TMI Blog2017 (12) TMI 590X X X X Extracts X X X X X X X X Extracts X X X X ..... ax [2007 (2) TMI 192 - BOMBAY High Court] that “as per the new provision of Section 145A of the Income-tax Act, 1961, the unutilized MODVAT credit had to be included in the closing stock of raw material and work in progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods.” However, Section 145A of the Act is prospective and does not apply to the AY in question. The Court is not inclined to permit the Assessee to raise the alternative plea for more than one reason. In the first place, it is a plea taken for the first time in these proceedings. It appears to be an afterthought. Secondly, the ITAT has already accepted another alternate plea made before it by the Assessee by allowing deduction in respect of the unutilized MODVAT credit of the earlier AY, the Court is not inclined to disagree with the reasoning and conclusion of the ITAT. The assessee cannot be allowed to go back and forth on the above plea. There has to be consistency. Thirdly, balance sheet of the Assessee for AY 1999-00 shows that the turnover for the year was over ₹ 8,000 crores. The corresponding sum claimed as deduction representing the unutiliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an appeal by Maruti Udyog Limited ( the Assessee ) under Section 260A of the Income Tax Act, 1961 ( Act ) against the order dated 11th October 2004 by the Income Tax Appellate Tribunal ( ITAT ) in ITA No.1240/Del/2003 for the Assessment Year ( AY ) 1999-00. 2. By an order dated 24th April 2006, while admitting this appeal, the Court had framed as many as nine substantial questions of law. Question (i) 3. Question (i) reads as under: Whether the ITAT erred in law in confirming the disallowance of the amount of ₹ 3,27,83,128/- deposited by the Appellant in its Central Excise Personal Ledger Account (PLA) before 31st March 2000, i.e. the end of the relevant accounting year, even though the Assessee has already incurred liability of excise duty of ₹ 12.27 crores? Facts relevant to Question (i) 4. The Assessee is engaged in the manufacture of automobiles, chargeable to excise duty under the Central Excise Act, 1994 ( CE Act ). In terms of the Central Excise Rules ( CE Rules ), the Assessee was required to deposit, from time to time, the amounts representing excise duty payable on the automobiles manufactured by it in its Central Excise Personal Ledger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see then carried the matter in appeal before the ITAT. In the impugned order dated 11th October 2004, the ITAT held that advance payment of excise duty without incurring the liability in respect of such payment is not allowable as deduction under Section 43B. Section 43B of the Income Tax Act 10. The case of the Assessee is that the aforementioned sum standing as credit balance as on 31st March 1999 should be considered to be the payment of excise duty within the meaning of Section 43B of the Act and therefore, liable as deduction. 11. In light of this, it would be appropriate to consider the substance of Section 43B of the Act which reads as under: 43B. Certain deduction 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 (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 employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum is actually paid by him. 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 3 - For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) 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, 1988, 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 3A -For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be paid within the previous year, the original provisions of section 438 will unnecessarily involve disallowance of the payment for the last quarter. 15.2 Certain courts have interpreted the provisions of section 43B in a manner which may negate the very operation of this section. The interpretation given by these courts revolves around the use of the words any sum payable The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Thus, the sales tax in respect of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and, therefore, by way of inserting an Explanation it has been clarified that the words any sum payable , shall means 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. Assessee s submissions on Question (i) 13. It was asserted by the Assessee before the ITAT that since the amount depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Paharpur Cooling Towers Ltd. v. CIT (2011) 244 CTR (Cal) 502, this Court concluded as under: 13. A plain reading of Section 43-B clarifies that, (a) The deduction claimed by the Assessee must be otherwise allowable under the other provisions of the Act. (b) The deduction must relate to any sum payable by way of tax, duty, cess or fee. (c) The Assessee must have incurred liability in respect of such tax, duty, etc. On fulfilling these conditions, the Assessee s claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term liability to pay such sum was incurred by the Assessee , together with the words a sum for which the Assessee incurred liability in Explanation 2, underline that payment must relate to the incurred liability to be called any sum payable . 14. In the present case, the Assessee had no option but to keep the account in respect of each excisable product (evident from the mandate in Rule 173G that it shall keep and account current ). The latter part of the main rule makes it clear beyond any doubt that the Assessee has no choice in the obligation, and cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the clear provisions of law, the deduction cannot be allowed in the assessment year 1988-89. In our view, both the learned Income Tax Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) fell in error in holding that since the Assessee-firm debited the cost of goods imported including the duty paid on delivery of goods in the trading account in April, 1987, and before the actual deliver of the goods, the value of the goods and customs duty paid thereon was shown in the balance-sheet as document in hands, therefore, the deduction should be allowed in the assessment year 1988-89, is contrary to the prescription of law. Section 43B in clear terms provides that the deduction claimed by the Assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the Assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arance of such car from the factory gate. Therefore, if the car is worth ₹ 200 and excise duty is payable at the rate of 10% thereon, at the time of clearance of such car from the factory gate, the Assessee can utilize MODVAT credit of ₹ 10 towards part payment of ₹ 20 custom duty while making direct payment of the remaining amount. 24. The controversy that arose was that as of 31st March 1999, the unutilized MODVAT credit stood, in the Assessee s books of accounts, at ₹ 69,93,00,428. This amount, having been paid by the Assessee on the raw material/input as excise duty, was not shown as expenditure and therefore, was not reflected in its P L account. Instead, it was shown as a current asset in the balance sheet. Assessee s submissions on Question (ii) 25. The case of the Assessee is that although the said amount is shown as unutilized MODVAT credit, it has been paid by the Assessee and should therefore be allowable as a deduction in terms of Section 43B of the Act. Mr. Ganesh, learned Senior Counsel for the Assessee, referred to Rule 57A to Rule 57I of the CE Rules and submitted that the liability to pay excise duty, although primarily on the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. 29. Mr. Ganesh also relied upon the decision of the Supreme Court in Berger Paints India Limited v. Commissioner of Income Tax [2004] 266 ITR 99 (SC). He submitted that the ITAT erred in holding that the deduction would be allowed on the balance in the MODVAT credit account only at the time of utilization of such credit for payment of excise duty, i.e. at the time of clearance of cars manufactured by the Assessee from the factory gate. Revenue s submissions on Question (ii) 30. Mr. Ruchir Bhatia, learned senior standing counsel appearing for the Revenue, on the other hand, submitted that it was not in dispute that the Assessee was entitled to the claim of duty paid by it to the manufacturer of the raw materials/inputs under Rule 57A to Rule 57I of the CE Rules. It is also not in dispute that the Assessee was entitled to utilize MODVAT Credit towards payment of excise duty leviable on the final products manufactured by it. Mr. Bhatia further submitted that the liability under the CE Act to pay excise duty is only on the manufacturer of the excisable goods. While the Assessee may be the person who pays the excise duty, the liability is that of the manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising the MODVAT credit. Analysis and reasons 32. An analysis of Section 43B of the Act reveals that for the deduction thereunder to be allowed, the following conditions are required to be satisfied: (a) there should be an actual payment of excise duty whether by way of tax, duty, cess or fee, by whatever name ; (b) such payment has to be under any law for the time being in force (c) the payment of such sum should have been made by the Assessee; (d) irrespective of the method of accounting regularly employed by the Assessee, deduction shall be allowed while computing the income tax for the previous year in which sum is actually paid by the Assessee; (e) the expression any such sum payable refers to 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. 33. There are two kinds of payment envisaged by Section 43B of the Act. Tax payable could be in the form of excise duty on the raw material/inputs purchased by the manufacturer. The second kind of payment could be of excise duty that is payable by manufacturer on the final product at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no corelation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available. 19. It is, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NVAT Credit Receivable (Inputs) has to be shown on the assets side, under the head advances . According to the accrual concept of accounting (mercantile system), credit is taken even after the documents evidencing payment of specific duty on inputs are received later than the physical receipt of the goods. 40. Mr. Bhatia is right in pointing out that the Assessee has two options. One, to claim excise duty paid as explained, and the other, to claim it under MODVAT credit for utilization at a subsequent point in time. It is plain that the Assessee in the present case has not exercised the first option. 41.1 The Court now turns to the decision in Oswal Agro Mills (supra). The facts, in brief, in the above decision were that the Appellant therein was engaged in the manufacture and trade of products like de-oiled meals, industrial hard oil, edible oils etc. The Assessee entered into agreements with other entities for the purchase of imported palm stearin fatty acid ( imported material ) from the said importers. In terms of the said agreement, the imported material was to be purchased by the Appellant at landed cost, i.e. CIF price, customs duty, clearing charges, etc. and 3% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability is eventually fastened upon the Appellant, the provision of bank guarantee in itself cannot be treated as payment as it has not been adjusted towards the customs duty. 41.5 This Court concurred with the ITAT and held that as long as the writ petitions were pending before the Supreme Court, the Appellant therein would have no obligation to pay any amount as the condition precedent for the Appellant to pay disputed amount would not be satisfied. The liability of the Appellant to pay the additional customs duty was contingent upon the importers being called upon to pay the same. Reference was made by this Court to the decision of the Supreme Court in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) where three conditions were laid down while considering where a provision made for future claims against warrantees was allowable as a deduction. On the facts of the case, this Court held that subject liability was a contingent liability in respect thereof could not be allowed as a deduction for the AY in question. 41.6 Specific to Section 43B, the Court considered whether it was in fact an obligation of the Appellant therein to pay additional customs duty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g stock of raw materials and inputs as on 31st March 1999. It is pointed out that this was noted by the CIT (A) in para 9.16 of the appellate order and that this finding was not questioned by the Revenue. It is accordingly submitted that even if the Revenue s contention on the interpretation of Section 43B was accepted, the Assessee is unquestionably entitled to deduction of the aforementioned amount of ₹ 15,73,38,110. It is further pointed out that out of the aforementioned unutilized MODVAT credit claimed as a deduction by the Assessee for the AY 1999-00, a further amount of ₹ 14,96,79,029 represents additional or countervailing duty which has been paid by the Assessee directly to the Customs Department on the import of raw materials, components and the inputs. This, according to the Assessee, is borne out by the RG-23 (Part-II) Register maintained by the Assessee and verified and audited from time to time by the excise authorities. It is asserted that the said amount has actually been paid by the Appellant to the customs authorities (and not to the Appellant s suppliers) and therefore, this amount should also be allowed under Section 43B of the Act. 44. The Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 is to be allowed then the question of utilising the unutilized MODVAT credit for payment of excise duty would not arise at all. 47. It may be noted that after the insertion of Section 145A of the Act, with effect from 1st April 2010, an Assessee must now necessarily follow the inclusive method of valuation of stock. It was explained by the Bombay High Court in Cartini India Limited v. Assistant Commissioner of Income Tax [2007] 291 ITR 355 (Bom) that as per the new provision of Section 145A of the Income-tax Act, 1961, the unutilized MODVAT credit had to be included in the closing stock of raw material and work in progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods. However, Section 145A of the Act is prospective and does not apply to the AY in question. 48. The Court is not inclined to permit the Assessee to raise the alternative plea for more than one reason. In the first place, it is a plea taken for the first time in these proceedings. It appears to be an afterthought. Secondly, the ITAT has already accepted another alternate plea made before it by the Assessee by allowing deduction in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the liability incurred on sales in this year. The ITAT s direction that the AO should allow the alternate claim after verification if such claim had not been allowed in the preceding year is affirmed. 55. Consequently Question (iii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee. Questions (iv) to (viii) 56. Questions (iv) to (viii) as framed by the order dated 24th April 2006 are inter-connected and read thus: (iv) Whether the Tribunal erred in law in remanding to the AO the question or issue of the addition made to the Appellant s assessable income on account of alleged excessive consumption of raw materials and inputs? (v) Whether the said direction given by the ITAT is not directly contrary to and irreconcilable with the evidence and material on record and, therefore, perverse? (vi) Has not the ITAT grossly erred in totally disregarding in evidence and materials on record which render the said remand order passed by the ITAT entirely unnecessary and superfluous? (vii) Whether the ITAT erred grossly in law in holding that the Appellant s books of account were liable to be rejected and its income computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w materials/components, it was found to be less than the inventories as per the RG23A records. 60. According to the Assessee, the above position was from 1986 to February 1999 when the MODVAT scheme was first introduced. Its officers succeeded in effecting a complete reconciliation to the extent of ₹ 1111 crores in respect of the period 1986-1999. According to the Assessee, there thus remained a net difference between the RG23A inventory of raw materials/inputs and the actual physical inventory of raw materials/inputs to the extent of ₹ 643 crores for the entire period of 13 years, i.e. 19861999, in respect of over 11,000 items. The Assessee states that the above anomaly was voluntarily disclosed by it to the excise department. On their part, according to the Assessee, the excise authorities threatened to deny the MODVAT credit to the Assessee on goods valued at an aggregate amount of ₹ 643.34 crores. The excise department issued to the Assessee a show cause notice ( SCN ) dated 14th September 2001 in which the amount of excise duty equivalent to the MODVAT credit taken on the said raw materials and inputs was computed at ₹ 108.39 crores and demanded fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the entries in the month of March, 1999. Yet, the ITAT somehow still held the opening stock not to be correct and held that the derived figure of consumption of raw materials required to be verified. 64. Mr. Ganesh drew attention to a report prepared by Pricewaterhouse Coopers ( PwC Report ). The said report was based on a detailed technical evaluation and estimates drawn up by the technical experts with regard to the raw materials and components consumed by the Assessee in the AY ended 31st March 1999. The PwC Report was placed before the CIT (A) and was noticed by him in the order dismissing the Assessee s appeal and at that stage no error was pointed out by the Revenue regarding the calculations based on 33,198 cars actually manufactured by the Assessee in the AY in question. According to the PwC Report, the total consumption of raw materials in the AY worked out to ₹ 3729.47 crores as against the amount of ₹ 3714.80 crores reflected in the Assessee s books of accounts. This was derived by applying the formula opening stock plus purchases minus closing stock which showed that the Assessee s accounts. 65. Mr. Ganesh submitted that the ITAT needlessly rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the mere fact that the Assessee had paid excise duty of ₹ 108.39 crores, in the proceedings before the Settlement Commission would not ipso facto mean that its claim of actual consumption of raw materials has been accepted by the Revenue. The order passed by the Settlement Commission accepting the Assessee s offer to pay the differential excise duty only meant that the Assessee itself accepted that the figure of consumption of raw materials as put forth earlier by it in its accounts was erroneous. The Court s findings on Questions (iv) to (viii) 70. The Court is unable to accept the above submissions of the learned counsel for the Revenue. The Assessee had gone before the Settlement Commission and accepted that the figure of consumption of raw materials for the aforementioned AYs was erroneous to the tune of ₹ 643.34 crores. The Assessee had on that basis offered to pay excise duty of ₹ 108.39 crores. The acceptance of this by the Settlement Commission meant that the above figure as disclosed by the Assessee as being the actual consumption of raw materials was accepted by the Excise Department to be correct. The second logical conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts maintained by it. 74. For all of the aforementioned reasons, the Court answers Questions (iv) to (viii) in the affirmative, i.e. in favour of the Assessee and against the Revenue, by holding that: (a) the ITAT erred in remanding the question concerning consumption of raw materials and inputs to the AO for fresh determination; (b) the direction given by the ITAT is directly contrary to and irreconcilable with the evidence and material on record; (c) the ITAT disregarded the PWHC report which is already on record; (d) the ITAT erred in rejecting the Assessee s books of accounts. Question (ix) 75. Question (ix) framed by the order dated 24th April 2006 reads as under: (ix) Has not the ITAT erred in law in failing to allow the software expenditure of ₹ 1,39,91,022 incurred by the Appellant as revenue expenditure. 76. It is explained by the Assessee that the expenditure incurred on application software is in the nature of revenue expenditure. Factually, the Assessee had incurred, during AY 1999-00, a total expenditure of ₹ 1,39,91,022 on acquisition of the following items of software: 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee as revenue expenditure for the first time in the year ended March 1999 relevant to AY 1999-2000 and not in any earlier year. 79. Mr. Ganesh placed reliance on the decisions in Binani Cement v. CIT (2016) 388 ITR 116 (Cal), Indian Aluminium Co. Ltd. v. CIT (2016) 384 ITR 386 (Cal), Chief Commissioner of Income Tax v. O.K. Play India Ltd. (2012) 346 ITR 57 (P H), and Commissioner of Income Tax v. Varinder Agro Chemicals Ltd. (2009) 309 ITR 272 (P H). 80. The Revenue has been unable to dispute that the assessee in fact did not claim the expenditure in any of the earlier AYs. The aforementioned decisions also fully support the case of the Assessee that the above expenditure is in the nature of a revenue expenditure and not a capital one. 81. Question (ix) is accordingly answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. Summary of conclusions 82. To summarise the conclusions: (a) Question (i) is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue; (b) Question (ii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee in the manner indicated in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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