Tax Deduction on Advance Excise Duty: Supreme Court Upholds High Court Rulings

The Supreme Court of India recently ruled on the case of Commissioner of Income Tax II vs. M/S Modipon Ltd., addressing the issue of whether an assessee is entitled to claim a deduction under Section 43B of the Income Tax Act, 1961, for advance excise duty paid in the Personal Ledger Account (PLA). The case revolved around multiple assessment years and involved the interpretation of tax deduction provisions in relation to excise duty deposits.

The issue in this case had been consistently ruled in favor of the assessee by the Delhi High Court and Punjab & Haryana High Court in similar cases. The Revenue Department (Income Tax) challenged this position, arguing that excise duty should only be deductible when it is actually adjusted against removals and clearances of goods. The Supreme Court, however, upheld the High Court decisions, affirming that the advance deposit of excise duty constitutes an actual payment, making it eligible for deduction under Section 43B.

Background of the Case

The dispute arose regarding the assessment years 1993-1994, 1996-1997, 1997-1998, and 1998-1999 for M/S Modipon Ltd., and for the assessment year 1996-1997 for Paharpur Cooling Towers Ltd. The central question in these appeals was:

“Whether the assessee is entitled to claim deduction under Section 43B of the Income Tax Act, 1961, in respect of the excise duty paid in advance in the Personal Ledger Account (PLA)?”

Arguments of the Revenue Department (Petitioner)

• The Revenue contended that the liability to pay excise duty arises only at the time of removal of goods, not at the time of depositing money in the PLA.
• Since the excise duty amount deposited in advance could potentially be refunded or adjusted, it does not constitute an actual payment.
• Under Rule 21 of the Central Excise Rules, 1944, if goods are lost or damaged before removal, the duty payable can be remitted, reinforcing that duty is not finalized until removal.
• Section 43B requires actual payment, and the PLA balance should not be considered as an eligible deduction.

Arguments of the Assessee (Respondent)

• The assessee argued that their practice of claiming a deduction for the PLA balance at year-end while adding it back in the subsequent year had been consistently accepted by the Revenue from 1984-1985 to 1998-1999, except for the disputed assessment years.
• Two High Courts—Delhi High Court in CIT vs. Maruti Suzuki India Ltd. and Punjab & Haryana High Court in CIT vs. Happy Forgings Ltd.—had ruled in favor of the assessee in similar cases.
• They contended that excise duty becomes a liability as soon as goods are manufactured, and the deposit into the PLA is a mandatory requirement under Rule 173G of the Central Excise Rules.
• The revenue implications were nil since the amounts were adjusted year-on-year, making the dispute unnecessary.

Supreme Court’s Analysis and Ruling

The Supreme Court, after reviewing the arguments, ruled in favor of the assessee, affirming the judgments of the Delhi and Punjab & Haryana High Courts.

1. Nature of PLA Deposits

The Court noted that the Personal Ledger Account (PLA) is a statutory requirement where excise duty must be deposited in advance before removing goods. This ensures orderly collection of excise duty and prevents revenue loss. Once money is deposited in the PLA, it is credited to the government, and the assessee loses direct control over it.

2. Section 43B and Actual Payment

The Court interpreted Section 43B to mean that any tax, duty, or fee paid to the government qualifies for deduction only when actually paid. However, in this case, the deposit in PLA was deemed an actual payment because:

• The excise duty liability is determined at the time of manufacture, even if the exact amount is finalized upon removal.
• Once deposited, the funds cannot be withdrawn without approval from excise authorities, making it equivalent to an irreversible payment.
• The legislative intent behind Section 43B was to prevent deductions without actual payments, which is not the case here.

3. Precedents and Consistency

The Court observed that the Revenue had accepted this practice for multiple years and had not appealed against the High Court decisions in similar cases. The Court cited:

• Radhasoami Satsang vs. CIT – Establishing that consistency in tax treatment should be maintained unless strong reasons justify a change.
• CIT vs. Excel Industries Ltd. – Holding that past accepted practices should not be disturbed without compelling reasons.

Conclusion

The Supreme Court dismissed the appeals and upheld the High Court rulings, holding that:

• The advance deposit of excise duty in PLA qualifies as an actual payment under Section 43B.
• The Revenue’s argument that duty is only due at removal was inconsistent with past practices.
• Consistency in tax assessments must be maintained unless strong public interest necessitates a different approach.

This ruling clarifies that businesses can claim deductions for advance excise duty payments in PLA, reinforcing stability and predictability in tax assessments.

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Download Judgment: Commissioner of Inco vs MS Modipon Ltd. Supreme Court of India Judgment Dated 24-11-2017.pdf

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