Case Note & Summary
The appeal before the Bombay High Court arose from Assessment Year 1988-89. The appellant assessee, a company formerly known as E. Merck (India) Ltd., had claimed a deduction of Rs.7,06,590 under Section 43B of the Income Tax Act, 1961. The amount represented sales tax set-off, being the part of purchase tax paid on raw materials and packing materials that the assessee was entitled to retain because the materials were consumed in manufacturing finished goods which were again liable to sales tax. The assessee contended that the entitlement to set-off created a legal fiction that the amount be treated as paid tax liability deductible under Section 43B. The Assessing Officer disallowed the claim by order dated 21 February 1991. The Commissioner of Income Tax (Appeals) upheld the disallowance on 8 July 1992. The Income Tax Appellate Tribunal dismissed the issue as not pressed on 1 January 2002, and a miscellaneous application was rejected on 7 November 2002 without a hearing. On 7 October 2004, the High Court admitted the appeal and framed two substantial questions of law: first, whether the Tribunal's conclusion that the appellant had not pressed the ground relating to disallowance was correct; second, whether the claim for sales tax set-off of Rs.7,06,590 was rightly disallowed under Section 43B. The Revenue argued that the amount was never actually paid but was retained by the assessee, and that only actual payment satisfied Section 43B. The Revenue also submitted that since the point was not pressed before the Tribunal, the court should not consider the second question. The court noted that the first question was framed knowing the Revenue's stand, and therefore proceeded to answer the second question on merits. The court examined Section 43B, which allows deduction for any sum payable by way of tax, duty, cess or fee only in the previous year in which such sum is actually paid. The court held that the amount of Rs.7,06,590, which was a liability due to be paid but had been adjusted by way of set-off, was a deemed payment amounting to actual payment within the meaning of Section 43B. Since the law permitted the assessee to set off or adjust the sales tax already paid on raw materials against the sales tax collected on finished goods, the assessee had effectively been reimbursed to that extent. The court relied on Rule 41D read with Rule 45(3) of the Bombay Sales Tax Rules and Sections 199 and 245 of the Income Tax Act as parallel provisions creating a legal fiction. It followed the Calcutta High Court decision in Commissioner of Income Tax v. National Standard Duncan Ltd., (2003) 260 ITR 97 (Cal), which held that such adjustment, by legal fiction, is deemed to be actual payment of tax liability and deductible under Section 43B. The court concluded that the disallowance for sales tax set-off of Rs.7,06,590 for Assessment Year 1988-89 was not correct. Question no.2 was answered in favour of the assessee. The appeal was disposed of with no order as to costs.
Headnote
A) Income Tax - Deductions Under Section 43B - Expression 'Actually Paid' Includes Adjusted or Set-Off Amounts - Income Tax Act, 1961, Section 43B - The appellant claimed deduction for sales tax set-off of Rs.7,06,590 representing purchase tax paid on raw materials and packing materials, which was allowed to be retained by way of set-off against output sales tax on finished goods. The Court held that the amount adjusted by way of sales tax set-off was a deemed payment by legal fiction and constituted actual payment within the meaning of Section 43B, relying on Rule 41D and Rule 45(3) of the Bombay Sales Tax Rules and the parallel provisions of Sections 199 and 245 of the Income Tax Act, 1961. Held that the disallowance was incorrect and the claim was deductible under Section 43B (Paras 5-7). B) Income Tax - Appeals - Substantial Question of Law - Income Tax Act, 1961, Section 216 - The Tribunal concluded that the appellant had not pressed the ground relating to the disallowance before it. The High Court, while admitting the appeal, framed two substantial questions of law, including whether the Tribunal's conclusion on non-pressing was correct. The Court observed that it was aware of the Revenue's stand at the time of admission and, since it had framed the second question on merits, proceeded to answer it at final hearing. Held that the second question was to be answered on merits (Paras 3-4).
Issue of Consideration
Whether the expression 'actually paid by him' in Section 43B of the Income Tax Act, 1961 includes amount set off or adjusted; Whether the Tribunal was correct in holding that the appellant had not pressed the ground relating to disallowance of sales tax set off; Whether the claim for sales tax set off was rightly disallowed under Section 43B of the Act
Final Decision
Appeal disposed in favour of the appellant; disallowance of sales tax set off Rs.7,06,590 under Section 43B for Assessment Year 1988-89 held incorrect; question no.2 answered in favour of appellant; no order as to costs.
Law Points
- Expression 'actually paid' in Section 43B includes amount set off or adjusted
- Set-off or adjustment of sales tax liability amounts to deemed payment by legal fiction
- Deduction under Section 43B allowed on deemed payment
- Sales tax set-off on raw materials against output sales tax constitutes actual payment
- Legal fiction treats adjusted liability as actual payment
