Worli, Mumbai 400 018 v. Dy. Commissioner Of

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO. 208 OF 2003 Merck Ltd.)formerly known as )E. Merck (India) Ltd.)Shiv Sagar Estate “A”)Dr. Annie Besant Road,)Worli, Mumbai 400 018)...AppellantVs.1. Dy. Commissioner of )Income Tax, Range-3)having its office at)Aayakar Bhavan, Maharshi)Karve Marg, Mumbai 400 020)2. Union Of India)through Ministry of Law)Aayakar Bhavan, Maharshi,)Karve Marg, Mumbai 400 020)...Respondents ...Respondents ---- Ms Arati Vissanji a/w Mr. S. J. Mehta for AppellantMr. Suresh Kumar for Respondents ---- CORAM : K.R. SHRIRAM &M.S.KARNIK, JJ. DATED : 16[th] SEPTEMBER 2021 ORAL JUDGMENT (PER K R. SHRIRAM J.): 1This pertains to Assessment Year 1988-89. Appellant had claimed asum of Rs.7,06,590/- being sales tax set off as deduction under Section 43Bof the Income Tax Act, 1961 (the Act). According to appellant, the sales taxset off represents that part of the purchase tax paid by appellant on purchase of raw materials and packing materials, which is allowed to beretained by it as the materials purchased are consumed in the manufactureof finished goods which are again liable to sales tax. This means that thesaid amount is not payable to the sales tax authorities at the time of payingthe sales tax on the sale of finished goods by appellant. According toappellant, the fact that they are entitled to claim the set off would mean thata legal fiction is created to the effect that this amount of Rs.7,06,590/- betreated to have been paid as a tax liability deductible under Section 43B ofthe Act. This was disallowed by the Assessing Officer by an order dated 21[st]February 1991. An appeal was preferred by petitioner under Section 216 of the Act.The CIT(A) by an order dated 8[th] July 1992 upheld the disallowance ofRs.7,06,590/- by the Assessing Officer. Petitioner challenged the order ofCIT(A) before ITAT. ITAT dismissed this issue in its order dated 1[st] January2002 as not pressed for. Petitioner filed a miscellaneous application relating to thisdisallowance of Rs.7,06,590/- under Section 43B of the Act, which alsocame to be rejected by ITAT vide its order dated 7[th] November 2002 withouta hearing. 2The fact that appellant was entitled to a set off or adjustment madeon the sales tax amount, is not disputed. According to Mr. Suresh Kumar, this amount of Rs.7,06,590/- was never paid but was retained by appellantand even if any adjustment or set off is claimed, there was no actualpayment and unless there is actual payment, Section 43B of the Act does notcome into play and, therefore, appellant cannot claim any benefit thereof. The only question to be decided therefore is, whether the expression“actually paid by him” in Section 43B also included the amount which hasbeen set off or adjusted? 3By an order dated 7[th] October 2004, this court was pleased to admitthe appeal as it was satisfied that the case involved a substantial question of law. The court was pleased to frame the following two questions of law: “1. Whether on the facts and circumstances of the case, the conclusionof the Tribunal that the appellant had not pressed the ground relatingto the disallownce of the sales tax set off Rs.7,06,590/- under Section43B for the assessment year 1988-89 is correct? 2. Whether on the facts and circumstances of the case and in law, theclaim for sales tax set off of Rs.7,06,590/- for the assessment year1988-89 has been rightly disallowed under Section 43B of the Act ?” 3By an order dated 7[th] October 2004, this court was pleased to admitthe appeal as it was satisfied that the case involved a substantial question of law. The court was pleased to frame the following two questions of law: “1. Whether on the facts and circumstances of the case, the conclusionof the Tribunal that the appellant had not pressed the ground relatingto the disallownce of the sales tax set off Rs.7,06,590/- under Section43B for the assessment year 1988-89 is correct? 2. Whether on the facts and circumstances of the case and in law, theclaim for sales tax set off of Rs.7,06,590/- for the assessment year1988-89 has been rightly disallowed under Section 43B of the Act ?” 4As regards the first question, Mr. Suresh Kumar submitted that sincethis point was not pressed for by appellant before the Tribunal, the courtshould not even consider the second question. We are at final hearing stage.In question no.1, the court has recorded whether the conclusion of theTribunal that appellant had not pressed the ground relating to the dis-allowance under Section 43B of the Income Tax Act (hereinafter referred toas the said Act), is correct? Therefore, the court was aware that it wasrespondents’ case that it was not pressed for. Notwithstanding that the court still framed question no.2. Therefore, we are inclined to answer question no.2. 5Section 43B reads as under: “43B:- Notwithstanding anything contained in any other provision ofthis 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, bywhatever name called, under any law for the time being in force or b) ………….c) ………….d) ………….da) ………….e) ………….f) ………….g) ………….shall be allowed (irrespective of the previous year in which the liabilityto pay such sum was incurred by the assessee according to the methodof accounting regularly employed by him) only in computing theincome referred to in section 28 of that previous year in which suchsum is actually paid by him.………….” 6Section 43B of the Act, therefore, provides for deductionnotwithstanding anything contained in any other provision of the Act inrespect of 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.According to respondents it shall be allowed provided the sum is actuallypaid. As noted earlier the amount of Rs.7,06,590/- has been set off becauseappellant was entitled to set off this amount. In our view, the amount ofRs.7,06,590/- which has since been liability due to be paid having beenadjusted, is a deemed payment amounting to actual payment within themeaning of Section 43B of the Act. Since the law permits appellant to setoff or adjust the sales tax already paid at the time of purchase of raw materials against the sales tax collected at the time of sale of finished goods,the assessee has retained the sales tax amount which has already paid andclaimed a set off. In fact to the extent of the sales tax paid on the rawmaterials, the assessee has actually been reimbursed to that extent by thesales tax collected at the sale of the finished product. Therefore, it ispresumed to be a deemed payment within the time to be included in therelevant assessment. Since the assessee was entitled to adjustment or set off,the amount of Rs.7,06,590/- is a liability adjusted deeming actual paymentby legal fiction. This adjustment, by legal fiction, is deemed to be an actualpayment of the tax liability and is deductible under Section 43B of the Act.We find support for this view in a judgment of the Calcutta High Court in 1 where the Commissioner of Income Tax Vs. National Standard Duncan Ltd.court held as under: 1 where the Commissioner of Income Tax Vs. National Standard Duncan Ltd.court held as under: Section 43B of the 1961 Act provides for deduction notwithstandinganything contained in any other provision of the Act in respect of (a)"any sum payable by the assessee by way of tax, duty, cess or fee, bywhatever name called, under any law for the time being in force, or . .." This section is qualified by one Explanation. The Explanationexplains that where deduction is allowed on the liability to pay in theassessment for the previous year when the liability was incurred, theassessee shall not be entitled to deduction in the assessment for theprevious year in which the amount is actually paid. The scheme of thesection makes it clear that the Legislature has left nothingunambiguous to express its intention that such deduction is allowedonce, either on the actual payment or on the liability, as the case maybe. “A part of the sales tax collected has since been paid. The balance hasbeen sought for being adjusted or being set off under Rule 41D readwith Rule 45(3) of the Bombay Sales Tax Rules. Therefore, it is to bepresumed to be a deemed payment within the time to be included inthe relevant assessment. The allowance is allowed in respect of thesales tax payable by the assessee, which is qualified by theExplanation to Section 43B of the Income-tax Act to mean to havebeen actually paid or incurred. That the liability was incurred is not indispute. In this case it has not been actually paid, but was sought to be adjusted or set off against payment of sales tax by the assessee onits purchase of raw material used for the product against which thesales tax has since been collected by the assessee on sale of theproduct concerned. Now it is to be seen whether the set off or adjustment amounts todeemed payment. In other words, whether this deemed payment is apayment of the liability contemplated under Section 43B of theIncome-tax Act. Rule 41D of the Bombay Sales Tax Rules allowedincentive by way of exemption of sales tax to the extent of payment ofsales tax on purchase of raw material used for the product. Rule 45(3)entitles the assessee to adjust or set off the amount in the return itself.It is a provision parallel to Sections 199 and 245 of the Income-taxAct creating a legal fiction. Therefore, this sum, which is subject toadjustment or set off, is a liability adjusted deeming actual paymentby legal fiction. The Sales Tax Rules have allowed an incentive by wayof adjustment of sales tax or in other words, the liability is beingadjusted as actual payment. Section 43B of the Income-tax Act allowsdeduction on tax payable by the assessee. When the assesseepurchases raw materials, it is liable to pay purchase tax on thepurchase. An equivalent of this amount is adjusted towards theliability on the sale of the product produced out of the raw materialspurchased. This adjustment, by legal fiction, is deemed to be an actualpayment of the tax liability. Admittedly, this amount is a tax payable.If it is a tax liability on being set off or adjusted, deemed actualpayment by legal fiction, it is deductible under Section 43B of the Act. 7Therefore, in the facts and circumstances of the case, the disallowancefor sales tax set off of Rs.7,06,590/- for Assessment Year 1988-89 was notcorrect. Question no.2 is answered accordingly. 8Appeal disposed with no order as to costs. (M.S. KARNIK, J.) (K.R. SHRIRAM, J.)