TMI Blog1997 (3) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... he following question has been referred to us under section 257 : " 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 disallowed under section 43B of the 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 during the year ending on June 30, 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 April 1, 1984. The assessee filed an appeal before the Commissioner of Income-tax (Appeals), inter alia, in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stood, did not contain the two provisos. The first proviso has been set out above. This proviso was inserted by the Finance Act of 1987, which came into effect from April 1, 1988. Explanation 2 has been added subsequently by the Finance Act of 1989, but with retrospective effect from April 1, 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 the insertion of section 43B, however, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident fund, Employees' State Insurance Scheme, etc., for long periods 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 provide 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 employees shall be allowed only in 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, is to the same effect. Section 43B was, therefore, clearly aimed at curbing the activities of those taxpayers, who did not discharge their statutory liability of payment of excise duty, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perates 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 April 1, 1984. The Memorandum explaining the reasons for introducing Explanation 2, states, inter alia, as follows :--- " 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 duly, etc., liability for which was incurred in the previous year will be allowed as a deduction, if it is actually paid by the due date for 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 withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from its inception along with Explanation 2. This position is reinforced by a Departmental Circular No. 550, dated January 1, 1990 :--- "Amendment of provisions relating to certain deductions to 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 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 be 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 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is inserted to remedy unintended consequences and to make 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 Courts. In the case of CIT v. Chandulal Venichand [1994] 209 ITR 7, the Gujarat High Court has held that the 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 deductible. This decision deals with assessment year 1984-85. The Calcutta High Court in the case of CIT v. Sri Jagannath Steel Corporation [1991] 191 ITR 676, has taken a similar view holding that the statutory liability for sales tax actually discharged after the expiry of the accounting year in compliance with the relevant statute 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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