Deduction in respect of advance payment of duties and taxes

Issue

BP & Co engaged in manufacture of commodities liable for excise duty made advance payment of Rs.15 lakhs before the goods were removed from factory premises. The assessee excluded the value of duty on closing stock but claimed the advance payment as allowable expenditure. The Assessing Officer contested both the claims of the assessee and held that the closing stock must be inclusive of duties and taxes and the actual payment is not eligible for deduction under section 43B. Decide.

Opinion

Section 145A deals with valuation of inventory. It says that the valuation of purchase and sale of goods and inventory shall be in accordance with the method of accounting regularly employed by the assessee and it should be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Section 145A inserted by the Finance (No.2) Act, 1998 has provided for inclusive basis of closing stock valuation as a mandatory measure. Thus the valuation of the assessee by excluding the value of duty on closing stock is not in consonance with the provisions of law. The value of inventory and the applicable amount of duties and taxes are to be aggregated and disclosed in the tax statements.

Section 43B provides for deduction in respect of statutory payments which are allowable on actual payment basis. The amount so paid is eligible for deduction 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. Hence, even for an assessee following mercantile system of accounting these statutory payments are deductible on actual payment basis regardless of the year in which the liability to pay such sum was incurred as per regular method of accounting employed by him.

In Dy.CIT v. Glaxo Smithkline Consumer Health Care Ltd (2007) 107 ITD 343 (Chd) (SB) similar such issue came up before the tribunal. It was held that the deduction for excise duty is allowable on payment basis even though such payment is made before incurring liability in respect of such amount. It was held that it is not necessary that the liability to pay is incurred first and only on such payment the deduction could be made on actual payment basis.

In CIT v. Modipon Ltd (2011) 334 ITR 106 (Del) the assessee made advance payment of excise duty to the extent of Rs.14.71 lakhs even before the goods were removed from the factory premises. The contention of the Revenue that only on removal of goods that the amount remitted could be claimed as deduction under section 43B was rejected by the court. Contrary view holding that when the payment is in advance and it does not relate to the year it will not be eligible for deduction was the decision in Gopi Krishna Granites India Ltd v. Dy.CIT (2001) 251 ITR 337 (AP).


Hence, it is possible to claim that the advance payment of excise duty is eligible for deduction regardless of the fact that the liability to pay was not incurred prior to such payment.

Position under DTC: Section 35(1)(xxxv) says that tax (not being a tax under this Code), duty, cess, royalty or fee by whatever name called is deductible as operating expenditure if the amount is actually paid. Therefore, the position in DTC is the same as it exists now under the Income-tax Act, 1961. It seems that incurring of liability is not a pre-condition for allowance of the claim in the DTC.

Valuation of inventory on the closing date is not specifically given in DTC however, section 33(1)(iii) dealing with computation of gross earning from business says that “the value of inventory as on the close of the financial year” is to be adopted. The opening stock of inventory, purchase of raw materials, stores, spares and consumables or stock in trade are dealt with in operating expenditure contained in section 35 of the DTC do not also specify that the tax paid thereon are to be included.

Source : The Tax Referencer, Volume 120, Issue No.3 Dt.18.07.2011
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