MANGALORE REFINERY AND PETROCHEMICALS LTD,MUMBAI vs. DCIT 3(2), MUMBAI

In the reopened assessment the Assessing Officer did not accept the contention of the assessee that the customs duty liability ceased to exists upon completion of export obligation. Accordingly, the Assessing Officer took the view that cessation of liability on account of customs duty is covered by the provisions of section 41(1) of the Act and the same cannot be allowed u/s. 43B of the Act, since the assessee did not make any payment to the Government Account. Accordingly, he assessed the same at ` 173.35 crores as income of the assessee. The learned CIT(A) also held that the assessee cannot claim deduction u/s 43B of the Act in respect of customs duty adjusted against the export obligation. Accordingly the Ld CIT(A) confirmed the addition made by the AO and hence the assessee has filed this appeal before us.

At the time of hearing, the learned counsel appearing for the assessee submitted that the Coordinate Bench of the Tribunal has considered an identical issue in assessee’s own case in and CO No.

We notice that an identical issue was considered by the co-ordinate bench in the assessee’s own case and for the sake of convenience, we extract below the relevant observations made by the Coordinate Bench in the above said case :- 27. Now, we may take up the merits of the disallowance of Rs.40,41,81,896/- made by the Assessing Officer, which is sought to be challenged by the assessee on various limbs. In order to appreciate the controversy, the following background of the dispute is relevant. The appellant-company procures a portion of its raw material (i.e. crude oil) through imports. A significant portion of the imports is against the Advance licences obtained for import of raw material for manufacture of products meant for exports. The Customs duty on the import of crude oil is provided on all imports and Provision to the extent of Rs.40,75,50,184/- was outstanding as on 31.3.2004 towards Customs duty on crude oil imported against Advance licences pending completion of export obligations. Subsequently, upto 30.9.2004 assessee fulfilled export obligations with respect to Customs duty amounting to Rs.40,41,81,896/-. The assessee-company adjusted the said amount of Rs.40,41,81,896/- against the Provision for Customs duty outstanding on 31.3.2004 and claimed it as a deduction u/s 43B of the Act. The Assessing Officer has disagreed with the assessee on the ground that there was no actual payment of Customs duty and, therefore, the said amount was not deductible in terms of Sec. 43B of the Act. According to the Assessing Officer, provision of Sec. 43B of the Act categorically states that the deductions thereof are to be allowed only on the basis of actual payment only. The assessee carried the matter in appeal before CIT(A) contending that the action of Assessing Officer was erroneous inasmuch as assessee- company had fulfilled its export obligations before the due date of filing of return of income thereby complying with the conditions laid down in Sec. 43B of the Act to claim the deduction of Rs.40,41,81,196/- comprised in the liability for Customs duty outstanding as on 31.3.2004. The CIT(A) has since affirmed the disallowance made by the Assessing Officer. In coming to his decision, the CIT(A) held that Sec. 43B of the Act was not applicable at all in the case of assessee because the liability for payment of Customs duty of Rs.40,41,81,196/- did not arise during the previous year relevant to the assessment year under consideration and, therefore, there was no 4 Mangalore Refinery & Petrochemicals Ltd.

In this background of the matter, the learned representative for the assessee has made varied submissions by pointing out that CIT(A) was not correct in holding that the liability for payment of Customs duty of Rs.40,41,81,196/- did not arise during the year. According to the assessee, the Assessing Officer was correct in deducing that the provisions of Sec. 43B of the Act was applicable thereby implying liability arose in the year under consideration, but erred to the extent of holding that fulfilment of export obligations by 30.9.2004 did not amount to payment of Customs duty within the meaning of Sec. 43B of the Act. Further, it has been pointed out that having regard to the manner in which assessee has treated the amount relating to the Customs duty in its books of account, the entire exercise is unnecessary and is tax neutral over the years. The learned representative has in detail argued on the aforesaid propositions, which we shall elucidate further in the subsequent paras.

On the contrary, the stand of the ld. DR appearing for the Revenue is in support of the orders of authorities below.

Pertinently, the entire controversy revolves around the provisions of Sec. 43B of the Act. Sec. 43B of the Act was inserted by the Finance Act, 1983 w.e.f. 1.4.1984 and prescribes for certain deductions to be allowed only on actual payment while computing the income chargeable to tax under the head ‘Profit and gains of business or profession’. Shorn of other details, insofar as it is necessary to appreciate the controversy in question, the salient features of Sec. 43B of the Act are as follows. Broadly speaking, Sec. 43B of the Act provides that deduction for any sums payable by the assessee by way of tax or duty, cess or fee or any other sum prescribed shall, irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which the said sum is actually paid. It is a non-obstante clause prescribing that notwithstanding anything contained in any other provisions of this Act, “a deduction otherwise allowable” under the Act in respect of the sums prescribed therein shall be allowed only in computing the income from profit and gains of business of that previous year in which such sum is actually paid 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. In the instant, the case made out by CIT(A) is that Sec. 43B of the Act is not applicable in the present case for the reason that the amount of Rs.40,41,81,196/- is not a deduction otherwise allowable under this Act. According to the CIT(A), the liability for the impugned Customs duty does not arise because assessee has obtained clearance of the imported material without payment of Customs duty, and that the ultimate liability

On this aspect of the matter, the stand of assessee is based on the provisions of Customs Act, 1962, which we shall refer to a little later. Before that, we may refer to the pertinent fact-situation. As noted earlier, assessee is importing a portion of its raw material, i.e., crude oil by utilizing the Advance licence benefits obtained for import of raw material for manufacture of products meant for export. As on 31.3.2004, assessee- company has made a Provision of Customs duty of Rs.40,75,50,184/- on crude oil imported against Advance licence pending completion of export obligations. Upto 30.9.2004, assessee has fulfilled the export obligations corresponding to the Customs duty liability of Rs.40,41,81,896/-. In its computation of income, assessee adjusted the aforesaid amount of Rs.40,41,81,896/- against the Provision for Customs duty as on 31.3.2004 and claimed it as deduction u/s 43B of the Act. We may also briefly touch upon the accounting treatment accorded by the assessee to such transactions. At the time of import of raw material, assessee creates a ‘Provision of Customs duty’ on such imports by debiting ‘Customs duty on raw material’ account and crediting ‘Customs duty – Advance licence’ account. The ‘Customs duty Advance licence’ account is shown as a liability outstanding in the Balance-sheet and subsequently, on fulfilment of the export obligation, the ‘Customs duty Advance licence’ account is debited and ‘Export licence benefit received’ account is credited and is offered as income. In the context of the instant fact-situation, it may be appreciated that assessee had created a Provision of Rs.40,75,50,184/- in the year under consideration, being Customs duty payable on import of raw material and the same was debited to the Profit & Loss Account. Subsequently, by 30.9.2004, assessee fulfilled its export obligations to the extent of Rs.40,41,81,896/- and adjusted the same against liability, which was offered as income in the next year. Considering the fulfilment of export obligations to the extent of Rs.40,41,81,896/- as a payment/discharge of liability of the Provision of Customs duty as on 31.3.2004, in terms of the first proviso to Sec. 43B of the Act, assessee claimed a deduction.

The first question to be decided is as to whether the Provision of Customs duty of Rs.40,75,50,184/- created by the assessee as on 31.3.2004 is a liability which has arisen so as to fall within the expression “a deduction otherwise allowable under this Act” in Sec. 43B of the Act. For the said purpose, the learned representative for the assessee referred to Sec. 12 of Customs Act, 1962 to emphasise on the timing of 6 Mangalore Refinery & Petrochemicals Ltd.

Sub-section (1) of Sec. 143A of Customs Act, 1962 prescribes that where any material is imported under an import licence belonging to the category of Advance licence, the competent authorities can permit clearance of such material “without payment of duty” leviable thereon. Sub-section (2) provides the conditions for grant of permission for clearance of goods without payment of duty. It is noteworthy that in terms

Therefore, in view of the aforesaid discussion, it is reasonable to conclude that the liability represented by the Provision of Rs.40,75,50,184/- being Customs duty payable on import of raw material

The first proviso to Sec. 43B of the Act prescribes that the disallowance u/s 43B of the Act would not apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under Subsection (1) of Sec. 139 of the Act in respect of the previous year in which the liability to pay such sum was incurred. On the strength of such proviso, the claim of assessee was that upto 30.9.2004, it has fulfilled export obligations amounting to Rs.40,41,81,896/- out of the total Provision for Customs duty outstanding as on 31.3.2004 and, therefore, claimed it as a deduction u/s 43B of the Act. The stand of the Assessing Officer was that the provisions of Sec. 43B of the Act envisaged deduction of sum which is actually paid, whereas in the instant case there was no actual payment of duty. In other words, the discharge of obligation to export the finished products as per the terms of the Advance licence benefit undertaken by the assessee has not been understood to be a sum actually paid for the purpose of Sec. 43B of the Act. In this context, the assessee relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Pratibha Syntex Ltd. (supra) where it has been held that if the liability for payment of Customs duty in relation to imports of raw material is liquidated by performing an act, it would tantamount to payment thereof and deduction u/s 43B of the Act ought to be granted for the Customs duty liability in the year of export as it went to reduce the Customs duty liability.

Before us, the ld. DR appearing for the Revenue has emphasised on the stand of Revenue to point out that the benefit of the first proviso to Sec. 43B of the Act can be availed only if the amount is actually or physically paid, which is not the case herein.

In our view, the stand of Revenue is misconceived because fulfilment of export obligations by the assessee reduces the Customs duty liability of the assessee. In fact, if no export of finished goods was made by the assessee as required, then assessee would have to pay the Customs duty in monetary terms. Obviously, the payment of duty in monetary terms would have facilitated deduction u/s 43B of the Act in the year of payment. The moot question is could the legislature have intended that an assessee who does not comply with the mandated export obligations would be able to avail the provisions of Sec. 43B of the Act, but not a performing assessee who complies with and discharges his obligation to make the mandated export? Be that as it may, in our view, the fulfillment

Apart from the aforesaid, assessee had also made a plea that the accounting treatment accorded by the assessee was tax neutral and, therefore, the entire exercise undertaken by the Assessing Officer was unnecessary in the present case. In this context, it has been pointed out that assessee has claimed deduction of the liability for payment of Customs duty in the year of import, as reflected by the debit to the Profit & Loss Account of the Provision of Customs duty and has correspondingly offered for assessment, the credits made in the subsequent year by way of fulfilment of export obligations in order to comply with the terms of the Advance licence scheme. It was, therefore, pointed out that if one examines the position over a period of 2 to 3 years, the debits for Customs duty payable in the year of import would be equal to the credits made in the Profit & Loss Account in the subsequent years on the making of exports as per the Advance licence scheme. In fact, it was pointed out that the credits in the Profit & Loss Account in the next years have been offered for assessment and have been assessed and, therefore, disallowance of Customs duty in the year of making import was unjustified and would result in double addition. At this stage, it has also been pointed out that the liability for payment of Customs duty, claimed as debit to the Profit & Loss Account, is neutralised by the inclusion of the same in the closing stock, and if the view of CIT(A) is adopted that there was no liability for payment of Custom duty in the first year of import, then the closing stock will have to be reduced by the corresponding duty included therein. It is pointed out that the inclusion of the Customs duty in the valuation of closing stock is undoubtedly on the footing that such a definite liability exists. Before us, reliance has been placed on the judgment of the Hon'ble Bombay High Court in the case of Nagri Mills Co. Ltd., 33 ITR 681 (Bom.) for the proposition that where a debit/credit in one year is off-set by a credit/debit in the subsequent year, the Assessing Officer would not be justified in disturbing what the assessee has done, particularly in the case of corporate assessees’, where tax is attracted at a uniform rate. At the time of hearing, the aforesaid factual matrix was put across to the ld. DR who has not controverted the same, but merely reiterated the stand of the lower authorities.

In our considered opinion, even on the principle of tax neutrality, the impugned stand of the Revenue is misconceived. Having regard to the judgment of the Hon'ble Bombay High Court in the case of Nagri Mills Co. Ltd. (supra), on this aspect also we find no reason to uphold the disallowance of Rs.40,41,81,896/- made by the Assessing Officer.

In view of the aforesaid discussion, we hereby set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition of Rs.40,41,81,896/-.

We notice that the Ld CIT(A) had taken the view in AY 2004-05 that the provisions of sec. 43B would not be applicable to the Customs duty liability, but the Tribunal had set aside the same. However, in the instant year, the Ld CIT(A) has confirmed the addition by holding that the provisions of sec. 43B shall be applicable to the assessee. We notice that the co-ordinate bench has taken the view that the customs duty liability adjusted against export obligations is liable to be allowed as deduction under first proviso to sec. 43B of the Act. We further notice that the view so taken by the co-ordinate bench has been followed by another co-ordinate bench in the assessee’s own case relating to AY 2005-06 in & CO No.104/M/2009 dated 22-12-2006. In view of the above, consistent with the view taken by the co-ordinate benches in other years, we hold that the assessee is entitled to deduction u/s 43B of the Act in respect of customs duty liability adjusted against export obligation. In the instant case, there is no dispute that the entire amount of customs duty liability has been adjusted against export obligation before the due date for filing return of income. Accordingly we reverse the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition.

The assessee has also raised grounds relating to validity of reopening of assessment and also alternative grounds on the deduction claimed by the assessee. Since we have decided the issue relating to deduction claimed u/s 43B of the Act in favour of the assessee, we do not find it necessary to dispose of the other two grounds, as the same would be academic in nature.

In the result, the appeal filed by the assessee is treated as allowed. Order has been pronounced in the Court on 22.3.2017.