Section 43 of the Income Tax Act, 1961

UNDERSTANDING SECTION 43 WITH LATEST CASE LAWS:

Now its time to unlock all mystery in respect of section 43 of the Income tax act, 1961 with the help of the latest court rulings and judgments. Let us divide the section according to the subject and then discuss the same according to case laws.

Definition

1. In the case of CIT vs. Shivalik Hatcheriers (P) Ltd., 188 Taxman 291, HP High court decided that Where building has been designed specifically to further cause of manufacture or production, then the same would be considered as a “plant”, for the purpose of depreciation. 

2. When block of asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold. Refer, Cable Corporation of India Ltd. ITA No. 5592/Mum/2002 dt. 29-10-2009 Bench E. 392 (2009) 41 BCAJ.  

3. Assessee is entitled to add the disputed customs duty paid by it under protest on the imported machinery to the cost of plant and machinery and depreciation thereon. Refer, CIT v Orient Ceramics & Industries Ltd, 56 DTR 397.

4. Assessee company engaged in the business of manufacture of soft drinks acquired manufacturing assets and other assets, land and building of its franchisees on the basis of valuation done by the approved valuer. Assessing Officer increased the value of land by 50 % on estimated basis and value of bottles and crates was reduced by 50% and plant and machinery by 25%. The Court held that Tribunal was justified in direction the Assessing Officer to accept the valuation of assets acquired by the assessee from five vendor companies on the basis of report of the registered valuer when there was no basis to discard the valuation report.( Asst Year 1996 - 97). Refer, CIT v Pepsico India Holdings (P) Ltd, 56 DTR 137.

Speculation

1. Mumbai ITAT in the case of ACIT vs. Dinesh K. Mehta HUF, decided that Derivatives are speculative transaction if not for bona fide hedging.

2. In the case of Bengal & Assam Company Ltd. vs. CIT, TLR 216 (Cal.) Vol. 40 Part 469, it had been decided that claim of assessee for hedging loss in shares is not allowable, as, said shares were ultimately sold at capital gain.

3. Assessee is entitled to adjust the actual cost of the imported capital assets acquired in foreign, currency, on account of fluctuation in the rate of exchange at each of relevant balance sheet dates pending actual payment of varied liability for the assessment years prior to the amendment in section 43A, w.e.f. 1st April 2003.  Refer, Oil & Natural Gas Corporation Ltd. vs. CIT, 36 DTR 345 (SC).

4. In the case of P.S. Kapur, 15 DTR 181, it was held that Loss claimed by assessee in derivative transaction is allowable as a business loss as the same is not covered by s. 43(5). Future and options not to be regarded as a speculation loss Clause (d) inserted in proviso to sub-s. (5) of 43 by the Finance Act, 2005 w.e.f. 1st April 2006, is retrospective in application. Editorial Note.: Reference can be made to following judgments. DCIT vs. SSKI Investors Services (P) Ltd. (2008) 113 TTJ 511 / 1 DTR 272 (Mum) R.B.K. Securities (P) Ltd. vs. ITO (2008) 118 TTJ 465 / 13 DTR 255 (Mum)

5. Term ‘derivative’ in which the underlying asset in shares falls within the meaning of the term ‘commodity’ for the purpose of s. 43(5); cl. (d) of proviso to s. 43(5) is prospective in nature and is effective w.e.f. 1st April, 2006; i.e., asst. year 2006-07 onwards; therefore, loss on account of futures and options was rightly treated as speculative loss for the asst. year. 2004-05 under consideration. Loss on account of futures and options has to be treated as speculative loss for the asst. year 2004- 05. Clause (d) of proviso to s. 43(5) is prospective in nature and is effective from 1st April, 2006. Refer, Shree capital services Ltd., 318 ITR 1 (AT).

6. Increase of price due to Forex is entitled for adjustment in cost of asset. Refer, CIT v Arihant Costyn Limited, 327 ITR 142.

7. Where the foreign exchange contracts were made by the assessee for the purpose of acquiring capital assets and the forward contracts were settled during previous year relevant to the assessment year under appeal, the claim of the assessee to adjust the loss on settlement being legitimate, the said loss needs to be added to the cost of the concerned capital assets as per section 43A, and consequently, depreciation is to be allowed on the enhanced value of the capital assets. Refer, JSW Steel Ltd. vs. ACIT (2010), 133 TTJ 742 (Bang.)(Trib.).

8. Exchanges notified on 25-1-2006, transactions carried out in previous year relevant to assessment year 2006-07, eligible for benefit of section 43(5)(d), loss on derivative transactions to be set off against profit earned in purchase and sale of shares on derivative basis. No expenditure can be allocated towards speculative business. Refer, Seema Jain (Smt) vs. ACIT, 6 ITR 488 (Delhi)(Trib.).

9. Trading in derivatives cannot be considered as a speculative transaction and therefore set off of loss of derivative trading against the profits of the share trading business was permissible. Refer, Dy. CIT vs. Paterson Securities (P) Ltd., 48 DTR 50 (Trib.)(Chennai).

10. Transactions in dereivatives are to be considered as speculative in nature and they are to be considered as business transactions only and income therefrom has to be considered under the head " Profits and gains of business". Refer, ACIT v Parimal D Nathwani. 

11. Transaction of the purchase & sale of shares cannot be regarded to be speculative transaction in case same is settled through actual delivery through demat a/c of investor. Refer, Jahanganj Cold Storage v ACIT.

12. Even transactions which are not speculative within sec 43(5) should be deemed to be speculative one if those come within purview of explanation to sec 73. Refer, RPG Industries Limited v CIT.

13. Post s. 43(5) amendment, pre-AY 2006-07 derivatives “speculation” losses have to be treated as “non-speculation” business losses for purposes of set-off.

14. For AY 2006-07, the assessee earned profits from derivative transactions which were set-off against the earlier year’s losses from derivative transactions. The AO allowed the set-off though the CIT revised the assessment u/s 263 on the ground that as pre-amendment to s. 43(5) by the FA 2005 w.e.f. 1.4.2006, derivatives transactions were treated as “speculative transactions”, the losses therefrom could only be set-off against speculative profits and not against normal profits. On appeal to the Tribunal, HELD allowing the appeal. Refer, Gajendra Kumar T Agarwal vs. ITO. (Mumbai ITAT).

15. Delhi ITAT had declared that a CA certificate cannot be used for proof of statutory payments.

16. Losses incurred from the Exchange traded derivative transactions carried on by the  assessee during relevant assessment year are speculative transactions covered under section 43 (5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss. Section 43 (5) is not restricted to contracts which are capable of performance by actual delivery , and therefore , fact that futures contracts settled otherwise than by actual delivery cannot be a ground to hold that futures contracts are not speculative transactions under section 43 (5). Clause (d) inserted in proviso to section 43 (5) with effect from 1-4-2006 is prospective in nature and ,therefore , transactions covered under clause (d) are deemed not be speculative transactions only with effect from 1-4-2006. ( Asst year 2003-04). Refer, CIT v Bharat R.Ruia ( HUF), 199 Taxman 265.

17. Notification issued on 25th Jan, 2006 cannot curtail the applicability of cl.(d) of proviso to S.43(5) so as to make investments in derivatives done prior to 25th Jan, 2006 as speculative; transactions carried out through stock exchanges from 1st April, 2005 to 25th Jan, 2006 which are recognized by notification issued by CBDT on 25th Jan, 2006 would be eligible for being treated as non-speculative within the meaning of cl(d) of proviso to s.43(5). Refer, ACIT v. Hiren Jaswantrai Shah, 62 DTR 95 (Ahd) (Trib).

18. Assessee has offered a sum of Rs. 3,27,687/- arising out of F&O transactions under the head ‘Short term capital gains’. Assessing Officer held that as per provisions of section 43(5)(d) profits from transaction in F&O was assessable under the head ‘Business’ and not ‘Capital gains’. As regards the loss amounting to Rs. 1,35,889/- was allowed to be carried forward as speculation loss. On appeal the Commissioner (Appeals) confirmed the order of Assessing Officer. On appeal the Tribunal held that insertion of clause (d) in section 43(5) is applicable from A. Y. 2006 - 07 and even loss incurred before 25th Jan., 2006 should also be reckoned as only business loss. The Tribunal directed the Assessing Officer to assessee net profit from F&O at Rs. 3,27,687/-under the head business.(A.Y. 2006 - 07). Refer, Pradeep Kumar Harlaka v. ACIT, 65 DTR 157.

Actual payment

1. Provision for leave encashment is applicable for computing book profit. Refer, CIT v Panasonic Home Appliances, 323 ITR 344 Mad.

2. Payment of employees and employees contribution to PF made beyond the due dates could not be disallowed under section 43B for the asst year 2003-04. Refer, CIT vs. Lakhani India Ltd., 39 DTR 210 (P & H).

3. Payment made to ESI fund before due date for filing return is not hit by the rigour of s. 43B. Refer, Indwel Linings (P) Ltd., 122 TTJ 137.

4. Deduction of Gratuity available if made before filing of return of Income, Refer, CIT v Popular Vehicles and Services Limited, 325 ITR 523.

5. Amount of sales tax deferred under the State Government’s Deferment Scheme could not be disallowed u/s. 43B of the Act. Refer, Jyoti Jain., 17 DTR 286 (Raj).

6. Interest accrued on deep Discount Bonds, though payable on maturity on some later date was in view of mercantile system of accounting followed by assessee, there being no loan or advance or borrowing by assessee, s. 43B, was not allowable. Refer, Gujarat Toll Road Investment Co. Ltd., 126 TTJ 262.

7. The production incentive bonus is liable to be deducted while computing business income, but it would be allowed only when payment of bonus is made in assessment year in question. Refer, Kisan Sahakari Chini Mills Ltd., 76 Taxman 265 (Uttarakhand).

8. Even employees’ contribution to PF paid before due date of filing ROI is allowable u/s. 43B. Refer, Aimil Limited, 35 DTR 68.  However, reverse order passed in the case of B S Patel v DCIT326 ITR 457.

9. In the case of Mcdowell Limited. 314 ITR 167, it was held that Furnishing of bank guarantee is not actual payment of tax or duty as required u/s. 43B of the Income tax Act.

10. Where neither such deduction is claimed nor charge is made to profit and loss account, no disallowance can be made u/s. 43B. Refer, Dynavision Ltd., 121 ITD 461.

11. Under Explanation 3C, conversion of interest amount in to loan would not be deemed to be regarded as “actually paid” amount within the meaning of s. 43B. Refer, Eicher Motors Limited, 315 ITR 312 (MP).

12. Excise duty paid on Manufactured goods but not sold lying in closing stock, cannot be disallowed. Refer, CIT v Motor Industries Co. Limited, 326 ITR 358 Kar.

13. Sales Tax & PF paid within permissible limits is allowed. Refer, CIT v Vijay Foundry and Engg Works.

14. Electricity Board collecting duty from customers as agent of State. Section 43B is not applicable. Kerala State Electricity Board vs. Dy. CIT (2010). 329 ITR 91 (Ker.).

15. Interest on SEBI turnover charges is of the same nature as tax, duty, cess or fees and accordingly will be allowed in accordance with section 43B when paid in current year. Refer, Wall Fort Financial Services Ltd. vs. Addl. CIT, 48 DTR 138.

16. Section 43B cannot be pressed into service in a case where deduction is not otherwise allowable u/s 36(1)(va). Refer, DCIT v Ashika Stock Broking Limited.

17. Certain deduction to be allowed only on actual payment , however, section 44BB superceeds section 43B. Refer, Cloughs Projects International Pte Limited v DDIT.

18. Certain deductions to be only on actual payment basis, where time for filing return is estented in terms of proviso to section 139(1) it automatically means extension of due date for the purpose of section 43B. Refer, CIT v Narender Anand. 

19. In case of Maruti Udyog Limited, 218 Taxation 668 (SC), it was held that Unutilised Modvat credit of earlier years cannot be treated as actual payment for the purpose of section 43B. Custom duty paid and allowed as deduction under section 43B is to be taken in to account in valuation of the closing stock.  However, in the case of ACIT v Kaiser Industries Limited, it was held that Adjustment of Modvat credit towards central excise liability amounts to actual payment under section 43B.

20. Assessing officer holding that deduction can be claimed only on removal of goods from factories. High Court held that the assessee is entitled to deduction in respect of excise duty paid in advance.( Asst year 1989 - 90). Refer, CIT v Modipon Ltd, 334 ITR 106.

21. When state government is allowing the deferred payment of sales tax, same cannot be disallowed under section 43B. Refer, CIT v. Bihar Foundry and Castings Ltd, 336 ITR 387.

22. Transactions in derivatives,both index based and individual share based, are to be considered as speculative transactions with in the meaning of section 43 (5) and they can not be treated as normal business or non speculative transactions. Section 43 (5)  has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities to be considered as short term or long term gains. Refer, LG Asian Plus Ltd v Asst CIT, 46 SOT 159 (Mum) (Trib).

23. Derivative transactions carried out form 1-4-2005 to 25-1-2006 through stock exchanges,which were recognised by notification issued by CBDT on 25-1-2006, would be eligible for being treated as non speculative transactions with in the meaning of clause (d) of proviso to section 43 (5). (Asst year 2006-07). Refer, Asst CIT v Hiren Jaswantrai Shah, 46 SOT 276 (Ahd) (Trib).

24. Bonus payment made before due date of filing of return no disallowance can be made. (A.Y. 2005-06). Refer, G.D.Metsteel ( P) Ltd v Asst CIT, 47 SOT 62.

25. Assessee had taken loans from HSBC and ICICI banks. Auditors in their audit report mentioned that since assessee had not paid interest on FCNR loans from schedule banks before due date of filing of return of income, same was liable for disallowance under section 43B (d). Assessing Officer did not made the disallowance. Subsequently Assessing Officer reopened assessment and made disallowance under section 43 B (d). The Tribunal held that since HSBC and ICICI banks did not fall under categories of State.

26. Financial Institutions, provisions of section 43B (d) were not applicable to case of assessee , hence the disallowance made by the assessing Officer was deleted.( A.Y. 2001-02). Refer, Rabo India Finance Ltd v Asst CIT, 48 SOT 52 (Mum) (Trib).

27. Provision made for labour welfare expenses was not for payment of bonus or any other payment in guise of bonus but it was to be paid as a part of wages being incentive for performance of workers, disallowance cannot be made. (A. Y. 1990-91). Refer, Dy CIT v Sri Shanmugavel Mills Ltd, 202 Taxman 640 ( Madras) (High Court).

28. Assessee had made the claim only by way of a provision in Profit and loss Account and no actual payment was made by the assessee in respect of the interest payable to the financial institutions, deduction cannot be allowed.(A.Y. 1995-96). Refer, CIT v Lotus Roofings (P) Ltd, 63 DTR 254 ( Mad) (High Court).

29. Provident payment made late cannot be disallowed under section 43B.( A.Y. 2001-02). Refer, B.D.P.S. Software Ltd v Dy CIT, 62 DTR 361 (Bom) (High Court).

30. The Court held that sales tax liability on or before due date of filing for furnishing the return of income for the relevant year could not be disallowed. (A. Y.1984-85).. Refer, Kishan Automobile v. CIT, 66 DTR 465.

31. The assessee is carrying on business of manufacturing and selling of tobacco, but some sales have been kept outside the books by not paying excise duty. The Assessing Officer estimated the gross profit. The Assessee claimed the deduction under section 43B in respect of excise duty paid. The Tribunal held that when income is estimated on gross profit the excise duty deemed to have been allowed hence, excise duty paid on suppressed sales cannot be allowed as deduction under section 43B. The Tribunal also observed that as the sales are kept outside the books by unlawful means, i.e. payment of excise duty cannot be allowed. (A. Y. 1999-2000). Refer, Chetna Zarda Company v. Dy. CIT, 67 DTR 22.

I hope the above summary of case laws in respect of section 43 will be useful for your business and practice. In case you need any further clarification, please contact me at my E-mail Id mr_manish_ca@yahoo.com. You can also read other tax news and articles at my blog taxbymanish.blogspot.com.