Subject : Arbitration

 
   Title :       Allowance of Certain Expenses on Actual Payments u/s 43B - A Reckoner
   Author : B.R. Dalal*  
   
 

B.R. Dalal*

A useful ready reckoner on section 43B, indicating what is considered to be paid, cases to which section is applicable and cases to which it is not applicable, etc. A useful tool for professionals. - Editor.

There is no specific provision for allowing taxes and duties paid on purchases, sales, stock-in-trade, etc. The same is allowable under residuary section 37 which allows deduction of expenses incurred wholly and exclusively for the purpose of business. Normally the expenses are allowable in the year of accrual of expenses if a mercantile system of accounting is followed by the assessee. There is one exception provided in section 43B of the IT Act. It was inserted w.e.f. 1-4-1984 to discourage taxpayers who did not discharge their statutory liability for long period but claim deduction on accrual basis.

It provides that notwithstanding what is provided in other provisions of the Act, a deduction otherwise allowable (IT, WT, capital expenses or personal expenses are not allowable) under the Act in respect of any sum payable (i.e., liability incurred, even though may not be payable in that year)

First proviso, omission of second proviso and Explanation 2 is held to be retrospective as they are curative in nature.

(a) as tax, duty, cess or fees under any law or

(b) contribution to Provident Fund (PF) or Super Annuation Fund (SF) or Fund for the welfare of the employee or

(c) bonus and commission payable to employee or

(d) interest on borrowings from Public Financial Institution (PFI) or State Financial Corporation (SFC) or State Industrial Investment Corporation (SIIC) or

(e) interest on loans or advances from Schedule Bank or

(f) leave encashment to employee

shall be allowed (irrespective of the previous year in which liability is incurred according to the method of accounting followed) in computing the business income in the previous year in which it is actually paid - section 43B.

However, if the same is paid on or before applicable due date of filing the return for the previous year in which liability to is incurred (for all subsequent year(s) it will be allowed in the year of payment), and proof of payment is attached to the return, the same will be allowed in the year of accrual - first proviso to section 43B.

First proviso, omission of second proviso and Explanation 2 is held to be retrospective as they are curative in nature - Jagatlal Jute and Ind. Ltd. 1 SOT 210 (ITAT-Kol.), Allied Motors (P.) Ltd. 224 ITR 677 and ACIT v. Vestas RRB India Ltd. 02 ITD 1 Del.).

Circular No. 674 is not applicable, where with the consent of the lender, interest payable is conver-ted into loan, i.e., it will not be considered as actual payment.

The second proviso stating that in the case of (b) stated above, i.e., contribution of PF/SF/Gratuity/Fund would be allowable only if paid before the due date under the respective Act (the same is not allowed even if paid subsequently) and the cheque shall be realised within fifteen days from the due date, was deleted w.e.f. 1-4-2004.

However, it does not exonerate the assessee from default committed in making payment of dues prior to amendment - Swarup Vegetables Products Ind. Ltd. 93 ITD 279. This means that the same will be allowed if paid on or before due date of filling the return, just as in other cases.

However, it is to be noted that there is no change in section 36(1)(va) and hence employee contribution to PF/SF/Gratuity/Fund will be allowed only when the payment of the same is made on or before the due date as per the respective Acts.

The period of fifteen days as stated above was to be counted from the close of the month for which salary is due and not from period from which payment is made - Swarup Vegetables Products Ind. Ltd. 93 ITD 279.

Tax v. Fees : There is no generic differences between them, both are compulsory payments to public authorities. Fees is levied by authority when service is performed by it, while tax is payable for common benefit of all. There is no quid pro quo between payer and authority in case of taxes while there is such co-relation in case of fees - Krishnadas v. Town Area Com. 183 ITR 401 (SC).

What is considered to be paid?

The deduction is to be allowed on payment basis irrespective of the year of accrual of expenses. Furnishing of bank guarantee is not considered to be actual payment - CIT v. Udaipur Distillery Co. Ltd.134 Taxman 398.

If the sales tax (ST) law provides that deferred ST/ST deemed to have been converted into loan, are to be treated as actual payment, the same will be treated as paid - Cir. 496, dated 25-9-1987, 196 ITR, St 53. and Cir. 674, dated 29-12-1993, 205 ITR ST 119, Mahalaxmi Bricks Mfg Mldg & Fab Ind. (P.) Ltd. 273 ITR 190 (P&H).

However, Circular No. 674 is not applicable, where with the consent of the lender, interest payable is converted into loan, i.e., it will not be considered as actual payment - Kalpana Lamps and Components Ltd. v. DCIT 255 ITR 491.

If a set-off is granted for tax paid on purchases and the ST payable is adjusted, the same will be considered as payment - National Standard Ducan Ltd. 260 ITR 97.

The full amount of excise and custom duty paid will be allowable as payment irrespective of its inclusion in the closing stock - Berger Paints India Ltd. v. CIT 266 ITR 99 SC.

Unutilised Modvat credit of excise was held as advance payment of excise and was not paid by way of any lia-bility nor was liable to be refunded and therefore will be allowed only upon ad-justment of it against excise payable on final product.

When Interest to Financial Institution is paid, but found to be payable in the succeeding years, no deduction is allowed as the same was not accrued in that year - Gopalkrishna Granites Ltd. 251 ITR 337 (AP).

Penalty and interest on ST arose first time in the Asst. Order on 2-11-1996 and therefore allowable in the relevant year - Apollo Textile Agency 142 Taxman 396 (All).

Advance payment of duty cannot be considered as expenditure as it is liable to be refunded, nor does it relate to the existing liability.

Incurring of liability to pay tax/duties is condition precedent for invoking section 43B - Maruti Udyog Ltd. 92 ITD 119 (Del.). The `liability to pay such sum was incurred' and the `sum for which assessee incurred liability' in main provision and Explanation 2 support the view that payment relates to the liability incurred. Further, in Maruti's case it was held that PLA balance, till it is adjusted against the liability to pay excise duty on goods manufactured, is an advance and will not be allowed nor will it be included in closing stock.

Unutilised Modvat credit of excise was held as advance payment of excise and was not paid by way of any liability nor was liable to be refunded and therefore will be allowed only upon adjustment of it against excise payable on final product.

The custom duty paid on imports of inputs for export remained unutilised before the end of the year will be allowed under section 43B read with section 145A, even though it was not debited to P&L a/c in view of the decisions in Lakhanpal National Ltd. 162 ITR 240 and Berger Paint India Ltd. 254 ITR 498.

The unutilised raw material debited to P&L a/c get cancelled when included in the closing stock. Next year upon utilising the same as Opening stock, the deduction would again stand allowed and hence care should be taken not to allow double deduction.

The liability of custom duty will be incurred when the goods reached the custom barrier and bill for the home consumption is filed.

The controversy whether the duty drawback is capital or revenue receipt is set at rest by retrospective amendment/insertion of section 28(iiic) of the Act. Hence, it is taxable in the year in which it accrued, i.e., the right to receive accrues on passing of the order in favour of the assessee and not immediately on export of goods.

However, where the payment was made in advance, it was allowed in the year of payment even though it is normally allowed in the year in which it is booked. For example, the year in which the liability to pay taxes has no relevance - CIT v. C.L. Gupta 259 ITR 513 (All).

Other maters related to section 43B - Deduction is admissible even if the expense is not charged to P&L a/c - Chemicals & Plastics (I) Ltd. v. CIT 260 ITR 193 (Mad).

Payment of purchase tax without provision is allowable as deduction - Associated Pigments Ltd. 234 ITR 589 (Cal.).

Section 43B is attracted when assessee debit expense to P&L a/c and seek deduction, there is no question of disallowing the amount taken to liability, e.g., professional tax collected from salary.

Assessee should be given opportunity to prove that interest is not paid to the applicable institution - Bhuna Co-op. Sugar Mills Ltd. (Unreported, SC).

Deduction under section 80P is granted on business income after making disallowance under section 43B - Jamuna Rural Bank 92 TTJ 791.

The question of applicability of section 43B arises only if the amounts collected are considered as trading receipts. Thus, when assessee does not have absolute right over the amount collected and the same were lying with him on account of uncertainty (as challenged over judicial authorities) over the extent of liability owed in respect of turnover tax payable to SEBI, provision of section 43B is not applicable - Reliance Shares & Stockbrokers (P.) Ltd. 1 SOT 44 (ITAT - Mum.) and Ellenbarrie Industrial Gases Ltd. 208 ITR 67 (Cal.). If the assessee collected deposit for ST for want of proper ST forms/declaration, it is not trading receipt, 43B does not apply. Ellenbarrie Industrial Gases Ltd. 208 ITR 67 (Cal).

Sales tax charged and collected is in the nature of the trading receipt assessable to IT, i.e., if it is collected but not paid pending adjudication of dispute, will be the revenue receipt in the year of collection if the accounts are maintained on mercantile basis - CIT v. Naggi Reddy 202 ITR 253 (SC).

Sales tax collected and credited to liability account but not claimed as expenses in the P&L account, section 43B is still held applicable - Associated Pigments Ltd. 71 Taxman 244, (Cal.).

Similarly Mandi tax collected credited to balance sheet is held to be income - Dhariwal Sales Enterprises 171 ITR 212 (MP).

In the following cases provisions of section 43B is held applicable.

1. Royalty is a tax - India Cements Ltd. v. State of Tamil Nadu 188 ITR 690 (SC). Popular Minerals 258 ITR 593.

2. Interest on delayed Sales Tax - Mewar Motors 260 ITR 218 (Raj.).

3. 43B applies to ST- additional ST. CST. TO tax, VAT, Interest Tax, custom and excise duty - CVD, Additional, etc., contribution to PF, SF, Family Pension Fund, Employee State Insurance Corporation, cess and fees under any law.

4. SEBI turnover tax/Registration Fees - Reliance Shares & Stockbrokers (P.) Ltd. 1 SOT 44 (ITAT - Mum.).

5. Section 43B has overriding effect on section 40A(7), it applies even if cash system of accounting is followed and operation of section 43B(b) is not restricted to employees contribution to PF, i.e., it includes employer's contribution also - ATE Pvt. Ltd. 84 TTJ 186 (ITAT - Mum.) based on the judgement of Calcutta High Court in Kamakhya Tea Co. P. Ltd.

6. Service tax.

7. Municipal tax of the property.

8. Contribution to Group Gratuity Scheme.

9. Motor vehicle tax.

10. Expenditure tax.

11. Entry tax.

12. Licence fees.

13. Profession tax.

14. Bottling fees is not tax, etc., but a consideration paid to state for acquiring privilege to deal liquor - Udepur Distillery Co Ltd. 136 Taxman 446 (Raj.).

In the following cases provisions of section 43B is held not applicable.

1. The Government audit charges is not covered - CIT v. Shree Warna Sahakari Sakhar Karkhana Ltd. 253 ITR 226.

2. Interest on Outstanding Municipal Tax not covered under section 43B - CIT v. Orient Beverages Ltd.117 Taxman 106 (Cal.).

3. Mandi fees/tax are not taxes or duties up to 1-4-1989 when section 43B was amended - Mansukhlal Prahjbhai and Co. 227 ITR 429.

4. Interest paid to Custom Department keeping goods in warehouse - Hindustan Motors Ltd. 218 ITR 450.

5. Interest paid on PT- Fort Gloster Ind. Ltd. 252 ITR 100.

6. Kist/Rental paid to Karnatak Government for vending Toddy - Sri Balaji & Co. 246 ITR 750.

7. Sales tax set-off - Maharashtra Scooters Ltd. 228 ITR 78.

8. Electricity Duty/Charges are not fees - Sarvaraya Textiles Ltd. 54 ITD 612, Hyd. Bench.

9. Price/consideration/licence fees for licence to manufacture spirit - Varas International (P.) Ltd. (Cal.).

10. Market Cess Sirkakollu Suba Rao & Co. and Om Prakash Agrawal 154 ITR 376 (SC).

11. Provision for gratuity for payment to retiring employees in relevant previous year, even though not paid - George Williamson (Asssam) Ltd. 228 ITR 343 (Guj).

Assessment and section 43B. - Disallowance under section 43B can be made and additional tax can be levied while issuing intimation under section 143(1)(a) Sitaram Textiles Ltd. 248 ITR139 (Ker).

Even disallowance can be made from the details certified by tax auditor regarding 43B under section 143(1)(a).

Even reopening of assessment on the ground of disallowance under section 43B is held valid - Jawaherlal Gupta 199, ITR 726. Reassessment notice for custom not included in valuing goods in bonded warehouse was not held valid - HLL 251 ITR 209. Allowance under section 43B is held as question of law - Shri Krishna Phowna Ltd. 188 ITR 316. High Court was not justified in declining the reference from the order of the Tribunal - CIT v. Gujarat Polycrete (P.) Ltd. (SC).

The disallowance under section 43B will result into time difference and therefore in the year of disallowance, deferred assets will have to be created in the Accounts. Even the tax auditor will have to certify in Form No. 3CD the disallowances under section 43B, the amount and date of payment before filing the return, the payment out of disallowance under section 43B of earlier years, etc. The increasing coverage of disallowances is against the principal of accrual based on which the companies have to prepare their accounts, which causes more inconvenient to taxpayers.

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* The author is a Chartered Accountant.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

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