction for tax, duty etc. is not allowable u/s 43B of the Income-tax Act, 1961 merely on payment basis before incurring the liability. The assessee would be entitled to deduction in the year of payment after incurring liability in any previous year. (2) The Modvat Credit available to the assessee as on the last day of the previous year does not amount to payment of Central Excise Duty u/s 43B. I hold accordingly.

Summary

Issues Involved:
1. Whether deduction for tax, duty, etc., is allowable u/s 43B of the Income-tax Act, 1961, on payment basis before incurring the liability to pay such amounts?
2. Whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise duty u/s 43B?

Summary:

Issue 1: Deduction for Tax, Duty, etc., on Payment Basis Before Incurring Liability
- The appeal concerns the assessment year 2001-02, where the assessee claimed a deduction of Rs. 1,03,48,071 as excise duty payments u/s 43B, arguing that the balance in the PLA and RG-23 accounts represents payment made to excise authorities.
- The Assessing Authority disallowed the deduction, which was upheld by the CIT(A) based on earlier appellate orders.
- The Tribunal noted divergent views among various benches and constituted a Special Bench to decide whether deduction for tax, duty, etc., is allowable on payment basis without incurring prior liability.
- The Special Bench, after considering arguments and various judicial precedents, held that the deduction for tax, duty, etc., is allowable u/s 43B on payment basis before incurring the liability to pay such amounts.
- The Tribunal emphasized that section 43B mandates deduction on actual payment of the liability, irrespective of the previous year in which the liability was incurred, aligning with the legislative intent to curb practices of claiming deductions without actual payments.

Issue 2: Modvat Credit as Payment of Central Excise Duty
- The assessee argued that Modvat Credit available at the year-end should be treated as equivalent to the payment of Central Excise duty.
- The Tribunal held that unexpired Modvat Credit does not amount to actual payment of excise duty u/s 43B. The credit becomes equivalent to payment only when set off against the liability.
- The Tribunal concluded that Modvat Credit available as on the last day of the previous year does not amount to payment of Central Excise duty u/s 43B.

Conclusion:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction for advance payment of excise duty u/s 43B.
- The Tribunal set aside the CIT(A)'s decision regarding Modvat Credit, restoring the disallowance made by the Assessing Authority.
- The appeal filed by the Revenue was partly allowed, affirming the deduction for advance payment of excise duty but denying the deduction for unexpired Modvat Credit.