2014 (5) TMI 518 - HC - Income Tax

Deduction under Section-43B of the Act - Provision for interest as it is a fictional liability Held that - The assessee has exported the spirit and I.M.F.L. to Delhi from U.P. - The duty is chargeable on the transactions but no excise duty was paid - the assessee has neither paid the duty nor interest, but enjoyed the deduction of Section 43B in the name of mercantile system of accounting - The AO has already allowed the deduction u/s 43B pertaining to the duty which has wrongly been done - the interest is nothing but an extended liability of the duty for the belated payment - It is compensatory in nature. The interest having accrued is a part of the main liability Relying upon Dinesh Mill Ltd. COMMISSIONER OF INCOME TAX Versus DINESH MILLS LIMITED 2008 (2) TMI 190 - GUJARAT HIGH COURT - the provision for the duty as well as for the interest is allowable u/s 43B only on the basis of actual payment and it is irrelevant that the assessee has followed the mercantile system of accounting - the object of Section 43B is to override to provision of mercantile system of accounting where the statutory liability was not actually discharged - The assessee is not entitled to claim the deduction u/s 43B pertaining to the interest payable during the AY Decided in favour of Revenue.

Summary

Issues Involved:
- Appeal under Section-260-A of the Income Tax Act against the judgment and order dated 16.01.2001 passed by the Income Tax Appellate Tribunal for the assessment year 1990-91.
- Allowance of deduction of Rs. 17,10,011/- on account of provision for interest as a fictional liability under Section-43B of the Income Tax Act.

Analysis:

1. Issue 1 - Appeal under Section-260-A:
The department filed an appeal challenging the Tribunal's decision to allow a deduction of Rs. 17,10,011/- for provision of interest under Section-43B of the Income Tax Act. The dispute arose from the assessee's failure to pay excise duty on exported goods, leading to a contention on the actual liability accrued during the assessment year. The department argued that the liability was contingent due to ongoing legal disputes, citing relevant case law to support its position. The assessee, on the other hand, defended the deduction based on previous Tribunal decisions and the nature of the liability. The High Court examined the facts and legal precedents, emphasizing the distinction between actual liability and contingent liability for deduction purposes.

2. Issue 2 - Allowance of Deduction for Provision of Interest:
The crux of the matter revolved around whether the provision for interest as part of the excise duty liability was allowable under Section-43B of the Income Tax Act. The department contended that actual payment, not mere provision, was necessary for deduction, citing specific legal provisions and court decisions. In contrast, the assessee argued that the provision for interest should be allowed as it was not a contingent liability and followed the mercantile system of accounting. The High Court analyzed various judgments and legal provisions related to the actual payment requirement under Section-43B, emphasizing the overriding nature of this provision over accounting methods. Ultimately, the Court ruled in favor of the department, disallowing the deduction for interest provision but allowing it upon actual payment in the future.

In conclusion, the High Court allowed the department's appeal, emphasizing the importance of actual payment for deductions under Section-43B and overriding the mercantile system of accounting when statutory liabilities are not discharged. The decision clarified the distinction between actual and contingent liabilities for deduction purposes, setting a precedent for similar cases in the future.