MODVAT Credit not allowable as Deduction u/s 43B of Income Tax Act: Supreme Court [Read Judgment]

The Supreme Court in the case of Maruti Suzuki India Ltd v CIT has held that MODVAT credit does not qualify as ‘any sum payable by the assessee by way of tax, duty, cess or fee’ u/s 43B of the Central Excise Act hence the unutilized credit under MODVAT scheme does not qualify for a deduction u/s 43B of the Income Tax Act.

The appellant is engaged in the business of manufacturing and sale of various Maruti cars and also trades in spares and components of the vehicles chargeable to Excise Duty under the Central Excise Act, 1994. The assessee had also been taking benefit of MODVAT credit on the raw material and inputs used in the manufacturing. A balance of an amount of unutilized MODVAT credit was claimed as eligible for deduction u/s 43B of the Income Tax Act. The AO followed by CIT, ITAT and the High Court upheld the disallowance of the above deduction on the ground that advance payment of Excise Duty which represented unutilized MODVAT credit without incurring the liability of such payment is not allowable as deduction and hence the present appeal.

The issue before the Court was the determination of whether the MODVAT credit was correctly disallowed.

The assessee contends that the object and purpose of Section 43B of the Act are to ensure that an assessee does not get the 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. Since the object of the provision is fully subserved, the deduction should be granted.

Department, on the other hand, contends that deduction under Section 43B is allowable only when the amount of tax, cess, etc. are due and payable and the assessee actually pays the same. In the present case, the Excise Duty becomes due and payable only when the assessee removes the finished product from the factory gate, at the point in time when the assessee makes payment to the suppliers the Excise Duty is not due and payable.

The Bench constituting of Justices Ashok Bhushan and Navin Sinha held that the unutilized credit under the MODVAT scheme does not qualify for deductions u/s 43B of the Income Tax Act. The reason for the same is that the facility of credit is not as good as tax paid. The same was discussed as follows:

“The unutilized 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 has shifted from the manufacturer to the purchaser and not the liability to the same.”

It further held that the deductions under Section 43B are allowable only when the sum is actually paid by the assessee. In the present case, the Excise Duty leviable on the appellant on the manufacture of vehicles was already adjusted in the concerned assessment year from the credit of Excise Duty under the MODVAT scheme. The unutilized 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 has shifted from the manufacturer to the purchaser and not the liability to the same.