Supreme Court allows deduction on advance excise duty payments: Commissioner of Income Tax II vs. M/S Modipon Ltd. (24 November 2017)

Date of the Judgment: 24 November 2017
Citation: (2017) INSC 1003
Judges: Ranjan Gogoi, J. and Navin Sinha, J.
Can a company claim a tax deduction for excise duty paid in advance into a Personal Ledger Account (PLA), even if the duty is only adjusted against actual clearances later? The Supreme Court of India addressed this question in a set of appeals concerning the interpretation of Section 43B of the Income Tax Act, 1961. The court considered whether the advance deposit of excise duty constitutes “actual payment” for the purpose of claiming deductions under the Income Tax Act. This judgment was delivered by a bench of Justices Ranjan Gogoi and Navin Sinha.

Case Background

The core issue in these appeals revolves around whether excise duty paid in advance into a Personal Ledger Account (PLA) qualifies for deduction under Section 43B of the Income Tax Act, 1961. The appeals were filed by the Commissioner of Income Tax against M/s Modipon Ltd. and Paharpur Cooling Towers Ltd. The dispute arose because the Income Tax Department disallowed deductions claimed by the companies for excise duty paid in advance, arguing that the actual payment only occurs when the duty is adjusted against clearances of goods. M/s Modipon Ltd. had consistently claimed deductions for the balance amount in the PLA at the end of each accounting year from the Assessment Year 1984-1985, adding it back as taxable income in the subsequent year. This practice was accepted by the Revenue until the assessment years under consideration.

Timeline

Course of Proceedings

The Income Tax Department challenged the decisions of the High Courts of Delhi and Calcutta, which had ruled in favor of the assessees. The High Courts had held that the advance deposit of central excise duty constitutes actual payment of duty within the meaning of Section 43B of the Income Tax Act. The Revenue argued that the payment is only complete when the duty is debited against the clearances/removals made by the assessee, not at the time of deposit into the PLA. The Supreme Court noted that the practice of the assessee, M/s Modipon Ltd., had been accepted by the Revenue for several years, except for the assessment years under consideration. The Supreme Court also took note of the decisions of the Delhi High Court and the Punjab & Haryana High Court, which had decided the same issue in favor of the assessee, and against which no appeals had been filed by the Revenue.

Legal Framework

The core legal provision at the heart of this case is Section 43B of the Income Tax Act, 1961. This section deals with deductions for certain expenses, including taxes, and specifies that these deductions are only allowed if the expenses are actually paid. The relevant portion of the section is not quoted verbatim in the source document, but the court interprets it to mean that deductions are allowed against actual payment, as opposed to mere accrual of liability. The court also discusses the Central Excise Act and the Central Excise Rules, 1944. As per Section 3 of the Central Excise Act, the levy of excise duty is on the manufacture of goods, though the duty is to be paid at the stage of removal of the goods. Rule 173G of the Central Excise Rules, 1944, mandates the advance deposit of central excise duty in a current account (PLA), from which adjustments are made against clearances. Sub-rule (1)(A) of Rule 173G allows for refunds from this account under specific conditions.

Arguments

Arguments by the Revenue:

• The Revenue argued that the levy of excise duty is on the manufacture of excisable goods, but actual payment occurs only at the stage of removal.
• The advance duty paid in the PLA is merely an advance deposit, which is adjusted against clearances.
• Until clearances are made and excise duty is debited from the advance deposit, there is no actual payment of duty.
• The amount in deposit is akin to a loan and can be refunded to the assessee under the Central Excise Rules.
• Under Rule 21 of the Central Excise Rules, 1944, duty can be remitted on goods lost, damaged, or unfit for consumption, further indicating that the deposit is not an actual payment of duty.

Arguments by the Assessee:

• The assessee argued that the practice of claiming deduction for the balance amount in the PLA at the end of each accounting year and adding it back in the next year makes the dispute academic, with no revenue implication.
• The practice had been accepted by the Revenue for the Assessment Years 1984-1985 to 1998-1999, except for the four years in question.
• The same issue had been decided in favor of the assessee by the Delhi High Court in C.I.T. vs. Maruti Suzuki India Ltd. and the Punjab & Haryana High Court in C.I.T. vs. Happy Forgings Ltd. and C.I.T. vs. Raj and San Deeps Ltd., and no appeals were filed against these decisions.
• Under Section 3 of the Central Excise Act, the event for levy of excise duty is the manufacture of goods, though payment is at the stage of removal.
• Rule 173G of the Central Excise Rules, 1944, makes the advance deposit of central excise duty in a current account mandatory.
• Refunds from the current account are not a matter of right and can only be granted on reasons being recorded by the Commissioner.
• The amount deposited in the PLA is irretrievably lost to the assessee, and payment of central excise duty takes place at the time of deposit in the PLA.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the assessee is entitled to claim deduction under Section 43B of the Income Tax Act, 1961 in respect of the excise duty paid in advance in the Personal Ledger Account (PLA)?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Court relied on Radhasoami Satsang vs. C.I.T. [1992] 193 ITR 321 (SC) and C.I.T. vs. Excel Industries Ltd. [2013] 358 ITR 295 (SC) to emphasize the principle of consistency in tax matters, noting that the assessee’s practice had been accepted by the Revenue for many years.
• The decisions of the Delhi High Court in C.I.T. vs. Maruti Suzuki India Ltd. [2013] 212 Taxman 603 (Del.) and the Punjab & Haryana High Court in C.I.T. vs. Happy Forgings Ltd. (ITA No. 590 of 2007) and C.I.T. vs. Raj and San Deeps Ltd. [2007] 293 ITR 127 were followed, as they had decided the same issue in favor of the assessee.
• The Court referred to C.K. Gangadharan and Anr. vs. C.I.T. [2008] 8 SCC 739 to clarify that appeals should not be entertained if they do not raise a substantial question of law or public interest.
• The Court drew an analogy from C.I.T. vs. Pandavapura Sahakara Sakkare Karkhane Ltd. [1995] 198 ITR 690 (Kar.) and C.I.T. vs. Nizam Sugar Factory Ltd. [2002] 253 ITR 68 (AP), where it was held that amounts deposited in a fund over which the assessee had no control were not taxable income. This was used to support the view that the advance deposit in the PLA is not under the assessee’s control and should be considered as payment.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors. The consistent practice of the assessee, which had been accepted by the Revenue for many years, played a significant role. The court also considered the decisions of the Delhi and Punjab & Haryana High Courts, which had already ruled in favor of the assessee on the same issue. The court emphasized that the purpose of Section 43B was to ensure actual payment of taxes, and the advance deposit in the PLA, where the assessee loses control over the funds, should be considered as such payment. The court also noted the statutory nature of the PLA and the fact that the amount deposited is credited to the Revenue, with the assessee having no control over it.

The Court’s reasoning was based on the following key points:

• The consistent practice followed by the assessee and accepted by the Revenue for several years, except for the assessment years under consideration.
• The decisions of the Delhi and Punjab & Haryana High Courts, which had decided the same issue in favor of the assessee.
• The statutory nature of the PLA and the fact that the amount deposited is credited to the Revenue, with the assessee having no control over it.
• The purpose of Section 43B of the Income Tax Act, which is to ensure actual payment of taxes.

The court quoted the following from the judgment:

“Deposit of Central Excise Duty in the PLA is a statutory requirement.”

“The self removal scheme and payment of duty under the Act and the Rules clearly shows that upon deposit in the PLA the amount of such deposit stands credited to the Revenue with the assessee having no domain over the amount(s) deposited.”

“Having regard to the object behind the enactment of Section 43B and the preceding discussions, it would be consistent to hold that the legislative intent would be achieved by giving benefit of deduction to an assessee upon advance deposit of central excise duty notwithstanding the fact that adjustments from such deposit are made on subsequent clearances/removal effected from time to time.”

There were no dissenting opinions in this case.

Key Takeaways

• Advance deposit of excise duty in the Personal Ledger Account (PLA) is considered actual payment for the purpose of claiming deductions under Section 43B of the Income Tax Act, 1961.
• The consistent practice followed by the assessee, if accepted by the Revenue for a considerable period, can be a factor in deciding tax disputes.
• Decisions of High Courts on the same issue, if not challenged by the Revenue, can be considered as persuasive precedents.
• The statutory nature of the PLA and the fact that the assessee loses control over the deposited amount are critical in determining whether a payment is considered “actual.”

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the advance deposit of excise duty in the PLA is considered “actual payment” under Section 43B of the Income Tax Act, 1961. This clarifies the position of law on the issue and provides relief to assessees who deposit excise duty in advance. This judgment reaffirms the principle that once the amount is deposited in the PLA, it is considered as payment, even if the adjustment against the duty happens later at the time of removal of goods. This is a departure from the Revenue’s interpretation that actual payment only occurs at the time of clearance/removal.

Conclusion

The Supreme Court dismissed the appeals filed by the Commissioner of Income Tax, affirming the decisions of the Delhi and Calcutta High Courts. The court held that the advance deposit of excise duty in the Personal Ledger Account (PLA) constitutes actual payment of duty within the meaning of Section 43B of the Income Tax Act, 1961. This decision provides clarity on the issue and allows assessees to claim deductions for excise duty paid in advance, aligning with the legislative intent of Section 43B.

Category

Parent Category: Income Tax Act, 1961

Child Category: Section 43B, Income Tax Act, 1961

Child Category: Excise Duty

Child Category: Personal Ledger Account

Child Category: Tax Deductions

Child Category: Tax Assessment

Parent Category: Central Excise Act

Child Category: Rule 173G, Central Excise Rules, 1944

FAQ

Q: What is the main issue in the Commissioner of Income Tax II vs. M/S Modipon Ltd. case?

A: The main issue is whether excise duty paid in advance into a Personal Ledger Account (PLA) qualifies for deduction under Section 43B of the Income Tax Act, 1961.

Q: What did the Supreme Court decide?

A: The Supreme Court decided that the advance deposit of excise duty in the PLA is considered actual payment and is eligible for deduction under Section 43B of the Income Tax Act, 1961.

Q: Why did the court consider the advance deposit as actual payment?

A: The court considered it as actual payment because the amount is credited to the Revenue, and the assessee loses control over it once deposited in the PLA.

Q: What is a Personal Ledger Account (PLA)?

A: A Personal Ledger Account (PLA) is a current account where assessees deposit excise duty in advance, which is then adjusted against the duty payable on clearances of goods.

Q: How does this judgment affect businesses?

A: This judgment allows businesses to claim deductions for excise duty paid in advance, which can reduce their taxable income and tax liability.

Q: What is Section 43B of the Income Tax Act, 1961?

A: Section 43B of the Income Tax Act, 1961, deals with deductions for certain expenses, including taxes, and specifies that these deductions are only allowed if the expenses are actually paid.