Deposit Of Amount In No-Lien/Escrow Account Will Not Constitute 'Actual Payment' U/S 43B Of Income Tax Act: Orissa High Court

While denying relief to the appellant, a Division Bench of Chief Justice Dr. S. Muralidhar and Justice R.K. Pattanaik observed,

"A payment envisages a payer and a payee. If only one part is fulfilled viz., the payer has made the payment, but the payee has not received it, then it cannot be said that the sum has been 'actually' paid. While the Assessee as payer may have parted with the amount, it has not totally lost control over it. The payment has been made conditional and it has been ensured that if the Assessee ultimately succeeds in the litigation, the amount will not be actually paid to the State Government."

Factual Background:

The Assessee paid electricity duty to the Government of Odisha at the rate of 6 paise per unit. This was enhanced to 20 paise per unit by the Government and a demand was raised on that basis. The Assessee challenged the hike in the rate of the electricity duty and the consequent demand. By an interim order passed in the said writ petition, the High Court directed the Assessee to continue to pay electricity duty at the rate of 6 paise per unit to the Government and to deposit the differential duty of 14 paise per unit in a separate 'no-lien' account till the disposal of the case.

Subsequently, the writ petition was dismissed by the Court. The Assessee then filed a Special Leave Petition in the Supreme Court against the said judgment. By an interim order, the Supreme Court directed the Assessee to continue paying the admitted amount of demand and as regards the disputed amount, it was directed to be deposited in an escrow account till further orders. The said SLP is stated to be pending in the Supreme Court. The Assessee conveyed that it has been complying with the aforementioned interim order till date.

During the Assessment Year 2009-10, the Assessee debited Rs.11,42,61,000/- in the profit and loss (P&L) account as electricity duty. Of this, a sum of Rs.6,29,11,949/- was shown to have been deposited in a designated escrow/ 'no-lien' account with the State Bank of India in terms of the directions issued by the Supreme Court. Thus, the Assessee claimed the entire amount of electricity duty as deduction from its income for the purposes of calculating profit and gains of the business.

However, the Assessing Officer ("AO") disallowed the payment of electricity duty in the sum of Rs. 6,29,11,949/- by holding that in terms of Section 43-B of the Act, deposit of a sum in a no-lien account cannot be regarded as actual payment of electricity duty.

Aggrieved by the decision of the AO, the Assessee appealed to the Commissioner of Income Tax (Appeals) [(CIT(A)] who confirmed the order of the AO. The Assessee then went in further appeal to the Income Tax Appellate Tribunal, which concurred with the AO as well as the CIT(A).

Contentions of the Appellant:

Appearing for the Appellant-Assessee, Advocate Sachit Jolly contended that the requirement of Section 43B(1) of the Act was only that the Assessee should have "actually paid" the electricity duty amount and not that the amount should have been received by the Government. He accordingly submitted that the AO was in error in disallowing deduction in respect of Rs. 6,29,11,949/- which had been deposited by the Assessee in a no-lien/escrow account in compliance with the interim direction of the High Court and then the Supreme Court.

He stressed that as far as the Assessee is concerned, it had no control over the said sum after it had parted with it. If in the future the Assessee succeeded in the appeal before the Supreme Court of India, then in the event of the amount being returned to it with interest, the sum would be offered for tax under Section 41(1) of the Act. Therefore, there was no loss to the Revenue.

He submitted that the AO, CIT (A) and the ITAT had erred in reading into Section 43-B of the Act a requirement was not specified therein viz., that not only the amount would have to be actually paid but the payee had to also receive the amount.

Contentions of the Respondent:

Mr. T.K. Satapathy, Senior Standing Counsel for the Department, defended the impugned order of the ITAT. He argued that the expression "actually paid" connotes that the Assessee should have nothing to do with the amount after it is paid. In the present case, however, the depositing of the amount by the Assessee in a no-lien/escrow account did not mean that the Assessee did not have chance of receiving it back. It was not an 'actual' payment in the sense envisaged in Section 43-B of the Act since the intended recipient had no access to the amount. What would happen to the amount is dependent upon the outcome of the case pending in the Supreme Court. At this stage, he pleaded, placing of the amount in the no-lien/escrow account will not amount to 'actual' payment for the purposes of Section 43B of the Act.

Observations of the Court:

The Court observed that the objective of Section 43B of the Act was to ensure that a liability could be claimed as deduction only if the Assessee has actually parted with the sum without any recourse to it thereafter. In the present case, the interim stay granted in favour of the Assessee was only to ensure that the disputed amount of electricity duty did not go to the State Government.

Thus, the Court held, short of such 'actual' payment, the Assessee was permitted, first by the High Court and then by the Supreme Court, to deposit the disputed amount of duty in a 'no-lien'/escrow account. The very nature of the stay was to prevent the State Government from having access to the amount placed in such no-lien/escrow account. Therefore, while it may be correct to say that the Assessee 'paid' the amount in dispute, it paid it only into an account from which the State Government could not withdraw the amount. In other words, under the orders of this Court as well as the Supreme Court, the State Government was prevented from having access to the sum in the said account.

The Court proceeded on to hold that the payment has been made conditional and it has been ensured that if the Assessee ultimately succeeds in the litigation, the amount will not be actually paid to the State Government. Therefore, a via media has been put in place whereby the Assessee does not fully lose control of the money or has no recourse to it after having paid it.

The sum has been paid into a no-lien/escrow account, and the State Government does not have access to it. Hence, the Court was of the considered view that such payment of the disputed amount of electricity duty this will not satisfy the requirement of the amount having been 'actually paid' for the purposes of claiming deduction under Section 43-B of the Act.

The Court placed reliance upon the decision in Mugat Dyeing and Printing Mills v. ACIT, (2007) 290 ITR 282 (Guj), where the question that arose was whether furnishing of a bank guarantee by the Assessee for the disputed amount of excise duty would satisfy the requirement under Section 43-B of the Act of the Assessee having actually paid the disputed amount of excise duty.

The Gujarat High Court answered the above question in the negative. It held so following the decision of the Supreme Court of India in Somaiya Organics (India) Ltd. v. State of Uttar Pradesh, [2001] 123 STC 623 (SC), that a bank guarantee is only a promise by the bank to pay to the beneficiary the amount under certain circumstances as indicated in the bank guarantee. It was held that furnishing of a bank guarantee will not tantamount to making payment as it was to avoid making payment of the excise duty that the bank guarantee was issued.

The Court accordingly came to the conclusion that the Assessee may not have furnished a bank guarantee, but its deposit of the disputed electricity duty amount in a no-lien/escrow account was only to ensure that during the pendency of the litigation the said disputed amount is not in fact paid directly to the State Government. Therefore, the net result is no different from the kind of payment made by the Assessee in the aforementioned case by furnishing bank guarantee in lieu of such disputed payment of duty. Therefore, the requirement of Section 43-B of the Act was not satisfied.

Case Title: M/s. Indian Metal and Ferro Alloys Ltd. v. Commissioner of Income Tax, Bhubaneswar

Case No.: I.T.A. No. 20 of 2014

Date of Judgment: 04 March 2022

Coram: Chief Justice Dr. S. Muralidhar and Justice R.K. Pattanaik

Authored by: Chief Justice Dr. S. Muralidhar

Counsel for Appellant: Mr. Sachit Jolly, Advocate

Counsel for Respondent: Mr. T.K. Satapathy, Senior Standing Counsel

Citation: 2022 LiveLaw (Ori) 24