2007 (7) TMI 431 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 43B of the Income-tax Act, 1961, to the additional fee levied on the import of rectified spirit.
2. Interpretation of the term "duty" under Section 43B in the context of the Bengal Excise Act, 1909.
3. Legislative competence of the State Government to levy excise duty or countervailing duty on rectified spirit under Entry 51 of List II of the Seventh Schedule to the Constitution of India.

Issue-wise Detailed Analysis:

1. Applicability of Section 43B of the Income-tax Act, 1961:
The primary issue was whether the additional fee levied on the import of rectified spirit by the assessee falls under the purview of Section 43B of the Income-tax Act, 1961. Section 43B mandates that certain expenses can only be claimed as deductions on a payment basis, including taxes and duties. The Tribunal initially allowed the appeals of the assessee, holding that the additional fee did not constitute a "fee" as contemplated under Section 43B before its amendment on 1-4-1989. The Tribunal reasoned that the fee was neither a tax nor a duty and thus not disallowable under Section 43B.

2. Interpretation of the term "duty" under Section 43B:
The Hon'ble Supreme Court remanded the matter back to the Tribunal to determine whether the additional fee constituted a countervailing duty under Entry 51 of List II of the Seventh Schedule to the Constitution. The Tribunal was directed to ascertain if the levy was indeed a duty, which would bring it within the ambit of Section 43B. The revenue argued that the additional fee was a countervailing duty, thus falling under the legislative competence of the State Government and subject to Section 43B. The Tribunal examined various provisions of the Bengal Excise Act, 1909, and the relevant rules, emphasizing that the fee was levied on the import of rectified spirit, not on the manufacture of country spirit.

3. Legislative competence of the State Government:
The Tribunal considered whether the State Government had the legislative competence to levy excise duty or countervailing duty on rectified spirit under Entry 51 of List II. The Tribunal referred to judgments of the Hon'ble Supreme Court, particularly in the cases of Synthetics & Chemicals Ltd. v. State of Uttar Pradesh and Deccan Sugar & Abkari Co. Ltd. v. Commissioner of Excise, which clarified that the State could levy excise duty only on alcoholic liquors for human consumption. The Tribunal concluded that rectified spirit did not fall under this category, and thus, the State Government lacked the legislative competence to levy excise duty or countervailing duty on it. Consequently, the additional fee could not be treated as a duty under Section 43B.

Conclusion:
The Tribunal held that the additional fee levied on the import of rectified spirit was not a countervailing duty or excise duty under Entry 51 of List II of the Seventh Schedule to the Constitution. Therefore, the rigours of Section 43B were not applicable to the unpaid additional fee, and the assessee was entitled to claim the deduction for the additional fee payable in both the assessment years in question. The appeals of the assessee were allowed.