The adjustment made by the assessee is deemed to be actual payment of tax liability: Bombay High Court

20.ITXA 208 03.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 208 OF 2003 formerly known as E. MerckLtd Shiv Sagar Estate “A” Dr. Annie Besant Road Worli Mumbai 400 018 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 Ms Arati Vissanji a w Mr. S. J. Mehta for Appellant Mr. Suresh Kumar for Respondents CORAM : K.R. SHRIRAM M.S.KARNIK JJ DATED : 16th SEPTEMBER 2021 ORAL JUDGMENTby an order dated 8th July 1992 upheld the disallowance of Rs.7 06 590 by the Assessing Officer. Petitioner challenged the order of CIT(A) before ITAT. ITAT dismissed this issue in its order dated 1st January 2002 as not pressed for. Petitioner filed a miscellaneous application relating to this disallowance of Rs.7 06 590 under Section 43B of the Act which also came to be rejected by ITAT vide its order dated 7th November 2002 without The fact that appellant was entitled to a set off or adjustment made on the sales tax amount is not disputed. According to Mr. Suresh Kumar 20.ITXA 208 03.doc this amount of Rs.7 06 590 was never paid but was retained by appellant and even if any adjustment or set off is claimed there was no actual payment and unless there is actual payment Section 43B of the Act does not come 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 has been set off or adjusted By an order dated 7th October 2004 this court was pleased to admit the 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 conclusion of the Tribunal that the appellant had not pressed the ground relating to the disallownce of the sales tax set off Rs.7 06 590 under Section 43B for the assessment year 1988 89 is correct 2. Whether on the facts and circumstances of the case and in law the claim for sales tax set off of Rs.7 06 590 for the assessment year 1988 89 has been rightly disallowed under Section 43B of the Act ” As regards the first question Mr. Suresh Kumar submitted that since this point was not pressed for by appellant before the Tribunal the court should not even consider the second question. We are at final hearing stage In question no.1 the court has recorded whether the conclusion of the Tribunal that appellant had not pressed the ground relating to the dis allowance under Section 43B of the Income Tax Actis correct Therefore the court was aware that it was respondents’ case that it was not pressed for. Notwithstanding that the court 20.ITXA 208 03.doc still framed question no.2. Therefore we are inclined to answer question Section 43B reads as under “43B: 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 allowedonly in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him Section 43B of the Act therefore provides for deduction notwithstanding anything contained in any other provision of the Act in respect 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 actually paid. As noted earlier the amount of Rs.7 06 590 has been set off because appellant was entitled to set off this amount. In our view the amount of Rs.7 06 590 which has since been liability due to be paid having been adjusted is a deemed payment amounting to actual payment within the meaning of Section 43B of the Act. Since the law permits appellant to set off or adjust the sales tax already paid at the time of purchase of raw 20.ITXA 208 03.doc 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 and claimed a set off. In fact to the extent of the sales tax paid on the raw materials the assessee has actually been reimbursed to that extent by the sales tax collected at the sale of the finished product. Therefore it is presumed to be a deemed payment within the time to be included in the relevant assessment. Since the assessee was entitled to adjustment or set off the amount of Rs.7 06 590 is a liability adjusted deeming actual payment by legal fiction. This adjustment by legal fiction is deemed to be an actual payment 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 Commissioner of Income Tax Vs. National Standard Duncan Ltd.1 where the court held as under Section 43B of the 1961 Act provides for deduction notwithstanding anything contained in any other provision of the Act in respect ofof the Bombay Sales Tax Rules. Therefore it is to be presumed to be a deemed payment within the time to be included in the relevant assessment. The allowance is allowed in respect of the sales tax payable by the assessee which is qualified by the Explanation to Section 43B of the Income tax Act to mean to have been actually paid or incurred. That the liability was incurred is not in dispute. In this case it has not been actually paid but was sought to 1.260 ITR 97 (CAL 20.ITXA 208 03.doc be adjusted or set off against payment of sales tax by the assessee on its purchase of raw material used for the product against which the sales tax has since been collected by the assessee on sale of the product concerned. Now it is to be seen whether the set off or adjustment amounts to deemed payment. In other words whether this deemed payment is a payment of the liability contemplated under Section 43B of the Income tax Act. Rule 41D of the Bombay Sales Tax Rules allowed incentive by way of exemption of sales tax to the extent of payment of sales 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 tax Act creating a legal fiction. Therefore this sum which is subject to adjustment or set off is a liability adjusted deeming actual payment by legal fiction. The Sales Tax Rules have allowed an incentive by way of adjustment of sales tax or in other words the liability is being adjusted as actual payment. Section 43B of the Income tax Act allows deduction on tax payable by the assessee. When the assessee purchases raw materials it is liable to pay purchase tax on the purchase. An equivalent of this amount is adjusted towards the liability on the sale of the product produced out of the raw materials purchased. This adjustment by legal fiction is deemed to be an actual payment of the tax liability. Admittedly this amount is a tax payable If it is a tax liability on being set off or adjusted deemed actual payment by legal fiction it is deductible under Section 43B of the Act Therefore in the facts and circumstances of the case the disallowance for sales tax set off of Rs.7 06 590 for Assessment Year 1988 89 was not correct. Question no.2 is answered accordingly Appeal disposed with no order as to costs M.S. KARNIK J K.R. SHRIRAM J

Summary: The assessee was entitled to an adjustment or set off the amount of Rs. 7,06,590 as a liability adjusted deeming actual payment by legal friction. Such adjustment was deemed to be actual payment of the tax liability and would be deductible under Section 43B of the Act as held by the Hon’ble Bombay High Court before the Hon’ble Mr. Justice K.R. Shriram and M.S. Karnik in the matters of Merch Ltd. v. Commissioner of Income Tax and Ors. [Income Tax Appeal No. 208 of 2003]. The case arises from the fact wherein the appellant had claimed a sum of Rs.7,06,590/- being sales tax set off as deduction under Section 43B of the Income Tax Act, 1961. The appellant sales tax set off represents that part of the purchase tax paid by appellant on purchase of raw materials and packing material, which is allowed to be retained by it as the materials purchased are consumed in the manufacture of finished goods which are again liable to sales tax. The amount is not payable to the sales tax authorities at the time of paying the sales tax on the sale of finished goods by the appellant. Appellant stated the facts that are entitled to claim the set off would mean that a legal fiction is created to the effect that this amount of Rs. 7,06,590/- be treated to been paid as a tax liability deductible under Section 43B of the Act. The petitioner preferred the appeal under Section 216 of the Act says any installment due before the expiry of six months from the commencement of the previous year in respect of which it is to be paid and shall be deemed to have become due fifteen days after the expiry of the said six months. The Corporate Income Tax upheld the disallowance of Rs.7,06,590/- by the Assessing Officer. Petitioner challenged the order of Corporate Income Tax before Income Tax Appellant Tribunal [ITAT] and dismissed at the same time. Petitioner filed a Miscellaneous Application for the disallowance of Rs. 7,06,590/- under Section 43B of the Act, which was also rejected without hearing. The appellant was entitled to set-off or adjustment made on the sales tax amount is not disputed. The amount Rs. 7,06,590/- was never paid but was retained by the appellant and even if any adjustment or set-off is claimed, there is no actual payment and unless there is actual payment, Section 43B of the Act does not come into play and therefore appellant cannot claim any benefit. The Tribunal concluded that Appellant had not pressed the grounds related to the disallowance under Section 43B of the Income Tax Act. Section 43B of the Act provides for deduction notwithstanding anything contained in any other provision of the Act in the respect of any sum payable by the assessee by way of tax, duty, cess or fee, or whatever name called, under any law for the time being in force. The amount Rs. 7,06,590/- has been liability due to be paid having been adjusted is deemed payable amounting to actual payment within the meaning of Section 43B of the Act. Since the law permits the appellant to set off or adjust the sales tax already paid at the time of purchase of raw material against the sales tax collected at the time of sale of finished goods, the assessee has retained the sales tax amount which has already been paid and claimed a set-off. In fact, to the extent of the sales tax paid on the raw materials, the assessee has actually been reimbursed to that extent by the sales tax collected at the sale of the finished product. Therefore, it is presumed to be a deemed payment within the time to be included in the relevant assessment. Since, the legislation left nothing unambiguous to express its intention that such deduction is allowed once, either on the actual payment or on the liability. It is presumed that the deemed payment within the time to be included in the relevant assessment. The allowance is allowed in respect of the sales tax payable by the assessee which is qualified by the explanation to section 43B of the Income Tax Act to mean to have been actually paid or incurred. The Appellant has not actually paid but sought to be adjusted or set off against payment of sales tax by the assessee on its purchase of raw material used for the product against which the sales tax has since been collected by the assessee on sale of the product concerned. The Hon’ble Court held that the disallowance for sales tax set off Rs. 7,06,590/- for the Assessment year is legally unsustainable. Hon’ble Mr. Justice K.R. Shriram and M.S.Karnik stated, “The Appeal disposed of with no order as to costs. The amount is tax payable.” It was further held that “Rule 41D of the Bombay Sales Tax Rules allows incentive by way of exemption of sales tax to the extent of payment of sales tax purchased by 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 Section 199 and 245 of the Income Tax Act creating legal friction.”