TMI Blog2007 (7) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... the Account-Current of the assessee and the unutilised Modvat Credit on 31-3-2001, the last day of the previous year relevant to the assessment year under appeal was Rs. 10,99,72,355. The balance on the last day of the immediately preceding previous year, as on 31-3-2000 was Rs. 9,96,24,284. The differential amount of Rs. 1,03,48,071 represented the excess amount of credit available for adjustment as and when the payments of excise duty become due. In its computation of income, the assessee-company has deducted this differential amount of Rs. 1,03,48,071 as excise duty payments. The contention of the assessee before the Assessing authority was that this balance available to the credit of the assessee amounted to payment of Central Excise duty, which should be allowed as deduction under section 43B of the Income-tax Act, 1961. 4. But the Assessing Authority held that the contentions of the assessee-company could not be accepted. She found that for the immediately preceding assessment year 2000-01 also, the assessee had made such a claim, which was not accepted by the department. She also found that the department has not accepted the decision of the Tribunal Chandigarh Bench in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accepting the contention of the assessee for deducting the incremental balance in assessee's Account-Current in PLA and RG-23, under section 43B of the Act as payments of Central Excise duty. The grounds raised by the Revenue are the following: "1. On the facts and circumstances of the case, the Ld. CIT(A) vide appellate order No. 326/P/2003-04 dated 19-1-2005 has erred in law and on the facts of the case in allowing deduction under section 43B of the Act, being incremental balance with Excise Authorities in PLA and RG-23. 2. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the Assessing Officer may be restored. 3. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard or disposed of." 8. When this appeal was posted for hearing and disposal before the Regular Division Bench at Chandigarh, the Bench 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 expressed by different Benches of the Tribunal. The Bench found that the Chandigarh Bench of the Tribunal in the case of Raj Sande ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the suggestion for a Larger Bench is proper and acceptable. The matter was thus again placed before the Hon'ble President, Income-tax Appellate Tribunal. The Hon'ble President, on the recommendation stated above, reconstituted the Special Bench with Five Members to consider and decide the issue placed before it. 12. In the course of preliminary hearing of the issue, the Three Member Bench, which was constituted at the first instance, had also an occasion to consider the exact nature of the issue to be considered and decided especially in the light of the facts of the case involved in the present appeal. In the present case, the assessee-company has sought for deduction under section 43B, two kinds of amounts, as advance payments of Central Excise duty. The first one is the actual amount of Central Excise duty remitted by the assessee in the Treasury to the credit of the Central Excise Department and reflected in the Account-Current. It is a case where the assessee-company had actually made cash payments as advance payments of Central Excise duty. The second one is the Modvat Credit available to the assessee as on the last day of the relevant previous year i.e., as on 31-3- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That section 43B permits certain deductions only on actual payment of the corresponding amounts. Section 43B is a non obstante clause. The section provides for deduction of the prescribed sums on actual payment only if those sums are "otherwise allowable under this Act". This rider em bodied in section 43B clarifies the legal position that an assessee cannot claim by way of expenditure, the payments of taxes and duties only for the fact that the assessee has made the payments of those taxes and duties. In addition to the payment of such taxes and duties, it is also necessary that those expenses should be "otherwise allowable" under the provisions of the Income-tax Act, 1961, in computing the business income. 2. That the law is very clear on this subject that the deduction of the prescribed sums would be available to an assessee only on the basis of payment, either in the relevant assessment year or in the subsequent assessment year but no deduction would be available on such payments where the corresponding liability was not incurred by the assessee. 3. That before introduction of section 43B, if an assessee maintained the accounts on accrual basis, the deduction of the prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability 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 sum actually to be paid by the assessee is specified in law as "...any sum payable by the assessee by way of tax.....". It means a sum which is not payable by the assessee pertaining to the previous year relevant to the assessment year will not be allowed as a deduction even if the sum was paid in the previous year. "Any sum payable" is one of the most important limbs of the statutory expression provided in section 43B. The expression "any sum payable" presupposes the incurring of a prior liability on the assessee to make such, payment. Unless the liability to pay is incurred, it is not possible to say that any sum is payable by the assessee. Therefore, incurring of the liability before making the payment is the sine qua non for claiming deduction under section 43B. 8. The proviso to section 43B allows an assessee to claim the deduction even if the designated payment was made after the close of the relevant previous year, but before the due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply the provisions of section 43B not only should the liability to pay tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. 2. IAC v. Tata Press Ltd [1990] 35 ITD 470 (Bom.). In this case, the assessee-company has claimed deduction in respect of the payment of gratuity fund, superannuation fund, provident fund etc. for the assessment year 1984-85. The deduction was claimed on payment basis in view of the newly inserted section 43B. The assessee's claim was notwithstanding the fact that the part of the payments related to the liabilities accruing not in the relevant previous year but in the subsequent previous year. The claim of the assessee was that the payments relating to liabilities accrued in the previous year and for the liabilities accruing in the subsequent year both should be allowed as deduction. The Tribunal held that the payments made against liabilities accruing in the subsequent year cannot be allowed as deduction. The provision contained in section 43B is essentially restrictive in nat4re and not an enabling one. 3. KCP Ltd 's case. In this case the very same issue was considered by the Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd. v. Asstt. CIT [1992] 41 ITD 582 (Cal.) where the Tribunal has held that in every interpretation both text and context are important. He has also made references to the decision of the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 and the decision of Punjab and Haryana High Court in the case of CIT v. Madanlal Bros. [2005] 276 ITR 571. He has also relied on the decision of the Special Bench rendered by ITAT, Chennai Bench in the case of Kwality Milk Foods Ltd. v. Asstt. CIT [2006] 100 ITD 199 where in paragraph 15 of its order, the Special Bench has held that if the language of the statute is plain, obvious meaning is to be applied; rules of interpretation are to be applied only to resolve the ambiguities. 19. In the light of the above arguments and contentions, the ld. Commissioner of Income-tax submitted that taxes and duties paid by an assessee before incurring the liability to pay such amounts are not allowable as deductions under section 43B as held by ITAT, Hyderabad Special Bench in the case of KCP Ltd. 20. Shri Ajay Vohra, the ld. Counsel appearing for the assessee on the other hand contended that section 43B does not stand in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo. The assessee-company being a corporate body is fundamentally bound by the provisions of the Companies Act, 1956. Section 209(3) of the Companies Act mandates that a company shall maintain its accounts in mercantile system/accrual system. In the Income-tax Act, the assessee has an option; in the Companies Act, the assessee has no option. The assessee therefore being a company is following mercantile/accrual system of accounting. 5. The impact of section 43B is that the above method of accounting regularly employed by the assessee is overturned and the deduction for the payment of tax, duty etc. is given only on payment basis. This means, in respect of deducting those sums, the Income-tax Act provides only one method of accounting, i.e., cash method. Therefore the accrual system and consequently the accrual of liability or incurring of liability all are ignored by the provisions of section 43B and in the light of non obstante clause, the mandate of cash accounting provided under section 43B prevails over any other consideration. 6. Section 43(2) defines the term "paid". It means actually paid or incurred according to the method of accounting upon the basis of which the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10. The Revenue authorities have given a lot of importance to the expression contained in section 43B as "...a deduction otherwise allowable under this Act,...". The contention of the Revenue authorities that the expression "otherwise allowable under this Act" means deduction available only for the year of incurring liability is without any basis. The correct interpretation of the expression "otherwise allowable" is that the item claimed as deduction needs to be an expenditure allowable under the provisions of the Income-tax Act in computing the income. It does not mean that it should be attributable to a particular assessment year. The real implication of the expression is that those items of expenditure which are not usually deductible in computing the income of an assessee cannot be claimed as deduction even if the assessee has made actual payments of those items. The expression "a deduction otherwise allowable" is used in a general and permissive manner as explained above. 11. The Revenue has also relied on the proviso to section 43B. The text of the proviso is that deduction shall be allowed under section 43B even though the payments were made after the close of the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following lines relying on the respective judgment referred, thereto: 1. Consequence of section 43B in the matter of method of accounting has been succinctly explained by ITAT Delhi 'B' Special Bench in the case of Indian Communication Net Work (P.) Ltd.. In paragraph 22 of the decision, the Tribunal has stated that section 43B was no doubt introduced to curb the practice adopted by the assessees to retain substantial funds by not depositing amounts into the Government account and claiming deductions at the same time; but it also brought out a change in the "method of accounting" regularly followed by an assessee. This happened due to certain deductions being allowed on "actual payment" basis although earlier the claim was allowed on "accrual" basis. 2. The intention of the Legislature is to allow deduction in respect of any tax or duty in computing under section 28, the income of that previous year in which such sum is actually paid by the assessee. This is considered by the Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240. The Court has held that section 43B opens with a non obstante clause which means that irrespective of other provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principle has been upheld that the deductions of tax, duty, should be allowed under section 43B in the year of payment, irrespective of the previous year are to be followed. The decision of the Supreme Court in Berger Paints (India) Ltd. settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed under section 43B irrespective of the previous year to which the corresponding liability related to. 5. The case of the Revenue is that the Explanation has stated that the sum deductible on payment under section 43B is the sum for which the liability has already been incurred. This is not a correct interpretation of the Explanation. The Explanation was brought in the statute book to tide over the judgment of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao. In the said case the Court has held that deduction under section 43B would be available to an assessee not only if the amount has been paid in the previous year, bat also if the amount become payable in the very same previous year. The intention of the law was to give deduction on the basis of the payment of the sum irrespecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made and liability also should be incurred in the previous year relevant to the assessment year in which deduction is sought by the assessee under section 43B. In that case the question placed before the Hon'ble Court related to admissibility of deduction of two sums paid by the assessee on account of purchase tax during the assessment year in question but those sums being relatable to an earlier accounting and assessment year. While considering the case, the Court held that no part of section 43B or Income-tax Act itself requires that when deduction is claimed on the basis of section 43B, the assessee must satisfy the twin test of both proving actual payment of duty, tax, cess in the previous year in question as well as satisfying the department that due provision had been made in the books in regard to such duty or tax for which payment was made later on. The Court held that to introduce this double test would be writing words into the section. The arguments 01 the Revenue in the light of the first proviso and Explanation 2 to section 43B that both the conditions of liability as well as payment must be satisfied before claiming a deduction under section 43B is erroneous in the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLA and RG-23 in the Account-Current, retain all the characteristics of payment of actual Central Excise duty and therefore the advance deposits . cannot be treated as an advance for future liability as construed in the ordinary commercial sense. 10. The Supreme Court has considered an instance of money lying to the credit of an assessee but nevertheless not belonging to it, in the case of CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397. The Court held that the Molasses amount transferred to the Molasses Reserve fund would not be the income of the assessee, as it had no control over that. 22. The ld. Counsel further referred to various decisions rendered by different Benches of ITAT in favour of the assessee. 1. The ITAT Chandigarh 'B' Bench has considered the issue in the case of Raj Sandeep Ltd. through their order dated 18-2-1993. The Tribunal decided the matter in the following manner: "...We, therefore hold that excise duty which is deposited in the account-current by way of advance excise duty and is actually paid in the Treasury qualifies for deduction under section 43B..." 2. ITAT Chandigarh Bench followed the above decision in the case of ACIT-1 v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (a) and sums payable under the clause (d) are different and distinct in nature and character. The reference made to matching principle in the said decision has no relevance once cash system is adopted for section 43B. 6. The Delhi Bench in the case of Maruti Udyog Ltd., while considering the issue has misdirected in its discussion regarding the expression "incurring of liability". The Tribunal has construed the meaning of the expression "liability incurred" equivalent to a demand raised by the Department as payable and outstanding at the close of the relevant previous year. The Tribunal has given an instant meaning to the expression "incurring" whereas in fact the expression implies the liability running along with the business of manufacturing carried on by the assessee and thereby becoming liable to pay excise duty. 24. The ld. Counsel further relied on the following in support of his contentions: 1. In SLP (Sr. 2766 of 1933), in the case of CIT v. South India Research Institute the Supreme Court has considered the judgment of Andhra Pradesh High Court in the matter of section 43B in the context of special account maintained by an assessee to pay excise duty. While di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibes that periodical credit in the Account-Current can be made only by cash payment to the Treasury. Thus the rule clearly lays down that credit of duty can be taken in the PLA only either through cash deposit under T.R. 6 Challan in the Treasury or by written permission to take credit by the proper officer. In this case, the appellant took credit back in the PLA on their own clearing goods under rule 57F(2) which was wrong. When the lower authorities directed the assessee to rectify the mistake by making debit entry in the PLA and taking the credit back in RG-23A Part-II, the assessee did not follow the same on the ground that the unit was not functioning. Even if the unit was not functioning, i.e. it was not producing excisable goods, it was still under excise control and the relevant account-current and RG-23A Part-II were available with the assessee. There was no merit in the prayer raised by the assessee." The above decision of the Tribunal explains the true and strict nature of Account-Current maintained by the assessee with excise authorities. Once payments are made in the Treasury to the credit of assessee's Account-Current, even if those payments were advance payments, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise duty will be mutatis mutandis apply to Modvat Credit as well. That is the unexpired Modvat Credit is nothing but the advance payment of Central Excise duty and as the advance payment of excise duty needs to be allowed as deduction under section 43B for the elaborate reasons already explained, Modvat Credit also should be entitled to be deducted under section 43B. 27. On the true character of the Modvat Credit, the ld. Counsel invited our attention to the decision of the Supreme Court in the case of CCE v. Dai Ichi Kar Karia Ltd. [1999J 7 SCC 633. The Court held that section 4(4) of the Central Excise Act, 1944, inter alia, provides that the value of exciseable goods does not include the amount of the duty of excise payable on such goods. The Modvat scheme is the part of the Central Excise Rule. It is to be held that determining the cost of the exciseable product covered by the Modvat scheme, the excise duty paid to raw material also covered by the Modvat scheme is not to be included. The ld. Counsel submitted that the Court has declared that Modvat Credit available to an assessee is an indefeasible right in favour of the manufacturer and it is not contingent and it partake t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions in subsequent points. Therefore, it could be seen that it is a case of exemption and not a case of payment as construed by the ld. Counsel appearing for the assessee. 31. The ld. Commissioner referred to the decision of the Supreme Court in the case of Eicher Motors Ltd which has been relied on by the assessee's counsel. The ld. Commissioner pointed out that what the Supreme Court has observed in the said case was that the facility of Modvat Credit is as good as tax paid. The Court has not stated that Modvat Credit is nothing but payment of excise duty. The observation of the Supreme Court is to be seen in the context of an assessee setting of the Modvat Credit against the demand of excise duty. In such circumstances, the Modvat Credit becomes as good as tax paid once the set off is made. At the point of time before setting of the Modvat Credit, it is not possible to hold that the Modvat Credit is as good as tax paid It becomes as good as tax paid only when the Credit is set off against Central Excise liability. But in the case of unexpired credit of Modvat, there is no question of set off on the last day of the previous year and therefore there is no question of treating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 35. The Central Excise and Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the nature of PLA in the case of Fibre Bangalore (P.) Ltd. In that case the assessee debited the duty in Account-Current and thereafter reversed the debit by crediting back the duty amount in the very same PLA whereas the assessee should have taken the credit through RG-23A Part-IT. As there was no revenue effect prejudicial to the Government, the assessee pleaded that the adjustment, even if improper may be condoned. But the Tribunal held that any appropriation can be made only on the permission of the concerned authorities. Normally, the money paid into those accounts are irretrievable. In effect, for all practical purposes, the deposits made by an assessee in Accounts-Current amount to actual payment of Central Excise duty. 36. In the light of the nature and character of the payments discussed in paragraphs above and also in the light of the decisions referred to therein, it is to be seen that, as far as an assessee is concerned, the payments made to the credit of the Accounts-Current are nothing but substantial! actual payments of Central Excise Duty. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting regularly employed by the assessee. 39. As argued by the ld. Counsel appearing for the assessee, the expression "irrespective of the previous year" dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression "irrespective" means lacking relation, regardless of what is mentioned. Here the subject-mentioned is "previous year". It means the deduction has to be allowed regardless of the previous year. 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. 40. The Supreme Court had an occasion to consider the very same issue of payment of duty vis-a-vis deduction under section 43B in Berger Paints (India) Ltd.. The Court observed that the judgments delivered by three High Courts viz., Gujarat, Bombay and Madras in the case of Lakhanpal National Ltd., Bharat Petroleum Corporation Ltd. and Chemicals Plastics, respectively have been accepted by the Income-tax Department by not challenging those decisions before the Supreme Court, and by accepting a series of three j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 43B in a case where the assessee had claimed deduction for the Customs and Excise duties paid in respect of raw materials imported and goods manufactured in the accounting year. The Bombay High Court in the case of Bharat Petroleum Corpn. Ltd has followed the decision of the Gujarat High Court and considered section 43B in a case where the assessee has claimed deduction of excise and custom duty paid on the closing stock. The Madras High Court in the case of Chemicals Plastics (India) Ltd followed the decision of Bombay High Court in the case of Bharat Petroleum Corporation Ltd, while examining the case where the assessee has not charged the duty paid by it to the profit and loss account but at the same time claimed the deduction under section 43B. The assessee in that case did not claim the item in the profit and loss account for the reason that a part of the Custom duty paid was in respect of raw materials which remained with the assessee at the end of the year. In all the above three cases, the facts considered by the High Courts are marginally different from the facts of the present case. In those cases, the Courts were examining the nature of Excise Duty and Custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case was the constitutional vires of the provisions of section 43B. In fact, it was not a decision which interprets the provisions of law contained in section 43B on its substantial merit. Anyhow, the applicability of the said decision has been undone by inserting of proviso to and Explanation 2 under section 43B. Therefore that decision is not relevant in deciding the present issue. Another decision relied on by the revenue is the decision of ITAT Mumbai Bench 'D' in the case of Tata Press Ltd. The observation of the Tribunal in the said case is that section 43B is restrictive in nature and not an enabling one. But this observation does not bring out the true intent and purpose of section 43B. An expense becomes deductible or non-deductible in the light of the enabling provisions like sections 32, 36, 37 etc. Section 43B per se does not decide or otherwise restrict the deduction of an expense. Section 43B alone is not determinative of the deductibility of an expenditure. The said section does not deal with deductibility, eligibility or restriction of expenses, as such. What exactly section 43B deals with is the question of actual deduction. It is not a restrictive section but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o proves advantageous to them. Whether an assessee would misuse section 43B for the above purpose, is a question of remote chance. Usually, all tax avoidance schemes are practised by the assessees without paying any money towards tax. If not impossible, it is highly improbable to presume that an assessee would indulge in tax avoidance by actually paying money towards duties and taxes. Any such benefit arising to an assessee is only incidental. 47. Another case relied on by the Revenue is the decision of ITAT Hyderabad Special Bench in the case of KCP Ltd. As argued by the ld. Counsel for the assessee, we find that the said decision may not be valid any more, in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd, wherein the Court has held that the assessee shall be entitled to get the benefit of deduction under section 43B on actual payment, irrespective of the year of payment by virtue of the overriding effect of section 43B. Likewise, the decision of ITAT Mumbai Bench 'E' in the case of Amtorge Industries Ltd is also not relevant. 48. Another Special Bench decision relied on by the Revenue is the decision of Hyderabad Special Bench in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain belated payments could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof. 51. W e have considered in detail the arguments of both sides and the authorities relied on by them; considered the statutory provisions as well; examined the exact nature of the advance payment of excise duty, etc. We have found that generally those payments are not provisional or refundable. They are actually payments of Central Excise duty. We have examined the legislative intent and purpose of section 43B. The assessees in the past were not paying taxes, duties and other dues to the Government in time. At the same time, they were booking those items as expenses in their accounts on accrual basis on the ground that they are following mercantile system of accounting. By doing so, they were claiming deduction and reducing the taxable income. Concurrently in many cases, the assessees were challenging the very liability itself before the Courts and Tribunals, finally resulting the payments belated, deferred, and sometimes never made. In order to stop such exploitation practised by the assessees, se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad set off the Modvat Credit against the demand of excise duty. When the unexpired Modvat Credit is set off against the excise duty payable and thereby the liability has been extinguished/reduced, that the Supreme Court has held that setting off Modvat Credit is as good as tax paid. The above observation of the Supreme Court become operative only when the unexpired Modvat Credit has actually been set off against the Central Excise duty payable by the assessee. The unexpired Modvat Credit available in the hands of the assessee on the last day of the previous year is the amount, which has not so far been set off against payment of excise duty. 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. Therefore, the contention of the ld. Counsel that unexpired Modvat Credit must be treated as advance paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance against the Central Excise liability and not before. 61. Therefore we hold that the Modvat Credit available to the assessee as on the last day of the previous year does not amount to payment of Central Excise duty under section 43B. The second question is answered in negative and against the assessee. 62. The only two issues raised by the Revenue in this appeal are the questions considered and answered by us. Regarding the first issue of advance payment of excise duty, we hold against the Revenue and accordingly uphold the order of the CIT(A) in directing the Assessing Officer to deduct such advance payment under section 43B. Regarding the second question of unexpired Modvat Credit, we held that the assessee is not entitled for claiming the same as deduction under section 43B. Accordingly the order of the CIT(A) on the issue of unexpired Modvat Credit is set aside and the disallowance if any made by the Assessing authority is restored. 63. In result, this appeal filed by the Revenue is treated as partly allowed. ORDER Per Vimal Gandhi, President. - I have gone through the very detailed order of my learned brother Dr. O.K Narayanan, Accountant Member. I agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability" for the claim of deduction. Only actual payment is insisted upon. 2.3 The memorandum explaining the provisions in the Finance Bill of 1983 is as under: "59. Under the Income-tax Act, profits and gains of business and profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting income and outgo are accounted for on the basis of accrual and not on the basis of actual disbursements or receipts. For the purposes of computation of profits and gains of business and profession, the Income-tax Act defines the word 'paid' to mean 'actually paid or incurred' according to the method of accounting on the basis of which the profits or gains are computed. 60. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh such sum might not have been payable within that year under the relevant law. Explanation 3.-... Explanation 4.-..." 3. Section 43B was considered by Their Lordship of Supreme Court in the case of Allied Motors (P.) Ltd. About the change, it has brought about in the claim of deduction of statutory liability, Their Lordship observed as under: "Prior to the insertion of section 43B in the Income-tax Act, 1961, income chargeable under the head "Profits and gains" of business or profession was computable in accordance with the method of accounting regularly employed by the assessee as per section 145 of the Income-tax Act, 1961. An assessee who had adopted the mercantile system of accounting would be entitled to account for his income and expenditure on the basis of accrual and not on the basis of actual receipt or disbursement. After the insertion of section 43B, however, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the assessee incurred the liability to pay that tax." 3.1 Their Lordship in above de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing stock. The assessee originally returned a total income of Rs. 14,22,830 for the assessment year 1984-85 but filed a revised return claiming deduction of the sum of Rs. 26,98,713 being duties paid before December 13, 1983, from the closing stock and consequently from the profits. Both the Assessing Officer and the Commissioner (Appeals) rejected the claim on the ground that no benefit of the nature was contemplated by section 43B of the Income-tax Act, 1961. On appeal to the Appellate Tribunal, the matter being posted before a Special Bench: Held, that the assessee was entitled to the deduction of Rs. 26,98,713 and that the opening stock for the following year would stand reduced by the same figure. The provisions of section 43B of the Income-tax Act, 1961, disturb the existing and accepted position of the assessee's account. The section stipulates full deduction of the customs duty and excise duty in the year of payment but by retaining a part of the amount paid as customs duty/excise duty in the closing stock ultimate deduction is given only in part and, therefore, it is necessary to remove the amount from the closing stock. Removal of the amount from the figure of clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble income of the petitioner-assessee." 4.4 The objection of the Revenue is noted as under: "Shri S.N. Shelat, the learned advocate appearing for the respondent, submits that the word "otherwise allowable" used in section 43B of the Act would mean that it would not be allowable for the assessment year 1984-85. He submits that section 43B of the Act does not enlarge the scope of deduction. According to his submission, what is allowable under commercial principles under section 43B of the Act is made on allowable deduction on the actual payment being made. He further submits that it does not permit deduction in respect of the amounts, which are not allowable under commercial principles only because they are paid. He further submits that it is not an expenditure pertaining to the goods sold in that year." 4.5 After considering provision or section 43B, their Lordship held as under: "On a perusal of the language of section 43B, it is clear that it opens with a non obstante clause which means that it controls the operation of other provisions of the Act and irrespective of the other provisions, section 43B will have overriding effect. Keeping this in mind, if we examine the lang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year would be 1985-86. It is true that at the time of making the assessment for the assessment year 1985-86, the respondent will have to be careful in seeing that the petitioner does not claim further deduction for the sum for which deduction is already given. In this case, it is not the contention of the respondent that any sum payable under clause (a) of section 43B of the Act was at any time claimed by way of deduction in any previous year prior to 1983. In fact, the raw materials were imported and the goods were manufactured in the year 1983, and they were cleared also in the year 1983. Therefore, their liability accrued in the year 1983, and they also paid the sum in the year 1983. In that view of the matter, the Explanation to section 43B of the Act is also not attracted in the present case. Mr. J.P. Shah, the learned advocate appearing for the petitioner, has invited our attention to the computation of the total income for the assessment year 1985-86 which is annexed to the petition as Annexure-L, wherein it has been pointed out that the amount of excise duty of Rs. 29,94,439 paid on the closing stock (in the year 1983) on finished goods lying at various depots wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction. We are unable to accept this argument. In place of mere accrual, requirement of actual payment cannot be argued to have enlarged the scope of the section. The decision cannot be read by taking one line from here and one line from there. The ratio of decision is to be considered and the ratio about change brought about by section 43B is recorded as under: "Under the mercantile method of accounting, as stated earlier, the moment the liability is incurred, it would be an admissible deduction. What section 43B of the Act states is that irrespective of the fact that the liability is already incurred, that would be an admissible deduction only when the actual amount in that regard is paid." 4.7 Their Lordship further emphasized: "The intention is made more specific by providing that it would be so 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 the assessee. This clearly makes out that even if the mercantile method of accounting is employed and the liability to pay might have accrued which would give the assessee a right to obtain deduction, in view of the sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in Lakhanpal National Ltd.'s case [1986] 162 ITR 240, excise and customs duty paid and included in the closing stock are allowable deductions from the income. That, section 43B does not bar such deductions. However, such deductions are subject to payment being added to the opening stock in the relevant subsequent year. We respectfully agree with the judgment of the Gujarat High Court in Lakhanpal National Ltd. 's case [1986] 162 ITR 240. This is a pure finding of fact. The Commissioner of Income-tax (Appeals) has also accepted that the aforestated amount is a part of the closing stock. In view of the concurrent finding of fact, no substantial question of law arises. Hence, the first question is answered in the affirmative, i.e., in favour of the assessee and against the department." It is clear from facts available on record that deduction claimed related to pre-paid taxes in respect of goods which were still with the assessee and in the closing stock. The Tribunal allowed the claim, "in view of the fact that assessee had actually paid, during the assessment year in question, Rs. 12,62,47,225." The ratio is that deduction cannot be disallowed on the ground that stock on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ductions are to be only on actual payment opens with a non obstante clause in relation to any other provision in the Act, and provides, inter alia that 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 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 under section 28 of that previous year in which that sum is actually paid by the assessee. The first proviso permits such payment being made even after the close of the previous year, but prior to filing the return of income under section 139(1) of the Act. The assessee, therefore, is entitled to the deduction of the amount of duty paid in the year in which the payment was made. The fact that part of the customs duty was paid in respect of raw materials, which remained with the assessee at the end of the year would not deprive the assessee of the benefit of claiming the deduction in the year in which duty had been actually paid. So also the right of the assessee to claim deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge its correctness in case of other assessee without just cause. Their Lordship noted the analysis and finding of the decision of Lakhanpal National Ltd. 's case as under: "A reading of the Gujarat High Court's judgment shows that the judgment is not based merely on the adjustments permissible under section 141A, as is contended by the Revenue, but that the judgment proceeds on analysis of section 43B and makes a finding that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year was an allowable deduction in respect of that year irrespective of the amount of excise duty/customs duty which was included in the valuation of the assessee 's closing stock at the end of the accounting year. After coming to this conclusion, the Gujarat High Court then proceeded to consider the impact of section 141A and granted appropriate relief thereunder. It is not possible for us to accept the contention of the Revenue that the judgment of the Gujarat High Court in Lakhanpal National Ltd. 's case [1986] 162 ITR 240 is distinguishable on the ground put forward. The decision in Lakhanpal National Ltd s case [1986] 162 ITR 240 (Guj.), which clearly laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h excisable goods falling under different Chapters of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), in such form and manner as the (Commissioner) may require, if the duties payable on the excisable goods and in particular such account (and also the account in Form RG 23, if the assessee is availing of the procedure prescribed in rule 173K) shall be maintained in triplicate by using indelible pencil and double-sided carbon, and the assessee shall periodically make credit in such account-current, by cash payment into the treasury (so as to keep the balance, in such account-current), sufficient to cover the duty due on the goods intended to be removed at any time and every such assessee shall pay the duty determined by him for each consignment by debit to such account-current before removal of the goods." Under proviso, the assessee instead of 'several' can maintain a single account. The provision has been quoted only to show that manufacturing concerns with huge turnover like the assessee or in three cases, pay excise duty through the current account as per excise rules. It is evident from above that excise paid in the cases cited above, in relation to goods or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of the previous year in which liability to pay such sum was incurred" was held to represent more specific intention of the Legislature. In the light of specific and strong intention of the Legislature, we see no scope for argument that besides actual payment, the assessee must also prove the incurring of the liability prior to payment to be entitle to deduction in the year of payment. 9.1 As the ld. Departmental Representative has stressed his point vehemently and as some Benches of the Tribunal have accepted them; hereinafter we deal with the submissions of the learned Departmental Representative (Commissioner of Income-tax). The submissions in a summarized form are as under: (a) That sum claimed as a deduction on actual payment basis must be established to be, "a deduction otherwise allowable under the Act". (b) In first proviso and Explanation 2to section 43B, specifically provide that sum claimed as a deduction should be a liability which is incurred in the previous year, though it may be payable after the end of the previous year. 9.2 Accordingly it was contended that in the light of clear language of proviso, Explanation and opening sentence of section 43B, it is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act is concerned "actually paid" is separated from word "incurred" by "or". The whole idea of enactment is to change the system and replace condition of allowability of deduction from incurring of the liability to actual payment. Therefore, it is not possible to accept that simultaneously the Legislature insisted on the incurring of the liability, as per mercantile system of accounting. Having in mind provision of section 43(2) and the purpose of section 43B, there is no question of asking the assessee to prove actual payment as well as incurring of a liability. The learned Departmental Representative while pressing above line of reasoning did not take into account meaning of word "paid" as given in section 43(2). 11. It would be appropriate to refer to certain pertinent observations of courts and the learned commentators about cash system of accounting. In Kanga and Palkhivala's The Law and Practice of Income-tax, Eighth Edition, Vol.-I at page 1160, the learned author has observed as under: "The cash system was described in the Full Bench case, Dhakeshwar Prasad v. CIT (4 ITR 71, 74) by Sir Courtney Terrell, CJ in these words: "According to the [cash basis] a record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tible in computing business income of an assessee. When above expression is read with clause (a) of the section, it becomes abundantly clear that the clause is applicable in cases, where for computation of business income, taxes, duties, cess or fees levied by whatever name called, is required to be deducted. Similar is the position under other clauses (b) to (f) of the section. Clubbing of variety items in one clause and use of expression "under any law for the time being in force" makes it clear that section envisages deduction of a statutory payment on general basis. The expression "a deduction otherwise allowable" reflects deduction on account of general liability fastened to assessee's business on account of duties, taxes, cess, fees by whatever name called arise in the course of the carrying on of the business. The express does not mean any specific liability which is required to be incurred. 14. Turning now to the reliance of learned Departmental Representative on proviso-I to section 43B, we have already noted that said proviso was added to obviate unintended hardships caused to certain assesses. Even sales tax collected in the month of March and when the same was payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso is very clear. 15. In the case of Beharam Khurshid Pesikaka v. State of Bombay AIR 1955 SC 123, it has been observed that the office and function of a proviso is to be except out of a previous enactment in an earlier part of a section, something which but for the proviso would have fallen within the scope of the enactment, unless the context, stating and purpose of the section warrants a different construction. The proviso is generally something engrafted on the main enactment. It cannot normally be so interpreted as to setting at naught the real object of the main enactment. 15.1 In the case of Tahsildar Sing v. State of Uttar Pradesh AIR 1959 SC 1012 the Apex Court held that it is a cardinal rule of interpretation that proviso to a provision of a statute only embraces the field which is covered by the main provision. The territory of a proviso is to carve out an exception to the main enactment and to exclude that which otherwise would have been within the section; a proviso is not normally construed other than as a subtraction of the main section and as introducing a qualification or exception to the enacting part. 15.2 In the case of CIT v. Indo Mercantile Bank Ltd [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly. If Explanation is not given a restricted meaning and taken to be inserted merely to override the decision of Hon'ble High Court, it would lead to absurd results which might defeat the very purpose of section 43B. The said Explanation to appreciate the argument is as under: "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 significant words in the provisions are "previous year" which is defined in section 3 of the Act to mean "the financial year immediately preceding the assessment year" (proviso is not relevant and is being not considered). Therefore a literal construction of the Explanation would mean that a statutory liability incurred in the previous year has to be cleared by "actual payment" in the previous year, to be eligible for deduction such statutory amount might not be payable in the previous year. Such steps would lead to great hardships is clearly admitted by the Legislature and the situation was sought to be improved by adding provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular conclusion in the matter of interpretation of the Statute. Again the case of State of Bombay v. United Motors (India) Ltd. AIR 1953 SC 252 Their Lordship of Supreme Court held that if the language of an explanation shows the purpose and construction consistent with that purpose can be reasonably placed upon it, that construction will be preferred as against any other construction which does not fit in with the description or the avowed purpose. 18. The learned Departmental Representative had vehemently contended that it would not be possible to ignore Explanation 2 defining "any sum payable" while considering impact and application of section 43B. The said Explanation cannot be treated as "redundant". We are unable to accept this situation. We are not treating Explanation 2 as redundant but only trying to reconcile it with the main section. The rule of harmonious construction requires that all relevant provisions of the Statute should be read together and then attempt made to reconcile them and take a reasonable view suggested by the language employed. However, what is to be done where one portion of the provision like Explanation 2 here is contradicting the other provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions: 19.1In the case of Chief Inspector of Mines v. Lala Karam Chand Thapar AIR 1961 SC 838, the Supreme Court noted the observations of Lord Chancellor in the case of Institute of Patent Agents v. Joseph Lockwood 1894 A.C. 347, to the following effect: "'No doubt' said he, 'there might be some conflict between a rule and a provision of the Act. Well there is a conflict sometimes between two sections to be founding the same Act. You have to try and reconcile them as best as you may. If you cannot, you have to determine which is the leading provision and which is the subordinate provision, and which must give way to the other. That would be so with regard to enactments and with regard to rules which are to be treated as if within the enactment. In that case probably the enactment itself would be treated as the governing consideration and the rule as subordinate to it'." 19.2 In the case of the State of Gujarat v. Chaturbhuj Maganlal [1976] 3 SCC 54, Their Lordship held: "Where the language of a statutory provision is susceptible of two interpretations, the one which promotes the objects of the provision, comports best with its purpose and preserves is smooth working should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty" prescribed by section 5 no doubt, the purpose of the definition is to indicate the class of transfers to which the provisions of the Transfer of Property Act are intended to be applied; but a definition of this kind cannot override the clear and positive direction contained in the specific words used by section 2(d). As we have already seen, the result of the saving clause enacted by section 2(d) is to emphasise the fact that the provisions of section 57 and those contained in Chapter IV must apply to transfer by operation of law. Such a positive provision cannot be made to yield to what may appear to be the effect of the definition prescribed by section 5, and so, we are inclined to hold that notwithstanding the definition prescribed by section 5 the latter part of section 100 must be deemed to include auction sales." 20. In the light of clear object of section 43B, found from its heading, its language, the mischief it sought to cover and various decisions of Courts, it has to be held that deduction in respect of statutory payment is to be allowed in the previous year in which the amount is actually paid. The section itself commands that actual discharge of liability is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shown total sales of Rs. 90093.29 lakhs, including sales of excisable goods. It has further debited excise duty at Rs. 9817.70 lakhs in the profit and loss account. The above detail is available at page 63 of the paper book, as under: Year ended March 31, 2001 (Rs. lakhs) EXCISE DUTY Excise duty: 12179.90 Add: Excise Duty on closing stock 910.12 (includes Excise duty payable on finished goods not cleared from bonded warehouse Rs. 317.62 lakhs (Previous year: 355.26 lakhs). Less: Excise Duty on Opening Stock (957.68) (includes excise duty on finished goods not cleared from bonded warehouse Rs. 355.26 lacs (Previous year: Nil) Less: Modvat credit availed during the year:(2314.64) ----------- 9817.70 ----------- It is clear from above that assessee is making regular bulk manufactures and paying excise duty by making deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is answered in favour of the assessee. ORDER Per M.A. Bakshi, Vice President - I have gone through the proposed orders since I could not persuade myself to agree with the reasoning and conclusion partly arrived at in the proposed orders I would like to give my reasons in regard to the issue raised before the Special Bench. In para 13 of the proposed order, the issues before the Special Bench have been identified as under:- "1. Whether deduction for tax, duty etc. is allowable under section 43B of the Income-tax Act, 1961, on payment basis before incurring the liability to pay such amounts? 2. Whether Modvat Credit available to the assessee as on the last day of the previous year amounts to payment of Central Excise Duty under section 43B ?" In regard to the second issue, I agree with the conclusion arrived at in the proposed order that Modvat credit available to the assessee as on the last day of the previous year does not amount to payment of Central Excise duty under section 43B. In regard to the first issue, I give my reasons as well as conclusions as under: The issue involved herein is relating to the interpretation of provision of section 43B of the Income- tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of total income, be classified under the following heads of income: A. - Salaries B. - Income from house property. C. - Profits and gains of business or profession. D. - Capital gains E. - Income from other sources." 3. The assessee before us derives income from profits and gains of business or profession and is accordingly assessable as such. Section 28 of the Act provides the categories of income chargeable to income-tax under the head "Profits and gains of business or profession". Section 29 of the Act provides as to how profits and gains of business or profession are to be computed. The said section reads as under: "29. Income from profits and gains of business or profession, how computed.- The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D." 4. Before we consider section 43B and make an attempt to understand the meaning of the section, it will be relevant to refer to section 145 of the Act. The said section reads as under: "145. Method of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, 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: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting 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, 2001, 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 4.-For the purposes of this section,- (a) "public financial institutions" shall have the meaning assigned to it is section 4A of the Companies Act, 1956 (1 of 1956); (aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11; (b) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (c) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the context. With those glasses we must look at Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit in the scheme of this entire Act." 8. Keeping in view the above principles of interpretation, it is considered necessary to trace the legislative intent and history behind the enactment of section 43B. Section 43B was inserted by the Finance Act, 1983 with effect from 1st April, 1984 applicable for and from assessment year 1984-85. The scope and effect of the originally inserted section 43B have been elaborated in the following portion of the CBDT Circular No. 372 dated 8-121983 : "35.1 (xxvi) Disallowance of unpaid statutory liability - Section 43B - Under section 145 of the Income-tax Act, 1961, profits and gains of business or profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting, income and expenditure are accounted for on the basis of accrual and not on the basis of actual receipts or disbursements. For the purposes of computation of profits and gains of business or profession, section 43(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in section 43B by the Finance Act, 1987 which may not be relevant for the purpose of present controversy. Finance Act, 1988 made another amendment in section 43B. The scope of the amendment was explained by the CBDT vide Circular No. 528 dated 16-12-1988. The said circular and the amendment is also not relevant for the purpose of the present controversy. Finance Act, 1989 made yet another amendment in section 43B by virtue of which 2nd proviso to section 43B was substituted with effect from 1-4-1989 by a new proviso. A new Explanation 2 was inserted to operate retrospectively with effect from 1-4-1984. Explanation 2 to section 43B was renumbered as Explanation 3 with effect from 1-4-1989 and Explanation 3 was renumbered with effect from 1-4-1989 as Explanation 4. The scope and effect of the amendments has been elaborated vide Circular No. 550, dated 1-1-1990 of the CBDT as under: "15.1 Amendment to provisions relating to certain deductions to be allowed only on actual payment - Under the existing provision of section 43B of the Income-tax Act, 1961, a deduction for any sum payable by way of tax, duty, cess or fee, etc. is allowed on actual payment basis only. The objective b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 43B in the Income-tax Act, 1961, income chargeable under the head "Profits and gains of business or profession" was computable in accordance with the method of accounting regularly employed by the assessee as per section 145 of the Income-tax Act, 1961. An assessee who had adopted the mercantile system of accounting would be entitled to account for his income and expenditure on the basis of accrual and not on the basis of actual receipt or dis bursement. After the insertion of section 43B, however, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the assessee incurred the liability to pay that tax. Hence, an assessee (as in the present case), who had collected sales tax in the last quarter of the previous accounting year and deposited it in the treasury within the statutory period falling in the next accounting year, would not be entitled to claim any deduction for it. The sales tax so collected will form a part of the assessee's income. To obviate this kind of unexpected outcome of section 43B, the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force (irrespective of whether such tax or duty is disputed or not) or 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 shall be allowed only in computing the income of that previous year in which such is actually paid by him." The Budget Speech of the Finance Minister for the year 1983-84, reproduced in [1983] 140 ITR (St.) 31 is to the same effect. Section 43B was, therefore, clearly aimed at curbing the activities of those taxpayers who did not discharge their statutory liability of payment of excise duty employer's contribution to provident fund etc., for long periods of time but claimed deductions in that regard from their income on the basis of the liability to pay these amounts had been incurred by them in the relevant previous year. It was to stop this mischief that section 43B was inserted. It was clearly not realized that the language in which section 43B was worded, would cause hardship to those taxpayers who had paid sales tax w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 for furnishing the return under section 13 9(1) of the Income- tax Act, 1961, in respect of the assessment year to which aforesaid previous year relates. This proviso was introduced to remove the hardship caused to certain taxpayers who had represented that since the sales tax for the last quarter cannot be paid within that previous year, the original provision of section 43B will unnecessarily involve disallowance of the payment for the last quarter. Certain courts have interpreted the provision 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the books of account as and when it is incurred. So in respect of excise duty, which is the subject-matter of dispute before us, the assessee would ordinarily be entitled to deduction in respect of the accrued liability notwithstanding the fact that the assessee had disputed the liability or not paid such duty. Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 held that assessee following mercantile system of accounting is entitled to deduction in respect of accrued statutory liabilities notwithstanding the fact that the assessee is contesting the liability. Some taxpayers were getting the deduction even without making the payments. I have elsewhere quoted the statement of objects for the incorporation of section 43B from which it is evident that section 43B was incorporated to discourage such taxpayers from claiming deduction on account of accrued liabilities without making the payments of such taxes, duties etc. When we read section 145 in conjunction with section 43B, it becomes abundantly clear that section 145 which mandates assessment of profits and gains of business in accordance with the method of accounting adopted by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise allowable under the Act. Explaining the words 'deduction otherwise allowable under this Act', their Lordships at page 247 of the judgment held as under:- "......The argument of Mr. S.N. Shelat that section 43B of the Act does not enlarge the scope of deduction is correct inasmuch as it speaks about the deduction otherwise allowable under this Act, but his argument is not that the sum which is paid by way of import duty or liability to pay excise duty is not the sum given under the permissible deductions." The said judgment of the Hon'ble Gujarat High Court was not challenged by the Revenue. Subsequently, the Bombay High Court in the case of Bharat Petroleum Corpn. Ltd. and the Madras High Court in the case of Chemicals Plastics India Ltd. echoed the same view as expressed by the Gujarat High Court in the case of Lakhanpal National Ltd. The aforementioned decisions of three High Courts have been considered by the Hon'ble Supreme Court in the case of Berger Paints India Ltd. In that case their Lordships of the Supreme Court observed that the above three judgments rendered by the three different High Courts have been accepted by the Department which has brought in a consiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile to repeat Explanation 2 as under:- "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 2 operative from 1-4-1984 coins the definition for the purpose of clause (a) of section 43B as in force at all material times the expression 'any sum payable' so as to mean a sum for which assessee incurred liability in the previous year even though such sum might not have been payable within that previous year under the relevant law. If the contention advanced on behalf of the assessee that incurring of liability is not necessary for allowance of deduction is accepted, then Explanation 2 to section 43B would become redundant." Their Lordships of Supreme Court in the case of Grasim Industries Ltd. v. Collector of Customs [2002] 128 STC 349 held that no word or expression used in any statute can be said to be redundant or superfluous. Their Lordships of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 also held as under:- "A statutory prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same." The contention advanced on behalf of the assessee that it is not necessary for the assessee to establish that any payment made by him is towards the liability on account of any tax, duty etc. is also negatived by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. In the said case, their Lordships repelling the contention held as under: "the argument of Mr. S.N Shelat that section 43B of the Act does not enlarge the scope of deduction is correct inasmuch as it speaks about the deduction otherwise allowable under this Act but his argument is not that the sum which is paid by way of duty or liability to pay excise duty is not the sum given under the permissible deductions. Under the mercantile method of accounting, as stated earlier, the moment liability is incurred, it would be an admissible deduction what section 43B of the Act states is that irrespective of the fact that the liability is already incurred, that would be an admissible deduction only when the actual amount in that regard is paid. Therefore, it is clear that in the year 1983 when the goods including the raw materials were imported and the finished goods lying at various depots were manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of advance, both the conditions required for claim of deduction under section 43B are satisfied. Firstly, the liability has been incurred by the assessee in any previous year and secondly the payment has been made by the assessee towards that liability. Once both the conditions for grant of deduction under section 43B are satisfied, the assessee is entitled to deduction. So, however, the year in which deduction is permissible is to be determined with reference to the year of payment. To the extent the liability has been adjusted out of the advance payment, both the conditions being satisfied, deduction will be permissible to the assessee in respect of the liability though incurred in the subsequent assessment year, in the year of payment i.e. the year under appeal. It is, however, clarified that deduction is not permissible to the assessee merely on account of payment having been made in the year under appeal but deduction is permissible to the assessee because the liability has been incurred in the subsequent assessment year and the payment made by the assessee has been adjusted against the liability. So, in respect of the liability incurred in the subsequent assessment year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility having accrued up to that date. Now, if the liability has already been incurred by the assessee against which the advance payment of excise duty has also been paid both the conditions required to be satisfied for grant of deduction under section 43B stand fulfilled and the assessee would be entitled to claim deduction in respect of the amount adjusted towards the liability notwithstanding the fact that the liability has accrued in the subsequent assessment year. Needless to repeat, section 43B provides for deduction in the year of payment irrespective of the previous year in which the liability is incurred. 15. It may be pertinent to mention that proviso to section 43B, reproduced thereunder for ready reference, also provides for a departure to the general rule enacted in section 43B:- "Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prepared taxes is made. In fact, this was the contention advanced on behalf of the Revenue. So, however, there is no provision for allowance of deduction under section 43B in the year of adjustment. It would be pertinent to mention that in the case of sales tax deferred payment scheme, the CBDT has issued a Circular No. 496 dated 25-9-1987 by virtue of which deduction is allowed to the assessee in respect of deferred payment of sales tax if under the provisions of the relevant sales tax law such deferred payment is considered the actual payment. The Hon'ble Supreme Court in the case of CIT v. Gujarat Polycrete (P.) Ltd [2000] 246 ITR 463, here that the CBDT Circular No. 496 dated 25th September, 1987 providing for allowance of deduction in respect of the sales tax deferred payment would apply only if a State Government had amended its Sales-tax Act to provide that the sales tax that was deferred under an incentive scheme framed by it would be treated as actually paid so as to meet the requirements of section 43B of the Income-tax Act, 1961. Their Lordships of the Supreme Court held that the Tribunal had not taken notice to ascertain as to whether under the Gujarat Sales-tax Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps of the Supreme Court rejected the SLP filed against the above judgment of Andhra Pradesh High Court and held as under :- "In view of the clear finding of fact to which reference has been made in the impugned order of the High Court that the assessee claimed deduction in respect of the amount representing the actual duty paid and so adjusted, there can be no doubt that the High Court is right in taking the view that no question of law arises out of the Tribunal's order. There is thus no ground to interfere. The special leave petition is dismissed." The Hon'ble Supreme Court did not interfere with the decision of the Andhra Pradesh High Court as there were clear findings that the amount paid by the assessee and claimed as a deduction was representing the actual duty paid and so adjusted. The said decision of the Hon'ble Supreme Court and the decision of the Andhra Pradesh High Court do not advance the case of the assessee. On the other hand, it supports the view that the deduction is permissible to the assessee under section 43B only once the amount has been adjusted towards the actual duty accrued. 19. Reference may also be relevant to the decision of the Central Excise G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excisable goods for purposes of charging of duty of excise. It is, therefore, evident that unless goods are manufactured by the assessee, the liability to pay excise duty is not incurred. The mere fact that under the Excise Rules, an assessee is required to keep sufficient money in advance in PLA a/c to meet the liability towards the payment of excise duty on removal of goods does not justify the inference that such an advance takes the colour of accrued liability. It has earlier been mentioned that the mere fact that assessee cannot withdraw the advance payment of excise duty in PLA a/c without the permission of the excise authority also does not convert the advance kept by the assessee in PLA a/c into the accrued liability towards excise duty. 21. In my considered view, there is also no merit in the contention advanced on behalf of the assessee that section 43B mandates deduction in respect of certain liabilities on the basis of cash system of accounting. If the Legislature intended so, it would have provided for the same in the statute. The words in section 43B "in the previous year in which such sum is actually paid by him" cannot be read to mean that deduction shall be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability, when should deduction of such liability be allowed? B. Whether deposit in PLA/unutilized balance in RG23A (part-II) amounts to payment of duty, entitling the assessee to claim deduction thereof in terms of section 43B of the Act ?" In my considered view, the answer to the above questions on the basis of analysis and reasoning is as under:- A. (1) Section 43B is not an enabling provision but a regulatory provision in regard to certain deductions specified therein. (ii) Existence of liability in any previous year either preceding or subsequent to the date of payment is the condition precedent for allowance of deduction under section 43B. (iii) When the payment is made in advance of incurring liability, the deduction would be permissible in the year of payment only after the amount is adjusted against the liability incurred by the assessee. B. The deposit in PLA/ unutilized balance in RG 23A (Part II), does not amount to payment towards incurred liability in terms of section 43B of the Income-tax Act, 1961.Thus, my opinion in regard to the two issues referred to in para 13 of the proposed order is as under :- (1) The deduction for tax, duty etc. is not allowabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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