2003 (11) TMI 302 - AT - Income Tax

Pre-condition for the grant of permits for import of the liquor - countervailing duty - Business Disallowance - Whether, the excise duty paid in advance for import of the goods can be allowed as a deduction u/s 43B, the goods have not been received during the year ? - HELD THAT - From the record, it is clear that what is allowed is only levies like property tax for which there is a demand. Such levies, though the represent prepaid expenses in the books, are held to be allowable. Whereas levies referable to the stock in trade like the excise duty are clearly not held allowable. It was also mentioned that, if the prepaid excise duty is allowed as an expenditure, there should be a revaluation of the closing stock, which would off-set the deduction and the net result would be the same. In other words, it has been clearly held by the Special Bench in the said decision that excise duty referable to the stock in trade is allowable only to the extent warranted by what is called matching principle in mercantile system of accounting, to which we have referred to hereinabove. We are of the opinion that the view taken by the Special Bench in KCP Ltd.'s case is clearly supported by the decision of the Apex Court in the case of British Paints India Ltd. In the present case, the countervailing excise duty had only been reflected as prepaid expenses. To our mind, it has correctly been so reflected. It has been so reflected correctly and does not require any adjustment in the computation of income. The adjustment claimed by way of a deduction for the prepaid taxes is out of the apprehension that it cannot be allowed in subsequent year because of the provisions of section 43B. That apprehension, to our mind, seems to be misplaced because the scope of section 43B is to disallow deduction for an otherwise allowable liability on the ground of non-payment, but when the payment had already been made and the payment is transferred to the trading account in the next year, it becomes allowable as part of cost of goods sold, and no separate deduction is called for. It is not for us at this stage to give any direction as to what should happen in the subsequent year. However, the amount of Rs. 25,36,671 disallowed in the first year deserves to be taken to the assessment year 1991-92 as part of the cost of the goods sold in that year. We hope that a similar treatment would be given for the amount of Rs. 58,44,632 involved in the second year, viz;, assessment year 1991-92 in its succeeding year. For the above reasons, we answer the question referred to us in the negative and in favour of the Revenue and hold that the excise duty paid in advance cannot be allowed as a deduction u/s 43B because the goods have not been received during the year.

Issues Involved:
1. Whether countervailing duty is different from excise duty.
2. Whether the duty is paid by the appellant for importing goods or on behalf of the principal manufacturer.
3. Whether it is a statutory obligation or a component of the purchase price.
4. When the liability for countervailing duty crystallizes.
5. Applicability of section 43B to the present facts.

Summary:

Issue 1: Whether countervailing duty is different from excise duty
The CIT(A) concluded that countervailing duty is distinct from excise duty and is borne by the purchaser inside the State rather than the manufacturer outside the State. This was based on the purpose of countervailing duty, which is to keep the price of products manufactured outside the State competitive with those manufactured inside the State.

Issue 2: Whether the duty is paid by the appellant for importing goods or on behalf of the principal manufacturer
The CIT(A) determined that the countervailing duty is paid by the purchaser himself and not on behalf of the manufacturer. This was supported by the fact that the wholesaler who procures products from both local and outside manufacturers has to pay the duty to ensure price parity.

Issue 3: Whether it is a statutory obligation or a component of the purchase price
The CIT(A) observed that while countervailing duty forms a component of the purchase price, it is a statutory obligation that should be allowed when incurred, independent of the purchase price. This was supported by the Supreme Court decision in CIT v. Maharashtra Sugar Mills Ltd [1971] 82 ITR 452.

Issue 4: When the liability for countervailing duty crystallizes
The CIT(A) held that the liability crystallizes at the time of applying for the permit and making the payment, not at the time of receipt of goods. This is because the payment is a statutory liability required for the import permit, independent of the actual purchase.

Issue 5: Applicability of section 43B to the present facts
The CIT(A) concluded that the deduction for countervailing duty is allowable under section 37 read with section 43B, as it is a statutory obligation paid during the year of account. The CIT(A) directed the assessing officer to allow the claim for the respective years.

Tribunal's Decision:
The Tribunal, however, disagreed with the CIT(A) and held that the excise duty paid in advance cannot be allowed as a deduction u/s 43B because the goods were not received during the year. The Tribunal emphasized that section 43B is not a permissive section for granting deductions but a prohibitory section to disallow deductions for unpaid liabilities. The Tribunal also noted that excise duty is a business expense directly related to the acquisition of stock-in-trade and should be allowed as a deduction only in the year in which the related stock is received and reflected in the trading account. The Tribunal's decision was influenced by the jurisdictional High Court's ruling in Gopi Krishna Granites India Ltd. v. Dy. CIT [2001] 251 ITR 337 (AP), which emphasized that a deduction under section 43B can only be allowed when the liability for the payment has accrued in the relevant previous year.

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