Income Tax Deduction Not Allowable On Deposit In No-Lien/Escrow Account: Orissa High Court

The appellant/assessee, a company, is in the business of manufacturing and selling ferro alloys like ferro silicon and charge chrome. The assessee filed its return of income, declaring a total income, which was revised.

The assessee paid electricity duty to the government of Odisha at the rate of 6 paise per unit. The price was enhanced to 20 paisa per unit by the government of Odisha and a demand was raised on that basis. The assessee filed a writ petition challenging the increase in the rate of the electricity duty and the consequent demand.

In an interim order passed in the writ petition, the Court directed the assessee to continue to pay electricity duty at the rate of 6 paise per unit to the government of Odisha and to deposit the differential duty of 14 paise per unit in a separate "no-lien" account till the disposal of the case.

The writ petition was dismissed by the Court. The assessee then filed a Special Leave Petition in the Supreme Court against the judgement of the High Court. In 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 SLP was pending in the Supreme Court.

The assessee debited Rs. 11,42,61,000 in the profit and loss (P & L) account on account of 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. The assessee claimed the entire amount of electricity duty as a deduction from its income for the purposes of calculating profit and gains for the business.

The Assessing Officer 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 Income Tax Act, 1961, the deposit of a sum in a no-lien account cannot be regarded as actual payment of electricity duty. As regards the foreign travel expenses, 20% was disallowed on the ground that no details were furnished by the assessee regarding the foreign travels undertaken by the directors for business purposes.

Counsel appearing for the assessee, submitted that the requirement of Section 43B (1) of the Income Tax 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 of Odisha. The AO was in error in disallowing the deduction which had been deposited by the assessee in a no-lien/escrow account in compliance with the interim direction.

On the other hand, counsel appearing for the respondent submitted that the expression "actually paid" connotes that the assessee should have nothing to do with the amount after it was paid. In the present case, however, the deposit of the amount by the assessee into a no-lien/escrow account did not mean that the assessee did not have a 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 depended on the outcome of the case pending in the Supreme Court of India? At this stage, therefore, placing the amount in the no-lien/escrow account will not amount to 'actual'payment for the purposes of Section 43B of the Income Tax Act.

The court relied on the decision of the Supreme Court in the case of Somaiya Organics (India) Ltd. v. State of Uttar Pradesh [2001] 123 STC 623 (SC), which held that a bank guarantee was only a promise by the bank to pay the beneficiary the amount under certain circumstances as indicated in the bank guarantee. It was held that furnishing 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 observed that while the assessee may not have furnished a bank guarantee, 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 disputed amount was not in fact paid directly to the State Government. Therefore, the net result was no different from the kind of payment made by the assessee by furnishing bank guarantees in lieu of such disputed payment of duty. Therefore, the requirement of Section 43 B of the Income Tax Act was not satisfied.

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

Citation: 2022 LiveLaw (Ori) 26

Case No.: I.T.A. No.20 of 2014

Dated: 04.03.2022

Counsel For Appellant: Advocate Sachit Jolly

Counsel For Respondent: Senior Standing Counsel T.K. Satapathy

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