Business Expenditure – Allowable only on actual payment – Bank guarantee is nothing but a guarantee for payment on some happening and cannot be equated with actual payment as required under section 43B of the Act for allowance as deduction in the computat

The dispute relates to the assessment year 1988-89. The
question arose in the background of the view of the Assessing Officer as well as
the Commissioner of Income Tax (Appeals), Jodhpur (in short “the Commissioner”),
that the assessee was not entitled to deductions in terms of section 43B of the
Act. The amount in question related to payability of excise duty on wastage. The
assessee took the stand that the provision for excise duty made on wastage of
IMFL in transit which is debited to the customer’s account and credited to this
account does not attract section 43B of the Act. The Income Tax Officer as well
as the Commissioner held that the assessee’s stand was not acceptable. An appeal
was filed before the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur (in
short “the ITAT”) which decided the issue in favour of the assessee. In the High
Court, the assessee took the stand that a bank guarantee had been furnished in
respect of the amount and, therefore, there was no scope for applying section
43B of the Act. It was also submitted that section 43B of the Act applied to
payments relatable to tax, duty, cess, or fee. But bottling fees, chargeable
from the assessee under the Rajasthan Excise Act, 1950 (in short “the Excise
Act”) and the Rajasthan Excise Rules, 1962 (in short “the Rules”), and interest
chargeable for late
payment, did not amount to tax, duty and cess. The High Court held that such
fees were not covered under the ambit of section 43B.

The revenue appealed against the said view of the High Court
which, nevertheless, held that furnishing of bank guarantee was not the same as
making payment as stipulated in section 43B of the Act. The Supreme Court held
that the requirement of section 43B of the Act is actual payment and not deemed
payment as condition precedent for making the claim for deduction in respect of
any of the expenditure incurred by the assessee during the relevant previous
year specified in section 43B. The furnishing of bank guarantee cannot be
equated with actual payment which requires that money must flow from the
assessee to the public exchequer, as required under section 43B. By no stretch
of imagination can it be said that furnishing of bank guarantee is actual
payment of tax or duty in cash. The bank guarantee is nothing but a guarantee
for payment on some happening and that cannot be actual payment as required
under section 43B of the Act for allowance as deduction in the computation of
profits.

The Supreme Court further held that section 43B, after
amendment with effect from April 1, 1989, refers to any sum payable by the
assessee by way of tax, duty or fee by whatever name called under any law for
the time being in force. The basic requirement, therefore, is that the amount
payable must be by way of tax, duty and cess under any law for the time being in
force. The bottling fees for acquiring a right of bottling of IMFL which is
determined under the Excise Act and rule 69 of the Rules is payable by the
assessee as consideration for acquiring the exclusive privilege. It is neither
fee nor tax but the consideration for grant of approval by the government as
terms of contract in the exercise of its rights to enter into a contract in
respect of the exclusive right to deal in bottling liquor in all its
manifestations. Referring to various precedents on the subject, the Supreme
Court concluded that the High Court was justified in holding that the amount did
not fall within the purview of section 43B.