Explanation 2 to section 43B upheld as valid, allowing tax deductions only on actual payment; section 154 notice sustained

HC upheld the constitutional validity and retrospective operation of Explanation 2 to section 43B, holding that the legislative intent is clear: deduction for taxes is allowable only on actual payment. The court rejected the challenge that Explanation 2 is ultra vires or arbitrary, observing that Parliament is competent to plug fiscal loopholes and that the provision is neither discriminatory nor violative of fundamental rights. Finding no jurisdictional error in the notice issued under section 154 seeking withdrawal of the earlier deduction, HC declined to exercise writ jurisdiction under Article 226, noting that the assessee can raise all objections before the income-tax authorities. The writ petition was dismissed.

---

---

Issues involved: Challenge to notice issued u/s 154 of the Income-tax Act seeking to withdraw deduction allowed u/s 43B.

Summary:
The petitioner appealed before the Commissioner of Income-tax (Appeals) for the assessment year 1985-86, arguing against the inclusion of amounts collected as sales tax in its income. The Commissioner allowed the deduction under section 43B based on a decision of the Andhra Pradesh High Court. Subsequently, a notice u/s 154 was issued to withdraw this deduction after an amendment to the Income-tax Act. The petitioner argued that different interpretations of section 43B exist, citing a decision of the Patna High Court.

In a separate case, the High Court interpreted section 43B as requiring the deduction for sales tax only when the payment is actually made, not when the liability is incurred. The Court disagreed with the Patna High Court's interpretation, emphasizing that clear language in the statute should guide interpretation, not subjective views on harshness. The Court also rejected the retrospective application of the proviso and upheld the validity of Explanation 2 under section 43B.

The Court found the notice u/s 154 valid, stating that any ambiguity in interpretation was resolved by the insertion of Explanation 2. The petitioner was advised to address concerns within the tax authority rather than through constitutional proceedings. Ultimately, the petition was dismissed based on the above reasoning.

---