Income Tax - Deduction - Excise Duty paid under protest - ITAT allows

RECENTLY, the ITAT delivered an important judgement related to Central Excise.

Section 43B of the Income Tax Act reads as,

43B.  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) to (f) …………..

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 questions before the ITAT were whether balance in PLA, balance in CENVAT Account and Duty paid under Protest are eligible for deduction under Section 43B.

PLA: The Tribunal observed, "The assessee paid certain sum under PLA which is nothing, but, excise duty paid in account as advance, to be adjusted against actual excise duty required to be paid at the time of removal of goods from bonded warehouse. 

It is in the nature of advance payment of excise duty to be adjusted against the removal of goods from bonded warehouse at a later point of time in subsequent year. Normally, at the time of payment of excise duty, the amount goes to the PLA, which is an item of asset appearing in the balance sheet. When goods are removed from bonded warehouse, a corresponding sum of excise duty is taken away from PLA and is carried to Profit and Loss account as Excise duty."

Held: While we hold that the above referred sum of unutilized amount in PLA at the end of the year u/s 43B under 'Exclusive method' qualifies for deduction, we also hold that this amount cannot be allowed deduction once again in the immediately succeeding year and also the similar amount allowed as deduction in the preceding year u/s 43B requires to be included in the computation of income of the current year.

Balance in CENVAT Credit Account: Under the central excise law, a manufacturer is entitled to claim Modvat credit in respect of the amount of central excise duty paid on raw material and inputs purchased for manufacture of excisable goods. The amount in dispute is Modvat credit unutilized at the end of the year. The assessee treated it as payment of tax and claimed deduction u/s 43B of the Act. The AO refused to allow this deduction.

At the outset, the Tribunal mentioned that the Special Bench of the Tribunal in Glaxo Smithkline Consumer Healthcare has held that unexpired Modvat credit before it is set off, cannot be treated as tax paid. Accordingly the Special Bench held that the Modvat credit available to the assessee as on the last date of the previous year does not amount to payment of excise duty and is, hence, not allowable u/s 43B. In earlier years, the Tribunal has followed the dictum of this Special Bench verdict and upheld the disallowance.

The Supreme Court in the case of  CIT Vs. Shri Ram Honda Power Equipment Ltd.- 2012-TIOL-88-SC-IT held that: 'The Authorities below are right in coming to the conclusion that MODVAT Credit is excise duty paid'. The jurisdictional High Court in the assessee's own case in  CIT vs. Maruti Suzuki India Ltd. - 2012-TIOL-1038-HC-DEL-IT,after taking note of the judgment of the Hon'ble Supreme Court in the case of Shri Ram Honda Power Equipment Corporation has held that: 'This court also notices that the Supreme Court has upheld the view which allows assesses to claim credits, such as Modvat, etc, falling within the description of liability paid, to escape the mischief of Section 43-B.'

Held: Since this amount is considered as excise duty paid, the same has to be allowed as deduction during the year of payment as per section 43B. Caveat remains that deduction in the current year, being the Modvat credit unutilized at the end of the year under the exclusive method, also requires enhancement of income of the succeeding year to this extent. 

Duty paid under protest: The AO disallowed it on the ground that the same was being contested and there was no finality regarding the liability and further, such amount was not debited to the Manufacturing, Trading, Profit and loss account ('Profit and loss account').

Held: Since the amount in question has been paid during the year, it qualifies for deduction in terms of section 43B under the exclusive method. Thus on one hand deduction for excise duty paid under protest is available in the year of payment under the exclusive method, the same amount cannot be allowed to get deducted once again on the finalization of the dispute with the Excise department on its transfer to Excise duty account. Simultaneously, the amount of excise duty paid under protest in earlier years getting deduction u/s 43B calls for inclusion in the total income of the current year on the removal of the amount from Excise duty paid under protest account.