April 2008
S. 43B : (a) Advance payment of excise duty allowable without incurring of prior liability. (b) Modvat credit available does not amount to payment, hence not allowable.
By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
Reading Time 6 mins
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2) (2007) 110 TTJ 183 (Chd.) (SB)
Dy. CIT v.
Glaxo Smithkline Consumer Healthcare Ltd.
ITA No. 343 (Chd.) 2005
A.Y.2001-02. Dated : 20-7-2007
S. 43B of the Income-tax Act, 1961 –
(a) Deduction for tax, duty, etc. is allowable u/s.
43B on payment basis before incurring the liability to pay such amounts;
excess amount of excise duty reflected in the account-current is, therefore,
nothing but actual payment of excise duty, even though mentioned as advance
payments. Hence, it is allowable deduction u/s.43B.
(b) Modvat credit available to assessee, as on the
last day of the previous year does not amount to payment of excise duty and,
hence, not allowable u/s.43B.
Allowability u/s.43B on payment :
The assessee’s claim before the Assessing Officer was that
the balance of Central Excise Duty lying in the PLA and RG-23 registers should
be allowed as a deduction u/s.43B. The CIT(A) allowed the claim, relying on the
decisions in the following cases :
(a) Raj & Sandeep Ltd. v. Asst. CIT, (ITA No.
1853/Chd./1992 dated 18-2-1993)
(b) Modipon Ltd. v. IAC, (1995) 52 TTJ (Del.) 477
(c) Honda Siel Power Products Ltd. v. Dy. CIT,
(2000) 69 TTJ 97 (Del.)/(2001) 77 ITD 123 (Del.)
The Regular Division Bench at Chandigarh found that divergent
views have been expressed by the co-ordinate Benches of the Tribunal on this
issue and there is no judgment of any superior Court so as to settle the
divergent views. The Special Bench was constituted to decide the following
issue :
“Whether deduction for tax, duty, etc. is allowed on
payment basis without incurring of prior liability to pay such amount u/s.43B
of the Act ?”
The Special Bench held that deduction for tax, duty, etc. is
allowable u/s.43B on payment basis before incurring the liability to pay such
amounts; excess amount of excise duty reflected in the account-current is,
therefore, nothing but actual payment of excise duty even though mentioned as
advance payments. Hence, it is allowable as deduction u/s.43B. The Special Bench
relied on the decisions in the following cases :
(a) Indian Communication Network (P) Ltd. v. IAC,
(1994) 48 TTJ (Del.) (SB) 604; (1994) 49 ITD 56 (Del.) (SB)
(b) Lakhanpal National Ltd. v. ITO, (1986) 54 CTR
(Guj.) 241; (1986) 162 ITR 240 (Guj.)
(c) Berger Paints India Ltd. v. CIT, (2004) 187 CTR
(SC) 193; (2004) 266 ITR 99 (SC)
The Special Bench noted as under :
(a) S. 43B provides for the deduction of sums payable
mentioned in clauses (a) to (f), only if actually paid, but it 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 language used in S. 43B that the deduction in respect of tax or duty,
which was actually paid by the assessee has to be allowed as deduction without
looking into the year of incurring the liability. The expression ‘irrespective
of the previous year’ dispenses with the concept of previous year in the
matter of the sums covered by S. 43B.
(b) 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.
(c) The payments made to the credit of the accounts-current
are nothing but substantial/actual payments of central excise duty. The
assessee has no option to pay or not to pay such deposits in that running
account to meet the liability of central excise duty arising from time to
time. The payments of advance deposits in the account-current are necessitated
by the mandate of law and not by the option of the assessee. The advance
payments of central excise duty, therefore, satisfy the character of exaction
made by the sovereign under authority of law.
(d) S. 43B has brought in a change in the normal rule of
deduction of expense based on the 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 is incurred during the previous year even when the payment was
made by the assessee.
(e) The nature of the account-current brings home the point
that the advance payments 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 u/s.43B.
Modvat credit not allowable u/s.43B :
The other issue considered by the Special Bench was whether
Modvat credit available to the assessee as on the last day of the previous year
amounts to payment of central excise duty u/s.43B.
The Special Bench held that Modvat credit available to the
assessee on the last day of the year does not amount to payment of excise duty
and, hence, it is not allowable u/s.43B.
The Special Bench noted as under :
(a) 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 unexpired Modvat credit against the
liability towards the payment of duty may be as good as tax paid, but the
unexpired Modvat credit before the point of such set-off cannot be treated as
tax paid.
b) In the case of unexpired Modvat credit, there is no question of set-off on the last day of the previous year and, therefore, there is no occasion to treat the unexpired credit as equivalent to tax paid. In fact, the unexpired Modvat credit available to an assessee is in the nature of a future entitlement which cannot be considered as equivalent to advance payment of duty.
c) In a case of advance payment of central excise duty, there is a defacto payment of duty by cash in the Government treasury. The payment is made towards the central excise account which has been already held as actual payment of excise duty itself. However, in the scheme of Modvat, there is no such payment of excise duty. The credit is available to an 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.
d) The balance of Modvat credit 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.
