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Mohan R. Lavi

Mohan R. Lavi on the reasonableness of treating deposit for guarantee as `payment'

THE issue whether furnishing of a bank guarantee backed by a fixed deposit of equivalent amount with the bank would tantamount to "payment" to avoid the rigours of Section 43B of the Income-Tax Act travelled till the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) in the Assistant Commissioner of Income Tax vs Mugat Dyeing and Printing Mills (2003 87 ITD 215 (Ahd) TM) case.

The nuances of the case were that Mugat derived income from the business of processing, dyeing, bleaching and printing of grey cloth on job-work basis. The grey cloth processed by Mugat belonged to the merchant manufacturers and the same is supplied by these parties to Mugat for processing, dyeing, printing, and so on. Income to Mugat emanated from labour charges. Since its nature of business involved levy of excise duty, Mugat collected the excise duty and paid it to the Government. The levy and payment of excise duty did not hit Mugat's profit and loss (P&L) account and the differential duty was parked in the balance-sheet.

The law relating to levy of excise duty on processing charges is clear and Mugat was abiding by the law. However, they disputed the levy of excise duty on the grey cloth belonging to the merchant owners and lying with them. Their contention was that they were only agents of the manufacturers and, hence, no duty could be levied by them.

A petition was filed before the apex court which ruled that the levy and recovery of such duties be stayed. However, the court instructed the petitioners to furnish a bank guarantee to the full extent of the disputed amount. Mugat accordingly furnished the guarantee by backing it up with a fixed deposit of an equivalent amount. The assessing officer (AO) disallowed the disputed amounts saying that they did not comply with Section 43B. The CIT (Appeals) differed with the AO and gave the assessee the benefit relying on the ratio in the Nuchem Plastic vs Dy CIT (1992 44 TTJ (Delhi) 261) and Sunil Silk Mills Ltd vs Dy CIT (1993 46 ITD 4) cases. The Department elevated the matter to the Tribunal. The judicial and accountant members (AM) of the Tribunal differed in their views on the matter.

The AM agreed with the arguments produced by Mugat, which relied heavily on the Asst. CIT vs Shanti Dyeing & Finishing Works (2000 68 TTJ Ahd 214) case. The ratio of this decision was on all fours with the dilemma of Mugat. The AM also analysed the rules of interpretation of statutes, which stated that it is an established rule of interpretation that the words of a statute are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view. He agreed with the judge who said that, "one cannot make a fortress out of the dictionary".

The AM distinguished similar cases decided by other Benches of the Tribunal in favour of the revenue (Puralator India Ltd vs IAC 1990 34 ITD 286). The Nuchem Plastic case was sufficient to convince the AM that furnishing of a bank guarantee would amount to payment.

The judicial member (JM), in contrast, went through the Section 43B, per se, and the memo explaining the provisions of the Finance Act, 1983 wherein it was expressly stated that Section 43B was being inserted with a view to curb the practice of claiming a liability under the I-T Act and then disputing it and not paying it. The JM felt that in the instant case, to avoid the payment of duty, the assessee obtained a bank guarantee. He also felt that the words "actually paid" in Section 43B are unambiguous and furnishing of a bank guarantee cannot be said to mean an actual payment. Thus the matter travelled to the third member (TM).

Apart from the decisions quoted above, the TM also had to consider the ratio of the decision in CIT vs Shri Ambica Mills Co. Ltd (IT Reference No 228 of 1992) wherein the Gujarat High Court had to contend with a situation wherein there was a 50 per cent deposit and bank guarantee. Another contention of the Department was that Mugat had previously lost a similar case before the Tribunal (2000 75 ITD 387 Ahd). This case was not referred to in the Ambica Mills case quoted above by the Tribunal. The representative of the Department also culled out statistics to prove that, in the plethora of litigation on the subject, the majority of the decisions were against the assessee.

The Department also took shelter in the apex court's diktat in Empire Industries Ltd vs Union of India (1986 162 ITR 846) that Government expenditure cannot be run on bank guarantees alone. The decisions of the Supreme Court in Oswal Agro Mills Ltd vs Asst Collector of Central Excise (1994 2 SCC 546) and Somaiya Organics (India) Ltd vs State of UP (2001 5 SCC 519) were also considered by the TM.

The TM, after considering the plethora of legal decisions in the matter, opined that furnishing of a bank guarantee would not tantamount to payment. Furnishing of a bank guarantee is only a security or a guarantee given by the bank to pay the disputed amount of duty collected by the assessee in the event of the Revenue succeeding in the appeal.

It would appear that the ratio of the decision would be tested further. In Central Excise Law, there is a provision for a pre-deposit of disputed duty. Assessees are also permitted to pay duties under protest and adjust differences, if any, after final judgements are received. By furnishing a bank guarantee, a taxpayer is ensuring that the Department gets the payment after the dispute has been settled.

In case the dispute is settled in favour of the assessee, he withdraws the guarantee and in case it is decided against him, the Department gets the money in a matter of hours. In either case, the assessee does not make any further payment. As far as the assessee is concerned, the matter ends the moment he furnishes the guarantee. It would seem unjust to distinguish between a cash deposit made with the Central Excise authorities and a cash deposit made with a bank to obtain a guarantee.

An assessee would not be permitted to withdraw or annul the bank guarantee without the dispute being decided either way. At the other end of the spectrum, the Department can walk into the bank and encash the guarantee any time. With so much of the odds stacked in favour of the Department, the I-T authorities need to reconsider their stand and bring bank guarantees out of the mischief of Section 43B. Probably they can make a distinction that bank guarantees that cover 100 per cent of the disputed amount would qualify for this largesse.

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