the Orissa High Court decided that the deposit of an amount in ‘non-privileged/escrow account‘ will not constitute ‘actual payment’ under Section 43-B from Income Tax Act, 1961 (“the act”). The section provides a list of expenses allowed as a deduction under the heading ‘business and professional income’. It indicates certain expenses that can be claimed as a deduction from business income only in the year of the actual payment.
While denying relief to appellant, a division bench of Chief Justice Dr. S. Muralidhar and Judge RK Pattanaik observed,
“A payment considers a payer and a payee. If only one part is fulfilled, i.e. the payor has made the payment, but the payee has not received it, it cannot be said that the sum has been “actually” paid. The Assessor as payer may have parted with the amount, he has not totally lost control of it. Payment was made conditional and it was assured that if the Assessor ultimately wins the litigation, the amount will not actually be paid to the state government.”
The assessee has paid electricity tax to Odisha government at the rate of 6 paise per unit. This has been improved to 20 paise per unit by the government and a request was made on this basis. The Assessée challenged the increase in the electricity tax rate and the resulting demand. By an Interim Order adopted in the said Petition in Brief, the High Court ordered the Assessée to continue to pay Electricity Tax at the rate of 6 paise per unit to the Government and to deposit the differential tax of 14 paise per unit in a separate account. “non-privileged” account until the case is settled.
Subsequently, the motion in writ was dismissed by the Court. The assessee then filed a request for special authorization with the Supreme Court against the judgment. By an interim order, the Supreme Court ordered the Assessée to continue to pay the admitted amount of the claim and, with regard to the disputed amount, it was ordered to deposit it in a escrow account until further notice. Said SLP is declared pending before the Supreme Court. The assessee indicated that he has complied with the aforementioned interim order to date.
During the valuation year 2009-10, the assessee debited Rs.11,42,61,000/- in the profit and loss (P&L) account as electricity tax. Out of this amount, a sum of Rs.6,29,11,949/- has been deposited in a designated/”non-lien” escrow account with the State Bank of India as per instructions issued by the Supreme Court. Thus, the assessee claimed the full amount of the electricity tax as a deduction from his income for the purpose of calculating the profits and gains of the business.
However, the Valuation Officer (“AO”) refused payment of Electricity Duty in the amount of Rs. 6,29,11,949/- finding that under Section 43-B of the law, the deposit of a sum in an account without privilege cannot be considered as the actual payment of an electricity royalty.
Affected by AO’s decision, assessee appealed to Commissioner of Income Tax (appeals) [(CIT(A)] who confirmed the AO’s order. The assessee then appealed to the Income Tax Appeal Tribunal, which agreed with the AO as well as the CIT(A).
Appearing for the Appellant-Assessée, Lawyer Sachit Jolly argued that the requirement of Section 43B(1) of the Act was only that the assessee had “actually paid” the amount of electricity tax and not that the amount had been received by the government. He therefore contended that the AO erred in disallowing the deduction in respect of Rs. of the High Court and then of the Supreme Court.
He pointed out that as far as the assessee is concerned, he had no control over the said sum after parting with it. If, in the future, the assessee succeeds in appealing to the Supreme Court of India, in case the amount is returned to him with interest, the sum will be offered as tax under section 41(1) of the Act.. Therefore, there was no loss of income.
He argued that the AO, CIT(A), and ITAT erred in interpreting a requirement in Section 43-B of the Act that was not specified therein. to know, that not only should the amount actually be paid, but the payee should also receive the amount.
Mr. TK Satapathy, Senior Permanent Counsel for Commerce, defended the impugned ITAT order. He argued that the expression “actually paid” implies that the Assessed should have nothing to do with the amount once it has been paid. In the present case, however, the deposit of the amount by the Assessée in a non-privileged/escrow account did not mean that the Assessée had no chance of recovering it. This was not a “real” payment within the meaning of Article 43-B of the law since the intended recipient did not have access to the amount. What would happen to the amount depends on the outcome of the case pending before the Supreme Court. At this point, he argued, placing the amount in the non-lien/escrow account will not constitute a “real” payment for the purposes of Section 43B of the Act.
The Court observed that the purpose of section 43B of the Act was to ensure that a liability could only be claimed as a deduction if the assessee had actually parted with the sum without any recourse thereafter. In this case, the interim stay granted in favor of the Assessée was intended solely to ensure that the disputed amount of electricity tax did not go to the state government.
Thus, the Court held that in the absence of such an “actual” payment, the Assessée was authorized, first by the High Court, then by the Supreme Court, to deposit the disputed amount of duty on a “non-privileged”/escrow account. The very nature of the hold was to prevent the state government from having access to the amount placed in this non-lien/escrow account. Therefore, while it may be correct to say that the assessee “paid” the disputed amount, he only paid it 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 of said account.
The Court went on to state that the payment was made conditional and it was guaranteed that if the assessee were ultimately successful in the litigation, the amount would not actually be paid to the state government. Therefore, a via media has been put in place whereby the Assessed does not totally lose control of the money or has no recourse to it after having paid it.
The money was paid into a non-lien/escrow account and the state government does not have access to it. Therefore, the Court held that such a payment of the disputed amount of electricity tax would not satisfy the requirement that the amount had been “actually paid” for the purposes of claiming a deduction under the article 43-B of the law.
The Court relied on the decision in Mugat dyeing and printing works c. ACIT(2007) 290 RIR 282 (Guj)where the issue was whether the provision of a bank guarantee by the assessee for the disputed amount of excise duty would satisfy the requirement of Section 43-B of the Act that the assessee actually paid the disputed amount of excise duty.
The Gujarat High Court answered the above question in the negative. She tried it following the decision of the Supreme Court of India in Somaiya Organics (India) Ltd. vs. State of Uttar Pradesh,  123 STC 623 (CS), that a bank guarantee is only a promise by the bank to pay the beneficiary the amount under certain circumstances, as stated in the bank guarantee. It was held that the provision of a bank guarantee does not amount to making a payment as it was to avoid paying the excise duty that the bank guarantee was issued.
The Court therefore came to the conclusion that the Assessée may not have provided a bank guarantee, but its deposit of the disputed amount of the electricity tax in a non-lien/escrow account was only intended to ensure that, for the duration of the dispute, said disputed amount is not in fact paid directly to the State Government. Therefore, the net result is no different from the type of payment made by the recipient in the above-mentioned case by providing a bank guarantee in lieu of the disputed duty payment. Therefore, the requirement of Article 43-B of the law was not satisfied.
Case title: Mrs. Indian Metal and Ferro Alloys Ltd. vs. Income Tax Commissioner, Bhubaneswar
Case no: ITA No. 20 of 2014
Judgment date: March 04, 2022
Koram: Chief Justice Dr. S. Muralidhar and Justice RK Pattanaik
Written by: Chief Justice Dr. S. Muralidhar
Counsel for the Appellant: Mr. Sachit Jolly, lawyer
Counsel for the Respondent: Mr. TK Satapathy, Senior Permanent Counsel
Quote: 2022 LiveLaw (Ori) 24