Navigating Section 43B: Supreme Court Decision on Unutilised MODVAT Credit and Sales Tax Recoverable

Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2020 (2) TMI 376 - Supreme Court

Introduction

The Supreme Court of India, in the case cited as MARUTI SUZUKI INDIA LTD. (EARLIER KNOWN AS MARUTI UDYOG LTD.) VERSUS COMMISSIONER OF INCOME TAX, DELHI - 2020 (2) TMI 376 - SUPREME COURT , addressed significant issues regarding the applicability of Section 43B of the Income Tax Act in relation to unutilised MODVAT credit and Sales Tax Recoverable Account. The case centered around the interpretation of Section 43B and whether unutilised MODVAT credit and sales tax could be allowed as deductions. This judgment provides clarity on the treatment of such credits and has far-reaching implications for businesses engaged in manufacturing and similar activities.

Arguments Presented

By Appellant- 

The appellant, a company engaged in the manufacturing of automobiles, contended that the unutilised MODVAT credit and the amount in the Sales Tax Recoverable Account for the assessment year 1999-2000 should be allowed as deductions under Section 43B of the Income Tax Act. The appellant argued that the payment of excise duty to suppliers of raw materials should be treated as a payment of excise duty qualifying for deduction under Section 43B.

 The appellant also cited the first proviso to Section 43B, claiming entitlement to the deduction as the MODVAT credit was utilized in the subsequent financial year before filing of return. 

By Respondent- 

The respondent, representing the Revenue, countered that deductions under Section 43B are allowable only when the amount of tax, cess, etc., is due and payable and actually paid by the assessee. 

They argued that the liability to pay excise duty arises only upon the removal of finished products from the factory, not when raw materials are procured.

 Therefore, unutilised MODVAT credit and amounts in the Sales Tax Recoverable Account do not qualify for deductions under Section 43B.

Court's Analysis

The Supreme Court noticed the provisions of Section 43B under which deduction is sought to be claimed.

“43B.Certain deductions to be only on actual payment. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force 

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

The Court highlighted that for a deduction under Section 43B, the payment must be made "by way of tax, duty, cess or fee" and should be "actually paid" in the relevant previous year. The unutilised MODVAT credit does not fulfill these conditions as it represents an advance payment and not an actual payment of duty by the assessee.

The Court further explained that the credit under the MODVAT scheme is an entitlement to adjust future liabilities and not a payment in itself. The liability to pay excise duty on manufactured goods arises only when the finished product is removed from the factory. Therefore, the unutilised MODVAT credit cannot be considered as a sum payable by the assessee by way of duty under Section 43B.

Regarding the definition of 'assessee' under the Central Excise Act, the Court noted that the Central Excise Rules, 1944 define an assessee as any person who is liable for payment of duty assessed, including producers or manufacturers of excisable goods. In this context, the assessee, being a purchaser of raw materials and not the manufacturer, is not liable to pay excise duty on those raw materials. The excise duty is payable by the manufacturer, and the assessee's payment is only an incidence of duty passed on to the purchaser, not a statutory liability on the part of the assessee.

Regarding the Sales Tax Recoverable Account, the Court noted that sales tax paid on raw materials, while part of the cost, is debited to a separate account and set off against the liability on sales of finished goods. This mechanism does not equate to an actual payment of tax as envisaged by Section 43B.

The Court examined the proviso to Section 43B, which allows deductions for sums actually paid by the assessee on or before the return due date for the previous year in which the liability was incurred. This proviso applies when the liability is incurred but not paid within the year and is paid in the subsequent year before the return filing date. In this case, no liability to adjust the unutilised MODVAT credit existed in the previous year . The liability to pay excise duty arose in the subsequent year (from 01.04.1999), and what we are concerned with is unutilised MODVAT Credit as on 31.03.1999 on which date the asseessee was not liable to pay any more Excise Duty.Hence, the appellant could not claim the benefit of the proviso to Section 43B.

Concluding Remarks

The Supreme Court upheld the decisions of the lower courts, ruling that the unutilised MODVAT credit and the amount in the Sales Tax Recoverable Account do not qualify for deductions under Section 43B of the Income Tax Act. The Court emphasized that Section 43B allows deductions only for sums that are actually paid in the relevant previous year and are payable as per statutory liability.

This judgment reinforces the principle that deductions under Section 43B are strictly contingent upon actual payment of tax, duty, cess, or fee, and cannot be claimed based on advance payments or credits.

Comprehensive Summary

The Supreme Court in MARUTI SUZUKI INDIA LTD. (EARLIER KNOWN AS MARUTI UDYOG LTD.) VERSUS COMMISSIONER OF INCOME TAX, DELHI - 2020 (2) TMI 376 - SUPREME COURT ruled that unutilised MODVAT credit and amounts in the Sales Tax Recoverable Account are not deductible under Section 43B of the Income Tax Act. The Court held that deductions u/s 43B are allowable only for actual payments of tax, duty, cess, or fee made in the relevant previous year. The decision clarifies that unutilised credits and advance payments do not meet the criteria for deductions under this section, emphasizing the need for actual statutory liability and payment for such claims.

Full Text:

2020 (2) TMI 376 - Supreme Court