The judgment of the court was delivered by
Dr. Satish Chandra,J.-The present appeal is filed by the department under Section-260-A of the Income Tax Act against the judgment and order dated 16.01.2001, passed by the Income Tax Appellate Tribunal, Delhi in Appeal No.6408 of 1993 for the assessment year 1990-91.
On 17.03.2010, the appeal is admitted by a Co-ordinate Bench on the following substantial questions of law:-
(a) Whether on the facts and in the circumstances of the case the Tribunal has erred in law in allowing the deduction of Rs. 17,10,011/- on account of provision for interest as it is a fictional liability?
The brief facts of the case are that the assessee is a limited company deriving the income from manufacturing and sale of sugar and I.M.F.L. During the assessment year under consideration, the assessee has exported the country sprit, I.M.F.L. to Delhi. The excise duty was payable on these items as per the U.P. Excise Act. The assessee has not paid the duty payable to the government on export the goods outside the U.P. The A.O. opined that assessee is liable to pay the interest too. Like previous years, the assessee has debited the duty and interest in the profit & loss account to claim the benefit under Section-43B of the Act. The amount of Rs. 17,10,011/- on account of interest was claimed as deduction under Section-43B of the Income Tax Act, but the same was not allowed by the A.O., the First Appellate authority as well as the Tribunal have allowed the claim. Being aggrieved, the department has filed the present appeal.
With this background, Sri R.K. Upadhya, learned counsel for the department has justified the order passed by the A.O. and submits that the demand of the export duty was assailed before the Hon'ble High Court where the assessee has lost the case. The assessee has assailed the same before Hon'ble Apex Court. The fate of the said case pending before Hon'ble Apex Court is not known, but there is no interim order passed by Hon'ble Supreme Court. To justify his submission, he relied on the ratio laid down in the case of C.I.T. Vs. Kesar Sugar Works Ltd. 1999 (239) ITR, 400 (Bombay), wherein it was observed that:-
" We have carefully considered this controversy. The income-tax law makes a distinction between actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. The controversy to be decided in this case, therefore, is whether the present liability accrued against the assessee in the assessment year under consideration. This has to be decided by taking into account all the facts and circumstances of the case. If the liability is an actual liability in praesenti in the year under consideration, it is deductible. If it is a contingent liability, it cannot be the subject matter of deduction even under the mercantile system of accounting. There is no dispute in the present case that in the years under consideration the liability to pay interest was an actual liability. It was no more contingent. There is no dispute on this count. The only ground on which the claim of the assessee for duduction was denied by the Income-tax Officer was that the assessee was disputing the liability by filing an appeal to the Supreme Court. This view of the Income-tax Officer did not find favour with the Commissioner (Appeals) and the Tribunal. The law in this regard is well-settled by the decision of the Supreme Court in Kedarnath Jute Mfd. Co. Ltd. v. CIT [1971] 82 ITR 363, that if there is actual liability in praesenti, deduction cannot be denied on the ground that the assessee is disputing the liability."
Finally, he made a request to allow the appeal.
On the other hand, Sri S.D. Singh, Senior Counsel assisted by Sri Rahul Agarwal, learned counsel for the assessee has justified the impugned order.
He submits that the assessee has filed an appeal before the Hon'ble Supreme Court but he was unable to tell the outcome of the said case. The learned counsel further submits that the Tribunal had followed its earlier order for the previous assessment year 1986-87. For the purpose, he relied on ratio laid down in the case of Radhasoami Satsang v. C.I.T. (1992) 1 SCC 659, where it was observed that:-
"Each assessment year is different assessment year but a finding of fact on any fundamental aspect which was come in previous year pertaining to assessee and which remained unchallenged, should not be allowed to be disturbed in subsequent years."
Learned counsel also submits that no amount of the export duty is actually being paid till date though the provision was allowed by the A.O. as the assessee is following the mercantile system of accounting. The provision made by the assessee pertaining to the interest is allowable as it is not a contingent liability. To support his arguments, he relied on the ratio laid down in the following cases:-
(1) Kedarnath Jute Mfd. Co. Ltd. v. Commissioner of Income-tax [1971] 082 ITR 0363 (SC);
(2) Commissioner of Income-tax v. J.K. Synthetics Ltd. [1983] 143 ITR 0771 (SC);
(3) Municipal Corpn. Of City of Thane v. Vidyut Metallics Ltd. And another (2007) 8 SCC 688;
(4) Commissioner of Income-tax v. Poonam Chand Trilok Chand [1976] 105 ITR 0618 (Alld.); and
(5) Union of India Vs. Kamlakshi Finance Corporation Ltd. 1991 (55) E.L.T. 433 (S.C.).
Lastly, he made a request to dismiss the appeal filed by the department.
We heard both the parties at length and gone through the materials available on record. From the record, it appears that during the assessment year under consideration, the assessee has exported the sprit and I.M.F.L. to Delhi from U.P.. The duty is chargeable on the said transactions but no excise duty was paid. But the deduction under Section 43B was enjoyed. The assessee has lost its case in the High Court and the
interim order granted earlier was also vacated. The assessee has approached Hon'ble Apex Court where the matter is still pending as per the statement of both the parties, but none was able to tell the outcome. However, we are sure that by now, the Hon'ble Apex Court might have decided the dispute which was filed in the previous century. Let it, as it may be.
On merit, it appears that during the assessment year under consideration, the assessee has exported the sprit and I.M.F.L. from Delhi and was liable to pay the excise duty. For the belated payment the interest was also to be paid, but the same has become a subject matter of the legal dispute. When the amount is not paid and only provision is made then the same is not liable for deduction under Section-43B. The words "actually paid" means the amount actually paid in the coffers of the revenue and not a constructive payment. A bank guarantee furnished for grant of stay is not equivalent to payment of disputed excise duty as per the ratio laid down in case of C.I.T. Vs. Mc-Dowell Company Ltd 314 ITR 67 Supreme Court.
It may be mentioned that actually paid can include a constructive payment. Deduction is allowable only on the basis of actual payment, irrespective of the method of the accounting adopted by the assessee as per the ratio laid down in the Sanghi Vs. Union of India 187 ITR 703 (Delhi); and C.I.T. Vs. Yashpal 110 Taxman 251 (Jammu). It also overrides Section-36(1) of the Act. For the convenience, Section-43B of the Income Tax Act is reproduced as under:-
43B. Certain deductions to be only on actual payment
Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-
....
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a state financial corporation or a state industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing;
....
Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him:
It may also be mentioned that Hon'ble High Court of Delhi in the case of Triveni Engineering and Industries Ltd. Vs. The Commissioner of Income Tax-XIX [2010]320ITR430(Delhi) observed that:-
"The other contention raised by the appellant relying upon the judgment of the Andhra Pradesh High Court in the case Srikakollu Subba Rao & Co. and Ors. v. Union of India and Ors. MANU/AP/0092/1998 : 173 ITR 708 that where the amount is not due for payment before the end of the relevant previous year such amount though having accrued could not be disallowed under Section 43B(d) of the Act, cannot be accepted by this Court because the same would negate the intention of existence of Section 43B(d) and would render otiose the expression "actually paid" occurring in the provision. Further we feel that in view of the categorical language used in the relevant provision, we need not refer to the other Sub-sections and exceptions of Section 43B."
Further, the Hon'ble Kerla High Court in the Case of Commissioner of Income-Tax Vs. Kerla Solvent Extractions Ltd [2008] 306 ITR 54 observed that:-
"Under Section 145 of the Income-tax Act, 1961, the income chargeable under the head "Profits and gains of business or profession" should be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee.
Section 43B of the Act in itself is not a provision providing for deduction of any item of expenditure which is otherwise not allowable under any of the provisions of the Act. The opening words of section 43 B show that the section deals with deductions otherwise allowable under the provisions of the Act. The section only lays down the conditions for eligibility for deduction of certain allowances which are otherwise admissible under the Act. The scheme of the section is to allow the deductions only on payment basis, even though the assessee follows the mercantile system of accounting. It is an exception to section 145 of the Act inasmuch as even if the claim is an allowable deduction of the assessee, based on the system of accounting followed, it will still be inadmissible under Section 43B if it is not paid on or before the end of the relevant previous year or at least before the date of filing of the return. Therefore, section 43B is only supplementary to section 145 of the Act and it is only an additional condition for allowance of deductions otherwise allowable under the other provisions of the Act." (Emphasis added)
It may also be mentioned that Calcutta High Court in the case of Exide Industries Ltd. And another Vs. Union of India and others [2007] 292 ITR 470 held that :-
"The original enactment of section 43B in the Income-tax Act, 1961, was to curb unreasonable deduction on the basis of the mercantile system of accounting without discharging statutory liabilities. It was observed by the Legislature that such enactment was necessary as there had been a trend to evade statutory liabilities on the one hand and claim appropriate benefit under the Act on the other. Under clause (f) of section 43B, any sum payable by the employer to its employees as leave encashment shall be deductible only in computing the income referred to in section 28 of that previous year in which the sum is actually paid by the employer to its employees."
Thus, the benefit of Section 43B is available only on actual payment and is irrelevant to the method of accounting followed by the assessee.
In the instant case, the assessee has neither paid the duty nor interest, but enjoyed the deduction of Section 43B in the name of mercantile system of accounting. The A.O. has already allowed the deduction under Section 43B pertaining to the duty which has wrongly been done. Be that as it may.
Before us the only issue is pertaining to the liability of the interest of Rs. 17,10,011/-. The interest is nothing but an extended liability of the duty for the belated payment. It is compensatory in nature. The interest having accrued is a part of the main liability as per the ratio laid down in the case of Dinesh Mill Ltd. 2008 302 ITR 164. Needless to mention that in the instant case, provision for interest was allowed by the A.O. in the earlier assessment years.
In the light of the above discussion and in the peculiar facts of the case, we are of the view that the provision for the duty as well as for the interest is allowable under Section-43B only on the basis of actual payment and it is irrelevant that the assessee has followed the mercantile system of accounting. In fact, the object of Section 43B is to override to provision of mercantile system of accounting where the statutory liability was not actually discharged. Hence, we set-aside the impugned order and allow the appeal filed by the department. The assessee is not entitled to claim the deduction under Section-43B pertaining to the interest payable during the assessment year under consideration. However, the A.O. will allow the said deduction in the year as and when the actual payment is made.
Answer to the substantial question of law is in favour of the department and against the assessee.
In the result, the appeal filed by the department is allowed. No cost.