9911796707
TMI Blog2007 (7) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment, the Assessing Authority has made certain disallowances/additions and thereby the assessment was finally concluded on an income of Rs. 147,29,65,974. 3. The total Central Excise deposits in the Account-Current of the assessee and the unutilised Modvat Credit on 31-3-2001, the last day of the previous year relevant to the assessment year under appeal was Rs. 10,99,72,355. The balance on the last day of the immediately preceding previous year, as on 31-3-2000 was Rs. 9,96,24,284. The differential amount of Rs. 1,03,48,071 represented the excess amount of credit available for adjustment as and when the payments of excise duty become due. In its computation of income, the assessee-company has deducted this differential amount of Rs. 1,03,48,071 as excise duty payments. The contention of the assessee before the Assessing authority was that this balance available to the credit of the assessee amounted to payment of Central Excise duty, which should be allowed as deduction under section 43B of the Income-tax Act, 1961. 4. But the Assessing Authority held that the contentions of the assessee-company could not be accepted. She found that for the immediately preceding assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty. 7. The Revenue is aggrieved by the above decision and therefore filed the second appeal before the Tribunal. The only issue raised in the present appeal is whether the CIT(A) is justified or not in accepting the contention of the assessee for deducting the incremental balance in assessee's Account-Current in PLA and RG-23, under section 43B of the Act as payments of Central Excise duty. The grounds raised by the Revenue are the following: "1. On the facts and circumstances of the case, the Ld. CIT(A) vide appellate order No. 326/P/2003-04 dated 19-1-2005 has erred in law and on the facts of the case in allowing deduction under section 43B of the Act, being incremental balance with Excise Authorities in PLA and RG-23. 2. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the Assessing Officer may be restored. 3. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard or disposed of." 8. When this appeal was posted for hearing and disposal before the Regular Division Bench at Chandigarh, the Bench found that divergent views have been expressed by the Co-ordinate Benches of the Tribunal on this issue and there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggested by the Bench that it would be appropriate if the case is heard by a Larger Bench comprising of at least 5 Members. This suggestion was placed before the contending parties also. The Revenue as well as the assessee agreed that the suggestion for a Larger Bench is proper and acceptable. The matter was thus again placed before the Hon'ble President, Income-tax Appellate Tribunal. The Hon'ble President, on the recommendation stated above, reconstituted the Special Bench with Five Members to consider and decide the issue placed before it. 12. In the course of preliminary hearing of the issue, the Three Member Bench, which was constituted at the first instance, had also an occasion to consider the exact nature of the issue to be considered and decided especially in the light of the facts of the case involved in the present appeal. In the present case, the assessee-company has sought for deduction under section 43B, two kinds of amounts, as advance payments of Central Excise duty. The first one is the actual amount of Central Excise duty remitted by the assessee in the Treasury to the credit of the Central Excise Department and reflected in the Account-Current. It is a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion whether deduction for tax, duty etc. is allowable under section 43B, on payment basis but before incurring the liability to pay such amounts, the ld. CIT brought out the contentions and arguments in the following manner: "1. That section 43B permits certain deductions only on actual payment of the corresponding amounts. Section 43B is a non obstante clause. The section provides for deduction of the prescribed sums on actual payment only if those sums are "otherwise allowable under this Act". This rider em bodied in section 43B clarifies the legal position that an assessee cannot claim by way of expenditure, the payments of taxes and duties only for the fact that the assessee has made the payments of those taxes and duties. In addition to the payment of such taxes and duties, it is also necessary that those expenses should be "otherwise allowable" under the provisions of the Income-tax Act, 1961, in computing the business income. 2. That the law is very clear on this subject that the deduction of the prescribed sums would be available to an assessee only on the basis of payment, either in the relevant assessment year or in the subsequent assessment year but no deduction w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) to (f). Clause (a) reads that 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. The sum actually to be paid by the assessee is specified in law as "...any sum payable by the assessee by way of tax.....". It means a sum which is not payable by the assessee pertaining to the previous year relevant to the assessment year will not be allowed as a deduction even if the sum was paid in the previous year. "Any sum payable" is one of the most important limbs of the statutory expression provided in section 43B. The expression "any sum payable" presupposes the incurring of a prior liability on the assessee to make such, payment. Unless the liability to pay is incurred, it is not possible to say that any sum is payable by the assessee. Therefore, incurring of the liability before making the payment is the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of his arguments and contentions, the ld. Commissioner of Income-tax has relied on the following decisions: (i). Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708 (AP). The AP High Court has held that in order to apply the provisions of section 43B not only should the liability to pay tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. (ii). IAC v. Tata Press Ltd [1990] 35 ITD 470 (Bom.). In this case, the assessee-company has claimed deduction in respect of the payment of gratuity fund, superannuation fund, provident fund etc. for the assessment year 1984-85. The deduction was claimed on payment basis in view of the newly inserted section 43B. The assessee's claim was notwithstanding the fact that the part of the payments related to the liabilities accruing not in the relevant previous year but in the subsequent previous year. The claim of the assessee was that the payments relating to liabilities accrued in the previous year and for the liabilities accruing in the subsequent year both should be allowed as deduction. The Tribunal held that the payments made against liabilities accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplained that the scheme of section 43B, has to be understood both in text and context and a harmonious interpretation has to be followed in order to arrive at a rightful proposition. On the Rule of interpretation, he relied on the decision of Dunlop India Ltd. v. Asstt. CIT [1992] 41 ITD 582 (Cal.) where the Tribunal has held that in every interpretation both text and context are important. He has also made references to the decision of the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 and the decision of Punjab and Haryana High Court in the case of CIT v. Madanlal & Bros. [2005] 276 ITR 571. He has also relied on the decision of the Special Bench rendered by ITAT, Chennai Bench in the case of Kwality Milk Foods Ltd. v. Asstt. CIT [2006] 100 ITD 199 where in paragraph 15 of its order, the Special Bench has held that if the language of the statute is plain, obvious meaning is to be applied; rules of interpretation are to be applied only to resolve the ambiguities. 19. In the light of the above arguments and contentions, the ld. Commissioner of Income-tax submitted that taxes and duties paid by an assessee before incurring the liability to pay such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antile system, to be regularly employed by an assessee for the purpose of computing income chargeable under the head "Profit and gains of business or profession" or "Income from other sources." The assessee is given a choice to select either of the two. The assessee-company being a corporate body is fundamentally bound by the provisions of the Companies Act, 1956. Section 209(3) of the Companies Act mandates that a company shall maintain its accounts in mercantile system/accrual system. In the Income-tax Act, the assessee has an option; in the Companies Act, the assessee has no option. The assessee therefore being a company is following mercantile/accrual system of accounting. 5. The impact of section 43B is that the above method of accounting regularly employed by the assessee is overturned and the deduction for the payment of tax, duty etc. is given only on payment basis. This means, in respect of deducting those sums, the Income-tax Act provides only one method of accounting, i.e., cash method. Therefore the accrual system and consequently the accrual of liability or incurring of liability all are ignored by the provisions of section 43B and in the light of non obstante clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... happen at the first instance and then only the other event should follow. The statute does not prescribe any proposition that pre-incurring of liability is a condition to claim deduction of duty, taxes etc. where those items were paid by the assessee. 10. The Revenue authorities have given a lot of importance to the expression contained in section 43B as "...a deduction otherwise allowable under this Act,...". The contention of the Revenue authorities that the expression "otherwise allowable under this Act" means deduction available only for the year of incurring liability is without any basis. The correct interpretation of the expression "otherwise allowable" is that the item claimed as deduction needs to be an expenditure allowable under the provisions of the Income-tax Act in computing the income. It does not mean that it should be attributable to a particular assessment year. The real implication of the expression is that those items of expenditure which are not usually deductible in computing the income of an assessee cannot be claimed as deduction even if the assessee has made actual payments of those items. The expression "a deduction otherwise allowable" is used in a gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overtake the section as such. In the present case Explanation 2 does not cover all sorts of payments. They cover only those payments within clause (a) and also to be read along with the proviso to section 43B. 21. The ld. Counsel further argued in the following lines relying on the respective judgment referred, thereto: 1. Consequence of section 43B in the matter of method of accounting has been succinctly explained by ITAT Delhi 'B' Special Bench in the case of Indian Communication Net Work (P.) Ltd.. In paragraph 22 of the decision, the Tribunal has stated that section 43B was no doubt introduced to curb the practice adopted by the assessees to retain substantial funds by not depositing amounts into the Government account and claiming deductions at the same time; but it also brought out a change in the "method of accounting" regularly followed by an assessee. This happened due to certain deductions being allowed on "actual payment" basis although earlier the claim was allowed on "accrual" basis. 2. The intention of the Legislature is to allow deduction in respect of any tax or duty in computing under section 28, the income of that previous year in which such sum is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt and has accepted in the case of one assessee, it is not open to the Revenue to challenge the correctness in the case of other assessees without just cause. In the matter of section 43B there being no such cause approved, the decision of the three High Courts where the principle has been upheld that the deductions of tax, duty, should be allowed under section 43B in the year of payment, irrespective of the previous year are to be followed. The decision of the Supreme Court in Berger Paints (India) Ltd. settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed under section 43B irrespective of the previous year to which the corresponding liability related to. 5. The case of the Revenue is that the Explanation has stated that the sum deductible on payment under section 43B is the sum for which the liability has already been incurred. This is not a correct interpretation of the Explanation. The Explanation was brought in the statute book to tide over the judgment of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao. In the said case the Court has held that deduction under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rule of reasonable construction must be applied while construing a statute. 7. The Calcutta High Court in the case of Associated Pigments Ltd v. CIT [1998] 234 ITR 589 has considered this question of twin conditions argued by the Revenue that payment also should be made and liability also should be incurred in the previous year relevant to the assessment year in which deduction is sought by the assessee under section 43B. In that case the question placed before the Hon'ble Court related to admissibility of deduction of two sums paid by the assessee on account of purchase tax during the assessment year in question but those sums being relatable to an earlier accounting and assessment year. While considering the case, the Court held that no part of section 43B or Income-tax Act itself requires that when deduction is claimed on the basis of section 43B, the assessee must satisfy the twin test of both proving actual payment of duty, tax, cess in the previous year in question as well as satisfying the department that due provision had been made in the books in regard to such duty or tax for which payment was made later on. The Court held that to introduce this double test would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained with Central Excise Department, the frequency of payments made by the assessee and the lifting of goods from the factory on a continuous basis, it is very clear that the money even if characterised as advance deposits paid by an assessee to Central Excise through PLA and RG-23 in the Account-Current, retain all the characteristics of payment of actual Central Excise duty and therefore the advance deposits . cannot be treated as an advance for future liability as construed in the ordinary commercial sense. 10. The Supreme Court has considered an instance of money lying to the credit of an assessee but nevertheless not belonging to it, in the case of CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397. The Court held that the Molasses amount transferred to the Molasses Reserve fund would not be the income of the assessee, as it had no control over that. 22. The ld. Counsel further referred to various decisions rendered by different Benches of ITAT in favour of the assessee. 1. The ITAT Chandigarh 'B' Bench has considered the issue in the case of Raj & Sandeep Ltd. through their order dated 18-2-1993. The Tribunal decided the matter in the following man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pradesh High Court in the case of Gopi Krishna Granites India Ltd. v. Dy. CIT [2001] 251 ITR 337. The issue raised before us in clause (a) of section 43B is to be considered. It is quite different from clause (d) considered by the High Court in the said decision. The sums payable under clause (a) and sums payable under the clause (d) are different and distinct in nature and character. The reference made to matching principle in the said decision has no relevance once cash system is adopted for section 43B. 6. The Delhi Bench in the case of Maruti Udyog Ltd., while considering the issue has misdirected in its discussion regarding the expression "incurring of liability". The Tribunal has construed the meaning of the expression "liability incurred" equivalent to a demand raised by the Department as payable and outstanding at the close of the relevant previous year. The Tribunal has given an instant meaning to the expression "incurring" whereas in fact the expression implies the liability running along with the business of manufacturing carried on by the assessee and thereby becoming liable to pay excise duty. 24. The ld. Counsel further relied on the following in support of his con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prayer of the assessee was not acceptable. Rule 173G(1A) provides that where any amount is to be withdrawn from the PLA account, then the assessee has to make an application to the Commissioner and only by obtaining permission from him, the said amount can be withdrawn. Rule 173G(1) also prescribes that periodical credit in the Account-Current can be made only by cash payment to the Treasury. Thus the rule clearly lays down that credit of duty can be taken in the PLA only either through cash deposit under T.R. 6 Challan in the Treasury or by written permission to take credit by the proper officer. In this case, the appellant took credit back in the PLA on their own clearing goods under rule 57F(2) which was wrong. When the lower authorities directed the assessee to rectify the mistake by making debit entry in the PLA and taking the credit back in RG-23A Part-II, the assessee did not follow the same on the ground that the unit was not functioning. Even if the unit was not functioning, i.e. it was not producing excisable goods, it was still under excise control and the relevant account-current and RG-23A Part-II were available with the assessee. There was no merit in the prayer r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequence of the above proposition is that the unutilised credit balance of Modvat available to an assessee on the last day of the previous year will be equivalent to advance payment of Central Excise duty and all the arguments advanced in support of the deductibility of advance payment of Central Excise duty will be mutatis mutandis apply to Modvat Credit as well. That is the unexpired Modvat Credit is nothing but the advance payment of Central Excise duty and as the advance payment of excise duty needs to be allowed as deduction under section 43B for the elaborate reasons already explained, Modvat Credit also should be entitled to be deducted under section 43B. 27. On the true character of the Modvat Credit, the ld. Counsel invited our attention to the decision of the Supreme Court in the case of CCE v. Dai Ichi Kar Karia Ltd. [1999J 7 SCC 633. The Court held that section 4(4) of the Central Excise Act, 1944, inter alia, provides that the value of exciseable goods does not include the amount of the duty of excise payable on such goods. The Modvat scheme is the part of the Central Excise Rule. It is to be held that determining the cost of the exciseable product covered by the Modv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not coming out of the payment of Central Excise duty per se. It is coming out of the purchase of the raw materials. Where raw materials are exciseable, the purchase cost also includes excise duty. In order to avoid a cascading effect of excise duty, the duty paid on earlier points are given as deductions in subsequent points. Therefore, it could be seen that it is a case of exemption and not a case of payment as construed by the ld. Counsel appearing for the assessee. 31. The ld. Commissioner referred to the decision of the Supreme Court in the case of Eicher Motors Ltd which has been relied on by the assessee's counsel. The ld. Commissioner pointed out that what the Supreme Court has observed in the said case was that the facility of Modvat Credit is as good as tax paid. The Court has not stated that Modvat Credit is nothing but payment of excise duty. The observation of the Supreme Court is to be seen in the context of an assessee setting of the Modvat Credit against the demand of excise duty. In such circumstances, the Modvat Credit becomes as good as tax paid once the set off is made. At the point of time before setting of the Modvat Credit, it is not possible to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, as the assessee had no control over that. The deposits made by the assessee in the Accounts-Current for making payments of Central Excise Duty are analogous to the case considered by the Supreme Court and the ratio laid down in the above judgment, we think, should apply to the present case. 35. The Central Excise and Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the nature of PLA in the case of Fibre Bangalore (P.) Ltd. In that case the assessee debited the duty in Account-Current and thereafter reversed the debit by crediting back the duty amount in the very same PLA whereas the assessee should have taken the credit through RG-23A Part-IT. As there was no revenue effect prejudicial to the Government, the assessee pleaded that the adjustment, even if improper may be condoned. But the Tribunal held that any appropriation can be made only on the permission of the concerned authorities. Normally, the money paid into those accounts are irretrievable. In effect, for all practical purposes, the deposits made by an assessee in Accounts-Current amount to actual payment of Central Excise duty. 36. In the light of the nature and character of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the above statutory language in the case of Lakhanpal National Ltd. The Court has held that deduction of tax or duty paid by an assessee has to be allowed as deduction in the year of payment, irrespective of the previous year in which the liability to pay such sum was incurred according to the method of accounting regularly employed by the assessee. 39. As argued by the ld. Counsel appearing for the assessee, the expression "irrespective of the previous year" dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression "irrespective" means lacking relation, regardless of what is mentioned. Here the subject-mentioned is "previous year". It means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the liability is dispensed with by the statute while concentration is made on the point of actual payment of the sum to the Treasury of the Government. 40. The Supreme Court had an occasion to consider the very same issue of payment of duty vis-a-vis deduction under section 43B in Berger Paints (India) Ltd.. The Court observed that the judgments delivered by three High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court that the claim of the assessee for deduction of payments made to such special account has to be allowed as it represented actual duty paid by the assessee. The SLP of the department was dismissed. 42. The Gujarat High Court in the case of the Lakhanpal National Ltd has considered the scope of section 43B in a case where the assessee had claimed deduction for the Customs and Excise duties paid in respect of raw materials imported and goods manufactured in the accounting year. The Bombay High Court in the case of Bharat Petroleum Corpn. Ltd has followed the decision of the Gujarat High Court and considered section 43B in a case where the assessee has claimed deduction of excise and custom duty paid on the closing stock. The Madras High Court in the case of Chemicals & Plastics (India) Ltd followed the decision of Bombay High Court in the case of Bharat Petroleum Corporation Ltd, while examining the case where the assessee has not charged the duty paid by it to the profit and loss account but at the same time claimed the deduction under section 43B. The assessee in that case did not claim the item in the profit and loss account for the reason that a part of the Custom duty pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year so also the amount should become payable in the very same year for claiming deduction under section 43B. It is thereafter, the proviso to section 43B was inserted, to alleviate the consequent difficulties. But it is to be seen that the principal question placed before the High Court in this case was the constitutional vires of the provisions of section 43B. In fact, it was not a decision which interprets the provisions of law contained in section 43B on its substantial merit. Anyhow, the applicability of the said decision has been undone by inserting of proviso to and Explanation 2 under section 43B. Therefore that decision is not relevant in deciding the present issue. Another decision relied on by the revenue is the decision of ITAT Mumbai Bench 'D' in the case of Tata Press Ltd. The observation of the Tribunal in the said case is that section 43B is restrictive in nature and not an enabling one. But this observation does not bring out the true intent and purpose of section 43B. An expense becomes deductible or non-deductible in the light of the enabling provisions like sections 32, 36, 37 etc. Section 43B per se does not decide or otherwise restrict the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature in the immediately preceding month of March. 46. Another concern expressed by the Tribunal in the above case is that it will open floodgates for the assessees to make advance payments of such liabilities for any number of subsequent years and claim deduction thereto in an earlier year, if doing so proves advantageous to them. Whether an assessee would misuse section 43B for the above purpose, is a question of remote chance. Usually, all tax avoidance schemes are practised by the assessees without paying any money towards tax. If not impossible, it is highly improbable to presume that an assessee would indulge in tax avoidance by actually paying money towards duties and taxes. Any such benefit arising to an assessee is only incidental. 47. Another case relied on by the Revenue is the decision of ITAT Hyderabad Special Bench in the case of KCP Ltd. As argued by the ld. Counsel for the assessee, we find that the said decision may not be valid any more, in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd, wherein the Court has held that the assessee shall be entitled to get the benefit of deduction under section 43B on actual payment, ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 43B. Proviso has made the Explanation practicable and workable by stating that the payments made even after the close of the previous year but made before the due date of filing of the return, will be deductible. It could be seen that the circular/deals with the extended period of time by which certain belated payments could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof. 51. We have considered in detail the arguments of both sides and the authorities relied on by them; considered the statutory provisions as well; examined the exact nature of the advance payment of excise duty, etc. We have found that generally those payments are not provisional or refundable. They are actually payments of Central Excise duty. We have examined the legislative intent and purpose of section 43B. The assessees in the past were not paying taxes, duties and other dues to the Government in time. At the same time, they were booking those items as expenses in their accounts on accrual basis on the ground that they are following mercantile system of accounting. By doing so, they were claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvat Credit available to an assessee is to be treated as good as Central Excise duty paid by the assessee on account. But we find that the context in which the observation was made by the Supreme Court has to be noted of. The observation of the Supreme Court had been made in a case where the assessee had set off the Modvat Credit against the demand of excise duty. When the unexpired Modvat Credit is set off against the excise duty payable and thereby the liability has been extinguished/reduced, that the Supreme Court has held that setting off Modvat Credit is as good as tax paid. The above observation of the Supreme Court become operative only when the unexpired Modvat Credit has actually been set off against the Central Excise duty payable by the assessee. The unexpired Modvat Credit available in the hands of the assessee on the last day of the previous year is the amount, which has not so far been set off against payment of excise duty. There is a distinction between unexpired Modvat Credit available in the hands of the assessee as well as the set off of the credit balance against actual liability. The time lag between the two points cannot be ignored. On actual set off of the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Commissioner of Income-tax that unexpired Modvat Credit does not amount to actual payment of Central Excise duty. 60. 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. 61. 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 under section 43B. The second question is answered in negative and against the assessee. 62. 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 under section 43B. Regarding the second question of unexpired Modvat Credit, we held that the assessee is not entitled for claiming the same as deduction under section 43B. Accordingly the order of the CIT(A) on the issue of unexpired Modvat Credit is set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing the taxable profit only in the year and to the extent it is actually paid." The purpose of the Legislation and the mischief it sought to check is abundantly clear and needs no elaboration. Only thing to be highlighted is that there is no reference to any condition to establish, "accrual of liability" for the claim of deduction. Only actual payment is insisted upon. 2.3 The memorandum explaining the provisions in the Finance Bill of 1983 is as under: "59. Under the Income-tax Act, profits and gains of business and profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting income and outgo are accounted for on the basis of accrual and not on the basis of actual disbursements or receipts. For the purposes of computation of profits and gains of business and profession, the Income-tax Act defines the word 'paid' to mean 'actually paid or incurred' according to the method of accounting on the basis of which the profits or gains are computed. 60. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of such payment is furnished by the assessee along with such return : Provided further...( Omitted w.e,f. 1-4-2004) Explanation 1.-...] Explanation 2.-For the purposes of clause (a) as in force at all material times, 'any sum payable' means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. Explanation 3.-... Explanation 4.-..." 3. Section 43B was considered by Their Lordship of Supreme Court in the case of Allied Motors (P.) Ltd. About the change, it has brought about in the claim of deduction of statutory liability, Their Lordship observed as under: "Prior to the insertion of section 43B in the Income-tax Act, 1961, income chargeable under the head "Profits and gains" of business or profession was computable in accordance with the method of accounting regularly employed by the assessee as per section 145 of the Income-tax Act, 1961. An assessee who had adopted the mercantile system of accounting would be entitled to account for his income and expenditure on the basis of accrual and not on the basis of actual receipt or disbursement. After the insertio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and excise duty pertaining to goods unsold (raw materials and finished goods) were included as part of its closing stock. For the assessment year 1984-85 also, the assessee had adopted the same system and had included an amount of Rs. 26,98,713 being customs duty and excise duty (on raw materials and finished goods) as part of the closing stock. The assessee originally returned a total income of Rs. 14,22,830 for the assessment year 1984-85 but filed a revised return claiming deduction of the sum of Rs. 26,98,713 being duties paid before December 13, 1983, from the closing stock and consequently from the profits. Both the Assessing Officer and the Commissioner (Appeals) rejected the claim on the ground that no benefit of the nature was contemplated by section 43B of the Income-tax Act, 1961. On appeal to the Appellate Tribunal, the matter being posted before a Special Bench: Held, that the assessee was entitled to the deduction of Rs. 26,98,713 and that the opening stock for the following year would stand reduced by the same figure. The provisions of section 43B of the Income-tax Act, 1961, disturb the existing and accepted position of the assessee's account. The section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed. He, therefore, submits that the customs duty being paid in the year 1983 on the raw material imported during the year, though the raw material is consumed in the year 1984, the assessee would be entitled to get an allowable deduction for the assessment year 1984-85 (accounting year ending on December 31, 1983) in computing the taxable income of the petitioner-assessee." 4.4 The objection of the Revenue is noted as under: "Shri S.N. Shelat, the learned advocate appearing for the respondent, submits that the word "otherwise allowable" used in section 43B of the Act would mean that it would not be allowable for the assessment year 1984-85. He submits that section 43B of the Act does not enlarge the scope of deduction. According to his submission, what is allowable under commercial principles under section 43B of the Act is made on allowable deduction on the actual payment being made. He further submits that it does not permit deduction in respect of the amounts, which are not allowable under commercial principles only because they are paid. He further submits that it is not an expenditure pertaining to the goods sold in that year." 4.5 After considering provision or section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of the closing stock of the petitioner-assessee should not be permitted in the assessment year 1984-85 (accounting year ending on December 31, 1983), though actually paid in the year 1983, because the assessment of the closing stock of the year 1983 will be in the subsequent previous year which would be in 1984 and the relevant assessment year would be 1985-86. It is true that at the time of making the assessment for the assessment year 1985-86, the respondent will have to be careful in seeing that the petitioner does not claim further deduction for the sum for which deduction is already given. In this case, it is not the contention of the respondent that any sum payable under clause (a) of section 43B of the Act was at any time claimed by way of deduction in any previous year prior to 1983. In fact, the raw materials were imported and the goods were manufactured in the year 1983, and they were cleared also in the year 1983. Therefore, their liability accrued in the year 1983, and they also paid the sum in the year 1983. In that view of the matter, the Explanation to section 43B of the Act is also not attracted in the present case. Mr. J.P. Shah, the learned advocate appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility to pay excise duty had accrued in the year 1983 and the sum was paid in the year 1983. The condition of accrual of liability as well as actual payment was proved. Therefore, the case supported the stand of the Revenue. It was also contended that their Lordship accepted that section 43B of the Act does not enlarge the scope of the deduction. We are unable to accept this argument. In place of mere accrual, requirement of actual payment cannot be argued to have enlarged the scope of the section. The decision cannot be read by taking one line from here and one line from there. The ratio of decision is to be considered and the ratio about change brought about by section 43B is recorded as under: "Under the mercantile method of accounting, as stated earlier, the moment the liability is incurred, it would be an admissible deduction. What section 43B of the Act states is that irrespective of the fact that the liability is already incurred, that would be an admissible deduction only when the actual amount in that regard is paid." 4.7 Their Lordship further emphasized: "The intention is made more specific by providing that it would be so irrespective of the previous year in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with the following finding: "Findings on question No.1: The facts brought on record show that during the financial year 1984-85 relevant to the assessment year 1985-86, the assessee actually paid a sum of Rs. 12,62,47,225. The said amount was a part of the closing stock as on March 31, 1985. As per the decision of the Gujarat High Court in Lakhanpal National Ltd.'s case [1986] 162 ITR 240, excise and customs duty paid and included in the closing stock are allowable deductions from the income. That, section 43B does not bar such deductions. However, such deductions are subject to payment being added to the opening stock in the relevant subsequent year. We respectfully agree with the judgment of the Gujarat High Court in Lakhanpal National Ltd. 's case [1986] 162 ITR 240. This is a pure finding of fact. The Commissioner of Income-tax (Appeals) has also accepted that the aforestated amount is a part of the closing stock. In view of the concurrent finding of fact, no substantial question of law arises. Hence, the first question is answered in the affirmative, i.e., in favour of the assessee and against the department." It is clear from facts available on record that de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw material and finished goods was negatived by the Assessing Officer, the Commissioner and finally by the Tribunal, all of whom took the view that as the amounts paid towards customs duty and excise duty had not been shown separately in the profit and loss account, the deduction could not be given. Section 43B of the Act which provides that certain deductions are to be only on actual payment opens with a non obstante clause in relation to any other provision in the Act, and provides, inter alia that 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 under section 28 of that previous year in which that sum is actually paid by the assessee. The first proviso permits such payment being made even after the close of the previous year, but prior to filing the return of income under section 139(1) of the Act. The assessee, therefore, is entitled to the deduction of the amount of dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icals & Plastics India Ltd 's case followed by Bombay High Court. The Special Bench decision of Appellate Tribunal in the case of Indian Communication Network (P.) Ltd. 's was also not challenged. Their Lordship held that having not challenged correctness of law laid down by High Courts, and accepted in case of one assessee, then it was not open to the Revenue to challenge its correctness in case of other assessee without just cause. Their Lordship noted the analysis and finding of the decision of Lakhanpal National Ltd. 's case as under: "A reading of the Gujarat High Court's judgment shows that the judgment is not based merely on the adjustments permissible under section 141A, as is contended by the Revenue, but that the judgment proceeds on analysis of section 43B and makes a finding that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year was an allowable deduction in respect of that year irrespective of the amount of excise duty/customs duty which was included in the valuation of the assessee 's closing stock at the end of the accounting year. After coming to this conclusion, the Gujarat High Court then proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of tax liability in the year in which amount was actually paid and allowed the deduction on mere finding that amount was actually paid. That is the ratio of the decided cases. 8. Besides, the following rule is relevant relating to payment of duty: "Rule 173G. Procedure to be followed by the assessee.-(1) Every assessee shall keep an account-current with the (Commissioner) separately for each excisable goods falling under different Chapters of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), in such form and manner as the (Commissioner) may require, if the duties payable on the excisable goods and in particular such account (and also the account in Form RG 23, if the assessee is availing of the procedure prescribed in rule 173K) shall be maintained in triplicate by using indelible pencil and double-sided carbon, and the assessee shall periodically make credit in such account-current, by cash payment into the treasury (so as to keep the balance, in such account-current), sufficient to cover the duty due on the goods intended to be removed at any time and every such assessee shall pay the duty determined by him for each consignment by debit to such account-curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided cases have clearly laid down that deduction of items mentioned in section 43B is to be allowed on actual payment under section 28 in the previous year in which such sums are actually paid by the assessee irrespective of the previous year in which liability to pay such sum was incurred, according to the method of accounting. As noted above in case of Lakhanpal National Ltd., the words "irrespective of the previous year in which liability to pay such sum was incurred" was held to represent more specific intention of the Legislature. In the light of specific and strong intention of the Legislature, we see no scope for argument that besides actual payment, the assessee must also prove the incurring of the liability prior to payment to be entitle to deduction in the year of payment. 9.1 As the ld. Departmental Representative has stressed his point vehemently and as some Benches of the Tribunal have accepted them; hereinafter we deal with the submissions of the learned Departmental Representative (Commissioner of Income-tax). The submissions in a summarized form are as under: (a) That sum claimed as a deduction on actual payment basis must be established to be, "a deduction oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be allowed on incurring of liability where mercantile system is followed but "shall be" allowed in the year in which the amount is actually paid. It does not appeal to reason that even after introduction of section 43B and its clear wording, the Legislature can intend to insist upon the incurring of the liability as a condition for allowability of the deduction. That as for as "paid" under the Income-tax Act is concerned "actually paid" is separated from word "incurred" by "or". The whole idea of enactment is to change the system and replace condition of allowability of deduction from incurring of the liability to actual payment. Therefore, it is not possible to accept that simultaneously the Legislature insisted on the incurring of the liability, as per mercantile system of accounting. Having in mind provision of section 43(2) and the purpose of section 43B, there is no question of asking the assessee to prove actual payment as well as incurring of a liability. The learned Departmental Representative while pressing above line of reasoning did not take into account meaning of word "paid" as given in section 43(2). 11. It would be appropriate to refer to certain pertinent obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 43B. It must be an expenditure connected and related to assessee's business deductible under section 28 of the Act. It should not be prohibited item totally unrelated to the business of the assessee. The expression "a deduction otherwise allowable" only means statutory liabilities mentioned in section 43B. The implication of the expression is that those items of expenditure which are usually deductible in computing business income of an assessee. When above expression is read with clause (a) of the section, it becomes abundantly clear that the clause is applicable in cases, where for computation of business income, taxes, duties, cess or fees levied by whatever name called, is required to be deducted. Similar is the position under other clauses (b) to (f) of the section. Clubbing of variety items in one clause and use of expression "under any law for the time being in force" makes it clear that section envisages deduction of a statutory payment on general basis. The expression "a deduction otherwise allowable" reflects deduction on account of general liability fastened to assessee's business on account of duties, taxes, cess, fees by whatever name called arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is paid before the due date of filing of return in respect of a liability incurred in the previous year then provision of section 43B is not applicable. This proviso thus covers a specific situation. It cannot override clear intention and object of the main section and, therefore, is of no help to the revenue. We quote below some decisions, which explain the scope of a proviso although language and purpose of the proviso is very clear. 15. In the case of Beharam Khurshid Pesikaka v. State of Bombay AIR 1955 SC 123, it has been observed that the office and function of a proviso is to be except out of a previous enactment in an earlier part of a section, something which but for the proviso would have fallen within the scope of the enactment, unless the context, stating and purpose of the section warrants a different construction. The proviso is generally something engrafted on the main enactment. It cannot normally be so interpreted as to setting at naught the real object of the main enactment. 15.1 In the case of Tahsildar Sing v. State of Uttar Pradesh AIR 1959 SC 1012 the Apex Court held that it is a cardinal rule of interpretation that proviso to a provision of a statute only e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and override the decision, Explanation 2 was added to the section. This has been implicitly admitted in the circular of the CBDT referred to in the decision of the Supreme Court in the case of Allied Motors (P.) Ltd. However. Explanation 2 cannot be employed to govern the main section. It has very limited application and a specific purpose to serve, of superseding a view taken by the Court, and should be construed accordingly. If Explanation is not given a restricted meaning and taken to be inserted merely to override the decision of Hon'ble High Court, it would lead to absurd results which might defeat the very purpose of section 43B. The said Explanation to appreciate the argument is as under: "Explanation 2 - For the purposes of clause (a), as in force at all material times, 'any sum payable' means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law." The significant words in the provisions are "previous year" which is defined in section 3 of the Act to mean "the financial year immediately preceding the assessment year" (proviso is not relevant and is being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g upon decision of Supreme Court in the case of Allied Motors (P.) Ltd and other decisions referred to earlier, we may note the following decisions : (i) in the case of Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661, the Supreme Court held that intention of adding an explanation is to clear up the ambiguity if any, in the section. It is a subordinate part of the section included for purposes for arriving at a particular conclusion in the matter of interpretation of the Statute. Again the case of State of Bombay v. United Motors (India) Ltd. AIR 1953 SC 252 Their Lordship of Supreme Court held that if the language of an explanation shows the purpose and construction consistent with that purpose can be reasonably placed upon it, that construction will be preferred as against any other construction which does not fit in with the description or the avowed purpose. 18. The learned Departmental Representative had vehemently contended that it would not be possible to ignore Explanation 2 defining "any sum payable" while considering impact and application of section 43B. The said Explanation cannot be treated as "redundant". We are unable to accept this situation. We are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove. The argument that effect must be given to Explanation 2, and find the previous year in which the liability was incurred in preference to clear command of section, "irrespective of the previous year in which liability to pay was incurred" cannot be accepted in the light of law discussed below, where even defining word "transfer" in the Transfer of Property Act was ignored as it was found to be inconsistent with other provisions: 19.1 In the case of Chief Inspector of Mines v. Lala Karam Chand Thapar AIR 1961 SC 838, the Supreme Court noted the observations of Lord Chancellor in the case of Institute of Patent Agents v. Joseph Lockwood 1894 A.C. 347, to the following effect: "'No doubt' said he, 'there might be some conflict between a rule and a provision of the Act. Well there is a conflict sometimes between two sections to be founding the same Act. You have to try and reconcile them as best as you may. If you cannot, you have to determine which is the leading provision and which is the subordinate provision, and which must give way to the other. That would be so with regard to enactments and with regard to rules which are to be treated as if within the enactmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more other living persons. Apparently this section does not include auction purchase and resultantly excluded altogether the auction purchaser who had sought protection under section 100 of Transfer of Property Act. 19.5 The Supreme Court excluded application of section 5 defining "transfer" with the following observations: "In our opinion the positive provision contained in section 2(d) must prevail over the definition of "transfer of property" prescribed by section 5 no doubt, the purpose of the definition is to indicate the class of transfers to which the provisions of the Transfer of Property Act are intended to be applied; but a definition of this kind cannot override the clear and positive direction contained in the specific words used by section 2(d). As we have already seen, the result of the saving clause enacted by section 2(d) is to emphasise the fact that the provisions of section 57 and those contained in Chapter IV must apply to transfer by operation of law. Such a positive provision cannot be made to yield to what may appear to be the effect of the definition prescribed by section 5, and so, we are inclined to hold that notwithstanding the definition prescribed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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. 23. As entire appeal has been referred to us for disposal, we note down the relevant facts of the case relating to amounts involved. In the profit and loss account, the assessee has shown total sales of Rs. 90093.29 lakhs, including sales of excisable goods. It has further debited excise duty at Rs. 9817.70 lakhs in the profit and loss account. The above detail is available at page 63 of the paper book, as under: Year ended March 31, 2001 (Rs. lakhs) Excise duty: 12179.90 Add: Excise Duty on closing stock (includes Excise duty payable on finished goods not cleared from bonded warehouse Rs. 317.62 lakhs (Previous year: 355.26 lakhs). 910.12 Less: Excise Duty on Opening Stock (includes excise duty on finished goods not cleared from bonded warehouse Rs. 355.26 lacs (Previous year: Nil) (957.68) Less: Modvat credit availed during the year: (2314.64) 9817.70 It is clear from above that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrived at in the proposed orders I would like to give my reasons in regard to the issue raised before the Special Bench. In para 13 of the proposed order, the issues before the Special Bench have been identified as under:- "1. Whether deduction for tax, duty etc. is allowable under section 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 under section 43B ?" In regard to the second issue, I agree with the conclusion arrived at in the proposed order that Modvat credit available to the assessee as on the last day of the previous year does not amount to payment of Central Excise duty under section 43B. In regard to the first issue, I give my reasons as well as conclusions as under: The issue involved herein is relating to the interpretation of provision of section 43B of the Income- tax Act, 1961. In order to appreciate the relevance of section 43B in computing the profits and gains of business. It will be useful to refer to the scheme of taxation under the provisions of the Act to serve a prelud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . - Income from other sources." 3. The assessee before us derives income from profits and gains of business or profession and is accordingly assessable as such. Section 28 of the Act provides the categories of income chargeable to income-tax under the head "Profits and gains of business or profession". Section 29 of the Act provides as to how profits and gains of business or profession are to be computed. The said section reads as under: "29. Income from profits and gains of business or profession, how computed.- The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D." 4. Before we consider section 43B and make an attempt to understand the meaning of the section, it will be relevant to refer to section 145 of the Act. The said section reads as under: "145. Method of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the agreement governing such loan or borrowing, or (e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, 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. Explanation 1.-For the removal of doubts, it is hereby declared that where a deduction in respect of any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 4.-For the purposes of this section,- (a) "public financial institutions" shall have the meaning assigned to it is section 4A of the Companies Act, 1956 (1 of 1956); (aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11; (b) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (c) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of section 36." 5. Legislative history, context and background: In the case of Imperial Chit Funds (P.) Ltd v. ITO [ 1996] 219 ITR 498 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme of this entire Act." 8. Keeping in view the above principles of interpretation, it is considered necessary to trace the legislative intent and history behind the enactment of section 43B. Section 43B was inserted by the Finance Act, 1983 with effect from 1st April, 1984 applicable for and from assessment year 1984-85. The scope and effect of the originally inserted section 43B have been elaborated in the following portion of the CBDT Circular No. 372 dated 8-12-1983 : (xxvi) Disallowance of unpaid statutory liability - Section 43B - Under section 145 of the Income-tax Act, 1961, profits and gains of business or profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting, income and expenditure are accounted for on the basis of accrual and not on the basis of actual receipts or disbursements. For the purposes of computation of profits and gains of business or profession, section 43(2) of the Income-tax Act defines the word "paid" to mean "actually paid or incurred" according to the method of accounting on the basis of which the profits or gains are computed. 35.2 Sev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amendment was explained by the CBDT vide Circular No. 528 dated 16-12-1988. The said circular and the amendment is also not relevant for the purpose of the present controversy. Finance Act, 1989 made yet another amendment in section 43B by virtue of which 2nd proviso to section 43B was substituted with effect from 1-4-1989 by a new proviso. A new Explanation 2 was inserted to operate retrospectively with effect from 1-4-1984. Explanation 2 to section 43B was renumbered as Explanation 3 with effect from 1-4-1989 and Explanation 3 was renumbered with effect from 1-4-1989 as Explanation 4. The scope and effect of the amendments has been elaborated vide Circular No. 550, dated 1-1-1990 of the CBDT as under: "15.1 Amendment to provisions relating to certain deductions to be allowed only on actual payment - Under the existing provision of section 43B of the Income-tax Act, 1961, a deduction for any sum payable by way of tax, duty, cess or fee, etc. is allowed on actual payment basis only. The objective behind these provisions is to provide for a tax disincentive by denying deduction in respect of a "statutory liability" which is not paid in time. The Finance Act, 1987, inserted a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egularly employed by the assessee as per section 145 of the Income-tax Act, 1961. An assessee who had adopted the mercantile system of accounting would be entitled to account for his income and expenditure on the basis of accrual and not on the basis of actual receipt or dis bursement. After the insertion of section 43B, however, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the assessee incurred the liability to pay that tax. Hence, an assessee (as in the present case), who had collected sales tax in the last quarter of the previous accounting year and deposited it in the treasury within the statutory period falling in the next accounting year, would not be entitled to claim any deduction for it. The sales tax so collected will form a part of the assessee's income. To obviate this kind of unexpected outcome of section 43B, the first proviso was added in section 43B by the Finance Act of 1987. The proviso makes it clear that the section will not apply in relation to any sum which is actually paid by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch tax or duty is disputed or not) or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall be allowed only in computing the income of that previous year in which such is actually paid by him." The Budget Speech of the Finance Minister for the year 1983-84, reproduced in [1983] 140 ITR (St.) 31 is to the same effect. Section 43B was, therefore, clearly aimed at curbing the activities of those taxpayers who did not discharge their statutory liability of payment of excise duty employer's contribution to provident fund etc., for long periods of time but claimed deductions in that regard from their income on the basis of the liability to pay these amounts had been incurred by them in the relevant previous year. It was to stop this mischief that section 43B was inserted. It was clearly not realized that the language in which section 43B was worded, would cause hardship to those taxpayers who had paid sales tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction in respect of a statutory liability which is not paid in time. The Finance Act, 1987, inserted a proviso to section 43B to provide that any sum payable by way of tax or duty, etc., liability for which was incurred in the previous year will be allowed as a deduction, if it is actually paid by the due date for furnishing the return under section 13 9(1) of the Income- tax Act, 1961, in respect of the assessment year to which aforesaid previous year relates. This proviso was introduced to remove the hardship caused to certain taxpayers who had represented that since the sales tax for the last quarter cannot be paid within that previous year, the original provision of section 43B will unnecessarily involve disallowance of the payment for the last quarter. Certain courts have interpreted the provision of section 43B in a manner which may negate the very operation of this section. The interpretation given by these courts revolves around the use of the words any sum payable. The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. This is against the legislative intent a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us, the assessee would ordinarily be entitled to deduction in respect of the accrued liability notwithstanding the fact that the assessee had disputed the liability or not paid such duty. Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 held that assessee following mercantile system of accounting is entitled to deduction in respect of accrued statutory liabilities notwithstanding the fact that the assessee is contesting the liability. Some taxpayers were getting the deduction even without making the payments. I have elsewhere quoted the statement of objects for the incorporation of section 43B from which it is evident that section 43B was incorporated to discourage such taxpayers from claiming deduction on account of accrued liabilities without making the payments of such taxes, duties etc. When we read section 145 in conjunction with section 43B, it becomes abundantly clear that section 145 which mandates assessment of profits and gains of business in accordance with the method of accounting adopted by the assessee, is modified by section 43B in respect of the liabilities referred to in that section to the extent indicated therein. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 247 of the judgment held as under:- "......The argument of Mr. S.N. Shelat that section 43B of the Act does not enlarge the scope of deduction is correct inasmuch as it speaks about the deduction otherwise allowable under this Act, but his argument is not that the sum which is paid by way of import duty or liability to pay excise duty is not the sum given under the permissible deductions." The said judgment of the Hon'ble Gujarat High Court was not challenged by the Revenue. Subsequently, the Bombay High Court in the case of Bharat Petroleum Corpn. Ltd. and the Madras High Court in the case of Chemicals & Plastics India Ltd. echoed the same view as expressed by the Gujarat High Court in the case of Lakhanpal National Ltd. The aforementioned decisions of three High Courts have been considered by the Hon'ble Supreme Court in the case of Berger Paints India Ltd. In that case their Lordships of the Supreme Court observed that the above three judgments rendered by the three different High Courts have been accepted by the Department which has brought in a consistency of approach on the issue involved under section 43B. The claim of the Revenue that deduction should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (a) as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law." Explanation 2 operative from 1-4-1984 coins the definition for the purpose of clause (a) of section 43B as in force at all material times the expression 'any sum payable' so as to mean a sum for which assessee incurred liability in the previous year even though such sum might not have been payable within that previous year under the relevant law. If the contention advanced on behalf of the assessee that incurring of liability is not necessary for allowance of deduction is accepted, then Explanation 2 to section 43B would become redundant." Their Lordships of Supreme Court in the case of Grasim Industries Ltd. v. Collector of Customs [2002] 128 STC 349 held that no word or expression used in any statute can be said to be redundant or superfluous. Their Lordships of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 also held as under:- "A statutory provision must be so construed, if possible, that absurdity and mischief may be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary for the assessee to establish that any payment made by him is towards the liability on account of any tax, duty etc. is also negatived by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. In the said case, their Lordships repelling the contention held as under: "the argument of Mr. S.N Shelat that section 43B of the Act does not enlarge the scope of deduction is correct inasmuch as it speaks about the deduction otherwise allowable under this Act but his argument is not that the sum which is paid by way of duty or liability to pay excise duty is not the sum given under the permissible deductions. Under the mercantile method of accounting, as stated earlier, the moment liability is incurred, it would be an admissible deduction what section 43B of the Act states is that irrespective of the fact that the liability is already incurred, that would be an admissible deduction only when the actual amount in that regard is paid. Therefore, it is clear that in the year 1983 when the goods including the raw materials were imported and the finished goods lying at various depots were manufactured in the year 1983 (including one under the closing stock), the liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 43B are satisfied. Firstly, the liability has been incurred by the assessee in any previous year and secondly the payment has been made by the assessee towards that liability. Once both the conditions for grant of deduction under section 43B are satisfied, the assessee is entitled to deduction. So, however, the year in which deduction is permissible is to be determined with reference to the year of payment. To the extent the liability has been adjusted out of the advance payment, both the conditions being satisfied, deduction will be permissible to the assessee in respect of the liability though incurred in the subsequent assessment year, in the year of payment i.e. the year under appeal. It is, however, clarified that deduction is not permissible to the assessee merely on account of payment having been made in the year under appeal but deduction is permissible to the assessee because the liability has been incurred in the subsequent assessment year and the payment made by the assessee has been adjusted against the liability. So, in respect of the liability incurred in the subsequent assessment year, the assessee has to get the deduction in the year of payment and the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred by the assessee against which the advance payment of excise duty has also been paid both the conditions required to be satisfied for grant of deduction under section 43B stand fulfilled and the assessee would be entitled to claim deduction in respect of the amount adjusted towards the liability notwithstanding the fact that the liability has accrued in the subsequent assessment year. Needless to repeat, section 43B provides for deduction in the year of payment irrespective of the previous year in which the liability is incurred. 15. It may be pertinent to mention that proviso to section 43B, reproduced thereunder for ready reference, also provides for a departure to the general rule enacted in section 43B:- "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 proviso makes an exception to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the Revenue. So, however, there is no provision for allowance of deduction under section 43B in the year of adjustment. It would be pertinent to mention that in the case of sales tax deferred payment scheme, the CBDT has issued a Circular No. 496 dated 25-9-1987 by virtue of which deduction is allowed to the assessee in respect of deferred payment of sales tax if under the provisions of the relevant sales tax law such deferred payment is considered the actual payment. The Hon'ble Supreme Court in the case of CIT v. Gujarat Polycrete (P.) Ltd [2000] 246 ITR 463, here that the CBDT Circular No. 496 dated 25th September, 1987 providing for allowance of deduction in respect of the sales tax deferred payment would apply only if a State Government had amended its Sales-tax Act to provide that the sales tax that was deferred under an incentive scheme framed by it would be treated as actually paid so as to meet the requirements of section 43B of the Income-tax Act, 1961. Their Lordships of the Supreme Court held that the Tribunal had not taken notice to ascertain as to whether under the Gujarat Sales-tax Act, 1969 there was such an,amendment. Therefore, as to whether the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Andhra Pradesh High Court and held as under :- "In view of the clear finding of fact to which reference has been made in the impugned order of the High Court that the assessee claimed deduction in respect of the amount representing the actual duty paid and so adjusted, there can be no doubt that the High Court is right in taking the view that no question of law arises out of the Tribunal's order. There is thus no ground to interfere. The special leave petition is dismissed." The Hon'ble Supreme Court did not interfere with the decision of the Andhra Pradesh High Court as there were clear findings that the amount paid by the assessee and claimed as a deduction was representing the actual duty paid and so adjusted. The said decision of the Hon'ble Supreme Court and the decision of the Andhra Pradesh High Court do not advance the case of the assessee. On the other hand, it supports the view that the deduction is permissible to the assessee under section 43B only once the amount has been adjusted towards the actual duty accrued. 19. Reference may also be relevant to the decision of the Central Excise & Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chenn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 21. 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of such liability be allowed? B. Whether deposit in PLA/unutilized balance in RG23A (part-II) amounts to payment of duty, entitling the assessee to claim deduction thereof in terms of section 43B of the Act ?" 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 under section 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. B. The deposit in PLA/ unutilized balance in RG 23A (Part II), does not amount to payment towards incurred liability in terms of section 43B of the Income-tax Act, 1961. Thus, my opinion in regard to the two issues referred to in para 13 of the proposed order is as under :- (1) The deduction for tax, duty etc. is not allowable under section 43B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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