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TMI Blog2007 (7) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... g of section 43(2) and section 43B support the argument of the ld. Commissioner of Income-tax that unexpired Modvat Credit does not amount to actual payment of Central Excise duty. 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. 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 u/s 43B. The second question is answered in negative and against the assessee. 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 u/s 43B. Regarding the second question of unexpired Modvat Credit, we held that the assessee is not entitled for claiming the same as deduction u/s 43B. Accordingly the order of the CIT(A) on the issue of unexpired Modvat Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, did not go into the question of accrual of the liabilities qua the claim. But details would have to be examined and reworked if the stand of the Revenue is ultimately to prevail. We hold accordingly. For all the above reasons, question No.1 is answered in favour of the assessee. Per M.A. Bakshi, Vice President - HELD THAT:- It is pertinent to mention that under the Central Excise Act, 1944 (1 of 1944), the liability towards excise duty accrues on manufacture of goods and the same is payable on removal of goods. Section 3 of the Central Excise Act, 1944 provides that(1) There shall be levied and collected in such manner as may be prescribed,-(a) a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods excluding goods produced or manufactured in special economic zones, which are produced or manufactured in India as and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986). Section 4 of the said Act provides for valuation of excisable goods for purposes of charging of duty of excise. It is, therefore, evident that unless goods are manufactured by the assessee, the liability to pay excise duty is not inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein. (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 u/s 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. The deduction for tax, duty etc. is not allowable u/s 43B of the Income-tax Act, 1961 merely on payment basis before incurring the liability. The assessee would be entitled to deduction in the year of payment after incurring liability in any previous year. (2) 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 u/s 43B. I hold accordingly. - HON'BLE VIMAL GANDHI, PRESIDENT, M.A. BAKSHI, VICE PRESIDENT, O.K. NARAYANAN, N.K. SAINI AND G.S. PANNU, A.MS For the Appellant : R. K. Goyal and Smt. Sukhwinder Khanna For the Respondent : Ajay Vohra, Ashwani Kumar And Smt. Rashmi Kapoor ORDER Per Dr. O.K. Narayanan, Accountant Member. 1. This appeal is filed by the Revenue. The relevant assessment year is 2001-02. The appeal is direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Central Excise Rules] should be allowed as deduction under section 43B, on the basis of the Appellate orders passed for the earlier assessment years. The CIT(A) observed that the same issue had come up for consideration before him in the matter of the same assessee for an earlier assessment year 1998-99. The issue was decided infavour of the assessee for the said assessment year 1998-99 vide his order dated 27-2-2004 in Appeal No. 316/P/2001-02. The finding of the CIT(A) for the said assessment year 1998-99 has been referred to in the following extract: I have carefully considered the submissions of the assessee and the arguments of the Assessing Officer. The appellant has claimed deduction under section 43B in respect of balance in PLA and RG-23 accounts, which represents payment made to the excise authorities, which can be used by the assessee to off set payment of duty on the final product. The Hon'ble Chandigarh Bench of ITAT in the case of Raj Sandeep, Delhi Bench of ITAT in the case of Modipon and Honda Siel held that balance in PLA/RG-23 qualifies for deduction under section 43B of the Act. My predecessor has also accepted the claim of the appellant. Considering the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 43B of the Act. The Tribunal observed that the first decision supports the case of the assessee whereas the second decision supports the case of the Revenue. In view of the above divergent views, the Bench referred the question before the Hon'ble President of the Income-tax Appellate Tribunal for considering the constitution of a Special Bench to decide the issue. 9. On the recommendation of the Regular Bench of the Tribunal at Chandigarh dated 26-12-2006, the Hon'ble President passed an order under section 253(4) constituting Three Member Special Bench to hear and decide the following issue: Whether deduction for tax, duty etc. is allowed on payment basis without incurring of prior liability to pay such amount under section 43B of the Act ? 10. The matter was thus placed before the Special Bench consisting of Three Members. When the Bench was in session and preliminary arguments were placed before it, the Bench found that apart from the decisions of Regular Benches of the Tribunal which have resulted in divergent views, there are Special Bench decisions too on the issue. Three instances of Special Bench decisions have been observed by the Bench. Those Special Benches co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been stated before the Special Bench in the course of the preliminary hearing, that the issue referred before it needs to be considered in two segments as one relating to the cash payment of advance duty and the second relating to the Modvat Credit available to the assessee. 13. In the above scenario, the issue referred to before the Five-Member Special Bench has been fine-tuned by the Hon'ble President, in the following questions: 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. 14. The above questions were placed before the Revenue and the assessee to seek suggestions and also objections if any. The ld. Commissioner of Income- tax appearing for the Revenue and the ld. Counsel appearing for the assessee fairly agreed that the above split questions do reflect the exact nature and dimension of the issue placed before the Special Bench. 15. Shri R.K. Goyal, the ld. Commissioner of Income-tax appeared for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uties made by an assessee even before accruing the corresponding liability is eligible for deduction under section 43B. 4. That section 43B has increased the number of conditions from one to two for the deduction of the prescribed sums. Instead of the erstwhile single condition of accrual of liability, section 43B has brought out dual condition viz., accrual of liability as well as actual payment against the liability. 5. That this position is very clear in the words used in section 43B in the following manner: ...Notwithstanding anything contained in any other provisions of this Act, a deduction otherwise allowable under this Act in respect of ...... 6. That a deduction otherwise allowable under this Act , means a deduction qualified to be allowed before considering the question of payment. The item must be permissible as a deduction under any of the enabling provisions; the expenses, must be incurred or liability must be incurred. That, only for the restriction brought in by section 43B that cash must be actually paid, it does not mean that the remaining and existing conditions provided in law have been dispensed with. All such conditions are still retained. The further condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return. The expression . . . in respect of the previous year in which the liability to pay such sum was incurred as aforesaid.... is the speaking expression to be marked. The law has made it very clear in simple terms that what is to be paid and for which evidence has to be furnished is in respect of the payment for which the liability was incurred in the previous year. This shows that incurring of prior liability in a previous year is essential in claiming a deduction governed by the provisions of section 43B. The additional requirement of making actual payment has not obliterated any other remaining requirements embodied in the law relating to deduction of expenses in computing income from business. 9. That further, the position has been explicitly made clear in the statute by providing Explanation 2 to section 43B. Explanation 2 reads that, for the purposes of clause (a), as in force at all material time, 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 factum that the liability should be incurred during the previous year has been reiterated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility would not be allowed as deduction under section 43B. (v) CWC Wines (P.) Ltd 's case: The Special Bench has; held that countervailing excise duty paid in advance for importing Liquor cannot be allowed, as deduction under section 43B where goods have not been received during the relevant previous year, which means advance payment of duty cannot be allowed as deduction before actually incurring the corresponding liability. (vi) Maruti Udyog Ltd 's case: In this case, the Tribunal has examined the issue and has come to a finding that advance payment of taxes or duties without incurring liability to pay such taxes or duties. cannot be allowed as deduction under section, 43B. 17. In addition to the above judicial pronouncements, the ld. Commissioner has also placed reliance on Circular No. 550 issued by CBDT on 1-1-1990, providing Explanatory Notes on the provisions relating to Direct Taxes contained in the Finance Act, 1989. It has been clarified therein that Explanation 2 has been provided in section 43B to nullify the rigors of certain judicial pronouncements [Srikakollu Subba Rao Co. s case] where the courts have held that in addition to the incurring of liabilities, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory liabilities in the year of payment is introduced notwithstanding the fact that the liability in respect thereof may have accrued in another year. In effect section 43B overrides the method of accounting consistently followed by an assessee and directs that deduction of statutory liabilities will be available only in the year of payment. 2. The assessee has claimed deduction under section 43B in respect of the balances on the Personal Ledger Account (PLA) maintained with the Excise authorities. As the amounts have irretrievably gone out of the hands of the assessee-company, those payments are allowable deduction as contemplated in section 43B. Section 43B provides that any sum payable on account of tax, duty etc. which is otherwise allowable, shall be allowed only in the year of actual payment, irrespective of the year in which the liability to pay the same was incurred. Consequently, where the liability to pay excise duty may be incurred in. a later date, the amount actually paid by the assessee has to be allowed as deduction in the year of payment itself. 3. The statutory provisions of section 43B and the PLA and RC-23 maintained under the Central Excise Rule clearly poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and no other consideration should prevail in deducting those items other than the consideration whether those sums have actually been paid by the assessee. In other words section 43B overrides all the rules regarding method of accounting and decides the issue of deducting the prescribed sums only on actual payment without any conflict to section 43(2). Cash system of accounting invariably means deduction of expenses in the year of payment. 8. Section 43B provides that the items enumerated thereunder shall be allowed on actual payment 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. The expression irrespective in fact removes any reference to time. The expression irrespective means regardless of time. Therefore the insistence that the incurring of liability must be referred to a particular previous year is uncalled tor in the administration of section 43B. 9. A careful reading of section 43B does not bring out any sequence or order of events in which the matters like incurring of liability, raising of demand, actual payment of the duty or taxes should occur. The scre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by way of sales tax in the month of April of the succeeding previous year is the liability actually incurred in the month of March falling within the immediately preceding previous year. Before the introduction of the proviso, Courts have held that in order to apply the provisions of section 43B, not only should the liability to pay the tax or duty be incurred in the accounting year, but the amount also should be statutorily payable in the accounting year - Srikakollu Subba Rao Co.'s case. It is to take care of such marginal situations and to mitigate the genuine hardships of the assessee as a result of High Court judgment that the proviso has been added to section 43B. It is not in the nature as argued by the Revenue that payment should succeed incurring of liability. 12. The Revenue has also placed much reliance on Explanation 2 to section 43B. Explanation 2 provides that for the purposes of clause (a), any sum payable means, a sum for which the assessee has incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. By making reference to clause (a), the items covered by Explanation 2 are tax, dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court. The interpretation placed on section 43B in the case of Lakhanpal National Ltd. 's case was directly followed by the judgment of the Bombay High Court in CIT v. Bharat Petroleum Corpn. Ltd. [2001] 252 ITR 43 and also by Madras High Court in the case of Chemicals Plastics India Ltd. v. CIT [2003] 260 ITR 193. 4. The above decisions of three High Courts have been considered by the Supreme Court in the case of Berger Paints (India) Ltd. v. CIT [2004] 266 ITR 99. The Supreme Court observed that the above three judgments rendered by 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 Court held that the said consistency of view has to be followed and therefore the judgment of the Calcutta High Court in CIT v. Berger Paints (India) Ltd. No.1 [2002] 254 ITR 498 was liable to be disapproved. The uniform view reflected in the decision of three High Courts has been held by the Supreme Court as a valid reason to endorse the said view and not to disturb the consistency. Referring to the Supreme Court judgments in Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219; CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plain a situation arising from the implementation of the law stated in a section. It does not bring any interpretation over and above the spirit of the law contained in a particular section. In the present case, Explanation 2needs to be read along with the proviso which enables an assessee to claim deduction even if made after the close of the previous year, but if made before the due date of filing of the return. Explanation 2 is the expression of the proviso meant for undoing the after effect of the judgment of Andhra Pradesh High Court. The proviso is the means provided by the statute, to accomplish the objective of the Explanation. Therefore they should be read together. 6. The above position has been explained by the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT[1997] 224 ITR 677. The Court has observed in the said judgment that the first proviso to section 43B and Explanation 2have to be read together as giving effect to the true intention of section 43B. Explanation 2 being retrospective, the first proviso has also to be so construed. Without the first proviso, Explanation 2would not obviate the hardship or unintended consequence of section 43B. The proviso sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t held that for the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee etc., the year of payment alone is relevant and is to be taken into account. The Court categorically held that the year in which the assessee incurred the liability to pay such taxes, duties etc. has no relevance and cannot be linked with the manner of giving benefit of deduction under section 43B. The above decision of the Allahabad High Court clearly endorses the argument of the assessee that incurring of liability mentioned in section 43B, the First proviso thereto and Explanation 2 thereunder are reflecting the general liability of an assessee carrying on the business where liability arises for duties and taxes and the expression does not mean an outstanding liability as construed by the Revenue. In the light of the general liability already stated, the actual payment alone is the sole criteria of deciding the admissibility of deduction under section 43B. 9. In order to get the refund of excise duty from the Account-Current, it is necessary for the assessee to make a formal claim and the excise authority has to pass appropriate orders after recording the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the issue raised before us. 1. The ITAT Mumbai Bench in the case of IAC v. Tata Press Ltd. has held that advance payment of excise duty cannot be allowed as deduction under section 43B. But the decision does not consider how the accrual of liability, one of the basic rules of mercantile system of accounting, would be still valid in allowing deduction under section 43B once the system has been statutorily shifted to cash basis. 2. The Revenue has relied on the Special Bench decision of ITAT Hyderabad Bench in the case of KCP Ltd. The said decision of the Special Bench is no longer good law in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. where the Court has held that the assessee shall be entitled to get the benefit of deduction under section 43B on actual payment, irrespective of the year of payment and by virtue of the overriding effect of section 43B. 3. The reliance placed by the Revenue on the decision of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao Co. is also misplaced. It is not a decision which interprets the provisions of law contained in section 43B. 4. The decision of ITAT Mumbai Bench 'E' in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication by the High Court on the question whether amounts in a special account maintained by the assessee to pay excise duty as and when the goods were removed, would partake the character of the excise duty and would hence be allowable under section 43B of the Income-tax Act, 1961. This is a straight decision of the Apex Court on the subject-matter considered here. 2. The ITAT Delhi Bench 'D' in the case of Honda Siel Power Products Ltd v. Dy. CIT [2001] 77 ITD 123 has considered the nature of advance payments of Central Excise duty for the purpose of deduction under section 43B. 3. The Central Excise Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the nature of the PLA in the case of F. Fibre Bangalore (P.) Ltd. v. CCE [2000] 120 ELT 579 (Tribunal). In that case the assessee debited the duty in PLA for acquiring under rule 57F(2) and took the credit back in PLA rather than taking the same in RG-23A Part-II. As such, the lower authorities directed the assessee to pay the duty in PLA and take the credit back in RG-23A Part-II. This direction could not be adhered to since as on that date, the unit was not functioning. The revival also could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he credit of duty of Central Excise or additional duty of Customs (countervailing duty), usually referred to as input duty paid on the goods used in the manufacture of final products can be utilised towards payment of duty of excise on the final products. Before the introduction of the above scheme, wherever applicable, duty of Central Excise had to be paid at every point thereby the cascading effect of the multiple levy of duty would be burdended by the ultimate consumer who consumes the goods. In order to avoid the escalation effect of the multiple point levy, the Modvat has brought a scheme whereby the excise duty paid by an assessee on the input goods would be available as credit to set off against the excise duty payable on the output goods. (ii) The input credit available to an assessee under Modvat is as good as payment of excise duty as it ultimately reduces the net liability of the assessee to pay Central Excise duty on the finished goods. If such credit is not available by way of Modvat, the assessee has to pay Central Excise duty to that extent also, by cash which means that availing of Modvat Credit in pari materia amounts to payment of Central Excise duty by way of cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Honda Siel Power Products Ltd. The ld. Counsel has also relied on the decision of ITAT Agra Bench in the case of Hind Lamps Ltd. 29. Shri R.K Goyal, the ld. Commissioner of Income-tax also argued in a forceful presentation that unexpired credit of Modvat account is no way similar to the advance payment of Central Excise duty. The ld. Commissioner again reiterated that even the advance payment of Central Excise duty through actual payment of cash in the Treasury does not qualify the deduction under section 43B unless corresponding liability is incurred in the previous year. He submitted therefore that even if the unexpired credit in the Modvat account is if at all treated as similar to advance payment of Central Excise duty, still it is not deductible for the reason that the advance payment of excise duty per se is not deductible under section 43B. 30. Without prejudice to the above contention, the ld. Commissioner submitted that Modvat is a scheme whereby the law exempts an assessee from payment of Central Excise duty on final products to the extent duty was paid on the raw material, if any. Therefore it does not amount to actual payment. It is only an entitlement of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary that the assessee should keep sufficient credit balance in the Account-Current so that every such removal is noted in Account-Current for debiting the appropriate duty amount. The nature of Account-Current, therefore, is that of a running account in the light of the fact that the activities carried on by an assessee are also incessant and continuous. They both run together. As the assessee has to meet the Central Excise liability on a continuous basis without any interruption, the assessee has to maintain a running account in the form of Account-Current. It is to be seen that the excess amount reflected in the Account-Current amounts to nothing but payment of excise duty. The credits available in such accounts cannot be considered advances as construed in the ordinary commercial accounting sense. 34. A similar issue was considered by Supreme Court in the case of New Horizon Sugar Mills. In that case the assessee was required to set apart specific amounts towards Molasses Storage Reserve Fund, which could be utilised only for the purpose of constructing Molasses Storage Tank. This appropriation was mandatory in the light of Molasses Control Order as the assessee was a manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting method followed by an assessee. The normal principles and practices are done away. Accordingly, there is no force in the argument of the revenue that the deduction can be granted only if the liability has incurred during the previous year, even when the payment was made by the assessee. The point coming out of the above discussion is that the rule of deduction under section 43B is the actual payment of the liability. The nature of the Account-Current already examined brings home the point that the advance payment of excise duties are actual payments of duties. Therefore, when the payments are understood as actual payments, those payments even if mentioned as advance payments need to be allowed as deduction under section 43B. 38. The above position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid; but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in section 43B, that the deduction in respect of tax or duty, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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. The Supreme Court has approved the judgments of the High Courts of Gujarat, Mumbai and Madras not only on the rule of consistency but also on the merits of the issue. The Supreme Court has held that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year is allowable under section 43B of the Income-tax Act, 1961, as a deduction in respect of that year, irrespective of the amount of excise duty/customs duty included in the valuation of the assessee's closing stock at the end of the accounting year. It is not that the Supreme Court has considered the issue in the case of Berger Paints (India) Ltd. 266 ITR 99 alone. The revenue had taken up the decision of Andhra Pradesh High Court rendered on this issue before the Supreme Court in Special Leave Petition (SLP-SR 2766 of 1993), in the case of South India Research Institute. The Supreme Court has examined the judgment of Andhra Pradesh High Court in the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee...... . The Supreme Court in the case of Berger Paints (India) Ltd. has also considered the Special Bench decision of the ITAT Delhi in the case of Indian Communication Network (P.) Ltd. The said decision of the Special Bench has been approved by the Supreme Court. The Court has reproduced the relevant portion of the order of the Special Bench and endorsed the view of the Special Bench that Excise duty payments must be deducted in the year of payment irrespective of the year of incurring of liability. What we find is that the Supreme Court has considered the decision of the Delhi Special Bench dealing with the very same issue and has approved the decision that advance payment of excise duties need to be deducted in the year of payment under section 43B. Therefore, the proposition argued by the assessee-company has not only been approved by the various High Courts but also by the Supreme Court and the issue is squarely covered by the decision of the Supreme Court in the case of Berger Paints (India) Ltd. 44. We may also examine the relevance of the case laws cited by the ld. CIT (DR) at the time of hearing. He has placed reliance on the decision of Andhra Pradesh High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concept of going concern . Accounting principles, practice and standards all are framed on the above basic concept that a business will run for quite a long time and is not going to terminate its operation in a near future. If the concept of continuity is not there, one will have to consider every receipt as income and every payment as expenditure, irrespective of the nature of the receipt and payment. The whole frame of accountancy is made on the principle of going concern . Accountancy provides the rules for working out, profit and loss of an entity. These principles are incorporated in Taxation Law, as well. That is why section 32 allows an assessee to write off a specified percentage in a staggered manner as successive deduction of depreciation allowances; section 35D provides for expenses to be written off for a period of 10 years. Various deductions under Chapter VI-A provide for deduction for more than one assessment year, sometimes 5 assessment years to 10 assessment years. When that is the case, the basic rule is that the business will continue for years to come and the assessee will have to claim the deduction on a regular basis from assessment year to assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the expression incurring of liability . While considering the above, the Tribunal has not read the proviso to section 43B together with Explanation 2 and also it has completely overlooked the prominent expression of irrespective of the previous year . The decision also has relied on various decisions mentioned above and which were held not relevant. 50. The ld. CIT has also relied on the Circular No. 550, dated 1-1-1990 issued by CBDT in the context of Explanation 2 to section 43B. The Finance Act, 1989 has brought in the Explanation 2 to section 43B, according to which any sum payable shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable. In fact, the circular deals with the short question of the distinction between liability incurred and payment due. It clarifies that even if the sum is not due for payment during the previous year deduction would be available if payment was made. There was a judicial view that for, claiming deduction, the amounts also must be payable within the previous year. [Srikakollu Subba Rao Co.]. It created a difficult situation for asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable refers to a declaration of permission in law that which are available as deductions on payment under section 43B, are those expenses which are usually allowed by the Income-tax Act for the purpose of computing income. We have seen that the expression any sum payable does not mean payment outstanding . In the light of the decision of the Supreme Court in the case of Allied Motors v. CIT [1997] 224 ITR 677, we have held that for the purpose of section 43B the proviso there-under and Explanation 2 have to be read and construed together. 52. Therefore, we hold that the 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. Accordingly, the first question is answered in affirmative and in favour of the assessee. 53. The next question to be considered is whether Modvat Credit available to an assessee as on the last day of the previous year amounts to payment of Central Excise duty under section 43B ? 54. The forceful argument of the ld. Counsel appearing for the assessee is on the basis of the Supreme Court decision in the case of Eicher Motors. The argument of the ld. Counsel is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessee under the scheme of Modvat in order to minimise the escalation effect of payment of excise duty by successive manufacturers. Therefore, the excise duty paid at the earlier point is set off against the Central Excise liability at the next point. Till the set off is availed at the next point, the duty available for set off by the assessee, is nothing but part of the cost of the materials purchased by him. That is not a payment per se made towards excise duty but it was in fact a payment made towards the purchase cost. 58. Section 43 of the Income-tax Act, 1961 has provided the definition of certain terms relevant to the computation of income from profits and gains of business or profession. Sub-section (2) of that section defines the term paid . Section 43(2) reads as below: (2) 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'Profits and gains of business or profession'. 59. The definition states that paid means money actually paid by an assessee or incurred by the assessee and not anything else. In section 43B, the deduction is given only for those sums a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Law Review), is thus ...........The Legislation as a name, it seeks to obviate some mischief, to supply an inadequacy, to effect a change of policy, to formulate a plan of Government. That aim, that policy is not drawn, like nitrogen out of the air, it is evidenced in the language of the statute, as read in the light of other external manifestations of purpose........ 2.1 To resolve the controversy before us, we must consider heading of section 43B, the circumstances compelling the Legislature to introduce it (the mischief involved before its introduction) and the purpose it was to serve. 2.2 The Finance Minister while presenting Finance Bill, 1983, stated as under: Several cases have come to notice where taxpayers do not discharge the statutory liability such as in respect of excise duty, employer's provident fund, employees State Insurance scheme, for long period of time. For the purpose of their income-tax assessment, they nevertheless claim the liability as deduction even as they take resort to legal action, thus depriving the Government all its dues while enjoying the benefit of nonpayment. The curb such practices, I propose to provide that irrespective of the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming deduction of Excise Duty etc. on accrual basis under mercantile system of accounting by providing for actual payment. 2.4 The relevant provisions of section 43B for our purposes, with highlighted heading, are as. follows: 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, or...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 referred to in clause (a) or clause (c) or clause (d) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of accrual of liability is the very purpose of enactment. The memorandum explaining the provision has made specific reference to the meaning of word paid under the Income-tax Act. We will explain this a little later. 4. In the case of Sanghi Motors v. Union of India [1991] 187 ITR 703 (overruled on another point), the Hon'ble Delhi High Court, speaking through Justice B.N. Kirpal (as he then was), on effect of provision of section 43B observed as under: A reading of this section clearly shows that the deduction can be claimed only in the year in which the payment is actually made. In other words, the deduction cannot be allowed as per the principles of the mercantile system of accounting, namely, when the liability arises but now it can be allowed only in the year in which the tax is actually paid. In the present case, the tax having been paid on January 31, 1985, it would be in the case of the petitioner, in the accounting year ending January 31, 1985, and corresponding to the assessment year 1986-87, that the deduction can be claimed. 4.1 In the case of Indian Communication Network (P.) Ltd., the Special Bench held as under: In accordance with the system followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore two amounts referred to above were part of the cost element in the closing stock as per consistent and established principle of accounting. Therefore, excise and customs duty included in the closing stock could not be allowed as a deduction as the entire amount paid during the year has already been debited to the profit and loss account with the manufacturing expenses. The case of the assessee is noted by their Lordship as under: At the time of hearing, Mr. J.P. Shah, the learned advocate appearing for the petitioner, submits that any sum payable by an assessee by way of tax or duty under any law for the time being in force is allowable and as per the mercantile method of accounting, it would be allowable at the time when it becomes due and/or the assessee would be liable to pay the same and not on the actual payment of tax or duty, but as per the newly added provision of section 43B of the Act, it would be allowable only in computing the income referred to in section 28 of the previous year in which the sum is actually paid by the assessee irrespective of the previous year in which the liability to pay such tax was incurred by the assessee according to the method of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to pay the tax or duty but would be so entitled to get deduction only on actual payment of tax or duty. The Legislature has also taken care by providing an Explanation that the assessee shall not be entitled to any deduction under section 43B of the Act in respect of such sum in computing the income of the previous year in which such sum is clearly paid by him in case a deduction in respect of any such sum was allowed in the previous year. It is, therefore, clear that the assessee shall not be entitled to get the benefit twice, i.e., at the time when the liability arises and also at the time when the actual payment is made. In view of the specific language of the section that deduction of the amount as mentioned in clauses (a) and (b) of section 43B would be allowed in the previous year in which such sum is paid, there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee. There is no dispute on the point that the amount of import duty and excise duty are allowable deductions. What is disputed on behalf of the respondents that the amount of customs and excise d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction 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 material were imported and the finished goods lying at various depots were manufactured in the year 1983 (including the one under the closing stock), the liability to pay import duty and excise duty on the said goods was incurred by the petitioner-assessee. When that is so, it is also clear that the deduction of the said excise duty and import duty even on the closing stock was allowable in the accounting year 1983, but because of the specific language of section 43B of the Act which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made and, therefore, it is not allowable. Therefore, the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles are claimed as deductions merely because they are paid, cannot be accepted. 4.6 The learned Departmental Representative before us emphasized that in the case of Lakhanpal National Ltd. th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e must establish accrual of liability before payment. On the other hand, the arguments advanced on behalf of the assessee by Mr. J.P. Shah have been accepted and it has been further observed, There is no dispute on the point that the amount of import duty and excise duty are allowable deductions. 5. In the case of Bharat Petroleum Corpn. Ltd., Bharat Petroleum Corporation had claimed deduction of Rs. 12,62,47,225 under the head Excise and customs duty paid on the closing stock as on March 31, 1985. The amount was not debited in the Profit and Loss Account but shown in the balance sheet as current assets under the caption Prepaid taxes . The Assessing Officer did not allow the claim for deduction as the amount was not debited in the profit and loss account in respect of goods falling in the closing stock nor the amount was included in the value of the closing stock. The first appeal of the assessee was rejected. It is noted in the report that the Tribunal allowed the appeal, and held that the entire amount was an allowable deduction in view of the fact that the assessee had actually paid, during the year in question, Rs. 12,62,47,225. The High Court upheld the decision with the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nyl chloride, rigid PVC pipes and fittings and other items. The assessee had, in the previous year corresponding to the assessment year 1984-85, imported materials required for the manufacture of the assessee's products. The assessee had paid import duty of Rs. 35,09,826. According to the assessee the cost of the imported materials inclusive of duty was taken to the profit and loss account only on consumption basis. The balance of import duty of Rs. 11,58,833 paid on the raw materials held as closing stock, was taken into the balance sheet and shown as part of current assets. Schedule 15 of the balance sheet set out the current assets, loans and advances. In that Schedule, under the heading Inventories the value of raw materials held in stock was shown. The value of the raw materials stated therein, according to the assessee, includes this sum of Rs. 11,58,833. Similarly excise duty paid on finished goods held as closing stock was shown as part of the inventory under the current assets in the balance sheet. The assessee's claim under section 43B of the Act for deducting the actual customs duty and excise duty paid on the stock of raw material and finished goods was negative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profits when the gross profits have been properly ascertained by valuing the closing stock as also the opening stock including therein the duty paid on such stock. A view similar to the one taken by us has been taken by the Bombay High Court in the case of CIT v. Bharat Petroleum Corporation Ltd. [2001] 252 ITR 43. The assessee had filed before the Assessing Officer the necessary adjustment statement. The question referred to us is answered in favour of the assessee. It is clear from above that deduction was allowed to the assessee in respect of his claim under section 43B and their Lordship has elaborated as to how deduction is to be allowed only on actual payment irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. 7. The application of section 43B was again considered by their Lordship of Supreme Court in the case of Berger Paints India Ltd. Their Lordship noted that revenue had not challenged decision of Gujarat High Court in Lakhanpal National Ltd. 's case which was followed by Bombay High Court in Bharat Petroleum Corpn. Ltd 's case, Madras High Court in Chemicals Plastics India Ltd 's case followed by Bombay Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Apex Court, what was analysis and finding in the case of Lakhanpal National Ltd., followed in other cases, the learned Departmental Representative argued that above decisions were distinguishable and not applicable to the facts of the case. In all the decisions, there was no dispute that liability to pay statutory amount had accrued and the amounts were payable and deductions rightly claimed on actual payment basis. The question involved before us was not involved in those cases. We do not find any substance in this argument of the learned Departmental Representative. Object, purpose and import of section 43B has been explained, emphasized and noted above. The same was clearly stated and admitted to be to allow deduction of six items mentioned in clauses (a) to (f) of the section in the year in which the amount is actually paid, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee, according to the method of accounting. In all the cases discussed above, despite difference in facts, the Courts noted the main thrust of section 43B of allow ability of deduction of tax liability in the year in which amount was actually paid an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious 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. To introduce this double test would be writing words into the section which neither the Tribunal nor the court is en titled to do. In other parts of the Act, where provision in the books is given a special status, and that is specifically called for but section 43B is not one such section. 8.2 The decision of Allahabad High Court in the case of C.L. Gupta Sons is also direct On the point. Therein the Court held as under: Held, that the amount of customs duty of Rs. 3,56,541 was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it was deductible only in the year in which it was actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of method of accounting regularly adopted by him and, therefore, in view of the clear provision of law, the deduction could not be allowed in the assessment year 1988-89. 9. The aforesaid decided cases have clearly laid down that deduction of items mentioned in section 43B is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with section 43B is accepted by the Revenue in the memorandum explaining the provision of section 43B in the Finance Bill, 1983 (reproduced above), in these words: For the purpose of computation of profits and gains of business and profession, Income-tax Act define 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. 10.2 It is evident from above that actually paid is treated as equal to incurred i.e. incurring of a liability, according to method of accounting followed by the assessee for computing profits of business. It is further well known that under cash system, deduction is allowed when sum is actually paid whereas under mercantile system, it is allowed when liability is incurred . It is clear from above discussion that mercantile system of accounting did not work well in respect of items, more particularly in respect of statutory liabilities and was abused. Therefore, provision of section 43B was introduced to check above abuse. The Scheme is that deduction would not be allowed on incurring of liability where mercantile system is followed but shall be allowed in the year in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B), (f) CIT v. E.A.E. T. Sundararaj [1975] 99 ITR 226 (Mad.), (g) CIT v. Amalgamated Development Ltd. [1967] 65 ITR 395 (SC). 12. Having seen that under cash system of accounting, the deduction is allowed only in the year of disbursement, we now proceed to consider the arguments of the revenue and first submission was that the assessee must show that amount actually paid is a deduction otherwise allowable under the Act . In other words the assessee must show that it is a liability which is deductible. Only in such circumstances, where amount is shown as payable and is actually paid in respect of taxes, duties etc. the deduction can be allowed under section 43B. 13. We do not find any substance in the above submission. We have already noted the relevant observations from the case of Lakhanpal National Ltd., how under cash system of accounting, the deduction is allowed when amount is actually paid. It is not necessary that assessee must prove incurring of a specific liability under any Statute referred to in different clauses 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y them did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales tax had in fact been paid by the assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from. claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence, the first proviso was inserted in section 43B. The amendment which was made by the Finance Act of 1987 in section 43B by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provisions unworkable or unjust in a specific situation. The proviso is an exception to the general rule and has a limited application. If the amount 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 cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Andhra Pradesh High Court in the case of Srikakollu Subba Rao Co. wherein it was held as under: In order to apply the provisions of section 43B, not only should be liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. Section 43B itself is clear to this extent. It refers to the sum payable in clauses (a) and (b). The amendment with effect from April 1, 1988, permitting the deduction of taxes and duties paid before the filing of income-tax returns makes this clear. Where writ petitions were filed against the disallowance of (i) market cess and (ii) disallowance of sales tax payable for the month of March, 1984, under section 43B. Held, (i) that the sales tax payable for the month of March, 1984, could not be disallowed under section 43B. 17. Above decision, according to CBDT, was contrary to intention of the Legislature. It was defeating very purpose of the section. Therefore to supersede 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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. [Portion (a) is going in different direction than the main section and it is not possible to reconcile them.] The very purpose of section 43B as discussed earlier, is to allow the deduction in the assessment year relevant to the previous year in which the amount is actually paid. Even Departmental Representative has not disputed that liability should be shown to have been incurred earlier than actual payment not necessarily in the same previous year. If Explanation 2 is read literally, it can lead to absurd results and hardships and in some case might become unworkable. It will therefore, be most reasonable to read Explanation 2 as governing a particular situation arising on account of the view taken by High Courts, as discussed above. 17.1 In this connection, besides relying 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by clauses (a) to (f) shall be allowed in computing income under section 28 of the previous year in which such sum is actually paid. (ii) This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to method of accounting regularly employed by him. There is therefore no justification to examine the previous year in which liability to pay the sum was incurred when mandate is irrespective of the previous year in which liability was incurred and claim is to be allowed on the basis of actual payment. To do otherwise would be to do violence to words irrespective of the previous year in which liability was incurred and disregard the mandate of the section. 19. In our considered opinion, only way to harmonise different parts of section 43B which according to the Supreme Court is not happily worded is to give limited and restricted meaning to proviso (1) and Explanation 2, as discussed above. 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 cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsciousness of its own. The pulse beats emanating from the spinal cord of its basic framework can be felt all over its body, even in the extremities of its limbs. 19.4 In the case of Smt. Laxmi Devi v. Sethani Mukand Kanwar AIR 1965 SC 934, the dispute was whether transfer in favour of an auction purchaser for a consideration without notice of charge was protected under second part of section 100 of Transfer of Property Act. It was held that in the light of provisions of section 2(d) of Transfer of Property Act, providing that nothing herein contained shall be deemed to affect save as otherwise provided by section 57 and Chapter IV of this Act, Auction purchase is transfer by operation of law or by any execution of a decree or order of a Court of competent jurisdiction. However, section 5 of the Transfer of Property Act defines the transfer of property to mean an act by which a living person conveys property to one or 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akh as excise duty to reduce its total income which thereafter is worked out at Rs. 99 lakhs. Now what the assessee has saved is 3596 of Rs. 1 lakh i.e. Rs. 35,000 after selling out Rs. 1 lakh. How assessee is benefited by payment of duty or tax? Therefore, the contention that payment of taxes, cess etc. can be adopted as a device, is required to be stated to be rejected. 22. The assessee is maintaining current account and is making payment as per statutory provision of rule 173G of Excise Rule read with section 37(ib) of Central Excise Act. It is a payment made as per requirement of the Statute and, therefore, we do not see how such a payment can be disallowed. In case payment made is refunded for any reason, the same can be brought to tax in accordance with provisions of section 41(1) of the I.T. Act. However, if deduction is not allowed to the assessee, in the assessment year relevant to the previous year 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od under consideration. Otherwise the entire claim relating to excise duty will have to be rewritten, resulting in lot of wastage of time and energy. Therefore, claim of deduction is pressed on account of actual duty paid in the relevant period in a bona fide manner. Above claim was not considered by the Assessing Officer. The CIT (Appeals) allowed entire claim and, therefore, did not go into the question of accrual of the liabilities qua the claim. But details would have to be examined and reworked if the stand of the Revenue is ultimately to prevail. We hold accordingly. For all the above reasons, question No.1 is answered in favour of the assessee. ORDER Per M.A. Bakshi, Vice President 1. I have gone through the proposed orders since I could not persuade myself to agree with the reasoning and conclusion partly arrived 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the preceding sub-clauses. Explanation.-For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains; Section 14 of the Act gives the heads of income which reads as under: 14. Heads of income.-Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income: A. - Salaries B. - Income from house property. C. - Profits and gains of business or profession. D. - Capital gains E. - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained 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, or (b) 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, or (c) any sum referred to in clause (ii) of sub-section (1) of section, or (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment year commencing on the 1st day of April, 1996 or any earlier assessment year) in which 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 3B.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) of this section is allowed in computing the income, referred to in section 28, of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 2001, or any earlier assessment year) in which 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at in the context of its enactment, with the glasses of the statute maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit in 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 unpai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. In other words, an assessee who has already been allowed deduction of a liability on account of tax or duty or in respect of any sum payable as contribution to any fund for the assessment year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed a deduction in the assessment year 1984-85, or any subsequent year on the ground that he has actually made a payment towards such liability in that year. There was an amendment in section 43B by the Finance Act, 1987 which may not be relevant for the purpose of present controversy. Finance Act, 1988 made another amendment in section 43B. The scope of 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 Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of the present controversy. 9. The Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd had the occasion to explain the intent and purpose of incorporation of section 43B and certain subsequent amendments. In my view, it will be useful to reproduce the relevant portion from the judgment which apart from giving the history of the amendments also indicates the legislative intention behind incorporation of section 43B :- 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 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s contribution to provident fund, Employees' State Insurance Scheme, etc. - for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force (irrespective of whether such 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 discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the first proviso to section 43B operates only prospectively. We will refer only to some of these judgments. Explanation 2 was added to section 43B by the Finance Act of 1989 with retrospective effect from April 1, 1984. The Memorandum explaining the reasons for introducing Explanation 2, states, inter alia, as follows [1989] 176 ITR (St.) 123:- 24. Under the existing provision of section 43B of the Income- tax Act, 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 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 represente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther provision of this Act , meaning thereby that if there is anything contrary provided under any other provision of the Act, section 43B will prevail over such a general provision of the Act. It is noticed earlier that section 145 mandates that the Assessing Officer shall compute the profits and gains of business of an assessee in accordance with the method of accounting (cash or mercantile) regularly employed by the assessee. Under the mercantile system of accounting, the liability is provided in the books of account as and when it is incurred. So in respect of excise duty, which is the subject-matter of dispute before 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 el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of accrual of liability without making payments. Section 43B intends to put a curb on the tendency of taxpayers to claim deductions without making payments. Section 43B does not and is not intended to enlarge the scope of deductions thereunder. Interpreting the provision of section 43B, their Lordships of the Gujarat High Court in the case of Lakhanpal National Ltd. held that section 43B of the Income-tax Act does not enlarge the scope of deduction as it speaks about the deduction otherwise allowable under the Act. Explaining the words 'deduction otherwise allowable under this Act', their Lordships 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 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem of accounting regularly employed by the assessee but the payment had not become due under the relevant statute. The Legislature felt that the interpretation given by the Hon'ble Andhra Pradesh High Court would defeat the purpose of enactment of section 43B and accordingly Explanation 2 was inserted by the Finance Act, 1989 with effect from 1-4-1984. I have quoted Explanation 2 elsewhere in this order and since the controversy revolves around the meaning of the words 'any sum payable', it will be worthwhile to repeat Explanation 2 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. 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 contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any way interfere with or change the enactment or any part thereof, but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act, it can help or assist the court in interpreting the true purport or intendment of the enactment; (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming a hindrance in the interpretation of the same. The contention advanced on behalf of the assessee that it is not necessary 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmissible to the assessee in respect of any liability incurred in any previous year in respect of excise duty in the year of payment irrespective of the year in which the liability has been incurred it becomes abundantly clear that both the conditions for grant of deduction under section 43B stand satisfied on the date on which the liability of the assessee for excise duty has accrued and advance payment is adjusted against such accrued liability. In my view, after the accrual of the liability and adjustment out of advance, both the conditions required for claim of deduction under 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Chemicals Plastics India Ltd. The Madras High Court has also pointed out that it is open to the assessee to file an adjustment statement before the Assessing Officer for claiming deduction under section 43B. Therefore, in this case, when the assessee files the return, the liability towards the excise duty in normal circumstances would accrue in respect of the goods manufactured/removed up to the date of filing of the return of income. At the time of filing of the return, assessee is aware of the liability having accrued up to that date. Now, if the liability has already 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, repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in a subsequent assessment year when the liability towards excise duty accrued to the assessee. When provisions of section 43B are applied in this case the assessee gets the benefit of deduction in advance i.e., in the year of payment though the liability has accrued in the subsequent assessment year. There is thus no hardship to the assessee. It would be appropriate and in accord with the spirit of section 43B to allow deduction to the assessee in the subsequent year in which the adjustment of prepared taxes is made. In fact, this was the contention advanced on behalf 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst future liabilities as and when incurred on the manufacture/removal of goods. If for some reason or the other the assessee stops manufacturing of goods and is no longer required to make the payment of excise duty or exemption granted from levy of excise duty on the goods manufactured by the assessee, the advance in PLA A/c becomes refundable to the assessee. Reference may also be made to the decision of the Andhra Pradesh High Court in the case of South India Research Institute. Their Lordships of the Supreme Court rejected the SLP filed against the above judgment 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods. Section 3 of the Central Excise Act, 1944 provides that(1) There shall be levied and collected in such manner as may be prescribed,-(a) a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods excluding goods produced or manufactured in special economic zones, which are produced or manufactured in India as and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986). Section 4 of the said Act provides for valuation of excisable goods for purposes of charging of duty of excise. It 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 43B. On the basis of the analysis, I proceed to record my conclusion as under :- The assessee at page 208 of the paper book had proposed following question of law :- A. What is the effect of insertion of section 43B ? (i) Whether section 43B is only a disabling provision/prohibitive section? (ii) Whether there must be accrual of liability in the first instance to claim deduction under. section 43B in the (subsequent) year of payment? (iii) If the payment is made in advance of incurring the liability, when should deduction 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 advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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