2021 (9) TMI 874 - HC - Income Tax

Sales tax set off as deduction u/s 43B - whether the set off or adjustment amounts to deemed payment? - as per appellant, the sales tax set off represents that part of the purchase tax paid by appellant on purchase of raw materials and packing materials, which is allowed to be retained by it as the materials purchased are consumed in the manufacture of finished goods which are again liable to sales tax - HELD THAT - Rule 41D of the Bombay Sales Tax Rules allowed incentive by way of exemption of sales tax to the extent of payment of sales tax on purchase of raw material used for the product. Rule 45(3) entitles the assessee to adjust or set off the amount in the return itself. It is a provision parallel to Sections 199 and 245 of the Income-tax Act creating a legal fiction. Therefore, this sum, which is subject to adjustment or set off, is a liability adjusted deeming actual payment by legal fiction. The Sales Tax Rules have allowed an incentive by way of adjustment of sales tax or in other words, the liability is being adjusted as actual payment. Section 43B of the Income-tax Act allows deduction on tax payable by the assessee. When the assessee purchases raw materials, it is liable to pay purchase tax on the purchase. An equivalent of this amount is adjusted towards the liability on the sale of the product produced out of the raw materials purchased. This adjustment, by legal fiction, is deemed to be an actual payment of the tax liability. Admittedly, this amount is a tax payable. If it is a tax liability on being set off or adjusted, deemed actual payment by legal fiction, it is deductible under Section 43B of the Act. Disallowance for sales tax set off was not correct - Question answered accordingly.

Summary

Issues:
1. Disallowance of sales tax set off under Section 43B of the Income Tax Act for Assessment Year 1988-89.
2. Interpretation of the term "actually paid" in Section 43B of the Act.
3. Admissibility of appeal and framing of questions of law by the court.
4. Legal fiction regarding deemed payment under Section 43B of the Act.

Analysis:

1. The appellant claimed a sales tax set off as a deduction under Section 43B of the Income Tax Act for the Assessment Year 1988-89. The Assessing Officer disallowed this claim, which was upheld by the CIT(A) and dismissed by ITAT. The appellant argued that the set off amount should be treated as paid tax liability. The court admitted the appeal, framing questions regarding the disallowance of the set off.

2. The key issue was whether the term "actually paid" in Section 43B includes amounts set off or adjusted. The respondent argued that since the amount was not physically paid, it did not qualify for deduction under Section 43B. The court had to determine the interpretation of this term in the context of the case.

3. The court admitted the appeal based on the substantial question of law involved. Despite the respondent's contention that the issue was not pressed before ITAT, the court proceeded to address the second question framed, indicating its inclination to provide a ruling on the matter.

4. Section 43B of the Act allows deductions for sums payable by the assessee, provided they are actually paid. The court held that the set off amount, though not physically paid, was deemed as paid due to the legal fiction created by the entitlement to set off. The court relied on a judgment from the Calcutta High Court to support its view that the adjustment or set off constitutes a deemed payment, making it eligible for deduction under Section 43B. The court concluded that the disallowance of the sales tax set off was incorrect for the Assessment Year 1988-89.

In conclusion, the court ruled in favor of the appellant, allowing the deduction for the sales tax set off under Section 43B of the Act for the specified assessment year. The appeal was disposed of with no order as to costs.