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PETITIONER:

ALLIED MOTORS (P) LTD.

Vs.

RESPONDENT:

COMMISSIONER OF INCOME-TAX, DELHI.

DATE OF JUDGMENT: 10/03/1997

BENCH:

A.M. AHMADI, SUJATA V. MANOHAR, K. VENKATASWAMI

ACT:

HEADNOTE:

JUDGMENT:

(With Tax Reference No.1/94, CA Nos. 3175/91 and 2380/91)

J U D G M E N T

Mrs. Sujata V. Manohar, J.

The two Income-tax References which are before us deal

with a common question relating to the interpretation of

Section 43B of the Income-tax Act, 1961. The references have

been made under Section 256(1) of the Income-tax Act, 1961.

Since the same question arises in the two civil appeals also

these appeals have been heard along with these references.

For the sake of convenience, we are taking the statement of

the case in Income-tax Reference No.2 of 1993.

The following question has been referred to us under

Section 256(1):-

"Whether on the facts and in the

circumstances of the case, the

sales-tax collected by the assessee

and paid after the end of the

relevant previous year but within

the time allowed under the relevant

sales-tax law is to be Income-Tax

Act, 1961 while computing the

business income of the said

previous year "?

The relevant assessment year is 1984-85, the relevant

accounting period being the year ending on 30th of June,

1983. The assessee filed the return declaring an income of

Rs. 1,91,940/-. The Income-Tax Officer, however, disallowed,

inter alia, deduction claimed by the assessee of an amount

of Rs. 5,78.240/- which was on account of sales-tax

collected by the assessee for the last quarter of the

relevant accounting year. This amount was payable within 30

days of the end of the quarter. The deduction which was

claimed by the assessee was disallowed by the Income-tax

Officer under Section 43B of the Income-tax Act, 1961 which

was inserted in the statute with effect from 1.4.1984. The

assessee filed an appeal before the Commissioner of Income-

Tax (Appeals), inter alia, in respect of this disallowance.

However, the appeal was dismissed. The assessee filed an

appeal before the Income-Tax Appellate Tribunal. The

tribunal also dismissed the appeal on the basis of the

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judgments of the Delhi High Court in the case of Sanghi

Motors v. Union of India (187 ITR 703) and Escorts Ltd. v.

Union of India & Ors. (189 ITR 81). Hence the present

reference has come before us. One of the judgment relied

upon by the tribunal was the judgment in the case of

Escorts Ltd. v. Union of India (supra). Civil Appeal No.

3175 (NT) of 1991 is an appeal from the decision of the

Delhi High Court in the above case which is being heard

along with the present tax-references.

The relevant provisions of Section 43B for our purpose

ar as follows :-

"43B:- Certain deductions to be

only on actual payment --

Notwithstanding anything

contained in any other provision of

this Act, a deduction otherwise

allowable under this Act in respect

of --

(a) any sum payable by the assessee

by way of tax, duty, cess or fee,

by whatever name called, under any

law for the time being in force, or

(b) ............................

(c) ............................

(d) ............................

shall be allowed (irrespective of

the previous year in which the

liability to pay such sum was

incurred by the assessee according

to the method of accounting

regularly employed by him) only in

computing the income referred to in

section 28 of that previous year

fin which such sum in actually paid

by him :

- Provided that nothing

contained in this section shall

apply in relation to any sum

referred to in clause (a) or clause

(c) or clause (d) which is actually

paid by the assessee on or before

the due date applicable in his case

for furnishing the return of income

under sub-section (1) of section

139 in respect of the previous year

in which the liability to pay such

sum was incurred as aforesaid and

the evidence of such payment is

furnished by the assessee along

with such return :

Provided further .........

Explanation 1 - ..........

- - Explanation 2 -- For the

purposes of clause (a), as in force

at all material times, 'any sum

payable means a sum for which the

assessee incurred liability in the

previous year even though such sum

might not have been payable within

that year under the relevant law.

Explanation 3 - .............

Explanation 4 - ............."

Section 43B was inserted in the Income-tax Act, 1961

with effect from 1.4.1984. The section, as it originally

stood, did not contain the two provisos. The first proviso

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has been set out above. The proviso was inserted by the

Finance Act of 1987 which came into effect from 1.4.1988.

Explanation 2 has been added subsequently by the Finance Act

of 1989 but with retrospective effect from 1.4.1984. In

these References and appeals we are concerned with the

application of Section 43B as it stood before the provisos

were added.

Prior to the insertion of Section 43B in the Income Tax

Act, 1961, income chargeable under the head 'profits and

gains' of business or profession was computable in

accordance with the method of accounting regularly employed

by the assessee as per Section 145 of the Income-tax Act,

1961. An assessee who had adopted the mercantile system of

accounting would be entitled to account for his income and

expenditure on the basis of accrual and not on the basis of

actual receipt or disbursement. After insertion of Section

43B, however, even if the assessee had regularly adopted

mercantile system of accounting, the amount of tax payable

by the assessee could be deducted only in the year in which

the assessee incurred the liability to pay that tax. Hence

an assessee (as in the present case), who had collected

sales-tax in the last quarter of the previous accounting

year and deposited it in the treasury within the statutory

period falling in the next accounting year, would not be

entitled to claim any deduction for it. The sales-tax so

collected will form a part of the assessee's income. To

obviate this kind of unexpected outcome of section 43B, the

first proviso was added in Section 43B by the Finance Act of

1987. The proviso makes it clear that the Section will not

apply in relation to any sum which is actually paid by the

assessee in the next accounting year if it is paid on or

before the due date for furnishing the return of income in

respect of the previous year in which the liability to pay

such sum was incurred and the evidence of such payment is

furnished by the assessee along with the return.

The proviso, however, was not on the statute book when

the assessments were made in respect of these assessees

since the assessments pertain to assessment year prior to

the insertion of the proviso in Section 43B. The assessees,

however, contend that the proviso should be given effect to

retrospectively from the date when section 43B became a part

of the Income-tax Act, 1961, as it is intended to obviate

unexpected hardships in the application of Section 43B.

To under stand the circumstances in which section 43B

came to be inserted in the Income-tax Act and the mischief

which it sought to prevent, it is necessary to look at the

memorandum explaining the provisions in the Finance Bill of

1983 [(1983) 140 ITR (St.) 160] :-

"59. Under the Income-tax Act,

profits and gains of business and

profession are computed in

accordance with the method of

accounting regularly employed by

the assessee. Broadly stated, under

the mercantile system of

accounting, income and outgo are

accounted for on the basis of

accrual and not on the basis of

actual disbursements or receipts.

for the purposes of computation of

profits and gains of business and

profession, the Income-tax act

defines the word 'paid' to mean

'actually paid or incurred'

according to the method of

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accounting on the basis of which

the profits or gains are computed.

60. Several cases have come to

notice where tax payers do not

discharge their statutory liability

such as in respect of excise duty,

employer's contribution to

provident fund, Employees' State

Insurance Scheme, etc.. for long

period of time, extending sometimes

to several years. For the purpose

of their income-tax assessments,

they claim the liability as

deduction on the ground that they

maintain accounts on mercantile or

accrual basis. On the other hand

they dispute the liability and do

not discharge the same. For some

reason or the other undisputed

liabilities also are not paid. To

curb this practice, it is proposed

to proved that deduction for any

sum payable by the assessee by way

of tax or duty under any law for

the time being in force

(irrespective of whether such tax

or duty is disputed or not) or any

sum payable by the assessee as an

employer by way of contribution to

any provident fund, or

superannuation fund or gratuity

fund or any other fund for the

welfare of computing the income of

that previous year in which such

sum is actually paid by him."

The Budget Speech of the Finance Minister for the year

1983-84, reproduced in (1983) 140 ITR (St.) 31, is to the

same effect.

Section 43B was, therefore, clearly aimed at curbing

the activities of those tax payers who did not discharge

their statutory liability of payment of excise duty,

employer's contribution to provident fund etc. for long

periods of time but claimed deductions in that regard from

their income on the ground that the liability to pay these

amounts had been incurred by them in the relevant previous

year. It was to stop this mischief that Section 43B was

inserted. It was clearly not realised that the language in

which Section 43B was worded would cause hardship to those

tax payers who had paid sales-tax within the statutory

period prescribed for this payment, although the payment so

made by them did not fall in the relevant accounting year.

It could be paid only in the next quarter which fell in the

next accounting year. Therefore, even when the sales-tax had

in fact been paid by the assessee within the statutory

period prescribed for its payment and prior to the filing of

the income tax return, these assessees were unwittingly

prevented from claiming a legitimate deduction in respect of

the tax paid by them. This was not intended by Section 43B.

Hence the first proviso was inserted in Section 43B. The

amendment which was made by the Finance Act of 1987 in

Section 43B by inserting, inter alia, the first proviso, was

remedial in nature, designed to eliminate unintended

consequences which may cause undue hardship to the assessee

and which made the provision unworkable or unjust in a

specific situation.

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Looking to the curative nature of the amendment made by

the Finance Act of 1987 it has been submitted before us that

the proviso which is inserted by the amending Finance Act of

1987 should be given retrospective effect and be read as

forming a part of Section 43B from its inception. This

submission has taken support from decisions of a number of

High Courts before whom this question came up for

consideration. The High Courts of Calcutta, Gujarat,

Karnataka, Orissa, Gauhati, Rajasthan, Andhara Pradesh,

Patna and Kerala appear to have taken the view that the

proviso must be given retrospective effect. Some of these

High courts have held that "sum payable" under Section

43B(a) refers only to the sum payable in the same accounting

year thus excluding sales tax payable in the next accounting

year from the ambit of Section 43B(a). The Delhi High Court

has taken a contrary view holding that the first proviso to

Section 43B operates only prospectively. We will refer only

to some of these judgments.

Explanation 2 was added to Section 43B by the Finance

Act of 1989 with retrospective effect from 1.4.1984. The

Memorandum explaining the reasons for introducing

Explanation 2, states inter alia, as follows [(1989) 176 ITR

(St.) 123] :-

"24. Under the existing

provisions of section 43B of the

Income-tax Act, a deduction for any

sum payable by way of tax, duty

cess or fee, etc., is allowed on

actual payment basis only. The

objective behind these provisions

is to provide for a tax

disincentive by denying deduction

in respect of a statutory liability

which is not paid in time. The

Finance Act, 1987, inserted a

proviso to section 43B to provide

that any sum payable by way of tax

or duty, etc., liability for which

was incurred in the previous year

will he allowed as a deduction, if

it is actually paid by the due date

of furnishing the return under

Section 139(1) of the Income-tax

Act, in respect of the assessment

year to which the aforesaid

previous year relates. This proviso

was introduced to remove the

hardship caused to certain

taxpayers who had represented that

since the sales-tax for the last

quarter cannot be paid within that

previous of section 43B will

unnecessarily involve disallowance

of the payment for the last

quarter.

Certain courts have

interpreted the provisions of

section 43B in a manner which may

negate the very operations of his

section. The interpretation given

by these courts revolves around the

use of the words 'any sum payable'.

The interpretation given to these

words is that amount payable in a

particular year should also be

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statutorily payable under the

relevant statute in the same year.

This is against the legislative

intent and it is, therefore,

proposed, by way of a clarificatory

amendment and for removal of

doubts, that the words 'any sum

payable' be defined to mean any

sum, liability for which has been

incurred by the taxpayer during the

previous year irrespective of the

date by which such sum is

statutorily payable.

This amendment will take

effect from April 1, 1984."

While interpreting Section 43B without the first

proviso some of the High Courts, in order to prevent undue

hardship to the assessee, had taken the view that Section

43B would not be attracted unless the sum payable by the

assessee by way of tax, duty, cess or fee was payable in the

same accounting year. If the tax was payable in the next

accounting year, Section 43B would not be attracted. This

was done in order to prevent any undue hardship to assessees

such as the ones before us. The memorandum of reasons takes

note of the combined effect of Section 43B and the first

proviso inserted by the Finance Act, 1987. After referring

to the fact that the first proviso now removes the hardship

caused to such tax payers it explains the insertion of

Explanation 2 as being for the purpose of removing any

ambiguity about the term 'any sum payable' under clause (a)

of Section 43B. This Explanation is made retrospective. The

Memorandum seems to proceed on the basis that Section 43B

read with the proviso takes care of the hardship situation

and hence Explanation 2 can be inserted with retrospective

effect to make clear the ambit of Section 43B(a). Therefore,

Section 43B(a), the first proviso of Section 43B and

Explanation 2 have to be read together as giving effect to

the true intention of Section 43B. If Explanation 2 is

retrospective, the first proviso will have to be so

construed. Read in this light also, the proviso has to be

read into Section 43B from its inception along with

Explanation 2.

This position is reinforced by a departmental Circular No.

550 dated 1st of January 1990, [(1990) 182 ITR (St.) 114,

123] :-

"AMENDMENT OF PROVISIONS

RELATING OF CERTAIN DEDUCTION OT BE

ALLOWED ONLY ON ACTUAL PAYMENT.

15.1 Under the existing

provisions of section 43B of the

Income-Tax Act, 1961, a deduction

for any sum payable by way of tax,

duty, cess or fee, etc., is allowed

on actual payment basis only. The

objective behind these provisions

is to provide for a tax

disincentive by 'statutory

liability' which is not paid in

time. The Finance Act, 1987,

inserted a proviso to section 43B

to provide that any sum payable

liability for which was incurred in

the previsous year will be allowed

as a deduction, if it is actually

paid by the due date of furnishing

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the return under Section 139(1) of

the Income-tax Act, in respect of

assessment year to which the

aforesaid previous year relates.

This proviso was introduced to

remove the hardship caused to

certain taxpayers who had

represented that since the sales

tax for the last quarter cannot be

paid within the previous year, the

original provisions of section 43B

will unnecessarily involve

disallowance of the payment for the

last quarter.

Certain courts have

interpreted the provisions of

section 43B in a manner which may

negate the very operation of this

section. The interpretation given

by these courts revolves around the

use of the words ' any sum

payable'. The interpretation given

to these words is that the amount

payable in a particular year should

also be statutorily payable under

the relevant statute in the same

year. Thus, the sales tax in

respect of sales made in the last

quarter was held to be totally

outside the purview of section 43B

since the same is not statutorily

payable in the financial year to

which it relates. This is against

the legislative intent and,

therefore, by way of inserting an

Explanation, it has been clarified

that the words 'any sum payable'

shall mean any sum, liability for

which has been incurred by the

taxpayer during the previous year

irrespective of the date by which

such sum is statutorily payable

........"

The departmental understanding also appears to be that

Section 43B, the proviso and Explanation 2 have to be read

together as expressing the true intention of Section 43B.

Explanation 2 has been expressly made retrospective. The

first proviso, however, cannot be isolated from Explanation

2 and the main body of Section 43B. without the first

proviso, Explanation 2 would not obviate the hardship or the

unintended consequences of Section 43B. The proviso supplies

an obvious omission. But for this proviso the ambit of

Section 43B becomes unduly wide bringing within the scope

those payments which were not intended to be prohibited from

the category of permissible deductions.

In the case of Goodyear India Ltd. v. State of Haryana

and Anr. (188 ITR 402) this court said that he rule of

reasonable construction must be applied while construing a

statute. Literal construction should be avoided if it

defeats the manifest object and purpose of the Act.

Therefore, in the well known words of Judge learned

Hand, one cannot make a fortress out of the dictionary; and

should remember that statutes have some purpose and object

to accomplish whose sympathetic and imaginative discovery

is the surest guide to their meaning. In the case of R.B.

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Jodha Mal Kuthiala v. Commissioner of Income-tax, Punjab,

jammu & Kashmir and Himachal Pradesh (82 ITR 570), this

Court said that one should apply the rule of reasonable

interpretation. A proviso which is inserted to remedy

unintended consequences and to made the provision workable,

a proviso which supplies an obvious omission in the section

and is required to be read into the section to give the

section a reasonable interpretation, requires to be treated

as retrospective in operation so that a reasonable

interpretation can be given to the section as a whole.

This view has been accepted by a number of High Court.

In the case of Commissioner of Income-Tax v. Chandulal

Venichand ([1994] 209 ITR 7), the Gujarat High Court has

held that he first proviso to section 43B is retrospective

and sales-tax for the last quarter paid before the filing of

the return for the assessment year is deductable. This

decision deals with assessment year 1984-85. The Calcutta

High Court in the case of Commissioner of Income-tax v. Sri

Jagannath Steel Corporation ([1991] 191 ITR 676), has taken

a similar view holding that the statutory liability for

sales-tax actually discharge after the expiry of accounting

year in compliance with the relevant stature is entitled to

deduction under Section 43B. The High Court has held the

amendment to be clarificatory and, therefore, retrospective.

The Gujarat High Court in the above case held the amendment

to be curative and explanatory and hence retrospective. The

Patna High Court has also held the amendment inserting the

first proviso to be explanatory in the case of Jamshedpur

Motor Accessories Stores v. union of India and Ors. ([1991]

189 ITR 70.), It was held that amendment inserting first

proviso to be retrospective. The special leave petition from

this decision of the Patna High Court was dismissed. The

view of the Delhi High Court, therefore, that the first

proviso to section 43B will be available only prospectively

does not appear to be correct. As observed by G.P. Singh in

his Principles of statutory Interpretation, 4th Edn. Page

291, "It is well settled that if a statute curative or

merely declaratory of the previous law retrospective

operation is generally intended." In fact the amendment

would not serve its object in such a situation unless it is

construed as retrospective. The view, therefore, taken by

the Delhi High Court cannot be sustained.

In the premises the appeals are allowed and the Income-

tax references are answered in favour of the assessees and

against the revenue. In the circumstances, however, there

will be no order as to costs.