Delhi H.C : The assessee was entitled to exclude excise and customs duties paid from the value of the closing stock

High Court Of Delhi

CIT vs. Modipon Ltd. (No. 2)

Assessment Year : 1989-90

Section : 43B,37(1)

Sanjay Kishan Kaul And Rajiv Shakdher, JJ.

IT Appeal No. 48 Of 1999

January  25, 2011


1. The present appeal, which pertains to the assessment year 1989-90, raises the following questions of law :

“1. Whether the Tribunal was correct in law in directing the Income-tax Officer to calculate the disallowance under rule 6D of the Income-tax Rules, 1962 with reference to the total journeys undertaken in a year and not with reference to each journey undertaken by an employee or director ?

2. Whether the Tribunal was right in holding that the assessee was entitled to exclude excise and customs duties paid from the value of the closing stock ?

3. Whether the assessee is entitled to claim deduction of Rs. 14,71,387 on account of excise duty paid in advance as business expenditure ?”

2. Learned counsel for the respondent/assessee concedes that in so far as the first question is concerned, since in the subsequent assessment years, the addition made by the Department has been accepted by the assessee. Question No. 1 be answered in favour of the Department. It is ordered accordingly.

3. As regards question No. 2, Ms. Bansal affirms that it has to be answered in favour of the assessee in view of the judgment in Berger Paints India Ltd. v. CIT [2004] 266 ITR 99/135 Taxman 586 (SC). It is ordered accordingly.

4. This leaves us with only question No. 3. Ms. Bansal opposes the deduction of excise duty paid in advance in the relevant assessment year. The submission is premised on the learned counsel’s understanding that there is no payment of excise duty to the State. In support of her argument, recourse has been taken to the provisions of section 43B of the Income-tax Act, 1961 (in short the “I.T. Act”) and rule 173G of the Central Excise Rules, 1944 (in short “C.E. Rules”). To be noted section 43B was inserted in the Income-tax Act, with effect from April 1, 1984. The relevant portion of the provision reads as under :

“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 :”

5. It is a common case of the parties that the objective with which the aforesaid provision was introduced was to plug a loophole in the statute which permitted deduction on an accrual basis without the requisite obligation to deposit the tax with the State. Resultantly, on the basis of mere book entries the assessee would claim deduction without actually paying the tax to the State.

6. In the factual matrix of the present case, the controversy arises in respect of the excise duty payable by the assessee on the goods manufactured in the factory. The incidence for imposition of excise duty, that is, the liability arises on manufacture of goods. A self-assessment procedure was provided under rule 173G of the Central Excise Rules. The relevant portion of rule 173G of the Central Excise Rules reads as follows :

“173G. Procedure to be followed by the assessee.—(1) Every assessee shall keep an account-current with the Collector separately for each excisable goods falling under different Chapters of the Schedule to the Central Excise Tariff Act, 1985, in such forms and manner as the Collector may require, of the duties payable on the excisable goods and in particular such account (and also the account in Form R.G. 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 balances, 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.” [Emphasis supplied]

7. It is the submission of learned counsel for the Department that the aforesaid rule envisages payment in advance of the excise duty which is to be adjusted only on the goods being removed from the factory premises. It is, thus, contended that the amount of duty is liable for deduction only when the goods are removed from the factory premises.

8. In our considered view, the mischief which is sought to be cured by induction of the provisions of section 43B of the Income-tax Act is subserved by the payment of the duty to the Department concerned. The procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods are removed from the factory premises. The duty, thus, already stands deposited in the accounts of the assessee maintained with the treasury and the amount, thus, stands paid to the State.

9. We are, thus, not in agreement with the submission of the learned counsel for the Department that it was only on removal of the goods that the amount credited to the personal ledger account could be claimed as deductible under section 43B of the Income-tax Act. The question is, thus, answered in favour of the assessee.

10. The appeal is accordingly disposed of.

[Citation : 334 ITR 106]

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