Tax Management India.Com

Home Page

Home List
← Previous Next →

2017 (12) TMI 590

Allowable deduction under Section 43B - Disallowance of the amount 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 - Held that:- The Court is of the view that the above decision of this Court in the Assessee’s own case for AYs 1995-96 and 1996-97 [2012 (12) TMI 671 - DELHI HIGH COURT] covers the issue in favour of the Assessee - For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty, etc., has no relevance and cannot be linked with the matter of giving benefit of deduction under Section 43B - Disallowance represented MODVAT credit of excise duty that remained unutilized by 31st March 1999, i.e., the end of the relevant accounting year - Held that:- It was explained by the Bombay High Court in Cartini India Limited v. Assistant Commissioner of Income Tax [2007 (2) TMI 192 - BOMBAY High Court] that “as per the new provision of Section 145A of the Income-tax Act, 1961, the unu .....

X X X X X X X

Full Text of the Document

X X X X X X X

e 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. - Nature of software expenditure - revenue expenditure allowance - Held that:- The Revenue has been unable to dispute that the assessee in fact did not claim the expenditure in any of the earlier AYs. Thus the above expenditure is in the nature of a revenue expenditure and not a capital one. See Binani Cement v. CIT (2015 (3) TMI 849 - CALCUTTA HIGH COURT) - ITA No. 31/2005 - Dated:- 7-12-2017 - S. MURALIDHAR & PRATHIBA M. SINGH JJ. Appellant Through : Mr. S. Ganesh, Senior Advocate with Ms. Kavita Jha, Mr. S. Sukumaran, Mr. Anand Sukumar, Mr. Bhuwan Dhoopar, Ms. Roopali Gupta and Mr. Bhupesh Pathak, Advocates. Respondent Through: Mr. Ruchir Bhatia, Senior Standing Counsel, Mr. Puneet Rai, Junior Standing Counsel and Mr. Gaurav Kheterpal, Advocates. JUDGMENT Dr. S. Muralidhar, J.: 1. This is an appeal by Maruti Udyog Limited ( the Assessee ) under Section 260A of the Income Tax Act, 1961 ( Act ) against the order dat .....

X X X X X X X

Full Text of the Document

X X X X X X X

AO ), in the undated assessment order received by the Assessee on 2nd April 2002, disallowed the above balance in the PLA as deduction on the ground that the Assessee had not enhanced its profit by the said amount and that the said amount would be allowed as deduction only if it had been debited to the profit and loss account ( P&L Account ). 8. The Assessee took up the matter in appeal before the Commissioner of Income Tax (Appeals) [ CIT (A) ]. In the order dated 12th/13th March 2003, dismissing the appeal on this issue, the CIT (A) held that Section 43B of the Act would apply in regard to a deduction which was otherwise allowable under the Act. It was held that in the present case, since the goods were still to be manufactured there was no question of any liability on account of excise dues . It was further observed that the amount in PLA balance was not an expense since the goods were to be still manufactured and Section 43B cannot convert a pure and simple advance into an item of expenditure . 9. The Assessee 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date. Explanation 1-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) 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, 1983, 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 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 no .....

X X X X X X X

Full Text of the Document

X X X X X X X

ctual Payment 15.1 Under the existing provisions of section 43B of the Income-tax Act, a deduction for any sum payable by way of tax, duty, cess or fee, etc., is allowed on actual payment basis only. The objective behind these provisions is to provide for a tax disincentive by denying deduction in respect of a statutory liability which is not paid in time. The Finance Act, 1987, inserted a proviso to Section 43B to provide that any sum payable by way of tax or duty, etc., liability for which was incurred in the previous year will be allowed as a deduction, if it is actually paid by the due date of furnishing the return under section 139(1) of the Income-tax Act, in respect of the Assessment Year to which the aforesaid previous year relates. This proviso was introduced to remove the hardship caused certain taxpayers who had represented that since the sales tax for the last quarter cannot 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

ch liability had been incurred as on 31st March 1999 but which had not been paid as on that date, worked out to ₹ 12,27,93,785 which was paid subsequently on or before 19th May 1999. The Assessee s own case for AYs 1995-96 & 1996-97 16. The question framed also arose in the Assessee s own case for the AYs 1995-96 and 1996-97 before this Court in Commissioner of Income Tax v. Maruti Suzuki India Limited (2013) 255 CTR 140 (Del). One of the questions addressed by this Court in the said appeal was: Did the Tribunal fall into error in holding that the amounts deposited by the Assessee/Respondent in the Excise Personal Ledger Account (PLA) could not be disallowed under Section 43-B of the Income Tax Act? 17. After referring to the decisions in CIT v. C.L. Gupta (2003) 259 ITR 513 (All); CIT v. Modipon Ltd. (2011) 334 ITR 106 (Del) 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 Ass .....

X X X X X X X

Full Text of the Document

X X X X X X X

ext day s clearances. The point to be underlined is that there is no choice, and the amounts relate to the Assessee s duty liability, falling within the description under Section 43-B. The consequence of not allowing the amounts as deductions, are vividly brought out in the decision of the Allahabad High Court in C.L. Gupta & Sons (supra), where it was held that: 10. In the case in hand, admittedly, the amount of customs duty of ₹ 3,56,451 was paid by the Assessee in March, 1987, and therefore, in terms of Section 43B it is deductible only in the year in which it is actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the Assessee incurred the liability on the basis of the method of accounting regularly adopted by him and, therefore, in 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

id as part of the purchase price, the Assessee was entitled to MODVAT credit in terms of Rule 57A of the CE Rules. The excise duty paid by the Assessee was kept in a separate account, maintained as the RG23 register. 23. The Assessee could utilize this separate account/credit for payment of excise duty at the time of clearance of the automobiles manufactured by it from its factory. Illustratively, if the Assessee purchased steel, which is the raw material for the manufacture of automobiles, worth ₹ 100 and pays ₹ 10 as excise duty, which is reflected in the invoices raised by the steel manufacturer on the Assessee, it could utilize the said ₹ 10 towards payment of excise duty on the car manufactured at the time of clearance 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

amount paid towards excise duty on the purchases would be shown as an advance and not as a current asset . 28. Mr. Ganesh submitted that for the purposes of Section 43B of the Act, the utilization of the MODVAT credit amounts to payment of excise duty as was emphasized by the Supreme Court in Eicher Motors Limited v. Union of India (1999) 2 SCC 361. He also relied upon the decision of the Supreme Court in Collector of Central Excise, Pune v. Dai Ichi Karkaria Limited (1999) 7 SCC 448. On the question of valuation of closing stock being inclusive of excise duty paid thereon, Mr. Ganesh submitted that this would make no difference to the liability of deduction of the excise duty paid under Section 43B of the 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) .....

X X X X X X X

Full Text of the Document

X X X X X X X

es, be debited simultaneously to two different accounts, i.e. assets as well as expenditure. Mr. Bhatia relied on the decision of this Court in Oswal Agro Mills Limited v. Commissioner of Income Tax [2014] 363 ITR 486 (Del) which according to him answered the question squarely against the Assessee. He also referred to the decisions in Commissioner of Central Excise v. Nish Fibres 2010 (257) ELT 81 (Guj) and CCE v. Suprajit Engineering Limited 2010 (253) ELT 369 (Kar). Mr. Bhatia submitted that if Section 43B is read as a whole, it is plain that the deduction would be allowable only for that previous year in which the payment of excise duty is paid on the final product by utilising 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

er to its seller, as contended by the Revenue, or is it the price of raw material minus the excise duty thereon which has been paid by the seller and for which the manufacturer is entitled to credit under the MODVAT scheme to be utilized against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer. The Supreme Court analysed the entire MODVAT scheme, in particular Rules 57A to 57I, and observed as under: 18. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to 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 av .....

X X X X X X X

Full Text of the Document

X X X X X X X

cing payment of specified duty on inputs are received later than the physical receipt of the goods. According to the accrual concept of accounting, one may account for such credit, provided one is reasonably certain of getting the said documents at a later date. 39. The above Guidance Note answers both issues raised by the Revenue. One is that it clarified that MODVAT Credit is treated as a separate account where appropriate accounting entries will be made to adjust the excise duty paid out of the said account. It is clear that the debit balance in MODVAT/CENVAT 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

went before the ITAT. Rejecting the Appellant s appeal, the ITAT held that there was no actual payment and the liability was covered only by the bank guarantee which had not yet been appropriated or encashed and the same is still in the ownership of the Appellant and therefore, the claim for deduction could not be allowed as the bank guarantee cannot fulfil the requirements of expenditure so as to qualify for deduction from the total income. As far as Section 43B was concerned, it was held that even assuming it is a statutory liability, as the 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 S .....

X X X X X X X

Full Text of the Document

X X X X X X X

the raw materials and inputs. As far as the Assessee is concerned, the liability to pay the said amount is only contractual. 43. It must be noted at this stage that after hearing the arguments on 21st September 2017, an affidavit dated 6th November 2017 has been filed by the Assessee pointing out that out of the total amount of unutilized MODVAT credit of ₹ 69,93,00,428, an amount of ₹ 15,73,38,110 pertains to goods already consumed and which were, therefore, not includable in the closing 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 dir .....

X X X X X X X

Full Text of the Document

X X X X X X X

hod of valuation of stock as opposed to an inclusive stock valuation method. Such a plea was not taken at any stage of the present case before the AO, CIT (A) or the ITAT. As rightly pointed out, if the amount paid has to be allowed as a deduction under Section 37 of the Act then the inclusive method of valuation of stock has to be followed. The Assessee must opt to either treat the same as expenditure or treat it as forming part of current assets. If the plea of deduction under Section 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

that no deduction can be allowed in terms of Section 43 B of the amount standing to the credit of the 'Sales-tax Recoverable A/c is also hereby upheld. 54. Incidentally, here again the ITAT accepted the Assessee s alternate plea, in para 37 of the impugned order, that the amount representing advance payment of sales-tax in preceding year should be allowed deduction in the year under consideration since the same has been adjusted against 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 irreco .....

X X X X X X X

Full Text of the Document

X X X X X X X

xcise duty records. 59. Resultantly, when a physical verification of the stock of such raw material/inputs was undertaken, it was found to be less than the stock as computed in the RG23A records which was based on the standard figures of consumption of materials (which were less than the actuals). At the end of each accounting year, when a physical inventory was taken of the raw 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 threa .....

X X X X X X X

Full Text of the Document

X X X X X X X

the said amount has also been accepted by the AO as such. The ITAT specifically noted the fact that the closing stock had been physically verified as on 28th February 1999 and that, therefore, there was no dispute with regard to the closing stock figure as on 31st March 1999 which was arrived at after making the necessary adjustment 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 t .....

X X X X X X X

Full Text of the Document

X X X X X X X

. Mr. Sanjay Kumar, learned counsel for the Revenue, submitted that the ITAT s order remanding the matter to the AO for fresh determination may not have been necessary. Nevertheless, the burden was on the Assessee to show that the derived figure of consumption of raw materials was correct. It is 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 .....

X X X X X X X

Full Text of the Document

X X X X X X X

tores Co. Ltd v. CIT (1958) 33 ITR 13 (Bom) and Veeriah Reddiar (S) v. CIT (1960) 38 ITR 152 (Ker), it has been held that the mere non- maintenance of stock register would not lead to the conclusion that profit of the Assessee could not be determined on the basis of the books 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 sof .....

X X X X X X X

Full Text of the Document

X X X X X X X

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 this judgment. (c) Question (ii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee in the manner indicated in this judgment. (d) Questions (iv) to (viii) are answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. (e) Question (ix) is answered in the affirmative, i.e. in favour .....

X X X X X X X

Full Text of the Document

X X X X X X X

 

 

← Previous Next →