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

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 ... Deduction allowable only on actual payment under section 43B - retrospective operation of curative or clarificatory amendment - reading-in of a proviso to avoid unintended hardship - reasonable construction of statute to effect legislative intent - interaction of proviso and retrospective explanation to ascertain true intentDeduction allowable only on actual payment under section 43B - reading-in of a proviso to avoid unintended hardship - Whether sales tax collected for the last quarter of the accounting year and paid after the end of that previous year but within the statutory period for payment is disallowable under section 43B as it stood prior to insertion of the proviso - HELD THAT: - Section 43B, as originally enacted, required certain deductions to be allowed only in the year in which they were actually paid, producing the consequence that sales tax collected in the last quarter (payable within the statutory period falling in the next accounting year) would be disallowed when computing the income of the previous year. That outcome frustrated the apparent purpose of the provision because it penalised taxpayers who paid sales tax within the statutory period prescribed by the sales-tax law. The Court held that the first proviso later inserted by the Finance Act, 1987, was intended to obviate this unintended hardship by allowing deduction where the sum was actually paid by the due date for filing the return and evidence of payment furnished therewith. Applying the rule of reasonable construction, the proviso supplies an obvious omission in the original section and must be read so as to give effect to the legislative purpose; accordingly the sales tax in question is deductible.Sales tax collected for the last quarter and paid within the statutory period (though after the end of the relevant previous year) is not disallowable under section 43B; deduction is allowable in favour of the assessee.Retrospective operation of curative or clarificatory amendment - interaction of proviso and retrospective explanation to ascertain true intent - reasonable construction of statute to effect legislative intent - Whether the first proviso to section 43B (inserted by the Finance Act, 1987) must be given retrospective effect and read into section 43B from its inception, having regard to Explanation 2 and the legislative intent - HELD THAT: - The Court examined the legislative background, memoranda and departmental circulars and concluded that the proviso was a remedial, curative and clarificatory amendment introduced to remove unintended consequences of the original wording of section 43B. Explanation 2 (added later with retrospective effect) and the legislative history show that section 43B, the proviso and Explanation 2 are to be read together to give effect to the true intention of Parliament. Where an amendment is curative or explanatory and is necessary to make the provision workable and avoid injustice, it is to be construed as retrospective. The contrary view taken by the Delhi High Court was rejected as inconsistent with reasonable construction and the legislative purpose.The first proviso to section 43B is to be read retrospectively and construed with Explanation 2 and the main provision so as to give effect to Parliament's intent; the proviso applies to the assessments in question.Final Conclusion: The appeals and income-tax references are allowed and answered in favour of the assessees: sales tax collected for the last quarter and paid within the statutory period, though after the end of the relevant previous year, is deductible under section 43B read with the proviso which must be construed retrospectively to give effect to the legislative intent. 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.