Offsetting sales tax liability against purchase input to be deemed as actual payment eligible for Sec. 43B relief: HC

Case Details: Merck Ltd. v. DCIT - [2021] 132 taxmann.com 174 (Bombay)

Judiciary and Counsel Details

• • K.R. Shriram and M.S. Karnik, JJ.
  • Ms. Arati Vissanji and S.J. Mehta for the Appellant. 
  • Suresh Kumar for the Respondent.

Facts of the Case

Assessee had claimed a certain sum being sales tax set off as deduction under section 43B of the Income-tax Act, 1961. According to the assessee, the sales tax set off represents that part of the purchase tax paid by the assessee. According to the assessee, the amount set off to be treated has been paid as a tax liability which is deductible under section 43B.

However, Assessing Officer (AO) disallowed the claim of the assessee. The assessee preferred CIT(A), which upheld the disallowance, and later ITAT also dismissed appeal of the assessee. Aggrieved-assessee filed the appeal before the Bombay High Court.

The issue before the Bombay High Court was
‘Whether the expression “actually paid by him” in Section 43B also included the amount which has been set off or adjusted?’

High Court Held

The Bombay High Court held that the Sales Tax Rules allowed an incentive by way of adjustment of sales tax. In other words, the assessee can set off or adjust the sales tax already paid at the time of purchase of raw materials against the sales tax collected at the time of sale of finished goods. Law also allows the assessee to retain the sales tax amount which has been claimed as a set-off.

Since the procedure followed by the assessee is permitted and in accordance with law, therefore, set off tax liability is to be presumed to be a deemed payment. This adjustment, by legal fiction, is deemed to be an actual payment of the tax liability and is deductible under section 43B.

Accordingly, the amount settled by assessee by way of set-off or adjustment is eligible for section 43B relief.

Case Review

• • CIT v. National Standard Duncan Ltd. [2004] 134 Taxman 563/[2003] 260 ITR 97 (Cal.) (para 6) followed.

List of Cases Referred to

• • CIT v. National Standard Duncan Ltd. [2004] 134 Taxman 563/[2003] 260 ITR 97 (Cal.) (para 6) followed.