Maruti Udyog Ltd v. Commissioner Of Income Tax, Delhi

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 11[th] November 2017 Decided on: 7th December, 2017 + ITA No.31/2005 MARUTI UDYOG LTD. ..... Appellant Through : Mr. S. Ganesh, Senior Advocate with Ms. Kavita Jha, Mr. S. Sukumaran, Mr. Anand Sukumar, Mr. Bhuwan Dhoopar, Ms. Roopali Gupta and Mr.Bhupesh Pathak, Advocates. versus COMMISSIONER OF INCOME TAX, DELHI ..... Respondent Through: Mr. Ruchir Bhatia, Senior Standing Counsel, Mr. Puneet Rai, Junior Standing Counsel and Mr. Gaurav Kheterpal, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE PRATHIBA M. SINGH JUDGMENT 07.12.2017 % Dr. S. Muralidhar, J.: 1. This is an appeal by Maruti Udyog Limited („the Assessee‟) under Section 260A of the Income Tax Act, 1961 („Act‟) against the order dated 11[th] October 2004 by the Income Tax Appellate Tribunal („ITAT‟) in ITA No.1240/Del/2003 for the Assessment Year („AY‟) 1999-00. 2. By an order dated 24[th] April 2006, while admitting this appeal, the Court had framed as many as nine substantial questions of law. ITA No.31/2005 Question (i) 3. Question (i) reads as under: “Whether the ITAT erred in law in confirming the disallowance of the amount of Rs.3,27,83,128/- deposited by the Appellant in its Central Excise Personal Ledger Account (PLA) before 31[st] March 2000, i.e. the end of the relevant accounting year, even though the Assessee has already incurred liability of excise duty of Rs.12.27 crores? Facts relevant to Question (i) 4. The Assessee is engaged in the manufacture of automobiles, chargeable to excise duty under the Central Excise Act, 1994 („CE Act‟). In terms of the Central Excise Rules („CE Rules‟), the Assessee was required to deposit, from time to time, the amounts representing excise duty payable on the automobiles manufactured by it in its Central Excise Personal Ledger Account („PLA‟). This PLA is debited by the excise authorities with the amounts of excise duty payable at the time of clearance of the manufactured automobiles from the Appellant‟s factory. 5. As of 31[st] March 1999, which was the last day of the accounting year relevant to the AY in question, a sum of Rs. 3,27,83,128 stood as balance in the PLA of the Appellant for vehicles. This amount has yet to be appropriated towards excise duty payable by the Assessee. According to the Assessee, as of this date, i.e. 31[st] March 1999, the excise duty liability already incurred in respect of the automobiles that stood manufactured and were lying in stock, came to an amount which was more than Rs. 12 crores. The Assessee thus claimed that the duty liability drawn was therefore nearly four times as much as the said balance remaining in the PLA. 6. The Assessee claimed that as per the figures in its balance sheet, the exact amount of excise duty liability already incurred by it as on 31[st] March 1999 worked out to Rs. 12.27 crores. The Assessee has placed on record that the value of the vehicles already manufactured by it as on 31[st] March 1999 was Rs. 60.31 crores which formed part of the executing stock and on which the excise duty was nearly Rs. 12.31 crores. Assessment order and subsequent appeals 7. The Assessing Officer („AO‟), in the undated assessment order received by the Assessee on 2[nd] April 2002, disallowed the above balance in the PLA as deduction on the ground that the Assessee had not enhanced its profit by the said amount and that the said amount would be allowed as deduction only if it had been debited to the profit and loss account („P&L Account‟). Assessment order and subsequent appeals 7. The Assessing Officer („AO‟), in the undated assessment order received by the Assessee on 2[nd] April 2002, disallowed the above balance in the PLA as deduction on the ground that the Assessee had not enhanced its profit by the said amount and that the said amount would be allowed as deduction only if it had been debited to the profit and loss account („P&L Account‟). 8. The Assessee took up the matter in appeal before the Commissioner of Income Tax (Appeals) [„CIT (A)‟]. In the order dated 12[th]/13[th] March 2003, dismissing the appeal on this issue, the CIT (A) held that Section 43B of the Act would apply in regard to a deduction which was otherwise allowable under the Act. It was held that in the present case, since the goods were still to be manufactured “there was no question of any liability on account of excise dues”. It was further observed that the amount in PLA balance was not an expense since the goods were to be still manufactured and Section 43B “cannot convert a pure and simple advance into an item of expenditure”. 9. The Assessee then carried the matter in appeal before the ITAT. In the impugned order dated 11[th] October 2004, the ITAT held that “advance payment of excise duty without incurring the liability in respect of such payment is not allowable as deduction under Section 43B.” Section 43B of the Income Tax Act 10. The case of the Assessee is that the aforementioned sum standing as credit balance as on 31[st] March 1999 should be considered to be the payment of excise duty within the meaning of Section 43B of the Act and therefore, liable as deduction. 11. In light of this, it would be appropriate to consider the substance of Section 43B of the Act which reads as under: “43B. Certain deduction 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 (b) any sum payable by the Assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in clause (ii) of sub-Section (1) of Section 36, or (d) any sum payable by the Assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (e) any sum payable by the Assessee as interest on any term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan 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: Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) or clause (e) which is actually paid by the Assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the Assessee along with such return: Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date. Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date. Explanation 1-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1[st] day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 2-For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the Assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law. Explanation 3 - For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1[st] day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 3A -For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1[st] day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. Explanation 4-For the purposes of this section,- (a) "public financial institutions" shall have the meaning assigned to it in Section 4A of the Companies Act, 1956 (1 of 1956); (aa) "scheduled bank" shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of Section 11 (b) "State Financial Corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (c) "State Industrial Investment Corporation" means a Government company within the meaning of section 617 of the Companies Act, ITA No.31/2005 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of Section 36.” 12. Circular No.550 was issued by the Central Board of Direct Taxes (CBDT) clarifying the background position to the introduction of the Explanation 2 to Section 43B of the Act. The said Circular reads thus: “Amendment of Provisions Relating to Certain Deductions to be allowed only on Actual Payment (c) "State Industrial Investment Corporation" means a Government company within the meaning of section 617 of the Companies Act, ITA No.31/2005 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of Section 36.” 12. Circular No.550 was issued by the Central Board of Direct Taxes (CBDT) clarifying the background position to the introduction of the Explanation 2 to Section 43B of the Act. The said Circular reads thus: “Amendment of Provisions Relating to Certain Deductions to be allowed only on Actual Payment 15.1 Under the existing provisions of section 43B of the Income-tax Act, a deduction for any sum payable by way of tax, duty, cess or fee, etc., is allowed on actual payment basis only. The objective behind these provisions is to provide for a tax disincentive by denying deduction in respect of a "statutory liability" which is not paid in time. The Finance Act, 1987, inserted a proviso to Section 43B to provide that any sum payable by way of tax or duty, etc., liability for which was incurred in the previous year will be allowed as a deduction, if it is actually paid by the due date of furnishing the return under section 139(1) of the Income-tax Act, in respect of the Assessment Year to which the aforesaid previous year relates. This proviso was introduced to remove the hardship caused certain taxpayers who had represented that since the sales tax for the last quarter cannot be paid within the previous year, the original provisions of section 438 will unnecessarily involve disallowance of the payment for the last quarter. 15.2 Certain courts have interpreted the provisions of section 43B in a manner which may negate the very operation of this section. The interpretation given by these courts revolves around the use of the words "any sum payable” The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Thus, the sales tax in respect of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and, therefore, by way of inserting an Explanation it has been clarified that the words "any sum payable” , shall means any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable.” Assessee’s submissions on Question (i) 13. It was asserted by the Assessee before the ITAT that since the amount deposited by it in the PLA as on 31[st] March 1999 - which remained un-appropriated towards excise duty - was far less than the total amount of excise duty liability that had already been incurred in respect of automobiles manufactured by the Assessee which remained un-cleared from its factory, the entire balance in the PLA was allowable as a deduction under Section 43B of the Act having regard, in particular, to Explanation 2 to Section 43B. 14. Further, the Assessee, in its written submissions before the ITAT on this aspect, stated as under: “In any case, without prejudice to the foregoing, even if the contention of the learned counsel for the Revenue is accepted, then also it is submitted that the entire balance in the PLA of Rs.3.34 crores ought to be allowed, as the Assessee had on 31[st] March, 1999, manufactured motor vehicles of value of Rs.60.31 crores (page 63/A) which motor vehicles were held as part of the dosing stock, and on which liability for excise duty to the tune of Rs.12.31 crores approximately, had accrued. Thus even as per the position of law put forth by the learned counsel for the Revenue, the entire PLA balances of Rs.3.34 crores represented duty paid for which liability had been incurred (manufacture having taken place) and as such the same was allowable u/s 43B of the Act.” “In any case, without prejudice to the foregoing, even if the contention of the learned counsel for the Revenue is accepted, then also it is submitted that the entire balance in the PLA of Rs.3.34 crores ought to be allowed, as the Assessee had on 31[st] March, 1999, manufactured motor vehicles of value of Rs.60.31 crores (page 63/A) which motor vehicles were held as part of the dosing stock, and on which liability for excise duty to the tune of Rs.12.31 crores approximately, had accrued. Thus even as per the position of law put forth by the learned counsel for the Revenue, the entire PLA balances of Rs.3.34 crores represented duty paid for which liability had been incurred (manufacture having taken place) and as such the same was allowable u/s 43B of the Act.” 15. It is stated that the Assessee has also filed before the ITAT a copy of the tax audit report for the year ending 31[st] March 1999. It showed that the total amount of excise duty for which liability had been incurred as on ITA No.31/2005 31[st ]March 1999 but which had not been paid as on that date, worked out to Rs. 12,27,93,785 which was paid subsequently on or before 19[th] May 1999. The Assessee’s own case for AYs 1995-96 & 1996-97 16. The question framed also arose in the Assessee‟s own case for the AYs 1995-96 and 1996-97 before this Court in Commissioner of Income Tax v. Maruti Suzuki India Limited (2013) 255 CTR 140 (Del).One of the questions addressed by this Court in the said appeal was: “Did the Tribunal fall into error in holding that the amounts deposited by the Assessee/Respondent in the Excise Personal Ledger Account (PLA) could not be disallowed under Section 43-B of the Income Tax Act?” 17. After referring to the decisions in CIT v. C.L. Gupta (2003) 259 ITR 513 (All);CIT v. Modipon Ltd. (2011) 334 ITR 106 (Del) and Paharpur Cooling Towers Ltd. v. CIT (2011) 244 CTR (Cal) 502, this Court concluded as under: “13. A plain reading of Section 43-B clarifies that, (a)The deduction claimed by the Assessee must be “otherwise” allowable under the other provisions of the Act. allowable under the other provisions of the Act. (b)The deduction must relate to any sum payable by way of tax, duty, cess or fee. cess or fee. (c)The Assessee must have incurred liability in respect of such tax, duty, etc. duty, etc. On fulfilling these conditions, the Assessee‟s claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term “liability to pay such sum was incurred by the Assessee”, together with the words “a sum for which the Assessee incurred liability” in Explanation 2, underline that payment must relate to the incurred liability to be called „any sum payable‟. 14. In the present case, the Assessee had no option but to keep the account in respect of each excisable product (evident from the mandate in Rule 173G that it “shall keep and account current”). The latter part of the main rule makes it clear beyond any doubt that the Assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit: “...and the Assessee shall periodically made 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 duly due on the goods intended to be removed at any time, and every such Assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods”account-current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such Assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods” “...and the Assessee shall periodically made 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 duly due on the goods intended to be removed at any time, and every such Assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods”account-current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such Assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods” The revenue‟s contention that the amounts in credit also relate to goods not manufactured, and therefore not relatable to any “liability incurred” is, in the opinion of this Court, without any basis. The –arrangement prescribed by the rule is both a collection mechanism dictated by convenience, as well as mandatory. It is convenient, for the reason that if the Assessee were to be asked to pay the exact amount, through some other method, by deposit, as a precondition for clearance, that would have been cumbersome to it as well as the revenue; it would also have led to problems of storage of goods, and slow down their supply and distribution. The Rule makers pragmatically directed that “sufficient” amounts ought to be maintained in the account, to cover the removals. Therefore, at any given point of time, there had to be an excess in the account, if the Assessee were to remove the goods. Each clearance mentions the quantum of goods, and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day‟s clearances. The point to be underlined is that there is no choice, and the amounts relate to the Assessee‟s duty liability, falling within the description under Section 43-B. The consequence of not allowing the amounts as deductions, are vividly brought out in the decision of the Allahabad High Court in C.L. Gupta & Sons (supra), where it was held that: where it was held that: “10. In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the Assessee in March, 1987, and therefore, in terms of Section 43B it is deductible only in the year in which it is actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the Assessee incurred the liability on the basis of the method of accounting regularly adopted by him and, therefore, in view of the clear provisions of law, the deduction cannot be allowed in the assessment year 1988-89. In our view, both the learned Income Tax Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) fell in error in holding that since the Assessee-firm debited the cost of goods imported including the duty paid on delivery of goods in the trading account in April, 1987, and before the actual deliver of the goods, the value of the goods and customs duty paid thereon was shown in the balance-sheet as document in hands, therefore, the deduction should be allowed in the assessment year 1988-89, is contrary to the prescription of law. Section 43B in clear terms provides that the deduction claimed by the Assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the Assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the Assessee incurred the liability to pay such tax, duty, etc. has no relevance and cannot be linked with the matter of giving benefit of deduction under Section 43B of the Act. In this view of the matter, the appeal deserves to be allowed.” 18. The ITAT has, in the impugned order, opted not to follow the decision of C.L. Gupta (supra) which was affirmed by this Court in the Assessee‟s own case for AYs 1995-96 and 1996-97. Furthermore, the decision in Modipon(supra) has been upheld by the Supreme Court in its decision dated 24[th] November 2017 in C.A. No.19763 of 2017 arising out of S.L.P.(C) No.29816 of 2011. Decision on Question (i) 19. The Court is of the view that the above decision of this Court in the Assessee‟s own case for AYs 1995-96 and 1996-97 covers the issue in favour of the Assessee. 20. For all the aforementioned reasons, Question (i) is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. Question (ii) 21. Question (ii) reads as under: “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 unutilized by 31[st]March 1999, i.e., the end of the relevant accounting year?” Facts pertaining to Question (ii) 22. The Assessee purchased raw materials and inputs that went into the manufacture of automobiles. The purchase price paid by the Assessee for raw material/inputs included excise duty. To the extent that such excise duty had been paid as part of the purchase price, the Assessee was entitled to MODVAT credit in terms of Rule 57A of the CE Rules. The excise duty paid by the Assessee was kept in a separate account, maintained as the RG-23 register. Question (ii) 21. Question (ii) reads as under: “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 unutilized by 31[st]March 1999, i.e., the end of the relevant accounting year?” Facts pertaining to Question (ii) 22. The Assessee purchased raw materials and inputs that went into the manufacture of automobiles. The purchase price paid by the Assessee for raw material/inputs included excise duty. To the extent that such excise duty had been paid as part of the purchase price, the Assessee was entitled to MODVAT credit in terms of Rule 57A of the CE Rules. The excise duty paid by the Assessee was kept in a separate account, maintained as the RG-23 register. 23. The Assessee could utilize this separate account/credit for payment of excise duty at the time of clearance of the automobiles manufactured by it from its factory. Illustratively, if the Assessee purchased steel, which is the raw material for the manufacture of automobiles, worth Rs. 100 and pays Rs. 10 as excise duty, which is reflected in the invoices raised by the steel manufacturer on the Assessee, it could utilize the said Rs. 10 towards payment of excise duty on the car manufactured at the time of clearance of such car from the factory gate. Therefore, if the car is worth Rs. 200 and excise duty is payable at the rate of 10% thereon, at the time of clearance of such car from the factory gate, the Assessee can utilize MODVAT credit of Rs. 10 towards part payment of Rs. 20 custom duty while making direct payment of the remaining amount. 24. The controversy that arose was that as of 31[st] March 1999, the unutilized MODVAT credit stood, in the Assessee‟s books of accounts, at Rs. 69,93,00,428. This amount, having been paid by the Assessee on the raw material/input as excise duty, was not shown as expenditure and therefore, was not reflected in its P&L account. Instead, it was shown as a current asset in the balance sheet. Assessee’s submissions on Question (ii) 25. The case of the Assessee is that although the said amount is shown as unutilized MODVAT credit, it has been paid by the Assessee and should therefore be allowable as a deduction in terms of Section 43B of the Act. Mr. Ganesh, learned Senior Counsel for the Assessee, referred to Rule 57A to Rule 57I of the CE Rules and submitted that the liability to pay excise ITA No.31/2005 Page 13 of 41 duty, although primarily on the manufacturer of the raw material, is passed on to the purchaser (in this case, the Assessee) and therefore, becomes the liability of the Assessee at the time of clearance of the raw material. He also referred to clause (e) of the first proviso to Section 11B (2) which envisages the refund of the excise duty being made not to the manufacturer but to the buyer to whom the duty may be passed on. 26. Mr. Ganesh also referred to the Accounting Standards-2 („AS-2‟) issued by the Institute of Chartered Accountants of India („ICAI‟) with regards to the treatment of cost of purchase as well as the Guidance Note issued by the ICAI on Accounting Treatment for MODVAT/CENVAT. He submits that notwithstanding that the MODVAT credit may be shown as a „current asset‟ in the balance sheet and not taken in the P&L account as „expenditure‟, it would still be allowable as a deduction as long as the parameters of Section 43B of the Act are satisfied. He emphasized that the said amount constitutes excise duty paid by the Assessee “under any law for the time being in force” namely, the CE Act. 26. Mr. Ganesh also referred to the Accounting Standards-2 („AS-2‟) issued by the Institute of Chartered Accountants of India („ICAI‟) with regards to the treatment of cost of purchase as well as the Guidance Note issued by the ICAI on Accounting Treatment for MODVAT/CENVAT. He submits that notwithstanding that the MODVAT credit may be shown as a „current asset‟ in the balance sheet and not taken in the P&L account as „expenditure‟, it would still be allowable as a deduction as long as the parameters of Section 43B of the Act are satisfied. He emphasized that the said amount constitutes excise duty paid by the Assessee “under any law for the time being in force” namely, the CE Act. 27. Mr. Ganesh submitted that there could be a situation where an advance is paid to the manufacturer of the raw material by the Assessee which may have an excise duty component. However, till such time as there is a completed transaction of purchase, the liability does not arise. To that extent, deductions would be allowed under Section 43B of the Act only where it is a completed transaction, when it can be said that the advance no longer remains an advance but, in fact, constitutes payment for the completed transaction of purchase of the raw material. Till such time, the amount paid towards excise duty on the purchases would be shown as an „advance‟ and not as a „current asset‟. 28. Mr. Ganesh submitted that for the purposes of Section 43B of the Act, the utilization of the MODVAT credit amounts to payment of excise duty as was emphasized by the Supreme Court in Eicher Motors Limited v. Union of India (1999) 2 SCC 361. He also relied upon the decision of the Supreme Court in Collector of Central Excise, Pune v. Dai Ichi Karkaria Limited (1999) 7 SCC 448. On the question of valuation of closing stock being inclusive of excise duty paid thereon, Mr. Ganesh submitted that this would make no difference to the liability of deduction of the excise duty paid under Section 43B of the Act. 29. Mr. Ganesh also relied upon the decision of the Supreme Court in Berger Paints India Limited v. Commissioner of Income Tax [2004] 266 ITR 99 (SC). He submitted that the ITAT erred in holding that the deduction would be allowed on the balance in the MODVAT credit account only at the time of utilization of such credit for payment of excise duty, i.e. at the time of clearance of cars manufactured by the Assessee from the factory gate. Revenue’s submissions on Question (ii) 30. Mr. Ruchir Bhatia, learned senior standing counsel appearing for the Revenue, on the other hand, submitted that it was not in dispute that the Assessee was entitled to the claim of duty paid by it to the manufacturer of the raw materials/inputs under Rule 57A to Rule 57I of the CE Rules. It is also not in dispute that the Assessee was entitled to utilize MODVAT Credit towards payment of excise duty leviable on the final products manufactured ITA No.31/2005 Page 15 of 41 by it. Mr. Bhatia further submitted that the liability under the CE Act to pay excise duty is only on the manufacturer of the excisable goods. While the Assessee may be the person who pays the excise duty, the liability is that of the manufacturer. The Assessee is merely required to pay excise duty on the value of raw material/inputs. This does not ipso facto mean that the Assessee is the one who is liable to pay excise duty on such raw material/inputs. It is merely the incidence of excise duty that has shifted from the manufacturer to the purchaser and not the liability to pay the same. ITA No.31/2005 Page 15 of 41 by it. Mr. Bhatia further submitted that the liability under the CE Act to pay excise duty is only on the manufacturer of the excisable goods. While the Assessee may be the person who pays the excise duty, the liability is that of the manufacturer. The Assessee is merely required to pay excise duty on the value of raw material/inputs. This does not ipso facto mean that the Assessee is the one who is liable to pay excise duty on such raw material/inputs. It is merely the incidence of excise duty that has shifted from the manufacturer to the purchaser and not the liability to pay the same. 31. Mr. Bhatia submitted that the decision in Dai Ichi Karkaria (supra) does not lay down that the purchaser of the raw material/inputs is the person liable to pay excise duty for the purpose of Section 43B of the Act. Mr. Bhatia pointed out that on payment of excise duty to the supplier of raw material, the Assessee has two options. The first is to treat the excise duty as a part of the cost of the raw material and debit the entire amount to the purchases account and claim it as expenditure. In such a scenario, the Assessee does not claim excise duty paid by it to the raw material supplier as MODVAT credit. The second option is to avail MODVAT credit on the raw material. In terms of Guidance Note 25 issued by the ICAI, the MODVAT credit is shown on the assets side as „current assets‟. Once the Assessee is liable to pay the excise duty on goods manufactured/removed by it, the excise duty payable is shown as a „statutory liability‟ under the head „current liabilities‟ in the books of accounts. Thereafter, unutilized MODVAT credit under the head „current assets‟ is set off against this liability of excise duty payable. According to him, both options are mutually exclusive. If the excise duty paid is taken to the P&L account as expenditure ITA No.31/2005 there can be no claim by the Assessee as to MODVAT credit. The amount cannot, in accounting principles, be debited simultaneously to two different accounts, i.e. assets as well as expenditure. Mr. Bhatia relied on the decision of this Court in Oswal Agro Mills Limited v. Commissioner of Income Tax [2014] 363 ITR 486 (Del) which according to him answered the question squarely against the Assessee. He also referred to the decisions in Commissioner of Central Excise v. Nish Fibres 2010 (257) ELT 81 (Guj) and CCE v. Suprajit Engineering Limited 2010 (253) ELT 369 (Kar). Mr. Bhatia submitted that if Section 43B is read as a whole, it is plain that the deduction would be allowable only for that previous year in which the payment of excise duty is paid on the final product by utilising the MODVAT credit. Analysis and reasons 32. An analysis of Section 43B of the Act reveals that for the deduction thereunder to be allowed, the following conditions are required to be satisfied: (a) there should be an actual payment of excise duty whether “by way of ””tax, duty, cess or fee, by whatever name; (b)such payment has to be “under any law for the time being in force” (c) the payment of such sum should have been made by the Assessee; (d)irrespective of the method of accounting regularly employed by the Assessee, deduction shall be allowed while computing the income tax for the previous year “in which sum is actually paid” by the Assessee; Assessee, deduction shall be allowed while computing the income tax for the previous year “in which sum is actually paid” by the Assessee; (e) the expression „any such sum payable‟ refers to a sum for which the Assessee “incurred liability in the previous year even though such Assessee “incurred liability in the previous year even though such ITA No.31/2005 sum might not have been payable within that year under the relevant law. (b)such payment has to be “under any law for the time being in force” (c) the payment of such sum should have been made by the Assessee; (d)irrespective of the method of accounting regularly employed by the Assessee, deduction shall be allowed while computing the income tax for the previous year “in which sum is actually paid” by the Assessee; Assessee, deduction shall be allowed while computing the income tax for the previous year “in which sum is actually paid” by the Assessee; (e) the expression „any such sum payable‟ refers to a sum for which the Assessee “incurred liability in the previous year even though such Assessee “incurred liability in the previous year even though such ITA No.31/2005 sum might not have been payable within that year under the relevant law. 33. There are two kinds of payment envisaged by Section 43B of the Act. Tax payable could be in the form of excise duty on the raw material/inputs purchased by the manufacturer. The second kind of payment could be of excise duty that is payable by manufacturer on the final product at the time of clearance of such final products from the factory. 34. In Eicher Motors (supra), a challenge was raised to the validity of Rule 57F (4A) of the CE Rules under which credit which was lying unutilised as of 16[th] March 1995 with the manufacturers stood lapsed in the manner set out therein. The Supreme Court upheld the challenge by the manufacturers to the aforementioned Rule 57F (4A) of the CE Rules on the ground that under the MODVAT scheme as it existed on the date of change, i.e. 16[th]March 1995, MODVAT credit lying in the balance with the Assessee represented “a vested right accrued or acquired by the Assessee under the existing law”. It was observed as under: “5............when on the strength of the Rules available, certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that the right, which had accrued to a party such as the availability of a scheme, is affected and, in particular, it loses sight of the fact that the provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the Assessee concerned.” 35. It was further explained that the MODVAT credit is “a right accrued to ITA No.31/2005 the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed.” 36. In Dai Ichi Karkaria (supra), the question that arose for consideration was whether the cost of the raw material was the price paid by the manufacturer to its seller, as contended by the Revenue, or is it the price of raw material minus the excise duty thereon which has been paid by the seller and for which the manufacturer is entitled to credit under the MODVAT scheme to be utilized against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer. The Supreme Court analysed the entire MODVAT scheme, in particular Rules 57A to 57I, and observed as under: 36. In Dai Ichi Karkaria (supra), the question that arose for consideration was whether the cost of the raw material was the price paid by the manufacturer to its seller, as contended by the Revenue, or is it the price of raw material minus the excise duty thereon which has been paid by the seller and for which the manufacturer is entitled to credit under the MODVAT scheme to be utilized against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer. The Supreme Court analysed the entire MODVAT scheme, in particular Rules 57A to 57I, and observed as under: “18. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available. 19. It is, therefore, that in the case of Eicher Motors Ltd. vs. Union of India (1999) 2 SCC 361this Court said that a credit under the MODVAT scheme was as good as tax paid.” 37. Now turning to the treatment of the said payment of excise duty which has any MODVAT credit in the books of accounts, a reference may be made first to the AS-2 issued by the ICAI, para 7 of which reads as under: “Costs of Purchase 7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.” 38. The ICAI has also issued a Guidance Note for treatment of MODVAT/CENVAT. Paras 16 and 18 of the Guidance Note reads thus: “16. Specified duty paid on inputs may be debited to a separate account, e.g. MODVAT/CENVAT Credit Receivable (inputs) Account. As and when MODVAT/CENVAT credit is actually utilized against payment of excise duty on final products, appropriate accounting entries will be required to adjust the excise duty paid out of MODVAT/CENVAT Credit Receivable (inputs) Account to the account maintained for payment / provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of the specified duty on inputs. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of the specified duty on inputs. The debit balance in MODVAT/ CENVAT Credit Receivable (Inputs) should be shown on the assets side under the head „advances‟.xxx 18. A question may arise as to when the „MODVAT/CENVAT‟ credit should be taken if documents evidencing payment of specified duty on inputs are received later than the physical receipt of the goods. ITA No.31/2005 According to the accrual concept of accounting, one may account for such credit, provided one is reasonably certain of getting the said documents at a later date.” 18. A question may arise as to when the „MODVAT/CENVAT‟ credit should be taken if documents evidencing payment of specified duty on inputs are received later than the physical receipt of the goods. ITA No.31/2005 According to the accrual concept of accounting, one may account for such credit, provided one is reasonably certain of getting the said documents at a later date.” 39. The above Guidance Note answers both issues raised by the Revenue. One is that it clarified that MODVAT Credit is treated as a separate account where appropriate accounting entries will be made to adjust the excise duty paid out of the said account. It is clear that the debit balance in MODVAT/CENVAT Credit Receivable (Inputs) has to be shown on the assets side, under the head „advances‟. According to the accrual concept of accounting (mercantile system), credit is taken even after the documents evidencing payment of specific duty on inputs are received later than the physical receipt of the goods. 40. Mr. Bhatia is right in pointing out that the Assessee has two options. One, to claim excise duty paid as explained, and the other, to claim it under MODVAT credit for utilization at a subsequent point in time. It is plain that the Assessee in the present case has not exercised the first option. 41.1 The Court now turns to the decision in Oswal Agro Mills (supra). The facts, in brief, in the above decision were that the Appellant therein was engaged in the manufacture and trade of products like de-oiled meals, industrial hard oil, edible oils etc. The Assessee entered into agreements with other entities for the purchase of imported palm stearin fatty acid („imported material‟) from the said importers. In terms of the said agreement, the imported material was to be purchased by the Appellant at landed cost, i.e. CIF price, customs duty, clearing charges, etc. and 3% of ITA No.31/2005 the total cost. Under Clause 11 of the agreements, any liability arising after the sale of the imported material in respect of customs duty, excise duty, penalty, sales tax, etc. would be paid by the appellant and included in the landed cost of imported material. 41.2 At the time of actual import of material, the Customs Department demanded 100% of the applicable customs duty as additional customs duty on the CIF value of the imported material. The additional demand was challenged by the importers before the Supreme Court. As an interim measure, the Supreme Court allowed t