Appella v. Assistant Commissioner Of Income Tax

GURBAX SINGHIN THE HIGH COURT OF PUNJAB AND HARYANAAd 45 ng 44-402018.12.06 11:49 CHANDIGARH. ITA No.403 of 2016Date of decision: 21.11.2018. M/s Glaxo Smithkline Consumer Healthcare Limited .---- Appella Vs. Assistant Commissioner of Income Tax. ..--Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL,HON’ BLE MRS. JUSTICE MANJARI NEHRU KAULHON’ BLE MRS. JUSTICE MANJARI NEHRU KAUL Present: | Mr. Ajay Vohra, Sr. Advocate with Mr. Rohit Jain and Mr.Vishal Gupta, Advocate for the appellant.Vishal Gupta, Advocate for the appellant. Ms. Urvashi Dhugga, Sr. Standing Counsel for the respondent. Ajay Kumar Mittal,J. 1.This order shall dispose of a bunch of six appeals bearing ITA.Nos.403 of 2016, 505 to 508 and 537 of 2008, as according to the learnedcounsel for the parties, the issue involved in all these appeals is identical.However, the facts are being extracted trom ITA No.403 of 2016. oOITA No.403 of 2016 has been filed by the appellant-assesseeunder Section 260A of the Income Tax Act, 1961 (in short, “the Act’)against the order dated 5.4.2016, Annexure A.3 passed by the Income TaxAppellate Tribunal, Chandigarh (in short, “the Tribunal’) in ITANo.475/CHD/2002 for the assessment year 1997-98, claiming followingsubstantial questions of law:-_ “a) Whether on the facts and in the circumstances of the case,the Tribunal erred in law in (in-effect) upholding thedisallowance of.46,19,34,656/- which represented unutilised MODVAT credit of excise duty as on 31.3.1997 1.e. the end ofthe relevant accounting year, in terms of Section 43B of theAct?| b) Whether on the facts and in the circumstances of the case,the Tribunal erred in law in not treating the unutilisedMODVAT credit, balance as at the end of the year as paymentof excise duty, as allowable deduction in terms of Section 43Bof the Act? ) Whether on the facts and in the circumstances of the case, theTribunal erred in law in not following and applying theprinciples laid down by the various judicial pronouncements(including those of the Hon’ble Supreme Court) to the effectthat MODVAT credit is as good as tax paid and does notrepresent purchase cost of raw materials? 3 |A few facts relevant for the decision of the controversyinvolved as narrated in ITA No.403 of 2016 may be noticed. The appellant-assessee is a public limited company, engaged in the manufacture and sale ofconsumer healthcare products. It filed its return of income for the assessmentyear 1997-98 on 26.11.1997 declaring income of)L61,07,86,140/-. Theassessee uses duty paid input in the manufacture of its products. In respect ofthe duty paid on such inputs purchased, the assessee is entitled to MODVATcredit for the duty element embedded therein to be set off against the finalduty payable on the products manutactured by it. According to the assessee,in the system of accounting followed, in accordance with the methodapproved by the Institute of Chartered Accountants of India, the purchasesare stated net of duty/MODVAT credit even though the vendor has beenpaid the full amount. The MODVAT credit accumulated is set off against theexcise duty payable on the final products manufactured by the assessee. Tothe extent MODVAT credit remained unutilised at the year end, the assessee claimed deduction under Section 43B of the Act since the moneys to thatextent had irretrievably gone out of its coffers. During the assessment year inquestion, the assessee had paid excess advance excise duty by way ofdeposit with the Commissioner of Central Excise under Rule 173G(1) of theCentral Excise Rules, 1944 (in short, “the Rules”) amounting to45,75,63,219/- as well as had unutilised MODVAT credit under RG23A_amounting to46,19,34,656/-. Accordingly, the assessee claimed totaldeduction ofL11,94,97,875/- in the return of income for the assessment year|1997-98 under Section 43B of the Act. The return was processed. Inresponse to the query, the assessee submitted that notwithstanding that theamount oft411,94,97,875./- was in the nature of advance excise duty, the |Same having irretrievably gone out of its coffers in favour of the exciseauthorities, it was allowable as deduction under Section 43B of the Act onpayment basis. The Assessing Officer vide assessment order dated 1.2.2000,Annexure A.| passed under Section 143(3) of the Act rejected the plea ofthe assessee and disallowed the amount of411,94,97,875/- claimed as.deduction under Section 43B of the Act on the ground that excise duty beinga post manufacturing levy, the same had been allowed as deduction to theassessee to the extent of goods cleared from the factory and the advancedeposited by the assessee with the excise authorities did not amount topayment of duty as per the scheme of Section 43B of the Act. The assesseeassailed the assessment order before the Commissioner of [Income Tax(Appeals) [CIT(A)] on the ground that the provisions of section 43B of theAct override the method of accounting generally followed by an assesseeand mandate deduction of statutory liabilities in the year of payment thereofnotwithstanding accrual in another year. The appellant asserts that in orderto ensure timely payment of excise duty by the manufacturers, under Rule 173G of the Rules, a manufacturer is required to deposit excise duty in anaccount with the excise authorities and adjust the duty payable on excisablegoods against such deposit. Vide order dated 6.3.2002, Annexure A.2, theCIT(A) set aside and reversed the assessment order, allowing deduction of411,94,97,875/- claimed by the assessee under Section 43B of the Act.Aggrieved by the order, the revenue filed appeal before the Tribunal. In themeantime, similar disallowance was made by the Assessing Officer in thecase of the assessee for the subsequent years including assessment year2001-02 which was also set aside and deleted by the CIT(A) following theorder dated 6.3.2002 for the assessment year 1997-98. Aggrieved by the saidorder tor the assessment year 2001-02, the revenue preferred appeal beforethe Tribunal. The assessee vide letter dated 3.4.2006 requested the Tribunalto refer the said matter to the President of the Tribunal for constitution of a/special Bench to resolve the issue involved in the present case as there wereconflicting opinions of different benches of the Tribunal. Consequently, theappeal for the assessment year 2001-02 was heard by a bench of fivemembers. On 20.07.2007, the Special bench of the Tribunal passed the orderin the case of the appellant-assessee for assessment year 2001-02 rulingpartly in favour of the assessee-appellant and partly in favour of the revenue,on the issue of allowablitity of unutilized MODVAT credit under RG 23Aclaimed by the assessee as deduction under Section 43B of the Act. Videorder dated 05.04.2016, Annexure A.3, the Tribunal in the appeal for theassessment year 1997-98 remanded the matter back to the file of theAssessing Officer, to be adjudicated in accordance with the conclusionsreached by the Special Bench of the Tribunal. The order passed by theCIT(A) was set aside and disallowance of46,19,34,656/- representingunutilized MODVAT credit under RG 23A as deduction under Section 43B of the Act was confirmed. MHence the instant appeals by the appellant-assessee. 4AWe have heard learned counsel for the parties. 5 _The Apex Court in a recent judgment inCommissioner of of the Act was confirmed. MHence the instant appeals by the appellant-assessee. 4AWe have heard learned counsel for the parties. 5 _The Apex Court in a recent judgment inCommissioner of Income Tax —lI Vs. Modipon Limited-{2017] 299 CTR 306 considered the |question whether the assessee was entitled to claim deduction under Section43B of the Act in respect of excise duty paid in advance in the PersonalLedger Account. Therein, the assessee had been claiming deduction underSection 43B of the Act in respect of the balance amount in the PersonalLedger Account at the end of each accounting year and the assessee hadbeen adding back the same amount as part of the taxable income in theimmediately succeeding accounting year in order to avoid double deduction.The said practice adopted by the assessee had been accepted by the revenue.The revenue urged that though levy of excise was on manufacture ofexcisable goods, actual payment of duty was at the stage of removal. Thus,the amount of advance deposit did not represent actual payment of duty so as.to entitle an assessee to the benefit of deduction under Section 43B of the'Act. After considering the relevant statutory provisions and the case law onthe point, it was held by the Apex Court that the advance deposit of CentralExcise Duty constitutes actual payment of duty within meaning of Section43B and, therefore, the assessee was entitled to benefit of deduction of thesaid amount. The relevant paras of the judgments are quoted below:- | “7. On merits it has been submitted by Shri Vohra that under)Section 3 of the Central Excise Act, the event for levy of exciseduty 1s the manufacture of goods though the duty 1s to be paidat the stage of removal of the goods. Pointing out the provisionsof Rule 173G of the Central Excise Rules, 1944 1t 1s submittedSection 3 of the Central Excise Act, the event for levy of exciseduty 1s the manufacture of goods though the duty 1s to be paidat the stage of removal of the goods. Pointing out the provisionsof Rule 173G of the Central Excise Rules, 1944 1t 1s submitted 8 Q_ that the advance deposit of central excise duty in a currentaccount 1s a mandatory requirement from which adjustments aremade, from time to time, against clearances effected. Though,sub-rule (1)(A) contemplates refund from the current account,such refund can be granted only on reasons being recorded bythe concerned authority 1.e., the Commissioner on _ thapplication filed by the assessee. Refund 1s not a matter of right.The amount deposited in the PLA 1s irretrievably lost to theassessee, it 18 argued. Payment of central excise duty takesplace at the time of deposit in the PLA, though the deposit 1s onthe basis of an approximation and the precise amount of dutyqua the goods removed is ascertained at the stage ofremoval/clearances. The said facts, according to the learnedcounsel, would not make the deposit anything less than actualpayment of duty. We have considered the submissions made on behalf of the!parties. Notwithstanding the acceptance by the Revenue of thepractice adopted by the assessee-Modipon Ltd., in all theassessment years except for the ones under dispute as.enumerated above and the absence of any challenge to thedecisions of the Delhi and the Punjab & Haryana High Courts,the present challenge would still be entertainable so long as itdiscloses a substantial question of law or an issue impactingpublic interest or the same has the potential of recurrence infuture. The Revenue cannot be shut out from the presentproceedings merely because of its acceptance of the practice ofaccounting adopted by the assessee or its acceptance of thedecision of the two High Courts in question. An adjudication ofthe question(s) arising cannot be refused merely on the abovebasis. We will, therefore, have to proceed to answer the meritsof the challenge made by the Revenue in the present appeals.Deposit of Central Excise Duty in the PLA 1s a statutoryrequirement. The Central Excise Rules, 1944, specity a distinctprocedure for payment of excise duty leviable on manufacturedgoods. It is a procedure designed to bring in orderly conduct inthe matter of levy and collection of excise duty when both 10. 11.) manutacture and clearances are a continuous process. Debitsagainst the advance deposit in the PLA have to be made ofamounts of excise duty payable on excisable goods clearedduring the previous fortnight. The deposit once made 1sadjusted against the duty payable on removal and the balance iskept in the account for future clearances/removal. No.withdrawal from the account is permissible except on anapplication to be filed before the Commissioner who 1s requiredto record reasons for permitting an assessee to withdraw anyamount from the PLA. Sub-rules (3), (4), (5) and (6) of Rule173G indicates a strict and vigorous scrutiny to be exercised bythe central excise authorities with regard to manufacture andremoval of excisable goods by an assessee. The self removalscheme and payment of duty under the Act and Rules clearlyshows that upon deposit in the PLA the amount of such depositstands credited to the Revenue with the assessee having nodomain over the amount(s) deposited. InCIT V. Pandavapura Sahakara Sakkare Karkhane Ltd.[1992] 198 ITR 690 (Kar.) and)CIT V. Nizam Sugar FactoryLtd.[2002] 120 Taxman 378/253 ITR 68 (AP), cited at the Bar,the High Courts of Karnataka and Andhra Pradesh respectivelyhad occasion to consider as to whether the amounts credited tothe Molasses Storage Fund out of the sale proceeds of molasses.received by the assessee constitute taxable income of theassesssee. Under the scheme, the assessee had no control overthe amounts deposited in the fund and the assessee was also not.entitled to withdraw any amount therefrom without theapproval of the authorities. Further the amount deposited couldbe utilized only for the purpose specified. In _ thoscircumstances, the High Court held and in our view correctly,that the deposits made, though a part of the sale proceeds of theassessee, did not constitute taxable income at the hands of theassessee. We do not see why the same analogy would not beapplicable to the case 1n hand. The Delhi High Court in the appeals arising from the orders passed by it has also taken the view that the purpose of The Delhi High Court in the appeals arising from the orders passed by it has also taken the view that the purpose of introduction of Section 43B of the Central Excise Act (Sic.Income-Tax) was to plug a loophole in the statute whichpermitted deductions on an accrual basis without the requisiteobligation to deposit the tax with the State. Resultantly, on thebasis of mere book entries an assessee was entitled to claim|deduction without actually paying the tax to the State. Havingregard to the object behind the enactment of Section 43B andthe preceding discussions, it would be consistent to hold thatthe legislative intent would be achieved by giving benefit ofdeduction to an assessee upon advance deposit of central exciseduty notwithstanding the fact that adjustments from suchdeposit are made on subsequent clearances/removal effectedfrom time to time. 12.The above discussions, coupled with the peculiar features of thecase, noticed above 1.e. consistent practice followed by theassessee and accepted by the Revenue; the decisions of the two.High Courts in favour of the assessee which have attainedfinality in law; and no contrary view of any other High Courtbeing brought to our notice, should lead us to the conclusionthat the High Courts were justified in taking the view that theadvance deposit of central excise duty constitutes actualpayment of duty within the meaning of Section 43B of theCentral Excise Act (Sic. Income-Tax) and, therefore, theassessee 1s entitled to the benefit of deduction of the said|amount.’case, noticed above 1.e. consistent practice followed by theassessee and accepted by the Revenue; the decisions of the two.High Courts in favour of the assessee which have attainedfinality in law; and no contrary view of any other High Courtbeing brought to our notice, should lead us to the conclusionthat the High Courts were justified in taking the view that theadvance deposit of central excise duty constitutes actualpayment of duty within the meaning of Section 43B of theCentral Excise Act (Sic. Income-Tax) and, therefore, theassessee 1s entitled to the benefit of deduction of the said|amount.’ 6.Similarly, in|CIT Vs. Raj & San Deeps Limited12007] 293ITR 12 (P&H), the issue before this Court was whether the Tribunal wasright in law in deleting the addition made under Section 43B of the Act onaccount of advance excise duty paid which was neither debited to the profitand loss account nor sales account or made part of the purchase price. It washeld that once it was found as a fact by the Tribunal that excise duty as perStatutory provisions became payable, the moment goods were manutacturedand then assessee was under obligation to deposit that much amount in ‘account current” and amount so deposited in “account current” being nonrefundable, there was no reason for the revenue to deny the benefit ofdeduction of excise duty in the year in question when the goods weremanufactured and the amount was deposited 1n the “account current’. It wasfurther held that the expense would certainly relate to the year in which thegoods were manufactured and the amount was deposited which could notpossibly be treated as an advance. The relevant paras of the judgment readthus:- ‘The only contention raised by learned counsel for the Revenueis that since the goods in question were not removed from thepremises of the assesse during the year in question, the dutyamount would be considered to have been paid in advance andaccordingly the assessee was not entitled to deduction thereofduring the year in question as the expense was to relate to theyear in which the goods were removed from the factory. Anyadvance payment of taxes, which do not relate to theassessment year 1n question, 1s not a permissible deduction. ‘The only contention raised by learned counsel for the Revenueis that since the goods in question were not removed from thepremises of the assesse during the year in question, the dutyamount would be considered to have been paid in advance andaccordingly the assessee was not entitled to deduction thereofduring the year in question as the expense was to relate to theyear in which the goods were removed from the factory. Anyadvance payment of taxes, which do not relate to theassessment year 1n question, 1s not a permissible deduction. On the other hand, learned counsel for the assessee submittedthat the assessee was statutorily required to deposit the duty themoment goods, were manutactured and was under obligation tokeep amount to the extent of duty as calculated on the goods somanufactured in the ‘“‘account-current’. The assessee was noentitled to refund of the amount once deposited in the “account-current’, however, debit entry was made at the time of removalof goods from the factory. He has relied upon the judgment ofthe Gauhati High Court inIndiaCarbon Ltd. Vs. LAC of IT11993] 200 [TR 759. Having heard learned counsel for the parties, we find thecontention raised by learned counsel for the Revenue to betotally misconceived. Once it is found as a fact by the Tribunalthat duty as per the statutory provisions became payable, the moment goods were manufactured then the assessee was underobligation to deposit that much amount in the “account-current”and the amount so deposited in the “account-current” beingnon-refundable, there was no reason for, the Revenue to denythe benefit of deduction in the year 1n question when the goodswere manufactured and the amount was deposited in the‘“account-current’”. The expense would certainly relate to thyear in which the goods were manutactured and the amount wasdeposited, which cannot possibly be treated as an advance.” Similar view was taken by the Delhi High Court inCIT vs. Modipon|Limited (No.2),(2011) 334 ITR 106(Delhi) andCommissioner ofIncomeTax, Delhi-1 vs. M/s Samtel India Limited,ITA No.130 of 2000, decided|on 26.9.201 3. JIn view of the law laid down by the Apex Court 1n|ModiponLimited’scase (supra) holding that the advance deposit of Central Exciseduty constitutes actual payment of duty within the meaning of Section 43Bof the Act and that the assessee would be entitled to benefit of deduction ofthe said amount, the substantial questions of law raised in these appeals areanswered in favour of the assessee and against the respondent-revenue.Consequently, all the six appeals are allowed and the impugned orderspassed by the Tribunal in all the appeals are set aside. | November 21, 2018| Whether speaking/reasoned Whether reportable (Ajay Kumar Mittal)Judge (Manjari Nehru Kaul)Judge Yes Yes