Unutilised MODVAT credit of Excise Duty not allowable u/s 43B – Supreme Court

Unutilised MODVAT credit of Excise Duty not allowable u/s 43B. Paying cost of raw materials does not mean that assessee is liable to pay Excise Duty on such raw material/inputs

ABCAUS Case Law Citation:
ABCAUS 3247 (2020) (02) SC

Important case law relied upon by the parties:
Eicher Motors Ltd. and another versus Union of India and others, (1999) 2 SCC 361
Collector of Central Excise and others versus Dai Ichi Karkaria Ltd. and others; (1999) 7 SCC 448
Berger Paints India Ltd. versus Commissioner of Income Tax, 2004 (266 ITR  99
Lakhan Pal National Ltd. versus ITO (1986)  162  ITR  240

The appellant assessee was engaged in the business of manufacturing automobiles,  which were chargeable to Excise Duty under the Central Excise Act, 1994. The assessment year in question was assessment year 1999­-2000.  

The assessee company had been engaged in manufacturing and  sale of various Maruti Cars and also trades in spares and components of the vehicles. It acquires excieable raw materials and  inputs which were used in the manufacturing of the   vehicles.  

The assessee had also been taking benefit of MODVAT credit on the raw material and inputs used in the manufacturing. At the end of the relevant Assessment year a large amount was left as unutilised   MODVAT credit.  

In the income tax return it was claimed that the Company was eligible for deduction u/s 43B of the Income Tax Act, 1961 (the Act) as an allowable deduction. Similarly, the Company claimed deduction under Section 43B in respect of Sales Tax Recoverable Account.

The Assessing Officer disallowed the claim of deduction­. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax. The Commissioner of Income Tax also sustained the disallowance  of the above two  items.  

An appeal to ITAT met the same fate. The ITAT took the view that the advance payment of Excise Duty which represented unutilised MODVAT credit without incurring the liability of such payment is not an allowable deduction under Section 43B.

The assessee filed an appeal under Section 260A of the Income Tax Act in the High Court. The High Court answered the following question relating to the disallowance in favour of the Revenue:

(ii) Whether the ITAT had committed an error of law in upholding the disallowance of the amount which represented MODVAT credit of Excise Duty that remained unutilised at the end of the relevant accounting year ?

(iii) Whether the ITAT had committed an error of law in upholding disallowance in respect of Sales Tax Recoverable Account u/s 43B of the Act. 

Aggrieved by the judgment of the High Court, an appeal had been filed before Hon’ble Supreme Court.

The assessee contended that the amount paid by way of Excise Duty by the assessee to its suppliers of raw materials and inputs, is accepted as Excise Duty under the provisions of Central Excise Act and Rules. Consequently, when the said payments are made by the assessee to its suppliers, they should be treated as payments of Excise Duty which straightaway qualify for deduction under Section 43B of the Income Act, irrespective of whether or when the MODVAT credit arising from such payments is utilised to make payment of Excise Duty on  the  products manufactured by the assessee. 

Alternatively, it was submitted that the questions are squarely covered in favour of the assessee by the 1st proviso to Section 43B. The assessee’s Excise Returns establish that while the untilised MODVAT   credit   as   on   the start of the year was entirely   utilised   in April itself.  Consequently, the assessee was entitled to the deduction under the 1st proviso to Section 43B. 

It was submitted that the object and purpose of Section  43B of the Act is to ensure that an assessee does not get deduction in respect of an amount unless and until the amount has been received by the Government. In the present case the full amount of Excise Duty was paid into the coffers of Government when the manufacturer of raw material/inputs had cleared the same from his factory  gate for supply to the assessee. Thus the basic object of Section 43B of the Act is fully subserved and deduction should have been granted as claimed by the assessee.

The Hon’ble Supreme Court opined that It   is   the manufacturer of raw materials and inputs which are used by appellant who has statutory liability to pay Excise Duty. The appellant is not assessee within the meaning of Central Excise Act, 1944, with reference to raw materials and inputs manufactured by the entities from which appellant had purchased the raw materials and inputs.

The Hon’ble Supreme Court stated that as per Section 43B(a) of Income Tax Act, deduction is allowed on “any sum payable by the assessee by way of tax, duty, cess or fee.” The credit of Excise Duty earned by the appellant under  MODVAT scheme as per Central Excise Rules, 1944 is not sum payable by the assessee by way of tax, duty, cess. The scheme u/s 43B is to allow deduction when a sum is payable by assessee.

The Hon’ble Supreme Court further stated that the deductions under Section 43B is allowable only when sum is actually paid by the assessee.  In the present case, the Excise Duty leviable on appellant on manufacture   of   vehicles was   already adjusted in the concerned assessment year from the credit of Excise Duty under the MODVAT scheme. The unutilised credit in the MODVAT scheme cannot be treated as sum actually paid by the appellant. The assessee when pays the cost of raw materials where the duty is embedded, it does not ipso facto mean that assessee is the one who is liable to pay Excise Duty on such raw material/inputs. It is merely the incident of Excise Duty  that shifted from the manufacturer to the purchaser and not the liability to the same.

Accordingly, the Hon’ble Supreme Court held that the unutilised credit under  MODVAT  scheme  does not qualify for deductions under Section 43B of the Income Tax Act.

With respect to the second question, the Hon’ble Supreme Court opined that the High Court had  rightly answered the above question in favour of the Revenue . The sales tax paid by the appellant was debited to a separate account titled ‘Sales Tax recoverable account’. The assessee could have set off sales tax against his liability on the sales of finished goods i.e. vehicles. 

The Hon’ble Supreme Court observed that the 1st proviso to Section 43B   provides that nothing  contained in the Section shall apply in relation to any sum which is actually paid by assessee on or before due date applicable in his case for furnishing the return in respect of the previous year in which the liability to pay such sum was incurred. 

The Hon’ble Supreme Court stated that the crucial words in the proviso to Section 43B are “in respect of the previous year in which the liability to pay such sum was incurred”.  The  proviso  takes care of the situation when liability to pay a sum has incurred but could not be paid in the year  in question and has been paid in the next financial year before the date of submission of the Return

The Hon’ble Supreme Court observed that in the present case, there was no liability to  adjust  the  unutilised MODVAT credit in the year in question since had there been liability to pay Excise Duty by the appellant on manufacture of vehicles, the unutilised MODVAT credit  could  have  been  adjusted against the payment of such Excise Duty. In the present case, the liability to pay Excise Duty of the assessee   was incurred on the removal of finished goods in the subsequent year and what was important was unutilised MODVAT Credit as on 31st March on which date the asseessee was not liable to pay any more Excise Duty. Hence, appellant could not claim benefit of proviso to Section 43B.  

Accordingly the appeal was dismissed.

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