Dy. Cit v. Amforge Industries Ltd.

S.C. Tiwari, A.M.

The main issue in this appeal filed by the revenue is directed against the learned Commissioner (Appeals)s directions to the assessing officer to allow the assessee deduction of sales tax and excise duty amounting to Rs. 3,80,288 and Rs. 13,28,364 respectively.

2. The facts of the case leading to this appeal, in brief, are that in the return of income the assessee claimed deduction of the above amounts though the same had not been debited to the Profit & Loss Account. The assessee argued that as per section 43B the deduction was allowable on cash basis unlike mercantile system of accounting followed by the assessee. As the assessee had made the above mentioned payments by way of advance, he had claimed deduction on the ground of actual payment. The learned assessing officer did not accept this contention of the assessee-company because, according to him, no liability had accrued in the relevant previous year in respect of these amounts. He, therefore, disallowed the assessees claim of deduction, but at the same time remarked that the assessee would be entitled to deduction of these amounts in the subsequent years where the same were adjusted by way of excise duty and sales-tax liability. On assessees appeal the learned Commissioner (Appeals) went into the detailed working. He found that the assessee was not adjusting the sales-tax collected by it or paid by it to the Profit & Loss Account. During the year the assessee had collected a sum of Rs. 92,58,884 by way of sales-tax. Out of which, a sum of Rs. 71,76,790 had been credited by way of sales-tax set off account. The assessee had also actually made payment of Rs. 25,76,362 during the year. After adjusting an amount of Rs. 1,13,980 relating to sales tax of earlier assessment years, the learned Commissioner (Appeals) found that the assessee was entitled to a net deduction of Rs. 3,80,288 inasmuch as, the payments exceeded by that amount. In respect of excise duty, the learned Commissioner (Appeals) found that the sum of Rs. 13,28,364 was in excess of excise duty payable. However, he held that the assessing officer was not justified in not allowing deduction of this amount because under the provisions of section 43b, deduction had to be allowed on actual payment basis. The learned Commissioner (Appeals), therefore, asked the assessing officer to allow deduction of Rs. 3,80,288 in respect of sales-tax and Rs. 13,28,364 in respect of excise duty. He also relied on the judgment of the Honble Gujarat High Court in Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240 (Guj).

3. During the course of hearing before us, the learned Departmental Representative argued that provisions of section 43b were only provisions of disallowance if the actual payments had not been made. These provisions did not enable an assessee to claim deduction of an amount which was otherwise not deductible. Before claiming the deduction it was necessary that the liability had actually been incurred by the assessee. In the absence of incurrence of liability deduction could not be allowed. The learned Departmental Representative referred to the judgment of the Honble Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. v. Union of India (1988) 173 ITR 708 (AP) and argued that in that case it had been 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. Thus, there were two conditions that there should be liability and that there should be actual payment and both these conditions should be satisfied before a deduction could be made. Thereafter, the learned Departmental Representative referred to the decision in the case of Nageswara Rice Working Co. v. ITO (1989) 30 ITD 143 (Hyd.)(TM). He argued that in that case it was also held in order to attract section 43B not only liability to pay tax should arise in the accounting year but it should also be statutorily payable in that accounting year. Thereafter, he referred to the decision of the Income Tax Appellate Tribunal Bombay Bench in the case of Industrial Credit & Investment Corpn. of India Ltd. v. IAC (1990) 32 ITD 315 that if the amounts were not payable no deduction could be made. Finally, the learned Departmental Representative referred to the decision of the Income Tax Appellate Tribunal Special Bench in the case of KCP Ltd. v. ITO (1991) 38 ITD 15 (Hyd.) that the provisions of section 43b had no relevance to the issue and pre-paid taxes could not be allowed as deduction.

4. The learned counsel for the assessee relied upon the order of the learned Commissioner (Appeals). He stated that the view taken by the learned Commissioner (Appeals) was well supported by the judgment of the Income Tax Appellate Tribunal Delhi Bench in the case of Modipon Ltd. v. IAC (1995) 52 TTJ (Delhi) 477. The case of the assessee was also supported by the judgment of the Gujarat High Court in Lakhanpal National Ltd.s case (supra) and of the Delhi High Court reported in Sanghi Motors v. Union of India (1991) 187 ITR 703 (Del). He argued that these authorities were directly on the issue whereas various authorities relied upon by the learned Departmental Representative were not directly concerned with the subject matter. The learned counsel also pointed out that the assessee has not been allowed any deduction by the revenue in the subsequent assessment years on the basis of accrual method of accounting. The learned Departmental Representative countered that Income Tax Appellate Tribunal Special Bench decision in KCP Ltd.s case (supra) directly applied.

5. We have carefully considered the rival submissions. We shall begin by looking into various authorities cited before us. We find that in none of the three High Court judgments which were cited before us during the course of arguments, the Honble Courts were seized with the issue of deduction of advance payment of tax or duty. In the case of Lakhanpal National Ltd. (supra) the assessee had actually imported goods on which custom duty had been paid. Excise duty had been paid on the goods which had been manufactured during the previous year. The revenue contended that the raw material imported had not been consumed and the finished products were still part of the assessees closing stock as at the end of the relevant previous year. On these reasonings the assessing officer held that there would in fact no refund due to the assessee and therefore, no provisional assessment under section 141 A for grant of refund was required to be made. On these facts the Honble High Court observed at page 248 as under :

". . . . . . 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 deposits 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."

It is thus clear that in that judgment the Honble High Court came to the conclusion that the assessee had incurred the liability to pay import duty and excise duty, that case has not proceeded on the footing that even if the liability had not been incurred on the basis of mercantile system the assessee would be entitled to deduction in view of the provisions of section 43b.

6. The Second High Court judgment relied upon by the learned counsel for the assessee is the Delhi High Court judgment in the case of Sanghi Motors (supra). In that case the petitioners filed a writ petition challenging the constitutionality of the provisions of section 43b. The Honble High Court held that the special provisions of section 43b regulating the allowance of Tax, Duty, Cess or Fee only in the year of actual payment were neither unreasonable nor arbitrary. The learned counsel for the assessee argued that in this case the Honble High Court have held that provisions of section 43b direct deductions of such payment only in the year of actual payment. On a reading of the judgment, we find that the question of allowability of any advance payment of taxes or pre-paid taxes on actual payment basis did not constitute subject matter of that writ petition and therefore, that judgment cannot be taken as an authority for the proposition that taxes paid in advance or pre-paid taxes for which liability is to be incurred in a subsequent year should nonetheless be allowed in the year of payment on actual payment basis.

7. The learned Departmental Representative has relied upon the judgment of the Honble Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. (supra). He has, in particular, relied upon the following observations of the Honble High Court at pages 718 and 719 of the judgment.

"We find considerable force in the contention of Shri Swamy. In order to apply the provisions of section 43b, it seems to us that 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, section 43B itself is clear to this extent. It refers to the sum payable in clause (a) as well as in clause (b). If the legislature intended, it should have so provided that any sum of the payment of which liability was incurred by the assessee would not be allowed unless such sum is actually paid. Keeping in mind the object for which section 43B was enacted, it is difficult to subscribe to the view that a routine application of the provision is called for in cases where the taxes and duties, for the payment of which liability was incurred in the accounting year, were not statutorily payable in that accounting year."

8. The learned Departmental Representative argued that it has been held by the Honble Andhra Pradesh High Court that it was essential that the liability to pay the tax or duty had arisen. In that judgment otherwise the Honble High Court were concerned with the question as to whether the claim of deduction can be turned down on the ground of non-payment when the time for payment of such tax or duty had not expired by the end of the previous year.

9. We find that the decision in the case of Nageswara Rice Working Co. (supra), has also proceeded on the same question and in fact the decision has been based on the Andhra Pradesh High Court judgment in the case of Srikakollu Subba Rao & Co. (supra).

10. As far as the decision of the Bombay Bench of the Tribunal in the case of ICICI is concerned, we do not find that decision to be relevant.

11. We are now left with the two decisions of the Tribunal one relied upon by the learned Departmental Representative, i.e. KCP Ltd.s case (supra) and another relied upon by the learned counsel for the assessee in the case of Modipon Ltd. (supra). In the former case certain taxes and dues had been paid by the assessee company which covered period beyond relevant to the previous year. In the books of account the same were apportioned by the assessee and only the amount relating to the previous year had been taken to Profit and Loss Account. The amount relating to the period beyond the previous year was taken to balance sheet as pre-paid taxes. The assessee, however, claimed deduction of all amounts under section 43B on actual payment basis. The Honble Special Bench of the Income Tax Appellate Tribunal held that the provisions of section 43b had no relevance to the issue, that section only enable the Income Tax Officer to disallow claim for deduction of taxes and other statutory, levies which had not actually been paid. As against this, in the case of Modipon Ltd. (supra), the assessee had paid excise duty as advance by way of deposit. The case of the assessee was that having actually paid the amount to the excise department under a prescribed scheme/rules the assessee was in no way entitled to any refund. The amount paid was excise duty nothing else and therefore, allowable as a deduction under section 43B, the same having been actually paid. On these facts, the Delhi Tribunal held that excise duty which was deposited as per rule 173G of the Central Excise Rules, 1944, whether paid in advance or otherwise retained the character of excise duty and, therefore, covered by the provisions of section 43b.

12. We find that in the decision of Modipon Ltd. (supra), the Special Bench of the Tribunal decision in the case of KCP Ltd. (supra) has not been noticed. We also find that the provisions of Explanation 2 inserted by the Finance Act, 1989 have also not been taken into consideration.

13. In our considered opinion for the answer to the question before us apart from traversing the maze of various decisions and judgments, the answer is to be found by the language of statute itself. The main provisions of section 43b read as under :

"43B. 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

(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 36, 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 term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him."

The expression "a deduction otherwise allowable" appearing in the opening part of this provision needs emphasis. It is made clear in the opening part of section 43B that the provisions do not intend to allow as deduction what is not otherwise allowable under the Act.

Explanation 2 inserted by the Finance Act, 1989, with retrospective effect from 1-4-1984 in the provisions of section 43b puts the matter all the more clear.

Explanation 2. For the purposes of clause (a) as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.

The expression "a sum for which the assessee incurred liability in the previous year" needs emphasis. Unless the assessee incurred liability in the previous year, it does not become "any sum payable" and therefore section 43B would not have any application thereupon.

14. On a reading of the complex provisions of section 43b as a whole, we find that it cannot be pressed into service to claim a deduction otherwise not available to the assessee. In other words, the assessee must incur liability of the nature mentioned in various clauses in the first instance. Thereafter the year of allowability would be determined on the basis of the year of actual payment. However, in the cases of such as one before us, where actual payment may precede the incurrence of liability, the harmonious reading of the proviso would require the actual payment to be deemed in the year in which the amounts paid are adjusted towards liability. This is exactly what the assessing officer has done in the impugned assessment order. The view taken by the assessing officer is also supported by Income Tax Appellate Tribunal Special Bench decision in the case of KCP Ltd. (supra). We, therefore, hold that the learned Commissioner (Appeals) was not justified to interfere in the order in this behalf. We, therefore, set-aside the order of the learned Commissioner (Appeals) and restore the assessment order in this respect. We hope that following the stand taken in the assessment order and in this appeal before us, the revenue would allow the assessee deduction of these amounts in the relevant assessment years, if not already done so.

15. Apart from the main issues there are some other grounds in this appeal to which we shall address ourselves.

16. The first ground in this appeal is as under :

"On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in deleting the disallowance of Rs. 54,305 made by the assessing officer on account of ex-gratia payment."

17. It is seen that similar issue arose in the case of the assessee for the assessment year 1987-88 and Income Tax Appellate Tribunal Bombay Bench E as per its order dated 21-3-1997 in ITA No. 2154/B/91 allowed the assessees claim of deduction. Respectfully following the order of the Tribunal in the assessees own case, we reject this ground of appeal.

18. Ground of appeal No. 4 is as under :

"On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in deleting the disallowance of Rs. 1,36,231 made by the assessing officer under section 37(3) read with rule 6B."

19. It is seen that this issue is covered by the judgment of the Honble Bombay High Court in the case of CIT v. Allana & Sons (P) Ltd. (1995) 216 ITR 690 (Bom) in favour of the assessee and against the revenue. Hence, this ground of appeal is also rejected.

20. In the result, this appeal is partly allowed.