Supreme Court Upholds Disallowance of MODVAT Credit as Deduction: Maruti Suzuki India Ltd. vs. Commissioner of Income Tax (2020)

Date of the Judgment: 07 February 2020

Citation: [2020] INSC 118

Judges: Ashok Bhushan, J., Navin Sinha, J.

Can a company claim a deduction for unutilized MODVAT credit under Section 43B of the Income Tax Act? The Supreme Court of India recently addressed this question in a case involving Maruti Suzuki India Ltd. The core issue was whether the unutilized MODVAT credit, which the company had accumulated due to excise duty paid on raw materials, could be considered an allowable deduction under the Income Tax Act. This judgment clarifies the conditions under which deductions for taxes and duties can be claimed. The bench comprised of Justice Ashok Bhushan and Justice Navin Sinha, with the majority opinion authored by Justice Ashok Bhushan.

Case Background

Maruti Suzuki India Ltd., the appellant, is engaged in the manufacturing of automobiles, which are subject to excise duty under the Central Excise Act, 1944. During the assessment year 1999-2000, the company accumulated an unutilized MODVAT credit of Rs. 69,93,00,428. This credit arose from the excise duty paid on raw materials and inputs used in manufacturing vehicles. The company also claimed a deduction of Rs. 3,08,88,171 for sales tax recoverable. In its income tax return, Maruti Suzuki claimed these amounts as allowable deductions under Section 43B of the Income Tax Act.

The Assessing Officer disallowed these claims, a decision upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT). The ITAT reasoned that the advance payment of excise duty, represented by the unutilized MODVAT credit, did not constitute an allowable deduction under Section 43B since there was no actual liability. The High Court of Delhi also ruled against the company, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The Assessing Officer initially disallowed the deductions claimed by Maruti Suzuki, a decision which was upheld by the Commissioner of Income Tax (Appeals). Subsequently, the Income Tax Appellate Tribunal (ITAT) also ruled against the company, stating that the unutilized MODVAT credit did not qualify as an allowable deduction under Section 43B of the Income Tax Act. The High Court of Delhi affirmed the ITAT’s decision, leading Maruti Suzuki to appeal to the Supreme Court.

Legal Framework

The core of this case revolves around Section 43B of the Income Tax Act, which governs the deductibility of certain expenses. Section 43B states:

“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:”

The provision stipulates that deductions for taxes, duties, and other similar payments are allowed only in the year in which they are actually paid. However, a proviso to this section allows for deductions if the payment is made before the due date for filing the income tax return.

The Central Excise Act, 1944 and Central Excise Rules, 1944 are also relevant. The definition of “assessee” under Rule 2(3) of the Central Excise Rules, 1944, is crucial:

“Rule 2(3). “assessee” means any person who is liable for payment of duty assessed and also includes any producer or manufacturer of excisable goods or a registered person of a private warehouse in which excisable goods are stored;”

Arguments

Appellant’s Arguments (Maruti Suzuki):

• The appellant contended that the excise duty paid to its suppliers on raw materials and inputs should be treated as payments of excise duty, qualifying for deduction under Section 43B of the Income Tax Act, regardless of when the MODVAT credit is utilized.
• The appellant argued that the payments made to suppliers are essentially payments of excise duty, and not mere contractual payments.
• It was submitted that the company becomes entitled to MODVAT credit as soon as the raw materials are received, and the unutilized MODVAT credit balance should be deductible.
• In the alternative, the appellant argued that the first proviso to Section 43B applies. The company’s excise returns showed that the entire unutilized MODVAT credit was used in April 1999, and thus, it should be eligible for deduction.
• The object of Section 43B is to ensure that the government receives the amount. In this case, the full excise duty was paid when the raw material manufacturers cleared the goods from their factories.

Respondent’s Arguments (Revenue):

• The Revenue argued that a deduction under Section 43B is only allowed when the tax or duty is due, payable, and actually paid by the assessee.
• The Revenue contended that excise duty becomes due and payable only when the assessee removes the finished product from its factory, not when it pays its suppliers.
• The Revenue argued that the assessee is not the one liable to pay excise duty on the raw materials; instead, the liability lies with the manufacturer of those raw materials. The MODVAT credit is a benefit, not a payment of duty.
• The Revenue argued that the proviso to Section 43B does not apply because the liability to pay excise duty is incurred when the finished goods are removed, not when the raw materials are purchased.

The innovativeness of the argument by the assessee lies in its attempt to equate the payment of excise duty to suppliers with the actual payment of excise duty by the assessee, thereby trying to claim a deduction under Section 43B. The Revenue, on the other hand, maintained a strict interpretation of the law, emphasizing the actual liability and payment by the assessee.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the ITAT had committed an error of law in upholding the disallowance of the amount of Rs. 69,93,00,428, which represented MODVAT credit of Excise Duty that remained unutilised by 31st March, 1999 i.e. the end of the relevant accounting year?
2. Whether the ITAT has committed an error of law in upholding the disallowance of Rs. 3,08,99,171 in respect of Sales Tax Recoverable Account, under Section 43B of the Income-tax Act?

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court analyzed the authorities as follows:

• Eicher Motors Ltd. and another versus Union of India and others, (1999) 2 SCC 361: The court distinguished this case, noting that the observation that the facility of credit is as good as tax paid was in the context of Rule 57F(4A) of the Central Excise Rules, 1944, and cannot be applied to the present case.
• Collector of Central Excise, Pune and others versus Dai Ichi Karkaria Ltd. and others; (1999) 7 SCC 448: The court distinguished this case, holding that it dealt with the valuation of raw material under the MODVAT scheme and was not relevant to the issue of deduction under Section 43B.
• Berger Paints India Ltd. versus Commissioner of Income Tax, 2004 (266) ITR 99: The court distinguished this case, noting that it was not about unutilized MODVAT credit but about duties actually paid, and thus not applicable.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a strict interpretation of Section 43B of the Income Tax Act. The court emphasized that for a deduction to be allowed, the payment must be made by the assessee, and it must be a payment of tax, duty, cess, or fee for which the assessee is actually liable. The court also focused on the actual liability to pay excise duty, which, according to the Central Excise Act, lies with the manufacturer of the raw materials, not the purchaser. The court also noted that the MODVAT scheme is a benefit that allows the assessee to adjust the credit against its excise liability, but it does not equate to an actual payment of duty by the assessee.

Fact:Law Ratio

The court’s reasoning was heavily based on the legal interpretation of Section 43B and the Central Excise Act, with less emphasis on the factual aspects of the case.

Logical Reasoning

Judgment

The Supreme Court upheld the High Court’s decision, ruling against Maruti Suzuki. The court reasoned that the unutilized MODVAT credit was not a sum payable by the assessee by way of tax, duty, or cess, as required under Section 43B of the Income Tax Act. The court emphasized that the liability to pay excise duty lies with the manufacturer of the raw materials, not the purchaser. The MODVAT scheme provides a benefit to the purchaser, allowing them to adjust the credit against their excise liability, but it does not equate to an actual payment of duty by the purchaser.

The court also rejected the argument based on the proviso to Section 43B, stating that the liability to pay excise duty is incurred on the removal of finished goods, not at the time of raw material purchase. Therefore, the utilization of MODVAT credit in the subsequent year does not qualify for deduction in the previous year.

The court stated, “The scheme under Section 43B is to allow deduction when a sum is payable by assessee by way of tax, duty and cess and had been actually paid by him.” It further noted, “The assessee when pays the cost of raw materials where the duty is embedded, it does not ipso facto mean that assessee is the one who is liable to pay Excise Duty on such raw material/inputs. It is merely the incident of Excise Duty that has shifted from the manufacturer to the purchaser and not the liability to the same.” The court concluded, “We thus, conclude that the unutilised credit under MODVAT scheme does not qualify for deductions under Section 43B of the Income Tax Act.”

There were no dissenting opinions in this judgment.

Key Takeaways

• Unutilized MODVAT credit cannot be claimed as a deduction under Section 43B of the Income Tax Act.
• Deductions under Section 43B are only allowed when the assessee is liable to pay the tax, duty, or cess and has actually paid it.
• The liability to pay excise duty lies with the manufacturer of the raw materials, not the purchaser.
• The MODVAT scheme provides a benefit, not a payment of duty by the purchaser.
• The proviso to Section 43B does not apply if the liability to pay the duty is incurred in a subsequent year.

Directions

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

Specific Amendments Analysis

There is no discussion on any specific amendments in this judgment.

Development of Law

The ratio decidendi of this case is that unutilized MODVAT credit cannot be claimed as a deduction under Section 43B of the Income Tax Act. This judgment clarifies the interpretation of Section 43B and provides guidance on the conditions under which deductions for taxes and duties can be claimed. There is no change in the previous positions of law, but this ruling reinforces the strict interpretation of Section 43B.

Conclusion

The Supreme Court dismissed the appeals filed by Maruti Suzuki, upholding the disallowance of unutilized MODVAT credit as a deduction under Section 43B of the Income Tax Act. The court clarified that the liability to pay excise duty rests with the manufacturer of raw materials, not the purchaser, and that the MODVAT scheme is a benefit, not a payment of duty. This ruling reinforces the strict interpretation of Section 43B, emphasizing the requirement of actual payment by the assessee for a deduction to be allowed.

Category

Parent Category: Income Tax Act, 1961

Child Categories:

• Section 43B, Income Tax Act, 1961
• Deductions
• MODVAT Credit
• Excise Duty
• Tax Law

FAQ

Q: Can I claim a deduction for unutilized MODVAT credit in my income tax return?

A: No, according to the Supreme Court, unutilized MODVAT credit cannot be claimed as a deduction under Section 43B of the Income Tax Act. This is because the liability to pay excise duty lies with the manufacturer of the raw materials, not the purchaser.

Q: What is MODVAT credit, and how does it work?

A: MODVAT (Modified Value Added Tax) credit is a scheme that allows manufacturers to get credit for the excise duty paid on raw materials and inputs. This credit can be used to offset the excise duty payable on finished goods. It is a benefit, not an actual payment of duty by the purchaser.

Q: When can I claim a deduction for taxes and duties under Section 43B of the Income Tax Act?

A: You can claim a deduction under Section 43B only when you are liable to pay the tax, duty, or cess, and you have actually paid it. The payment must be made in the year in which the deduction is claimed, or before the due date for filing the income tax return.

Q: What if I use the MODVAT credit in the next financial year? Can I claim a deduction in the previous year?

A: No, the Supreme Court has clarified that the proviso to Section 43B does not apply if the liability to pay the duty is incurred in a subsequent year. Therefore, the utilization of MODVAT credit in a subsequent year does not qualify for deduction in the previous year.