2007-VIL-334-ITAT-CHD

Equivalent Citation: ITD 107, 343, TTJ 110, 183, [2007] 107 ITD 343 (CHD.) (SB), [2008] 299 ITR (A. T.) 1 (ITAT [Chand])

Income Tax Appellate Tribunal CHANDIGARH

IT APPEAL NO. 343 (CHD.) OF 2005

Date: 20.07.2007

DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 4 (1).

Vs

GLAXO SMITHKLINE CONSUMER HEALTHCARE LIMITED.

BENCH

Member(s)  : VIMAL GANDHI., M. A. BAKSHI., DR. O. K. NARAYANAN.

JUDGMENT

Per Dr. O.K. Narayanan, Accountant Member. - This appeal is filed by the Revenue. The relevant assessment year is 2001-02. The appeal is directed against the order of the CIT(A) at Chandigarh dated 19-1-2005. It arises out of the assessment completed under section 143(3) of the Income-tax Act, 1961.

2. The assessee-company is engaged in the business of manufacture and sale of food and Healthcare products. The assessee is the brand owner of "Horlicks". The assessee-company has returned an income of Rs. 132,15,75,339 for the impugned assessment year 2001-02. While completing the assessment, the Assessing Authority has made certain disallowances/additions and thereby the assessment was finally concluded on an income of Rs. 147,29,65,974.

3. The total Central Excise deposits in 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 the case of Raj & Sandeep Ltd v. Asstt. CIT [IT Appeal No. 1853 (Chd.) of 1992 dated 18-2-1993]. She accordingly disallowed the deduction of Rs. 1,03,48,071 and added the same to the income of the assessee-company.

5. The assessment order was taken in appeal before the CIT(A). Among other grounds, the nineth ground raised by the assessee in its appeal before the CIT(A) was that the Assessing authority has erred in not accepting the claim of the assessee that the incremental balance of Central Excise duty lying in PLA and RG-23 [Accounts Register prescribed by Central Excise Rules] should be allowed as deduction under section 43B, on the basis of the Appellate orders passed for the earlier assessment years. The CIT(A) observed that the same issue had come up for consideration before him in the matter of the same assessee for an earlier assessment year 1998-99. The issue was decided infavour of the assessee for the said assessment year 1998-99 vide his order dated 27-2-2004 in Appeal No. 316/P/2001-02. The finding of the CIT(A) for the said assessment year 1998-99 has been referred to in the following extract:

"I have carefully considered the submissions of the assessee and the arguments of the Assessing Officer. The appellant has claimed deduction under section 43B in respect of balance in PLA and RG-23 accounts, which represents payment made to the excise authorities, which can be used by the assessee to off set payment of duty on the final product. The Hon'ble Chandigarh Bench of ITAT in the case of Raj & Sandeep, Delhi Bench of ITAT in the case of Modipon and Honda Siel held that balance in PLA/RG-23 qualifies for deduction under section 43B of the Act. My predecessor has also accepted the claim of the appellant. Considering the legal and factual situation, I direct the Assessing Officer to allow claim of the assessee under section 43B of the Act. This ground of appeal is allowed."

6. The CIT(A), following the order for the earlier assessment year 1998-99 accepted the contention of the assessee-company and directed the Assessing Authority to give deduction for the amount of Rs. 1,03,48,071, under section 43B of the Act towards payment of Central Excise duty.

7. The Revenue is aggrieved by the above decision and therefore filed the second appeal before the Tribunal. The only issue raised in the present appeal is whether the CIT(A) is justified or not 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 & Sandeep v. Asstt. CIT [IT Appeal No. 1853 (Chd.) of 1992, dated 18-2-1993], has held for the assessment year 1989-90 that excise duty which is deposited in the Account-Current by way of advance excise duty qualifies for deduction under section 43B of the Act. The Tribunal further observed that in distinction to the above decision, the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 has held that advance payment in cash of taxes or duties without incurring liability to pay such taxes or duties cannot be allowed as a deduction under section 43B of the Act. The Tribunal observed that the first decision supports the case of the assessee whereas the second decision supports the case of the Revenue. In view of the above divergent views, the Bench referred the question before the Hon'ble President of the Income-tax Appellate Tribunal for considering the constitution of a Special Bench to decide the issue.

9. On the recommendation of the Regular Bench of the Tribunal at Chandigarh dated 26-12-2006, the Hon'ble President passed an order under section 253(4) constituting Three Member Special Bench to hear and decide the following issue:

"Whether deduction for tax, duty etc. is allowed on payment basis without incurring of prior liability to pay such amount under section 43B of the Act ?"

10. The matter was thus placed before the Special Bench consisting of Three Members. When the Bench was in session and preliminary arguments were placed before it, the Bench found that apart from the decisions of Regular Benches of the Tribunal which have resulted in divergent views, there are Special Bench decisions too on the issue. Three instances of Special Bench decisions have been observed by the Bench. Those Special Benches consisting of three Members each, had considered the following cases:

KCP Ltd. v. ITO [1991] 38 ITD 15 (Hyd.)(SB), Indian Communication Network (P.) Ltd. v. IAC [1994] 49 ITD 56 (Delhi)(SB), Dy. CIT v. CWC Wines (P.) Ltd. [2004] 89 ITD 1 (Hyd.)(SB).

11. As the above-mentioned Special Bench decisions also need to be considered while adjudicating the issue placed before this Bench, it was suggested by the Bench that it would be appropriate if the case is heard by a Larger Bench comprising of at least 5 Members. This suggestion was placed before the contending parties also. The Revenue as well as the assessee agreed 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 31-3-200 1. The assessee is entitled for claiming Mod vat Credit while discharging, its liabilities towards the payment of Central Excise duties. The assessee-company was having certain amount of Modvat Credit available for future set off in its Modvat account. Such Modvat Credit balance available as on 31-3-2001, according to the assessee-company amounted to payment of Central Excise duty and therefore the Modvat Credit also should be treated at per with advance payment of Central Excise duty for considering the deduction available under section 43B. Therefore, it has been stated before the Special Bench in the course of the preliminary hearing, that the issue referred before it needs to be considered in two segments as one relating to the cash payment of advance duty and the second relating to the Modvat Credit available to the assessee.

13. In the above scenario, the issue referred to before the Five-Member Special Bench has been fine-tuned by the Hon'ble President, in the following questions:

"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."

14. The above questions were placed before the Revenue and the assessee to seek suggestions and also objections if any. The ld. Commissioner of Income- tax appearing for the Revenue and the ld. Counsel appearing for the assessee fairly agreed that the above split questions do reflect the exact nature and dimension of the issue placed before the Special Bench.

15. Shri R.K. Goyal, the ld. Commissioner of Income-tax appeared for the Revenue and opened the case. He argued at length on the various factual and legal propositions relied on by the Revenue. He stated that, basically the ground raised by the Revenue in this appeal is that the CIT(A) has erred in allowing deduction under section 43B of the Income-tax Act, 1961 of the incremental balance maintained with the Central Excise authority in PLA and RG-23. On the question whether deduction for tax, duty etc. is allowable under section 43B, on payment basis but before incurring the liability to pay such amounts, the ld. CIT brought out the contentions and arguments in the following manner:

"1. 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 prescribed sums would be available in computing the business income if those liabilities were accrued during the previous year relevant to the assessment year, without the actual payment thereof. Even when section 43B has been introduced, the rule of accrual of liabilities has not been dispensed with. The accrual of liability has still been retained. Section 43B has made an additional condition that deductions would be allowed, in addition to the accrual of liability, only on actual payment of the sums. Therefore, it is not proper in law to argue that advance payment of taxes and duties made by an assessee even before accruing the corresponding liability is eligible for deduction under section 43B.

4. That section 43B has increased the number of conditions from one to two for the deduction of the prescribed sums. Instead of the erstwhile single condition of accrual of liability, section 43B has brought out dual condition viz., accrual of liability as well as actual payment against the liability.

5. That this position is very clear in the words used in section 43B in the following manner:

"...Notwithstanding anything contained in any other provisions of this Act, a deduction otherwise allowable under this Act in respect of ......"

6. That a deduction "otherwise allowable under this Act", means a deduction qualified to be allowed before considering the question of payment. The item must be permissible as a deduction under any of the enabling provisions; the expenses, must be incurred or liability must be incurred. That, only for the restriction brought in by section 43B that cash must be actually paid, it does not mean that the remaining and existing conditions provided in law have been dispensed with. All such conditions are still retained. The further condition of actual payment is an addition to the existing conditions, which determine the allowability of deduction in computing the business income of an assessee.

7. That six items have been provided in section 43B to which the restriction contained in that section regarding actual payment of cash before claiming the deduction, do apply. The six items are provided in clauses (a) to (f). Clause (a) reads 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 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 date of filing of the return under section 139(1). While extending the time to the benefit of the assessee as stated above, the law has inserted the proviso in the following manner:

"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 the assessee along with such return."

The expression ". . . in respect of the previous year in which the liability to pay such sum was incurred as aforesaid...." is the speaking expression to be marked. The law has made it very clear in simple terms that what is to be paid and for which evidence has to be furnished is in respect of the payment for which the liability was incurred in the previous year. This shows that incurring of prior liability in a previous year is essential in claiming a deduction governed by the provisions of section 43B. The additional requirement of making actual payment has not obliterated any other remaining requirements embodied in the law relating to deduction of expenses in computing income from business.

9. That further, the position has been explicitly made clear in the statute by providing Explanation 2 to section 43B. Explanation 2 reads that, for the purposes of clause (a), as in force at all material time, "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 factum that the liability should be incurred during the previous year has been reiterated in the above Explanation which rules out any other interpretation to the contrary.

10. Nowhere in the scheme of section 43B is there any whisper of a situation where an assessee can make advance payment of taxes or duties in the previous year, even before incurring of the liability and claim deduction in computing the income from business."

16. In support of his arguments and contentions, the ld. Commissioner of Income-tax has relied on the following decisions:

1. Srikakollu SubbaRao & Co. v. Union of India [1988] 173 ITR 708 (AP).

The AP High Court has held that in order to 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 Special Bench and has held that prepaid taxes where no demand has been raised or liability incurred could not be allowed as deduction.

4. Dy. CIT v. Amforge Industries Ltd [2001] 79 ITD 49 (Mum.).

In this case the Tribunal has again considered the deductibility of excise duty and sales tax paid in advance. The Tribunal held that in:order to claim under section 43B, assessee must first incur. liability of the nature mentioned therein and only thereafter the year of allowability would be determined on the basis of the year of actual payment. The Tribunal held that taxes, paid in advance before incurring the liability would not be allowed as deduction under section 43B.

5. CWC Wines (P.) Ltd 's case

The Special Bench has; held that countervailing excise duty paid in advance for importing Liquor cannot be allowed, as deduction under section 43B where goods have not been received during the relevant previous year, which means advance payment of duty cannot be allowed as deduction before actually incurring the corresponding liability.

6. Maruti Udyog Ltd 's case

In this case, the Tribunal has examined the issue and has come to a finding that advance payment of taxes or duties without incurring liability to pay such taxes or duties. cannot be allowed as deduction under section, 43B.

17. In addition to the above judicial pronouncements, the ld. Commissioner has also placed reliance on Circular No. 550 issued by CBDT on 1-1-1990, providing Explanatory Notes on the provisions relating to Direct Taxes contained in the Finance Act, 1989. It has been clarified therein that Explanation 2 has been provided in section 43B to nullify the rigors of certain judicial pronouncements [Srikakollu Subba Rao & Co. s case] where the courts have held that in addition to the incurring of liabilities, the amounts also should be statutorily payable in the previous year itself. The Circular has clarified that "any sum payable" shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable.

18. The ld. Commissioner of Income-tax explained that the scheme of section 43B, has to be understood both in text and context and a harmonious interpretation has to be followed in order to arrive at a rightful proposition. On the Rule of interpretation, he relied on the decision of Dunlop India 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 the way of claiming deductions in respect of taxes and duties paid in a particular previous year but otherwise payable in the subsequent assessment year. He explained, that section 43B is not a restrictive OF prohibiting section as sought to argue by, the Revenue but on the other hand it is equally an enabling provision where deductions are allowed on the basis of actual payments of taxes and duties. The detailed arguments and contentions placed by the ld. Counsel are summarised in the following manner:

"1. Section 43B provides a departure from the method of accounting followed by an assessee inasmuch as deduction of statutory liabilities in the year of payment is introduced notwithstanding the fact that the liability in respect thereof may have accrued in another year. In effect section 43B overrides the method of accounting consistently followed by an assessee and directs that deduction of statutory liabilities will be available only in the year of payment.

2. The assessee has claimed deduction under section 43B in respect of the balances on the Personal Ledger Account (PLA) maintained with the Excise authorities. As the amounts have irretrievably gone out of the hands of the assessee-company, those payments are allowable deduction as contemplated in section 43B. Section 43B provides that any sum payable on account of tax, duty etc. which is otherwise allowable, shall be allowed only in the year of actual payment, irrespective of the year in which the liability to pay the same was incurred. Consequently, where the liability to pay excise duty may be incurred in. a later date, the amount actually paid by the assessee has to be allowed as deduction in the year of payment itself.

3. The statutory provisions of section 43B and the PLA and RC-23 maintained under the Central Excise Rule clearly point out the pre-dominance of actual payment of duty as the sole consideration while granting deduction in the computation of income compared to the year of accrual or the incurring of liability or raising of the demand.

4. Section 145(1) of the Income-tax Act recognizes two methods of accounting, either cash or mercantile system, to be regularly employed by an assessee for the purpose of computing income chargeable under the head "Profit and gains of business or profession" or "Income from other sources." The assessee is given a choice to select either of the two. 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 profits or gains are computed under the head "Profits and gains of business or profession".

7. Reading of section 145(1) and section 43(2) along with section 43B brings out a unique situation as follows:

That the method of accounting for deducting taxes, duty etc. while computing the business income is cash accounting as a result of the impact of the section 43B. Therefore, the method of accounting for the purpose of section 43(2) is none other than cash accounting. When sections 43(2) and 43B are read together, the method of accounting for the computation of business profit in respect of sums like taxes, duties, cess etc. is cash accounting and no other consideration should prevail in deducting those items other than the consideration whether those sums have actually been paid by the assessee. In other words section 43B overrides all the rules regarding method of accounting and decides the issue of deducting the prescribed sums only on actual payment without any conflict to section 43(2). Cash system of accounting invariably means deduction of expenses in the year of payment.

8. Section 43B provides that the items enumerated thereunder shall be allowed on actual payment 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. The expression "irrespective" in fact removes any reference to time. The expression "irrespective" means regardless of time. Therefore the insistence that the incurring of liability must be referred to a particular previous year is uncalled tor in the administration of section 43B.

9. A careful reading of section 43B does not bring out any sequence or order of events in which the matters like incurring of liability, raising of demand, actual payment of the duty or taxes should occur. The screening of the entire provisions contained in section 43B does not bring out any rule that the liability to pay such duty or tax must incur first and only thereafter the payment of such duty or tax must be made/deducted. There is no such sequence of events that one particular event should alone happen at the first instance and then only the other event should follow. The statute does not prescribe any proposition that pre-incurring of liability is a condition to claim deduction of duty, taxes etc. where those items were paid by the assessee.

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 relevant previous year but before the due date of filing of the return under section 139(1). The law stated in the proviso does not in any way alter the character of section 43B wherever payments have been made by the assessee. The proviso applies in a case where the liability has incurred but the assessee has not paid the amounts in the said year and wants to claim the deduction on making the payment after the close of the previous year. Such situations happen in matter of sales tax. Sales might be made in the month of March. The liability to pay the sales tax arises only in the following month of April; after the close of the previous year. What is paid by the assessee by way of sales tax in the month of April of the succeeding previous year is the liability actually incurred in the month of March falling within the immediately preceding previous year. Before the introduction of the proviso, Courts have held that in order to apply the provisions of section 43B, not only should the liability to pay the tax or duty be incurred in the accounting year, but the amount also should be statutorily payable in the accounting year - Srikakollu Subba Rao & Co. 's case. It is to take care of such marginal situations and to mitigate the genuine hardships of the assessee as a result of High Court judgment that the proviso has been added to section 43B. It is not in the nature as argued by the Revenue that payment should succeed incurring of liability.

12. The Revenue has also placed much reliance on Explanation 2 to section 43B. Explanation 2 provides that for the purposes of clause (a), any sum payable means, a sum for which the assessee has incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. By making reference to clause (a), the items covered by Explanation 2 are tax, duty, cess or fee. This should be read along with the proviso already mentioned above. The proviso to section 43B and Explanation 2 go together. The operation of an Explanation is always governed by the main provisions of law contained in the relevant section. An Explanation cannot overtake the section as such. In the present case Explanation 2 does not cover all sorts of payments. They cover only those payments within clause (a) and also to be read along with the proviso to section 43B.

21. The ld. Counsel further argued in the 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, section 43B will have overriding effect. The court observed that 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.

3. The judgment of the Gujarat High Court in Lakhanpal National Ltd. 's case is in favour of the arguments advanced by the assessee on the question of true intent, purpose and implication of section 43B. The said judgment of the Gujarat High Court was not challenged by the Revenue before the Supreme Court thereby accepting the judgment of the Gujarat High Court. The interpretation placed on section 43B in the case of Lakhanpal National Ltd. 's case was directly followed by the judgment of the Bombay High Court in CIT v. Bharat Petroleum Corpn. Ltd. [2001] 252 ITR43 and also by Madras High Court in the case of Chemicals & Plastics India Ltd. v. CIT [2003] 260 ITR 193.

4. The above decisions of three High Courts have been considered by the Supreme Court in the case of Berger Paints (India) Ltd. v. CIT [2004] 266 ITR 99. The Supreme Court observed that the above three judgments rendered by three different High Courts have been accepted by the department which has brought in a consistency of approach on the issue involved under section 43B. The Court held that the said consistency of view has to be followed and therefore the judgment of the Calcutta High Court in CIT v. Berger Paints (India) Ltd. No.1 [2002] 254 ITR 498 was liable to be disapproved. The uniform view reflected in the decision of three High Courts has been held by the Supreme Court as a valid reason to endorse the said view and not to disturb the consistency. Referring to the Supreme Court judgments in Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219; CIT v. Narendra Doshi [2002] 254 ITR 606 and CIT v. Shivsagar Estate [2002] 257 ITR 59, the Court reiterated the principle of consistency to be followed in matters of adjudication. If the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted in the case of one assessee, it is not open to the Revenue to challenge the correctness in the case of other assessees without just cause. In the matter of section 43B there being no such cause approved, the decision of the three High Courts where 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 irrespective of the fact whether, the sum has actually become payable or not in the previous year. According to the relevant law governing the payment of tax, duty, cess or fee, the amount would be payable only after the close of the previous year; but the decision of the Andhra Pradesh High Court adversely affected even such payments made in the previous year but which became payable only after the close of the previous year. This anomaly has to be overcome. It is for that purpose Explanation 2 has been inserted. Explanation is to be governed by the section in the statute. It cannot override the intended purpose of the law stated in the concerned section. It enables to explain a situation arising from the implementation of the law stated in a section. It does not bring any interpretation over and above the spirit of the law contained in a particular section. In the present case, Explanation 2needs to be read along with the proviso which enables an assessee to claim deduction even if made after the close of the previous year, but if made before the due date of filing of the return. Explanation 2 is the expression of the proviso meant for undoing the after effect of the judgment of Andhra Pradesh High Court. The proviso is the means provided by the statute, to accomplish the objective of the Explanation. Therefore they should be read together.

6. The above position has been explained by the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT[1997] 224 ITR 677. The Court has observed in the said judgment that the first proviso to section 43B and Explanation 2have to be read together as giving effect to the true intention of section 43B. Explanation 2 being retrospective, the first proviso has also to be so construed. Without the first proviso, Explanation 2would not obviate the hardship or unintended consequence of section 43B. The proviso supplies an obvious omission. But for this proviso, the ambit of section 43B becomes unduly wide bringing within its scope those payments, which were not unintended to be prohibited from the category of permissible deductions. The Court has held therein that the rule of reasonable construction must be applied while construing a statute.

7. The Calcutta High Court in the case of Associated Pigments Ltd v. CIT [1998] 234 ITR 589 has considered this question of twin conditions argued by the Revenue that payment also should be 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 light of the above judgment of the Calcutta High Court.

8. The Allahabad High Court in the case of CIT v. C.L. Gupta & Sons [2003] 259 ITR 513 has considered the very same issue in a more realsome and direct manner. In that case, the assessee paid the Customs duty in March 1987, but goods delivered and entered in the accounts in April 1987. The payment fell in the previous year ending 31-3-1987 relating to the assessment year 1987-88 and the liability accrued in the previous year ending on 31-3-1988 relevant to the assessment year 1988-89. The assessment year in which the payment was made preceded to the assessment year in which the liability was incurred. The Court held that 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 alone is relevant and is to be taken into account. The Court categorically held that the year in which the assessee incurred the liability to pay such taxes, duties etc. has no relevance and cannot be linked with the manner of giving benefit of deduction under section 43B. The above decision of the Allahabad High Court clearly endorses the argument of the assessee that incurring of liability mentioned in section 43B, the First proviso thereto and Explanation 2 thereunder are reflecting the general liability of an assessee carrying on the business where liability arises for duties and taxes and the expression does not mean an outstanding liability as construed by the Revenue. In the light of the general liability already stated, the actual payment alone is the sole criteria of deciding the admissibility of deduction under section 43B.

9. In order to get the refund of excise duty from the Account-Current, it is necessary for the assessee to make a formal claim and the excise authority has to pass appropriate orders after recording the reasons in writing. Cash refunds are made only under specified circumstances; otherwise refund due to the assessee is always treated as a credit available for future set off and adjustment of Central Excise duty. From the nature of the account-current maintained with Central Excise Department, the frequency of payments made by the assessee and the lifting of goods from the factory on a continuous basis, it is very clear that the money even if characterised as advance deposits paid by an assessee to Central Excise through 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. Happy Forging Ltd. through their order dated 8-8-2005.

3. ITAT Delhi Bench in the case of Modipon Ltd. v. IAC [1995] 52 TTJ 477 has held that excise duty paid as advance by way of deposit in Personal Ledger Account (PLA) cannot be disallowed under section 43B.

4. ITAT Agra Bench through their order dated 18-12-2000 in ITA No. 283 (Delhi) of 1992 in the case of Hind Lamps Ltd. v. Dy. CIT has followed the above decision and held that similar advance deposit made in Account-Current are allowable as deduction under section 43B.

23. The ld. Counsel thereafter tried to explain that how the various judgments relied on by the ld. Commissioner of Income-tax are not really applicable to the issue raised before us.

1. The ITAT Mumbai Bench in the case of IAC v. Tata Press Ltd. has held that advance payment of excise duty cannot be allowed as deduction under section 43B. But the decision does not consider how the accrual of liability, one of the basic rules of mercantile system of accounting, would be still valid in allowing deduction under section 43B once the system has been statutorily shifted to cash basis.

2. The Revenue has relied on the Special Bench decision of ITAT Hyderabad Bench in the case of KCP Ltd. The said decision of the Special Bench is no longer good law in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. where 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 and by virtue of the overriding effect of section 43B.

3. The reliance placed by the Revenue on the decision of Andhra Pradesh High Court in the case of Sri Kakollu Subba Rao & Co. is also misplaced. It is not a decision which interprets the provisions of law contained in section 43B.

4. The decision of ITAT Mumbai Bench 'E' in the case of Amforge Industries Ltd. also does not flow from the language used in section 43B.

5. The decision of ITAT Hyderabad Special Bench in the case of CWC Wines (P.) Ltd. has placed reliance on the decision of Andhra Pradesh High Court in the case of Gopi Krishna Granites India Ltd. v. Dy. CIT [2001] 251 ITR 337. The issue raised before us in clause (a) of section 43B is to be considered. It is quite different from clause (d) considered by the High Court in the said decision. The sums payable under clause (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 dismissing the special petition filed by the revenue in appeal against the order dated 27-2-1991 of Andhra Pradesh High Court in ITC No. 126 of 1990, the Supreme Court held as follows:

"...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 Hiking 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 matter considered by the Supreme Court was the dismissal of a reference application by the High Court on the question whether amounts in a special account maintained by the assessee to pay excise duty as and when the goods were removed, would partake the character of the excise duty and would hence be allowable under section 43B of the Income-tax Act, 1961. This is a straight decision of the Apex Court on the subject-matter considered here.

2. The ITAT Delhi Bench 'D' in the case of Honda Siel Power Products Ltd v. Dy. CIT [2001] 77 ITD 123 has considered the nature of advance payments of Central Excise duty for the purpose of deduction under section 43B.

3. The Central Excise & Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai has considered the nature of the PLA in the case of F. Fibre Bangalore (P.) Ltd. v. CCE [2000] 120 ELT 579 (Tribunal). In that case "the assessee debited the duty in PLA for acquiring under rule 57F(2) and took the credit back in PLA rather than taking the same in RG-23A Part-II. As such, the lower authorities directed the assessee to pay the duty in PLA and take the credit back in RG-23A Part-II. This direction could not be adhered to since as on that date, the unit was not functioning. The revival also could not be done. The contention of the assessee before the Tribunal was that as there was no loss of revenue, the demand raised against it to make the credit in PLA be set aside. The Tribunal held that the prayer of the assessee was not acceptable. Rule 173G(1A) provides that where any amount is to be withdrawn from the PLA account, then the assessee has to make an application to the Commissioner and only by obtaining permission from him, the said amount can be withdrawn. Rule 173G(1) also prescribes 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, the money ceased to be the money of the assessee. The assessee cannot withdraw any credit from the Account-Current without the permission of the concerned authorities.

25. After concluding the arguments on the first question of advance payments of excise duty, arguments were made on the second question 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.

26. Shri Ajay Vohra, the ld. Counsel brought out his arguments on the above issue in the following manner:

(i) Modified Value Added Tax (Modvat) introduced from 1-31986 by incorporating Rules 57A to 57J in the Central Excise Rule, 1944, provides for the credit of duty of Central Excise or additional duty of Customs (countervailing duty), usually referred to as "input duty" paid on the goods used in the manufacture of final products can be utilised towards payment of duty of excise on the final products. Before the introduction of the above scheme, wherever applicable, duty of Central Excise had to be paid at every point thereby the cascading effect of the multiple levy of duty would be burdended by the ultimate consumer who consumes the goods. In order to avoid the escalation effect of the multiple point levy, the Modvat has brought a scheme whereby the excise duty paid by an assessee on the input goods would be available as credit to set off against the excise duty payable on the output goods.

(ii) The input credit available to an assessee under Modvat is as good as payment of excise duty as it ultimately reduces the net liability of the assessee to pay Central Excise duty on the finished goods. If such credit is not available by way of Modvat, the assessee has to pay Central Excise duty to that extent also, by cash which means that availing of Modvat Credit in pari materia amounts to payment of Central Excise duty by way of cash.

(iii) As the Modvat Credit availed by an assessee is de facto payment of Central Excise duty, the setting off Modvat Credit must be treated as payment of excise duty in cash. The consequence of the above proposition is that the unutilised credit balance of Modvat available to an assessee on the last day of the previous year will be equivalent to advance payment of Central Excise duty and all the arguments advanced in support of the deductibility of advance payment of Central Excise 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 the character of excise duty itself. According to him, therefore, unexpired Modvat Credit is nothing but excise duty paid by the assessee and to be set off against the running liability of Central Excise duty.

28. The ld. Counsel relied on the decision of the Supreme Court in the case of Eicher Motors Ltd. v. Union of India [1999] 106 ELT 3. The ld. Counsel pointed out that in the said case the Supreme Court has held that the facility of Modvat Credit is as good as tax paid. Therefore, unexpired Modvat Credit available to an assessee is to be treated as good as Central Excise duty paid by the assessee on account. The ld. Counsel thereafter referred to the decision of ITAT Delhi Bench 'D' in the case of Honda Siel Power Products Ltd. The ld. Counsel has also relied on the decision of ITAT Agra Bench in the case of Hind Lamps Ltd.

29. Shri R.K Goyal, the ld. Commissioner of Income-tax also argued in a forceful presentation that unexpired credit of Modvat account is no way similar to the advance payment of Central Excise duty. The ld. Commissioner again reiterated that even the advance payment of Central Excise duty through actual payment of cash in the Treasury does not qualify the deduction under section 43B unless corresponding liability is incurred in the previous year. He submitted therefore that even if the unexpired credit in the Modvat account is if at all treated as similar to advance payment of Central Excise duty, still it is not deductible for the reason that the advance payment of excise duty per se is not deductible under section 43B.

30. Without prejudice to the above contention, the ld. Commissioner submitted that Modvat is a scheme whereby the law exempts an assessee from payment of Central Excise duty on final products to the extent duty was paid on the raw material, if any. Therefore it does not amount to actual payment. It is only an entitlement of the assessee for claiming exemption from the excise liability that may arise in future. The unexpired Modvat Credit cannot be equated to advance payment of excise duty by cash. The Modvat credit is not coming out of the payment of Central Excise duty per se. It is coming out of the purchase of the raw materials. Where raw materials are exciseable, the purchase cost also includes excise duty. In order to avoid a cascading effect of excise duty, the duty paid on earlier points are given as deductions 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 such unexpired credit as good as tax paid. It is only a future entitlement of the assessee and not a payment of advance which could be used in future. This difference is obvious and has to be taken note of while appreciating the scheme of Modvat Credit.

32. On hearing both sides in a detailed manner, we may now proceed to consider the issues raised before us. We shall first look into the question, "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 ?"

33. In order to cover the Central Excise duty attributable to those goods lifted by the assessee out of the factory on a continuous basis, it is necessary that the assessee should keep sufficient credit balance in the Account-Current so that every such removal is noted in Account-Current for debiting the appropriate duty amount. The nature of Account-Current, therefore, is that of a running account in the light of the fact that the activities carried on by an assessee are also incessant and continuous. They both run together. As the assessee has to meet the Central Excise liability on a continuous basis without any interruption, the assessee has to maintain a running account in the form of Account-Current. It is to be seen that the excess amount reflected in the Account-Current amounts to nothing but payment of excise duty. The credits available in such accounts cannot be considered "advances" as construed in the ordinary commercial accounting sense.

34. A similar issue was considered by Supreme Court in the case of New Horizon Sugar Mills. In that case the assessee was required to set apart specific amounts towards Molasses Storage Reserve Fund, which could be utilised only for the purpose of constructing Molasses Storage Tank. This appropriation was mandatory in the light of Molasses Control Order as the assessee was a manufacturer of sugar. While examining the nature of the said money blocked in the Molasses Storage Reserve Fund, the Supreme Court held that the money would not be the income of the assessee, as the assessee had no control over that. The deposits made by the assessee in the Accounts-Current for making payments of Central Excise Duty are analogous to the case considered by the Supreme Court and the ratio laid down in the above judgment, we think, should apply to the present case.

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 has no option to pay or not to pay such deposits in that running account to meet the liability of Central Excise Duty arising from time to time. The payments of advance deposits in the Accounts-Current are necessitated by the mandate of law and not by the option of the assessee. The advance payments of Central Excise Duty, therefore, satisfy the character of exaction made by the sovereign under Authority of Law. In the circumstances, it is very difficult to accept the contention of the revenue that advance payments of excise duty are not to be treated as actual payments of duty for the purpose of deduction under section 43B.

37. Section 43B has brought in a change in the normal rule of deduction of expense based on the accounting method followed by an assessee. The normal principles and practices are done away. Accordingly, there is no force in the argument of the revenue that the deduction can be granted only if the liability has incurred during the previous year, even when the payment was made by the assessee. The point coming out of the above discussion is that the rule of deduction under section 43B is the actual payment of the liability. The nature of the Account-Current already examined brings home the point that the advance payment of excise duties are actual payments of duties. Therefore, when the payments are understood as actual payments, those payments even if mentioned as advance payments need to be allowed as deduction under section 43B.

38. The above position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid; but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in section 43B, that the deduction in respect of tax or duty, which was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability. The Gujarat High Court has examined the true meaning of the above statutory language in the case of Lakhanpal National Ltd. The Court has held that deduction of tax or duty paid by an assessee has to be allowed as deduction in the year of payment, irrespective of the previous year in which the liability to pay such sum was incurred according to the 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 judgments on the very same issue, the department has accorded a consistency of approach on this issue involved under section 43B. The Supreme Court held that the Courts has to follow the principle of consistency in the matter of adjudication and further held that the uniform view reflected in the decisions of three High Courts has to be endorsed as otherwise it would be disturbing the consistency without a reasonable provocation. The Supreme Court held in the above case that the deductions of tax, duty should be allowed under section 43B in the year of payment, irrespective of the previous year in which the liability was incurred.

41. In fact the decision of the Supreme Court in the case of 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. The Supreme Court has approved the judgments of the High Courts of Gujarat, Mumbai and Madras not only on the rule of consistency but also on the merits of the issue. The Supreme Court has held that the entire amount of excise duty/customs duty paid by the assessee in a particular accounting year is allowable under section 43B of the Income-tax Act, 1961, as a deduction in respect of that year, irrespective of the amount of excise duty/customs duty included in the valuation of the assessee's closing stock at the end of the accounting year. It is not that the Supreme Court has considered the issue in the case of Berger Paints (India) Ltd. 266 ITR 99 alone. The revenue had taken up the decision of Andhra Pradesh High Court rendered on this issue before the Supreme Court in Special Leave Petition (SLP-SR 2766 of 1993), in the case of South India Research Institute. The Supreme Court has examined the judgment of Andhra Pradesh High Court in the matter of section43B in the context of a special account maintained by the assessee to pay the Central Excise duty. The Supreme Court upheld the finding of the High Court that the claim of the assessee for deduction of payments made to such special account has to be allowed as it represented actual duty paid by the assessee. The SLP of the department was dismissed.

42. The Gujarat High Court in the case of the Lakhanpal National Ltd has considered the scope 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 Customs Duty paid by the assessees, but embedded in the stock of goods not consumed and/or cleared. In the present case, the issue is that of advance payment of excise duty, per se. The Courts while examining the issues before them in those cases, have in fact examined the law on the subject in its entire perspective and have clearly held that advance payments of Excise Duty are deductible under section 43B.

43. The Gujarat High Court in the case of Lakhanpal National Ltd. has in fact considered the entire scheme of section 43B and after long discussion, has held that "......there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee......". The Supreme Court in the case of Berger Paints (India) Ltd. has also considered the Special Bench decision of the ITAT Delhi in the case of Indian Communication Network (P.) Ltd. The said decision of the Special Bench has been approved by the Supreme Court. The Court has reproduced the relevant portion of the order of the Special Bench and endorsed the view of the Special Bench that Excise duty payments must be deducted in the year of payment irrespective of the year of incurring of liability. What we find is that the Supreme Court has considered the decision of the Delhi Special Bench dealing with the very same issue and has approved the decision that advance payment of excise duties need to be deducted in the year of payment under section 43B. Therefore, the proposition argued by the assessee-company has not only been approved by the various High Courts but also by the Supreme Court and the issue is squarely covered by the decision of the Supreme Court in the case of Berger Paints (India) Ltd.

44. We may also examine the relevance of the case laws cited by the ld. CIT (DR) at the time of hearing. He has placed reliance on the decision of Andhra Pradesh High Court in the case of Sri. Kakollu Subba Rao & Co. In that case the Andhra Pradesh High Court has held that the assessee should pay the amount in the previous year so also the amount should become payable in the very same year for claiming deduction under section 43B. It is thereafter, the proviso to section 43B was inserted, to alleviate the consequent difficulties. But it is to be seen that the principal question placed before the High Court in this 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 qualifying section. Restriction or otherwise of an expenditure is prescribed in the relevant section itself. Take for example section 32. It appears that allowances are granted in computing business profits of an assessee on satisfaction of prescribed conditions. The deductibility of expenditure is one thing and the actual deduction is something different. This distinction has not been considered in the decision of Tata Press Ltd.

45. In the said case, the Tribunal has treated the advance payment as "contingent liability". According to the Tribunal, the liability to pay duty mayor may not happen in future. The above observation of the Tribunal has not taken into consideration one of the basic postulates of accounting principle, viz., the concept of "going concern". Accounting principles, practice and standards all are framed on the above basic concept that a business will run for quite a long time and is not going to terminate its operation in a near future. If the concept of continuity is not there, one will have to consider every receipt as income and every payment as expenditure, irrespective of the nature of the receipt and payment. The whole frame of accountancy is made on the principle of "going concern". Accountancy provides the rules for working out, profit and loss of an entity. These principles are incorporated in Taxation Law, as well. That is why section 32 allows an assessee to write off a specified percentage in a staggered manner as successive deduction of depreciation allowances; section 35D provides for expenses to be written off for a period of 10 years. Various deductions under Chapter VI-A provide for deduction for more than one assessment year, sometimes 5 assessment years to 10 assessment years. When that is the case, the basic rule is that the business will continue for years to come and the assessee will have to claim the deduction on a regular basis from assessment year to assessment year. When there is the regularity of payment, it is not possible to hold that the excise duty payable in the month of April would be "contingent" in nature in the immediately preceding month of March.

46. Another concern expressed by the Tribunal in the above case is that it will open floodgates for the assessees to make advance payments of such liabilities for any number of subsequent years and claim deduction thereto in an earlier year, if doing so 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 the case of Dy. CIT v. CWC Wines (P.) Ltd. The said decision has been taken by the Special Bench by placing reliance on the decision of Andhra Pradesh High Court in the case of Gopi Krishna Granites (India) Ltd. v. Dy. CIT [2001] 251 ITR 337 wherein the High Court has considered the payments covered by clause (d). In the present case clause (a) of section 43B is to be considered. It is quite different from clause (d) considered by the High Court in the said decision. The sums payable under clause (a) and the sums payable under clause (d) are different in nature and character.

49. The Revenue has also relied on the decision of ITAT Delhi Bench in the case of Maruti Udyog Ltd. In that case also, the Tribunal has overwhelmingly discussed the effect of the expression "incurring of liability". While considering the above, the Tribunal has not read the proviso to section 43B together with Explanation 2 and also it has completely overlooked the prominent expression of "irrespective of the previous year". The decision also has relied on various decisions mentioned above and which were held not relevant.

50. The ld. CIT has also relied on the Circular No. 550, dated 1-1-1990 issued by CBDT in the context of Explanation 2 to section 43B. The Finance Act, 1989 has brought in the Explanation 2 to section 43B, according to which "any sum payable" shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable. In fact, the circular deals with the short question of the distinction between liability incurred and payment due. It clarifies that even if the sum is not due for payment during the previous year deduction would be available if payment was made. There was a judicial view that for, claiming deduction, the amounts also must be payable within the previous year. [Srikakollu Subba Rao & Co.]. It created a difficult situation for assessees; especially like payments of sales tax etc. In order to remove the difficulties, Explanation 2 was brought in, along with proviso to section 43B. Proviso has made the Explanation practicable and workable by stating that the payments made even after the close of the previous year but made before the due date of filing of the return, will be deductible. It could be seen that the circular/deals with the extended period of time by which 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, section 43B has been brought in the statute declaring that "well you claim the deduction, but only on actual payment." The law has made it clear that such payments are to be allowed as deductions in the year of payment. Section 43B does not lay down any sequence or order of events in which the liability has to be incurred and the payment has to be made by the assessee. Section 43B does not laid down any rule that the liability to pay the duty must incur first and only thereafter the payment of such duty to be made so as to claim the deduction under section 43B. But the Revenue tries to make out a case that the statute has prescribed such an order of events. In fact there is no such prescription in the statute. We have seen that the expression "otherwise allowable" refers to a declaration of permission in law that which are available as deductions on payment under section 43B, are those expenses which are usually allowed by the Income-tax Act for the purpose of computing income. We have seen that the expression "any sum payable" does not mean "payment outstanding". In the light of the decision of the Supreme Court in the case of Allied Motors v. CIT [1997] 224 ITR 677, we have held that for the purpose of section 43B the proviso there-under and Explanation 2 have to be read and construed together.

52. Therefore, we hold that the 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. Accordingly, the first question is answered in affirmative and in favour of the assessee.

53. The next question to be considered is whether Modvat Credit available to an assessee as on the last day of the previous year amounts to payment of Central Excise duty under section 43B ?

54. The forceful argument of the ld. Counsel appearing for the assessee is on the basis of the Supreme Court decision in the case of Eicher Motors. The argument of the ld. Counsel is that the Supreme Court has held that the facility of Modvat Credit is as good as tax paid. He argued that the unexpired Modvat Credit available to an assessee is to be treated as good as Central Excise duty paid by the assessee on account. But we find that the context in which the observation was made by the Supreme Court has to be noted of. The observation of the Supreme Court had been made in a case where the assessee had 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 payment of excise duty is not tenable in law.

55. In the case of unexpired Modvat Credit, there is no question of set off, on the last day of the previous year and therefore there is no occasion to treat the unexpired credit as equivalent to the tax paid.

56. In fact the unexpired Modvat Credit available to an assessee is in the nature of a future entitlement which cannot be considered as equivalent to advance payment of duty.

57. In a case of advance payment of Central Excise duty, there is de facto payment of duty by cash in the Government Treasury. The payment is made towards the Central Excise account; which we have already held as actual payment of excise duty itself. But in the scheme of Modvat, there is no such payment of excise duty. The credit is available to an assessee under the scheme of Modvat in order to minimise the escalation effect of payment of excise duty by successive manufacturers. Therefore, the excise duty paid at the earlier point is set off against the Central Excise liability at the next point. Till the set off is availed at the next point, the duty available for set off by the assessee, is nothing but part of the cost of the materials purchased by him. That is not a payment per se made towards excise duty but it was in fact a payment made towards the purchase cost.

58. Section 43 of the Income-tax Act, 1961 has provided the definition of certain terms relevant to the computation of income from profits and gains of business or profession. Sub-section (2) of that section defines the term "paid". Section 43(2) reads as below:

"(2) 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'Profits and gains of business or profession'."

59. The definition states that "paid" means money actually paid by an assessee or incurred by the assessee and not anything else. In section 43B, the deduction is given only for those sums "actually paid" by the assessee. A conjoint reading of section 43(2) and section 43B support the argument of the ld. Commissioner of Income-tax that unexpired Modvat Credit does not amount to actual payment of Central Excise duty.

60. The credit balance as such does not amount to payment. The credit balance becomes equivalent to the payment only at the point of time the assessee exercises his option to set off the credit 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 with him on answer to both the questions. However, in order to highlight the judicial precedents fully covering the issue and to add few more decisions, I am writing this consenting order only on question No. 1.

2. The relevant facts have already been noted by my learned Brother in his detailed order, and it is unnecessary to repeat them. To appreciate the contention that liability must be shown to have been incurred before claim based on actual payment is made under section 43B, we must bear in mind the observations of Frankfurter reproduced from the decision of Supreme Court in the case of United Bank of India v. Abijit Tea Co. Pvt. Ltd. AIR 2000 SC 2957. Quotation of Frankfurter from his article" Some Reflections on the Reading of Statutes" (essays on jurisprudence from the Columbia Law Review), is thus "...........The Legislation as a name, it seeks to obviate some mischief, to supply an inadequacy, to effect a change of policy, to formulate a plan of Government. That aim, that policy is not drawn, like nitrogen out of the air, it is evidenced in the language of the statute, as read in the light of other external manifestations of purpose........"

2.1 To resolve the controversy before us, we must consider heading of section 43B, the circumstances compelling the Legislature to introduce it (the mischief involved before its introduction) and the purpose it was to serve.

2.2 The Finance Minister while presenting Finance Bill, 1983, stated as under:

"Several cases have come to notice where taxpayers do not discharge the statutory liability such as in respect of excise duty, employer's provident fund, employees State Insurance scheme, for long period of time. For the purpose of their income-tax assessment, they nevertheless claim the liability as deduction even as they take resort to legal action, thus depriving the Government all its dues while enjoying the benefit of nonpayment. The curb such practices, I propose to provide that irrespective of the method of accounting followed by the taxpayers, a statutory liability will be allowed as a deduction in computing the taxable profit only in the year and to the extent it is actually paid."

The purpose of the Legislation and the mischief it sought to check is abundantly clear and needs no elaboration. Only thing to be highlighted is that there is no reference to any condition to establish, "accrual of liability" 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 basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid. To curb this practice, it is proposed to provide 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 sum is actually paid by him"

We have underlined the relevant portion to emphasise that the Legislature intended to ante the practice of claiming deduction of Excise Duty etc. on accrual basis under mercantile system of accounting by providing for actual payment.

2.4 The relevant provisions of section 43B for our purposes, with highlighted heading, are as. follows:

"43B. Certain deductions to be only on actual payment.-Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or...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 referred to in clause (a) or clause (c) or clause (d) 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 the assessee along with such return :

Provided further...( Omitted w.e,f. 1-4-2004)

Explanation 1.-...]

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

Explanation 3.-...

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 decision also explained why proviso to the section should be treated as retrospective, like Explanation 2, which Legislature specifically made retrospective with effect from 1-4-1984. Their Lordship also held that Proviso-I and Explanation 2 are required to be read together to obviate hardship or unintended consequences.

3.2 Consideration of the Budget Speech, memorandum explaining the provision, the decision of the Supreme Court, language of the provision, and purpose of the Legislature, make it clear that "accrual of liability" is nowhere mentioned as a condition to claim deduction of a statutory liability. Only actual payment is to be shown. In fact the earlier practice of claiming deduction on mercantile basis not paid in time has been sought to be curbed. Thus as a tax disincentive denial of deduction on the basis of accrual of liability is the very purpose of enactment. The memorandum explaining the provision has made specific reference to the meaning of word "paid" under the Income-tax Act. We will explain this a little later.

4. In the case of Sanghi Motors v. Union of India [1991] 187 ITR 703 (overruled on another point), the Hon'ble Delhi High Court, speaking through Justice B.N. Kirpal (as he then was), on effect of provision of section 43B observed as under:

"A reading of this section clearly shows that the deduction can be claimed only in the year in which the payment is actually made. In other words, the deduction cannot be allowed as per the principles of the mercantile system of accounting, namely, when the liability arises but now it can be allowed only in the year in which the tax is actually paid. In the present case, the tax having been paid on January 31, 1985, it would be in the case of the petitioner, in the accounting year ending January 31, 1985, and corresponding to the assessment year 1986-87, that the deduction can be claimed."

4.1 In the case of Indian Communication Network (P.) Ltd., the Special Bench held as under:

"In accordance with the system followed all along by the assessee, customs duty and excise duty pertaining to goods unsold (raw materials and finished goods) were included as part of its closing stock. For the assessment year 1984-85 also, the assessee had adopted the same system and had included an amount of Rs. 26,98,713 being customs duty and excise duty (on raw materials and finished goods) as part of the 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 closing stock is not tantamount to "tinkering" of the closing stock but allowing to the assessee the effective deduction to which it is entitled under section 43B."

4.2 In the case of Lakhanpal National Ltd. the assessee had paid excise duty of more than Rs. 5 crores and the customs duty of more than Rs. 2 crores. Out of the amount debited, the deduction of the following amounts was matter of controversy before the High Court:

(i) Stock of finished goods lying at various depots : Rs.29,80,439

(ii) Customs duty paid as per statement: Rs. 1,24,94,085

4.3 According to the Assessing Officer, excise duty of Rs. 5.25 crores (including the said sum of Rs. 29.80 lakhs) and customs duty of Rs. 2.78 crores (including the aforesaid amount of Rs. 1.2 crores) paid during the relevant year, were debited to the profit and loss account. Therefore two amounts referred to above were part of the cost element in the closing stock as per consistent and established principle of accounting. Therefore, excise and customs duty included in the closing stock could not be allowed as a deduction as the entire amount paid during the year has already been debited to the profit and loss account with the manufacturing expenses. The case of the assessee is noted by their Lordship as under:

"At the time of hearing, Mr. J.P. Shah, the learned advocate appearing for the petitioner, submits that any sum payable by an assessee by way of tax or duty under any law for the time being in force is allowable and as per the mercantile method of accounting, it would be allowable at the time when it becomes due and/or the assessee would be liable to pay the same and not on the actual payment of tax or duty, but as per the newly added provision of section 43B of the Act, it would be allowable only in computing the income referred to in section 28 of the previous year in which the sum is actually paid by the assessee irrespective of the previous year in which the liability to pay such tax was incurred by the assessee according to the method of accounting regularly employed. He, therefore, submits that the customs duty being paid in the year 1983 on the raw material imported during the year, though the raw material is consumed in the year 1984, the assessee would be entitled to get an allowable deduction for the assessment year 1984-85 (accounting year ending on December 31, 1983) in computing the taxable 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 language of the section, it clearly brings out the intention of the Legislature that the deduction in . respect of any tax or duty under any law would be an allowable deduction in computing the income under section 28 of that previous year in which such sum is actually paid by the assessee. 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 specific language of the section, the assessee would not be entitled to get deduction merely on accrual of the liability to pay the tax or duty but would be so entitled to get deduction only on actual payment of tax or duty. The Legislature has also taken care by providing an Explanation that the assessee shall not be entitled to any deduction under section 43B of the Act in respect of such sum in computing the income of the previous year in which such sum is clearly paid by him in case a deduction in respect of any such sum was allowed in the previous year. It is, therefore, clear that the assessee shall not be entitled to get the benefit twice, i.e., at the time when the liability arises and also at the time when the actual payment is made. In view of the specific language of the section that deduction of the amount as mentioned in clauses (a) and (b) of section 43B would be allowed in the previous year in which such sum is paid, there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee. There is no dispute on the point that the amount of import duty and excise duty are allowable deductions. What is disputed on behalf of the respondents that the amount of customs and excise duty on the value of the closing stock of the petitioner-assessee should not be permitted in the assessment year 1984-85 (accounting year ending on December 31, 1983), though actually paid in the year 1983, because the assessment of the closing stock of the year 1983 will be in the subsequent previous year which would be in 1984 and the relevant 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 was added to the net profit as per the profit and loss account. Similarly, the amount of Rs. 1,24,94,085 is also added. This further assures that the petitioner-assessee does not intend claiming double benefit for the same amount. 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 deduction. 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. Therefore, it is clear that in the year 1983, when the goods including the raw material were imported and the finished goods lying at various depots were manufactured in the year 1983 (including the one under the closing stock), the liability to pay import duty and excise duty on the said goods was incurred by the petitioner-assessee. When that is so, it is also clear that the deduction of the said excise duty and import duty even on the closing stock was allowable in the accounting year 1983, but because of the specific language of section 43B of the Act which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made and, therefore, it is not allowable. Therefore, the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles are claimed as deductions merely because they are paid, cannot be accepted."

4.6 The learned Departmental Representative before us emphasized that in the case of Lakhanpal National Ltd. the liability to pay excise duty had accrued in the year 1983 and the sum was paid in the year 1983. The condition of accrual of liability as well as actual payment was proved. Therefore, the case supported the stand of the Revenue. It was also contended that their Lordship accepted that section 43B of the Act does not enlarge the scope of the 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 specific language of the section, the assessee would not be entitled to get deduction merely on accrual of the liability to pay the tax or duty, but would be so entitled to get deduction only on actual payment of tax or duty."

4.8 As regards acceptance of revenue's case, and arguments of Mr. S.N. Shelat, it is nobody's case that section 43B enlarged the scope of the deduction. The provision enables the assessee to claim deduction on actual payment basis. The arguments of the counsel for the revenue were rejected by the Court by observing, "Therefore the submission of Mr. Shelat that in respect of the amounts which are not allowable under commercial principles are claimed as deduction merely because they are paid, cannot be accepted." This exactly is the case pleaded before us by the revenue. It has been argued that besides actual payment, the assessee must establish accrual of liability before payment. On the other hand, the arguments advanced on behalf of the assessee by Mr. J.P. Shah have been accepted and it has been further observed, "There is no dispute on the point that the amount of import duty and excise duty are allowable deductions."

5. In the case of Bharat Petroleum Corpn. Ltd., Bharat Petroleum Corporation had claimed deduction of Rs. 12,62,47,225 under the head "Excise and customs duty paid" on the closing stock as on March 31, 1985. The amount was not debited in the Profit and Loss Account but shown in the balance sheet as "current assets" under the caption "Prepaid taxes". The Assessing Officer did not allow the claim for deduction as the amount was not debited in the profit and loss account in respect of goods falling in the closing stock nor the amount was included in the value of the closing stock. The first appeal of the assessee was rejected. It is noted in the report that the Tribunal allowed the appeal, "and held that the entire amount was an allowable deduction in view of the fact that the assessee had actually paid, during the year in question, Rs. 12,62,47,225." The High Court upheld the decision with the following finding:

"Findings on question No.1:

The facts brought on record show that during the financial year 1984-85 relevant to the assessment year 1985-86, the assessee actually paid a sum of Rs. 12,62,47,225. The said amount was a part of the closing stock as on March 31, 1985. As per the decision of the Gujarat High Court 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 duty was paid was part of closing stock. There is no reference to any requirement of accrual of liability. Besides it is specifically noted that excise duty is "prepaid tax". In other words, it was advance excise duty paid by the assessee.

6. In the case of Chemicals and Plastics India Ltd., the entire decision is being reproduced as under, to see what is the ratio of the decision:

"Judgment

The judgment of the court was delivered by

R. Jayasimha Babu, J. - The question referred at the instance of the assessee is,

"Whether, on the facts and circumstances of the case, the customs duty and excise duty actually paid and shown as current assets in the balance-sheet and not charged to the profit and loss account could be deducted under section 43B in computing the income of the assessee?"

The assessment year is 1984-85. The assessee is engaged in the manufacture of polyvinyl chloride, rigid PVC pipes and fittings and other items. The assessee had, in the previous year corresponding to the assessment year 1984-85, imported materials required for the manufacture of the assessee's products. The assessee had paid import duty of Rs. 35,09,826. According to the assessee the cost of the imported materials inclusive of duty was taken to the profit and loss account only on consumption basis. The balance of import duty of Rs. 11,58,833 paid on the raw materials held as closing stock, was taken into the balance sheet and shown as part of current assets. Schedule 15 of the balance sheet set out the current assets, loans and advances. In that Schedule, under the heading "Inventories" the value of raw materials held in stock was shown. The value of the raw materials stated therein, according to the assessee, includes this sum of Rs. 11,58,833. Similarly excise duty paid on finished goods held as closing stock was shown as part of the inventory under the current assets in the balance sheet. The assessee's claim under section 43B of the Act for deducting the actual customs duty and excise duty paid on the stock of raw material and finished goods was negatived by the Assessing Officer, the Commissioner and finally by the Tribunal, all of whom took the view that as the amounts paid towards customs duty and excise duty had not been shown separately in the profit and loss account, the deduction could not be given. Section 43B of the Act which provides that certain deductions 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 for the amount of excise duty paid in the year in which it was paid is unaffected by the fact that part of the duty paid was in relation to finished goods which remained with the assessee at the end of the year. Section 43B does not stipulate that before an assessee could claim deduction in that year the assessee should have shown the amounts paid towards duty under a separate head and that the inclusion of the duty element in the valuation of the current assets would disentitle the assessee from claiming the deduction under section 43B. The fact that the duty paid was not charged to the profit and loss account by itself would not disentitle the assessee from claiming deduction under section 43B. It is open to the assessee to file an adjustment statement before the Assessing Officer. Learned counsel for the Revenue submitted that the duty paid is a legitimate charge on the gross profits when the gross profits have been properly ascertained by valuing the closing stock as also the opening stock including therein the duty paid on such stock. A view similar to the one taken by us has been taken by the Bombay High Court in the case of CIT v. Bharat Petroleum Corporation Ltd. [2001] 252 ITR 43. The assessee had filed before the Assessing Officer the necessary adjustment statement. The question referred to us is answered in favour of the assessee."

It is clear from above that deduction was allowed to the assessee in respect of his claim under section 43B and their Lordship has elaborated as to how deduction is to be allowed only on actual payment irrespective of the previous year in which the liability to pay such sum was incurred by the assessee.

7. The application of section 43B was again considered by their Lordship of Supreme Court in the case of Berger Paints India Ltd. Their Lordship noted that revenue had not challenged decision of Gujarat High Court in Lakhanpal National Ltd. 's case which was followed by Bombay High Court in Bharat Petroleum Corpn. Ltd 's case, Madras High Court in Chemicals & Plastics India Ltd 's case followed by Bombay High Court. The Special Bench decision of Appellate Tribunal in the case of Indian Communication Network (P.) Ltd. 's was also not challenged. Their Lordship held that having not challenged correctness of law laid down by High Courts, and accepted in case of one assessee, then it was not open to the Revenue to challenge 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 down the interpretation of section 43B was followed by the judgments of the Madras High Court and Bombay High Court and was again followed by the decision of the Special Bench of the Income-tax Appellate Tribunal, none of which have been challenged In these circumstances, the principle laid down in Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219 (SC); CIT v. Narendra Doshi [2002] 254 ITR 606 (SC) and CIT v. Shivsagar Estate [2002] 257 ITR 59 (SC) clearly applies. We see no "just cause" as would justify departure from the principle. Hence, in our view, the Revenue could not have been allowed to challenge the principle laid down in Lakhanpal National Ltd. 's case [1986] 162 ITR 240 (Guj.), which was followed by the Inspecting Assistant Commissioner in the case of the assessee in three assessment years in question."

7.1 In spite of above observations of the Apex Court, what was analysis and finding in the case of Lakhanpal National Ltd., followed in other cases, the learned Departmental Representative argued that above decisions were distinguishable and not applicable to the facts of the case. In all the decisions, there was no dispute that liability to pay statutory amount had accrued and the amounts were payable and deductions rightly claimed on actual payment basis. The question involved before us was not involved in those cases. We do not find any substance in this argument of the learned Departmental Representative. Object, purpose and import of section 43B has been explained, emphasized and noted above. The same was clearly stated and admitted to be to allow deduction of six items mentioned in clauses (a) to (f) of the section in the year in which the amount is actually paid, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee, according to the method of accounting. In all the cases discussed above, despite difference in facts, the Courts noted the main thrust of section 43B of allow ability of deduction of tax liability in the year in which amount was actually paid and allowed the deduction on mere finding that amount was actually paid. That is the ratio of the decided cases.

8. Besides, the following rule is relevant relating to payment of duty:

"Rule 173G. Procedure to be followed by the assessee.-(1) Every assessee shall keep an account-current with the (Commissioner) separately for each 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 raw material, which was part of closing stock could be paid as per above provision only and was merely advance duty paid through the current account on goods not removed from the factory. Facts here are similar and there is no justification for not treating the matter as fully covered in favour of the assessee. Therefore, there is no justification for not applying the ratio of above cases.

8.1 Besides, there is a direct decision of Calcutta High Court in the case of Associated Pigments Ltd.. Therein the Court relating to deduction of sum on actual payment basis have observed as under:

"Very simply put, our opinion is that there is no part of this section or the Income-tax Act itself which 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 the due tax or 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. To introduce this double test would be writing words into the section which neither the Tribunal nor the court is en titled to do. In other parts of the Act, where provision in the books is given a special status, and that is specifically called for but section 43B is not one such section."

8.2 The decision of Allahabad High Court in the case of C.L. Gupta & Sons is also direct On the point. Therein the Court held as under:

"Held, that the amount of customs duty of Rs. 3,56,541 was paid by the assessee in March, 1987, and, therefore, in terms of section 43B it was deductible only in the year in which it was 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 method of accounting regularly adopted by him and, therefore, in view of the clear provision of law, the deduction could not be allowed in the assessment year 1988-89."

9. The aforesaid decided cases have clearly laid down that deduction of items mentioned in section 43B is to be allowed on actual payment under section 28 in the previous year in which such sums are actually paid by the assessee irrespective of the previous year in which liability to pay such sum was incurred, according to the method of accounting. As noted above in case of Lakhanpal National Ltd., the words "irrespective 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 not possible to claim deduction of amount without establishing that liability in respect of the amount has been earlier incurred. The argument is if the assessee does not make actual payment of liability, which has been incurred, in the previous year in respect of items mentioned in the section, the deduction would be allowed in the following year/years when the amount is actually paid. However, incurring of a liability prior to payment is a must.

10. Before dealing with above arguments, we deem it necessary to consider provisions of section 43(2) giving meaning to term "paid" for purposes of computing business income. Section 43(2) is as under:

"Section 43(2) "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession".

10.1 The connection of above provision with section 43B is accepted by the Revenue in the memorandum explaining the provision of section 43B in the Finance Bill, 1983 (reproduced above), in these words: For the purpose of computation of profits and gains of business and profession, Income-tax Act define 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.

10.2 It is evident from above that "actually paid" is treated as equal to "incurred" i.e. incurring of a liability, according to method of accounting followed by the assessee for computing profits of business. It is further well known that under cash system, deduction is allowed when sum is "actually paid" whereas under mercantile system, it is allowed when liability is "incurred". It is clear from above discussion that mercantile system of accounting did not work well in respect of items, more particularly in respect of statutory liabilities and was abused. Therefore, provision of section 43B was introduced to check above abuse. The Scheme is that deduction would not be allowed on incurring of liability where mercantile system is followed but "shall be" allowed in the year in which the amount is actually paid. It does not appeal to reason that even after introduction of section 43B and its clear wording, the Legislature can intend to insist upon the incurring of the liability as a condition for allowability of the deduction. That as for as "paid" under the Income-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 is kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed, and if the profits of the business are accounted for in this way the tax is payable on the difference between the receipts and the disbursements for the period in question".

where the accounts are kept on receipt basis, allowances must be granted in the year of disbursement, irrespective of the question when the liability to pay the same arose."

11.1 Useful reference can be made to the following cases where deduction was allowed in the year of disbursement, irrespective of year of accrual of the liability:

(a) CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94 (PC),

(b) CIT v. Jananamandal Ltd. [1989] 180 ITR 420 (AI1.),

(c) Lal Umesh Bahadur Pal v. CIT [1972] 86 ITR 751 (SC),

(d) CIT v. Bijoy Kumar Das [1912] 84 ITR 351 (Orissa),

(e) B.M. Kamdar, In re [1946] 14 ITR 10 (Bom.)(FB),

(f) CIT v. E.A.E. T. Sundararaj [1975] 99 ITR 226 (Mad.),

(g) CIT v. Amalgamated Development Ltd. [1967] 65 ITR 395 (SC).

12. Having seen that under cash system of accounting, the deduction is allowed only in the year of disbursement, we now proceed to consider the arguments of the revenue and first submission was that the assessee must show that amount actually paid is a deduction "otherwise allowable under the Act". In other words the assessee must show that it is a liability which is deductible. Only in such circumstances, where amount is shown as payable and is actually paid in respect of taxes, duties etc. the deduction can be allowed under section 43B.

13. We do not find any substance in the above submission. We have already noted the relevant observations from the case of Lakhanpal National Ltd., how under cash system of accounting, the deduction is allowed when amount is actually paid. It is not necessary that assessee must prove incurring of a specific liability under any Statute referred to in different clauses of section 43B. It must be an expenditure connected and related to assessee's business deductible under section 28 of the Act. It should not be prohibited item totally unrelated to the business of the assessee. The expression "a deduction otherwise allowable" only means statutory liabilities mentioned in section 43B. The implication of the expression is that those items of expenditure which are usually deductible 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 in April of the relevant year, could not be allowed, as a deduction. Therefore, to remove hardships, proviso was added. This has been explained in detail in the decision of Supreme Court in the case of Allied Motors (P.) Ltd. Their Lordships held as under:

"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, employers contribution to provident fund, etc. for long periods of time but claimed deductions in that regard from their income on the ground that 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 worked, would cause hardship to those taxpayers who had paid sales tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales tax had in fact been paid by the assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from. claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence, the first proviso was inserted in section 43B. The amendment which was made by the Finance Act of 1987 in section 43B by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provisions unworkable or unjust in a specific situation."

The proviso is an exception to the general rule and has a limited application. If the amount is paid before the due date of filing of return in respect of a liability incurred in the previous year then provision of section 43B is not applicable. This proviso thus covers a specific situation. It cannot override clear intention and object of the main section and, therefore, is of no help to the revenue. We quote below some decisions, which explain the scope of a proviso although language and purpose of the proviso 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 [1959] 36 ITR 1, their Lordship of Supreme Court observed as under:

"The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso, would fall within the main enactment. Ordinarily, it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment."

15.3 There are umpteen authorities laying down the same proposition that proviso is an exception to the main provision and should be so read. It cannot control the main section. Therefore, reliance of the revenue on proviso is of no avail.

16. The ld. Departmental Representative has also placed strong reliance on Explanation 2 to section 43B. The said Explanation was added to deal with a specific situation. The situation had arisen on account of the decision of the Hon'ble Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. wherein it was held as under:

"In order to apply the provisions of section 43B, not only should be liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. Section 43B itself is clear to this extent. It refers to the "sum payable" in clauses (a) and (b). The amendment with effect from April 1, 1988, permitting the deduction of taxes and duties paid before the filing of income-tax returns makes this clear. Where writ petitions were filed against the disallowance of (i) market cess and (ii) disallowance of sales tax payable for the month of March, 1984, under section 43B.

Held, (i) that the sales tax payable for the month of March, 1984, could not be disallowed under section 43B."

17. Above decision, according to CBDT, was contrary to intention of the Legislature. It was defeating very purpose of the section. Therefore to supersede and override the decision, Explanation 2 was added to the section. This has been implicitly admitted in the circular of the CBDT referred to in the decision of the Supreme Court in the case of Allied Motors (P.) Ltd. However. Explanation 2 cannot be employed to govern the main section. It has very limited application and a specific purpose to serve, of superseding a view taken by the Court, and should be construed 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 proviso which is an exception to the rule. An exception obviously cannot serve the purpose of the section. Therefore, if assessee makes payment after the period of filing the return under section 139(1), then he would never be entitled to claim deduction despite actual payment as envisaged. Besides wording of Explanation 2 are contradicting the main section, which provides, "irrespective of the previous year in which the liability to pay such sum was incurred". If meaning of "any sum payable" is included, the section would lead to absurd reading and would be unworkable as under:

"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that previous year-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."

[Portion (a) is going in different direction than the main section and it is not possible to reconcile them.] The very purpose of section 43B as discussed earlier, is to allow the deduction in the assessment year relevant to the previous year in which the amount is actually paid. Even Departmental Representative has not disputed that liability should be shown to have been incurred earlier than actual payment not necessarily in the same previous year. If Explanation 2 is read literally, it can lead to absurd results and hardships and in some case might become unworkable. It will therefore, be most reasonable to read Explanation 2 as governing a particular situation arising on account of the view taken by High Courts, as discussed above.

17.1 In this connection, besides relying upon decision of Supreme Court in the case of Allied Motors (P.) Ltd and other decisions referred to earlier, we may note the following decisions :

(i) in the case of Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661, the Supreme Court held that intention of adding an explanation is to clear up the ambiguity if any, in the section. It is a subordinate part of the section included for purposes for arriving at a particular 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 and is leading to absurd results. To avoid above and to achieve object of the section, Explanation 2 is being given a restricted meaning as discussed above. The pertinent question is whether such treatment can be given to a "defining" provision. The answer is yes if defining provision is inconsistent with what is called sole of the section or leading/positive portion of the section. The sole of the provision is one, which reflects the intention of the Legislature, and contains mandate Courts are required to carry. The sole or the leading part of section 43B is reflected in the following language:

"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 the previous year in which such sum is actually paid by him."

The aforesaid provision emphasizes the following points:

(i) That deduction of sums covered by clauses (a) to (f) shall be allowed in computing income under section 28 of the previous year in which such sum is actually paid.

(ii) This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to method of accounting regularly employed by him. There is therefore no justification to examine the previous year in which liability to pay the sum was incurred when mandate is "irrespective of the previous year in which liability was incurred" and claim is to be allowed on the basis of actual payment. To do otherwise would be to do violence to words "irrespective of the previous year" in which liability was incurred and disregard the mandate of the section.

19. In our considered opinion, only way to harmonise different parts of section 43B which according to the Supreme Court is not happily worded is to give limited and restricted meaning to proviso (1) and Explanation 2, as discussed above. The argument that effect must be given to Explanation 2, and find the previous year in which the liability was incurred in preference to clear command of section, "irrespective of the previous year in which liability to pay was incurred" cannot be accepted in the light of law discussed below, where even defining word "transfer" in the Transfer of Property Act was ignored as it was found to be inconsistent with other provisions:

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 be chosen in preference to the other which introduces in convenience and uncertainty in the working of the system. This rule will apply in full force where the provision confers ample discretion on the Government for a specific purpose to enable it to bring about an effective result."

19.3 In the case of Chief Justice of A.P. v. L. VA. Dixitulu 1979 (2) SCC 34, a Constitution Bench of Hon'ble Supreme Court observed as under:

"Where two alternative constructions are possible, the Court must choose the one which will be in accord with the other parts of the statute and ensure its smooth, harmonious working, and eschew the other which leads to absurdity, confusion or friction, contradiction and conflict between its various provisions, or undermines, or tends to defeat or destroy the basic scheme and purpose of the enactment. These canons of construction apply to the interpretation of our Constitution with greater force, because the Constitution is a living, integrated organism, having a soul and consciousness of its own. The pulse beats emanating from the spinal cord of its basic framework can be felt all over its body, even in the extremities of its limbs."

19.4 In the case of Smt. Laxmi Devi v. Sethani Mukand Kanwar AIR 1965 SC 934, the dispute was whether transfer in favour of an auction purchaser for a consideration without notice of charge was protected under second part of section 100 of Transfer of Property Act. It was held that in the light of provisions of section 2(d) of Transfer of Property Act, providing that nothing herein contained shall be deemed to affect save as otherwise provided by section 57 and Chapter IV of this Act, Auction purchase is "transfer" by operation of law or by any execution of a decree or order of a Court of competent jurisdiction. However, section 5 of the Transfer of Property Act defines the transfer of property to mean an act by which a living person conveys property to one or more other living persons. Apparently this section does not include auction purchase and resultantly excluded altogether the auction purchaser who had sought protection under section 100 of Transfer of Property Act.

19.5 The Supreme Court excluded application of section 5 defining "transfer" with the following observations:

"In our opinion the positive provision contained in section 2(d) must prevail over the definition of "transfer of property" 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 be insisted upon irrespective of the previous year in which the liability to pay was incurred. It would be acting contrary to the purpose and spirit of section if we start examining the question as to in which previous year liability to pay was incurred. Therefore, in our considered opinion, section 43B allows deductions as are allowable in case of cash system of accounting and there is no need to establish incurring of the liability to pay the amount in question.

21. The Revenue authorities had expressed and apprehension that assessee can adopt a device to hoodwink the revenue by paying taxes and duties and thus avoid payment of income-tax. This contention can hardly be appreciated. We have not come across any case where device of payment of taxes, duties and cess was adopted to avoid payment of income-tax. Such device is neither practical nor possible. This can be illustrated with an example.

21.1 The income of the assessee is Rs. 1 crore and he is liable to pay tax @ 35% on total income. The assessee pays Rs. 1 lakh as excise duty to reduce its total income which thereafter is worked out at Rs. 99 lakhs. Now what the assessee has saved is 3596 of Rs. 1 lakh i.e. Rs. 35,000 after selling out Rs. 1 lakh. How assessee is benefited by payment of duty or tax? Therefore, the contention that payment of taxes, cess etc. can be adopted as a device, is required to be stated to be rejected.

22. The assessee is maintaining current account and is making payment as per statutory provision of rule 173G of Excise Rule read with section 37(ib) of Central Excise Act. It is a payment made as per requirement of the Statute and, therefore, we do not see how such a payment can be disallowed. In case payment made is refunded for any reason, the same can be brought to tax in accordance with provisions of section 41(1) of the I.T. Act. However, if deduction is not allowed to the assessee, in the assessment year relevant to the previous year in which the amount is actually paid, the assessee would not be entitled to get deduction in any subsequent year on account of section 43B. Therefore, interpretation placed by the Revenue on provision of section 43B cannot be accepted for reasons given above.

23. As entire appeal has been referred to us for disposal, we note down the relevant facts of the case relating to amounts involved. In the profit and loss account, the assessee has 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 in the current account against above deposits, assessee is taking out goods and in the period goods on which duty of Rs. 9817.70 lakhs was payable, were taken out of the factory and adjustments were made in the account. The adjusted figures were taken to the P&L A/c. However, amount paid in the current account being more, the assessee claimed the deduction of entire amount paid and, therefore, further deduction of Rs. 1,03,48,071, as per the following details:

-------------------------------------------------------

Particulars               Amount (Rs.)     Amount (Rs.)

-------------------------------------------------------

Deposit with Excise       48,21,804

Authorities in PLA

Deposit with Excise    10,51,50,551      10,99,72,355

Authorities in RG

23 (Part II)

 Less:

Excise deposit as on                      9,96,24,284 

31-3-2000 claimed as

deduction in A.Y.

2000-01

-------------------------------------------------------

Amount now allowable                      1,03,48,071

under section 43B  

-------------------------------------------------------

The above amount represented excise duty paid and not adjusted in the period ending 31-3-2001. It is the statutory requirement to make deposit in the current account first and thereafter clear the goods. The Excise Department does not insist on adjustment of each clearance of goods with each deposit. The assessee has merely to show that aggregate amount of duty payable on goods taken out (cleared) is less than total amount credited in the current account and there is sufficient balance in the account. It is submitted that even for income-tax purposes, adjustment of entry to entry be not made as some goods for which duty was paid last year, were cleared in the period under consideration. Otherwise the entire claim relating to excise duty will have to be rewritten, resulting in lot of wastage of time and energy. Therefore, claim of deduction is pressed on account of actual duty paid in the relevant period in a bona fide manner. Above claim was not considered by the Assessing Officer. The CIT (Appeals) allowed entire claim and, therefore, did not go into the question of accrual of the liabilities qua the claim. But details would have to be examined and reworked if the stand of the Revenue is ultimately to prevail. We hold accordingly. For all the above reasons, question No.1 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 Act, 1961. In order to appreciate the relevance of section 43B in computing the profits and gains of business. It will be useful to refer to the scheme of taxation under the provisions of the Act to serve a prelude to the interpretation of section 43B of the Income-tax Act, 1961 (hereinafter shortly referred to as 'the Act').

2. Income-tax Act, 1961 is the Act of Parliament providing the charge of tax on income of every person. Section 4 of the Act is a charging section which reads as under:

4.(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act."

As is seen from section 4 quoted above, income-tax is a tax in respect of total income of the previous year of every person. 'Person' is defined under section 2(31) of the Act as under:

"2. In this Act, unless the context otherwise requires,-

(31) "person" includes-

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.-For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;"

Section 14 of the Act gives the heads of income which reads as under:

"14. Heads of income.-Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation 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 provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144."

It is evident from the provision of section 145 read with section 29, quoted above, that income chargeable under the head "Profits and gains of business or profession" has got to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. There are certain exceptions provided under section 145 when the Assessing Officer can reject the method of accounting or the book results reference to which at this stage is not relevant for the purpose of the controversy involved before us. When section 29 is read in conjunction with section 145, it becomes abundantly clear that whereas the income chargeable under the head "Profits and gains of business or profession" is to be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee, the same is subject to modification as provided under the provisions of sections 30 to 43D of the Act. Section 43B regulates the allowance of deduction in respect of certain items specified thereunder. Section 43B is reproduced hereunder:

"43B. Certain deductions to be only on actual payment.-Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(c) any sum referred to in clause (ii) of sub-section (1) of section, or

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the assessee as interest on any 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 aforesaid and the evidence of such payment is furnished by the assessee along with such return.

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 1 st 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 not have been payable within that year under the relevant law.

Explanation 3.-For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3A.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996 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 3B.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (f) 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, 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 eligible for deduction under clause (viii) of sub-section (1) of section 36."

Legislative history, context and background:

5. In the case of Imperial Chit Funds (P.) Ltd v. ITO [ 1996] 219 ITR 498, Their Lordships of Supreme Court held that due importance must be given to the legislative history, context and background that led to the enactment. This principle was reiterated by the Hon'ble Supreme Court in the case of Indian Hotel Co. Ltd v. ITO [2000] 245 ITR 538.

6. Thus, in order to understand and appreciate the legislative intent or to ascertain the object or purpose behind the legislation, the speech made by the Minister or mover of the Bill in the Parliament can be taken into consideration. This principle was laid down by the Hon'ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234. In the case of Shashikant Laxman Kale v. Union of India [1990] 185 ITR 104, Their Lordships of the Hon'ble Supreme Court held that it is permissible to look into the statement of objects and reasons of the bill for the limited purpose of appreciating the background and the antecedents and the factual matrix leading to the legislation. The Hon'ble Supreme Court in the case of Hemalatha Gargya v. CIT [2003] 259 ITR 1 held that speech of the Finance Minister while introducing the Bill can be relied upon to ascertain the intention behind the enactment.

7. The following passage from the decision of the Hon'ble Supreme Court in the case of RBI v. Pearless General Finance & Investment Co. Ltd. [1987] 61 Compo Cas. 663, 692, sums up the principle as under:

"Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at in the context of its enactment, with the glasses of the statute maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided 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) of 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.

35.2 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 basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid.

35.3 To curb this practice, the Finance Act, 1983, has inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force 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 irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.

35.4 The section also contains an Explanation for the removal of doubts. The Explanation provides that where a deduction in respect of any sum aforesaid is allowed in computing the income of any previous year, being a previous year relevant to the assessment year 1983-84, 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 section 43B in respect of such sum on the ground that the sum has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a liability on account of tax or duty or in respect of any sum payable as contribution to any fund for the assessment year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed a deduction in the assessment year 1984-85, or any subsequent year on the ground that he has actually made a payment towards such liability in that year."

There was an amendment 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 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 provision of 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 to 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 43B will unnecessarily involve disallowance of the payment for the last quarter.

15.2 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 in a particular year should also be statutorily payable under the relevant statute in the same year. Thus, the sales tax in respect of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and; therefore, by way of inserting and Explanation it has been clarified that the words "any sum payable" shall mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable."

Finance Act, 1990 made yet another amendment in section 43B by virtue of which clause (d) of section 43B was amended. The said amendment is also not relevant for the purpose of the present controversy.

9. The Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd had the occasion to explain the intent and purpose of incorporation of section 43B and certain subsequent amendments. In my view, it will be useful to reproduce the relevant portion from the judgment which apart from giving the history of the amendments also indicates the legislative intention behind incorporation of section 43B :-

"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 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 proviso was added in section 43B by the Finance Act of 1987. The proviso makes it clear that the section will not apply in relation to any sum which is actually paid by the assessee in the next accounting year, if it is paid on or before the due date for furnishing the return of income in respect of the previous year in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with the return. The proviso, however, was not on the statute book when the assessments were made in respect of these assessees since the assessments pertain to the assessment years prior to the insertion of the proviso in section 43B. The assessee, however, contended that the proviso should be given effect to retrospectively from the date when section 43B became a part of the Income-tax Act, 1961 as it is intended to obviate unexpected hardships in the application of section 43B. To understand the circumstances in which section 43B came to be inserted in the Income-tax Act and the mischief which it sought to prevent, it is necessary to look at the memorandum explaining the provisions in the Finance Bill of 1983:

"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 basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid. To curb this practice, it is proposed to provide 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 within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales tax had in fact been paid by the assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence, the first proviso was inserted in section 43B. The amendment which was made by the Finance Act of 1987 in section 43B by inserting, inter alia, the first proviso, as remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation. Looking to the curative nature of the amendment made by the Finance Act of 1987, it has been submitted before us that the proviso which is inserted by the amending Finance Act of 1987, should be given retrospective effect and be read as forming a part of section 43B from its inception. This submission has taken support from decisions of a number of High Courts before whom this question came up for consideration. The High Courts of Calcutta, Gujarat, Karnataka, Orissa, Gauhati, Rajasthan, Andhra Pradesh, Patna and Kerala appear to have taken the view that the proviso must be given retrospective effect. Some of these High Courts have held that "sum payable" under section 43B(a) refers only to the sum payable in the same accounting year, thus excluding sales tax payable in the next accounting year from the ambit of section 43B(a). The Delhi High Court has taken a contrary view holding that the first proviso to section 43B operates only prospectively. We will refer only to some of these judgments.

Explanation 2 was added to section 43B by the Finance Act of 1989 with retrospective effect from April 1, 1984. The Memorandum explaining the reasons for introducing Explanation 2, states, inter alia, as follows [1989] 176 ITR (St.) 123:-

"24. Under the existing provision 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 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 in a particular year should also be statutorily payable under the relevant statute in the same year. This is against the legislative intent and it is, therefore, proposed, by way of a clarificatory amendment and for removal of doubts, that the words 'any sum payable', be defined to mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable."

10. With the legislative history and background that led to the enactment of section 43B in mind, I now proceed to look at the language of section 43B. Section 43B starts with a non obstante clause. First let us appreciate and understand the effect of a non obstante clause in the provision of the Act. In the case of Woodward Governor India (P.) Ltd. v. CIT [2002] 253 ITR 745, Hon'ble Delhi High Court held that a clause beginning with "notwithstanding anything" is sometimes appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non obstante clause. Their Lordships further held that the true effect of a non obstante clause is that in spite of the provision or Act mentioned therein, the enactment following it will have full operation or that the provisions embraced in the non obstante clause will not be an impediment for the operation of the enactment. In the case of Bharat Hari Singhania v. CWT [1994] 207 ITR 1 (SC), the Hon'ble Supreme Court held that the scope and purport of a non obstante clause has to be ascertained by reading it in the context of the provisions and consistent with the scheme of the enactment.

11. With the above principle of law in mind, I continue to consider the language of section 43B which starts with the non obstante clause. It reads, "Notwithstanding anything contained in any other provision of this Act", meaning thereby that if there is anything contrary provided under any other provision of the Act, section 43B will prevail over such a general provision of the Act. It is noticed earlier that section 145 mandates that the Assessing Officer shall compute the profits and gains of business of an assessee in accordance with the method of accounting (cash or mercantile) regularly employed by the assessee. Under the mercantile system of accounting, the liability is provided 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 assessee, is modified by section 43B in respect of the liabilities referred to in that section to the extent indicated therein. Section 43B provides that "notwithstanding anything contained in any provision of this Act", a deduction otherwise allowable under this Act in respect of (a) "any sum payable "by the assessee by way of tax, duty, cess or fee by whatever name called, under any law for the time being in force, 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. Section 43B mandates that deduction is permissible to the assessee in respect of "any sum payable" by the assessee by way of tax, duty, etc. in the previous year in which such sum is actually paid by him irrespective of the previous year in which the liability is incurred.

12. The contention advanced on behalf of the assessee before us is that section 43B provides for deduction of any sum referred to in various clauses of the Act to be deductible in the year of payment and that it is not necessary that such payment made should be towards the liability accrued under the mercantile system of accounting in any previous year. On the other hand, the stand of the department is that the incurring of the liability prior to payment is sine qua non for allowance of deduction under section 43B.In my considered view, the contentions advanced on behalf of both the parties on true interpretation of section 43B appear to be only partially correct. I have elsewhere reproduced the object and purpose behind incorporation of section 43B. It is seen that section 43B was incorporated to curb the general tendency of claiming deduction in respect of statutory liabilities etc., on the basis of accrual of liability without making payments. Section 43B intends to put a curb on the tendency of taxpayers to claim deductions without making payments. Section 43B does not and is not intended to enlarge the scope of deductions thereunder. Interpreting the provision of section 43B, their Lordships of the Gujarat High Court in the case of Lakhanpal National Ltd. held that section 43B of the Income-tax Act does not enlarge the scope of deduction as it speaks about the deduction otherwise 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 consistency of approach on the issue involved under section 43B. The claim of the Revenue that deduction should not be allowed to the assessee unless the liability has accrued in the previous year in which deduction is claimed was not accepted by the Hon'ble Supreme Court in the case of Berger Paints India Ltd. To this extent the claim of the Revenue is not accepted. So, however, the contention advanced on behalf of the assessee that the words 'irrespective of the previous year in which the liability has accrued under the system of accounting regularly employed by the assessee' has done away with the condition of accrual of liability for allowance of deduction in the year of payment is also not well founded. In my considered view, section 43B has got to be understood in the light of the legislative intent and the object enactment to give the true meaning of the words used in the section. Section 43B refers to a deduction otherwise allowable under the Act in respect of "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. So the subject-matter of deduction under section 43B is a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax etc. What is the meaning of "any sum payable" by the assessee by way of tax etc. was subject-matter of consideration before the Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. Their Lordships of the Andhra Pradesh High Court in that case held that section 43B would be attracted only in case of such deductions in respect of which assessee has incurred the liability in the previous year and were also payable under the relevant statute in the same year. Their Lordships further held that section 43B would be inapplicable in such cases where the assessee has incurred the liability under the system of accounting regularly employed by the assessee but the payment had not become due under the relevant statute. The Legislature felt that the interpretation given by the Hon'ble Andhra Pradesh High Court would defeat the purpose of enactment of section 43B and accordingly Explanation 2 was inserted by the Finance Act, 1989 with effect from 1-4-1984. I have quoted Explanation 2 elsewhere in this order and since the controversy revolves around the meaning of the words 'any sum payable', it will be worthwhile 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 provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a ration construction."

Thus, the interpretation advanced on behalf of the assessee is not acceptable. Their Lordships in the case of CIT v. Mangalore Ganesh Beedi Works [1992] 193 ITR 77 (Kar.) and in the case of CIT v. Maschmeijer Aromatics (India) (P.) Ltd. [1995] 214 ITR 22 (Mad.), held that an Explanation is intended to either explain the meaning of certain phrases and expressions contained in a statutory provision or depending upon its language it might supply or take away something from the content of a provision. Their Lordships of Supreme Court in the case of CAIT v. Plantation Corpn. of Kerala Ltd. [2001] 247 ITR 155, held that an Explanation at times is added by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt. Their Lordships of the Supreme Court in the case of Dilip N. Shroft v. Jt. CIT [2007] 291 ITR 519 defined the object of an Explanation to a statutory provision as under:-

"The object of an Explanation to a statutory provision is: (a) to explain the meaning and intendment of the Act itself; (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide additional support to the dominant object of the Act in order to make it meaningful and purposeful; (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof, but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act, it can help or assist the court in interpreting the true purport or intendment of the enactment; (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming a hindrance in the interpretation of the 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 manufactured in the year 1983 (including one under the closing stock), the liability to pay import duty and excise duty on the said goods was incurred by the petitioner-assessee. When that is so, it is also clear that the deduction of the said excise duty and import duty, even on the closing stock was allowable in the accounting year 1983 but because of the specific language of section 43B of the Act, which has an overriding effect, it could not have been claimed by way of deduction unless payment thereof was made and here in this case it is not the case of the respondent that the payment of the said duty is not made and, therefore, it is not allowed.This judgment, as pointed out earlier, has been followed by the Bombay High Court in the case of Bharat Petroleum Corpn. Ltd., and the Madras High Court in the case of Chemicals and Plastics India Ltd. and the Hon'ble Supreme Court in the case of Berger Paints India Ltd., has approved the above three judgments.

13. When the language of section 43B is read in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd., it becomes abundantly clear that deduction in respect of any tax etc. under section 43B is permissible in the year of payment in respect of the liability incurred by the assessee in any previous year. In my view, the allowance of deduction in respect of advance payment of tax, etc. without accrual of liability is not contemplated under section 43B. In the case before us, the assessee had made the payment in advance in PLA and RG (Accounts Register prescribed by Central Excise Rules) A/c to be adjusted against any future liability that may accrue to the assessee on the manufacture/removal of goods. It is not disputed that the amount paid in advance has been adjusted towards the liability incurred in the subsequent assessment year. When it is settled that deduction is permissible to the assessee in respect of any liability incurred in any previous year in respect of excise duty in the year of payment irrespective of the year in which the liability has been incurred it becomes abundantly clear that both the conditions for grant of deduction under section 43B stand satisfied on the date on which the liability of the assessee for excise duty has accrued and advance payment is adjusted against such accrued liability. In my view, after the accrual of the liability and adjustment 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, the assessee has to get the deduction in the year of payment and the year of payment is the year under appeal before us. The deduction is permissible to the assessee to the extent the advance payment has been adjusted towards the liability of the subsequent assessment year. As pointed out earlier, section 43B provides for deduction in respect of the deduction otherwise allowable irrespective of the previous year in which the liability has been incurred, in the year of payment. Therefore, notwithstanding the fact that the liability towards the excise duty has been incurred in the subsequent assessment year, the deduction is permissible to the assessee in, the year of payment which in this case precedes the incurring of the liability.

14. A question may arise as to how the assessee can claim deduction pertaining to the previous year when the liability towards the excise duty is incurred in the subsequent assessment year? In my considered view, there is a mechanism provided under the said section 43B for claiming deduction. The assessee maintains books of account on mercantile system of accounting. Section 43B does not oblige the assessee to change the system of accounting regularly followed by him. On the other hand, section 43B mandates the adjustment at the time of filing of the return. As pointed out earlier, section 145 of the Act makes it obligatory upon the Assessing Officer to compute the profits and gains of business in accordance with the method of accounting regularly employed by the assessee unless the case falls under the exceptions provided thereunder. So, however, certain adjustments as provided under sections 30 to.43 D are to be made in the computation sheet to be attached with the return of income after making adjustments to the profits and gains as determined in accordance with the method of accounting followed by the assessee. In the case of Chemicals & Plastics India Ltd. The Madras High Court has also pointed out that it is open to the assessee to file an adjustment statement before the Assessing Officer for claiming deduction under section 43B. Therefore, in this case, when the assessee files the return, the liability towards the excise duty in normal circumstances would accrue in respect of the goods manufactured/removed up to the date of filing of the return of income. At the time of filing of the return, assessee is aware of the liability 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 the assessee along with such return."

The proviso makes an exception to main section 43B in such cases where in respect of the accrued liability in the previous year the payment is made before the due date for filing of the return and the proof of such payment is attached with the return of income. The above proviso was inserted to remove the hardship that was faced by the taxpayers in such cases where for none of their fault the payment in respect of the liability incurred in the previous year was required to be made in the subsequent assessment year. For example, in case of last quarter of sales tax liability, the liability accruing upto ending March of the previous year is generally payable within next month that would fall in the subsequent year. But for the above proviso, the assessee would get a deduction as per the provision of section 43B in the subsequent year and not in the previous year notwithstanding the fact that there was no default on the part of the assessee. The liability had been incurred in the previous year and the payment had been made by the assessee within the stipulated time under the statute. If section 43B were to operate without the aforementioned proviso inserted with effect from 1-4-1988 and held to be applicable retrospectively by the Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd., then the assessee would be deprived of the deduction in the previous year. Such was not the intention of the Legislature and that is why a proviso was inserted to obviate the unintended hardship faced by the taxpayers. The above proviso also supports the view that subject-matter for deduction under section 43B is accrued liability and the payment is the condition for deduction.

16. In the present case, as per the system of accounting regularly employed by the assessee, i.e., mercantile system of accounting, deduction would be permissible only in a subsequent assessment year when the liability towards excise duty accrued to the assessee. When provisions of section 43B are applied in this case the assessee gets the benefit of deduction in advance i.e., in the year of payment though the liability has accrued in the subsequent assessment year. There is thus no hardship to the assessee. It would be appropriate and in accord with the spirit of section 43B to allow deduction to the assessee in the subsequent year in which the adjustment of 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, 1969 there was such an,amendment. Therefore, as to whether the Tribunal was right in law and on facts in directing allowance of deduction gave rise to a question of law which was to be considered by the Gujarat High Court, held the Supreme Court.

17. There is no such circular of the CBDT providing for deduction of excise duty in the year of adjustment of advance payments of excise duty. Therefore, deduction has got to be allowed to the assessee in the year of payment as provided under section 43B subject to the condition that the liability to that extent has accrued in any previous year. Once the advance payment is adjusted against the accrued liability in any previous year, one of the conditions required to be satisfied under section 43B that deduction should be otherwise allowable under the Act in any previous year stands satisfied. The second condition to be satisfied for allowance of deduction under section 43B of actual payment is also satisfied. Though the condition of accrual of liability is satisfied in the subsequent previous year of the year of payment. Section 43B mandates that deduction would be permissible to the assessee, subject to the above two conditions being satisfied in the year of payment. In this case, mere payment of excise duty in advance would not be permissible as a deduction unless the amount is adjusted towards the liability incurred in any previous year not necessarily the year of payment (section 43B provides - irrespective of the previous year in which the liability is incurred). Once the liability has been incurred even in the subsequent assessment year, deduction is permissible to the assessee in the year of payment.

18. It is also pertinent to mention that the payment made by the assessee in advance in PLA A/c under the Excise Rules is not irretrievable. The amount is required to be kept in advance in the account to be adjusted against future liabilities as and when incurred on the manufacture/removal of goods. If for some reason or the other the assessee stops manufacturing of goods and is no longer required to make the payment of excise duty or exemption granted from levy of excise duty on the goods manufactured by the assessee, the advance in PLA A/c becomes refundable to the assessee. Reference may also be made to the decision of the Andhra Pradesh High Court in the case of South India Research Institute. Their Lordships 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 & Gold Control Appellate Tribunal (CEGAT), Zonal Bench at Chennai in the case of M. Fibre Bangalore (P.) Ltd. In that case, the assessee debited the duty in PLA in acquiring under rule 57F(2) and took the credit back in PLA rather than taking the same in RG-23A Part II. As such, the lower authorities directed the assessee to pay the duty in PLA and take the credit back in RG-23A Part II. This direction could not be adhered to since as on the date of said order, the unit was not functioning. The revival of the said order was also not expected. The contention of the assessee before the Tribunal was that as there was no loss of revenue, the demand raised against it to make the credit in PLA be set aside. The Tribunal held that the prayer of the assessee was not acceptable. It was held that Rule 173G(1A) provides that where any amount is to be withdrawn from the PLA account, then the assessee has to make an application to the Commissioner and only by obtaining permission from him, the said amount can be withdrawn. The Tribunal rejected the prayer of the assessee. In my view, the said decision of the CEGAT does not advance the case of the assessee that the amount paid in advance in PLA a/c is irretrievable. The Tribunal has explained that the assessee has to seek permission for transfer of the account from PLA. In my view, the mere fact that permission is required to be obtained from the concerned authorities for adjustment or refund or any advance payment of excise duty which is no longer required to be kept in the account does not support the contention of the assessee that the said advance is irretrievable and has got to be considered to be the payment towards the accrued liability.

20. It is pertinent to mention that under the Central Excise Act, 1944 (1 of 1944), the liability towards excise duty accrues on manufacture of goods and the same is payable on removal of goods. Section 3 of the Central Excise Act, 1944 provides that(1) There shall be levied and collected in such manner as may be prescribed,-(a) a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods excluding goods produced or manufactured in special economic zones, which are produced or manufactured in India as and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986). Section 4 of the said Act provides for valuation of 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 allowed to the assessee on cash system of accounting. Hon'ble Supreme Court in the case of Grasim Industries Ltd. held that in interpreting a statute we should not concentrate too much on one word and pay too little attention to other words. No provision in the statute and no word in any section can be construed in isolation. Every statute is edict of Legislature. When words are clear, there is no scope for the court to take upon itself the task of amending or altering a statutory provision. Thus, in my view, the words "in the previous year in which sum is actually paid" cannot be stretched to be read as "on the basis of cash system of accounting".

22. It may also be pointed out that the definition of word 'paid' under section 43 is also not relevant for interpretation of section 43B. Firstly, the definition under section 43(2) of the word 'paid' is made applicable to sections 28 to 41 and section 43. The Legislature in its wisdom has consciously excluded section 43B from the applicability of the definition under section 43(2). Section 43(2) reads as under :-

"Section 43 : In sections 28 to 41 and this section, unless the context otherwise requires.-

(2) 'Paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits and gains are computed under the head 'Profits and gains of business and profession'."

It is thus evident from the language of section 43(2) that the definition of "paid" has no role in interpretation of section 43B. I am conscious of the fact that in the memorandum explaining the provisions in the Finance Bill, 1983 with reference to section 43B, reference has been made to the definition of word "paid" under section 43. So, however, it merely explains the reasons for incorporation of section 43B because of the definition and it does not enlarge the scope of definition to be applicable to section 43B. On the basis of the analysis, I proceed to record my conclusion as under :-

The assessee at page 208 of the paper book had proposed following question of law :-

"A. What is the effect of insertion of section 43B ?

(i) Whether section 43B is only a disabling provision/prohibitive section?

(ii) Whether there must be accrual of liability in the first instance to claim deduction under. section 43B in the (subsequent) year of payment?

(iii) If the payment is made in advance of incurring the liability, 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 allowable under section 43B of the Income-tax Act, 1961 merely on payment basis before incurring the liability. The assessee would be entitled to deduction in the year of payment after incurring liability in any previous year.

(2) 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.

3. I hold accordingly.

 

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