1997 (3) TMI 9 - SC - Income Tax

Retrospective application of tax provision benefits timely payers, prevents undue hardship

Allied Motors Private Limited Versus Commissioner of Income-Tax

The court held that the first proviso to Section 43B of the Income-tax Act should be applied retrospectively, allowing deductions for sums paid by the ... Assessee's claim that the first proviso to section 43B by the Finance Act, 1987 was applicable retrospectively, is accepted - sales-tax collected by the assessee and paid after the end of the relevant previous, but within the time allowed, is to be allowed u/s 43B 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.