1997 (3) TMI 9 - SC - Income Tax

First proviso to section 43B held retrospective: sales tax paid after year-end but within statutory time deductible for that year

Allied Motors Private Limited Versus Commissioner of Income-Tax

SC held that the first proviso to section 43B is retrospective, so sales tax collected and paid after the end of the relevant previous year but within the ... Interpretation of section 43B - Whether, 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 ? - HELD THAT:- 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 This view has been accepted by a number of High Courts. In the case of CIT v. Chandulal Venichand [1994 (1) TMI 50 - GUJARAT HIGH COURT], 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 [1990 (12) TMI 45 - CALCUTTA HIGH COURT], 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 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 [1990 (11) TMI 91 - PATNA HIGH COURT]. It has held the 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 is 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. Issues Involved:1. Interpretation of Section 43B of the Income-tax Act, 1961.2. Retrospective application of the first proviso to Section 43B.3. Impact of Explanation 2 to Section 43B.Issue-wise Detailed Analysis:1. Interpretation of Section 43B of the Income-tax Act, 1961:The primary issue in both income-tax references and civil appeals is the interpretation of Section 43B of the Income-tax Act, 1961, which was inserted with effect from April 1, 1984. Section 43B mandates that certain deductions, including sums payable by way of tax, duty, cess, or fee, are allowable only on actual payment. This provision overrides the mercantile system of accounting, which allows deductions based on accruals. The court examined whether 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 should be disallowed under Section 43B while computing the business income.2. Retrospective Application of the First Proviso to Section 43B:The first proviso to Section 43B, inserted by the Finance Act of 1987 and effective from April 1, 1988, clarifies that the section would not apply to sums actually paid by the assessee on or before the due date for furnishing the return of income for the previous year in which the liability was incurred. The court noted that the proviso was intended to remedy unintended hardships caused by the original wording of Section 43B, which did not account for statutory payments made in the next accounting year. The court held that the proviso should be given retrospective effect from the inception of Section 43B, as it was curative and designed to eliminate undue hardship.3. Impact of Explanation 2 to Section 43B:Explanation 2, added by the Finance Act of 1989 with retrospective effect from April 1, 1984, defines 'any sum payable' to mean a sum for which the assessee incurred liability in the previous year, irrespective of the statutory payment date. The court observed that Explanation 2 was introduced to clarify the legislative intent and remove ambiguities. The court held that Section 43B, the first proviso, and Explanation 2 must be read together to give effect to the true intention of the legislation. The combined reading ensures that the provision does not cause undue hardship to taxpayers who pay statutory liabilities within the prescribed period but after the relevant accounting year.Conclusion:The court concluded that the first proviso to Section 43B should be treated as retrospective, aligning with the curative nature of the amendment. This interpretation ensures that taxpayers who pay statutory liabilities within the prescribed period, even if in the next accounting year, are not unfairly disallowed deductions. The court allowed the appeals and answered the income-tax references in favor of the assessees, emphasizing that the legislative intent was to curb the practice of claiming deductions without actual payment, not to penalize timely statutory payments. There was no order as to costs.