1. This is an appeal by the assessee, a registered firm, against the order of the Appellate Assistant Commissioner upholding the order of the Income-tax Officer under Section 154.
2. The assessment was completed on a total income of Rs. 61,520. The ITO later on found that the sales-tax outstanding of Rs. 17,440, as shown in the balance sheet, has not been considered for the purpose of Section 43B. A notice Under Section 154 was issued for this purpose.
The assessee stated that they had one month's time for payment of sales-tax and this was shown as outstanding in respect of the dues of the last quarter. It was further submitted that the assessee has not charged the sales-tax amount in the Profit & Loss account and hence the profit or loss is not affected. The ITO did not accept this contention.
He held that only the actual sales-tax paid could be allowed as a deduction and since this amount did not represent actual payment it has to be disallowed under Section 43B. The Appellate Assistant Commissioner upheld the disallowance.
3. The assessee is in further appeal. Shri Sodani submitted that the facts of the case were not properly appreciated by the Departmental authorities. He submitted that the assessee charged sales-tax from the customers and was crediting it to a separate sales-tax account.
Whatever sales-tax charged or deposited during this year is debited to sales-tax account. These debits represent the monthly or quarterly sales-tax amount paid in any of these years. No provision was made for sales-tax payable in the last quarter of this year. Nothing is debited to the Profit & Loss account. Therefore, the provision of Section 43B would not apply at all.
4. We have seen the accounts maintained by the assessee regarding the sales-tax liability. The account as it stood for the prior accounting year ending Diwali 1982 is as follows : -To payments 17,724.00 By Balance b/d 16,006.52To provisions Nil By Collection duringTo Balance c/d 21,808.85 the year 23,526.33 Total Rs. 39,532.85 Total Rs. 39,532.85The account as it stood for this year is given below : - Assessment year 1984-85To payments for the period : By Openingon 27-12-1982 Balance 21,808.85(1-7-1982 to 15-11-1982) 12,647.00 By Realisation ofon 14-2-1983 Sales-tax during(16-11-1982 to 14-1-1983) 2,925.00 the year 16,261.04on 11-6-1983 -------------- -------------- Total Rs. 38,069.89 Total Rs. 38,069.89 -------------- -------------- It is in the above circumstances that the balance of Rs. 17,441 showed in the balance sheet as outstanding. It would be noticed that the collections made during this year only of Rs. 16,261. The payments made referred to the prior accounting year also. The payments as far as this year is concerned, are only three items, i.e., Rs. 2,925, Rs. 3,384 and Rs. 500. Shri Sodani had particularly referred to the absence of any provision in the sales-tax account in respect of the last quarter of the accounting year, i.e., the period covered by 9-8-1983 to 4-11-1983.
In respect of this period, an amount of Rs. 8,380 was due and it has been paid on 3-12-1983.
5. On these facts the first question to be decided is whether the ITO would be justified in applying the provisions of Section 154. In our opinion, the order Under Section 154 falls into two parts. The first part refers to a mistake committed by the ITO in not considering the provisions of Section 43B at all. When there are materials prima facie like outstanding sales-tax, it is mandatory for the ITO to consider the provisions of Section 42B. Insofar as he had over-looked to apply these mandatory provisions and consider whether any disallowance is required, there is a mistake. It is this mistake which the ITO had attempted to rectify. So this part of the order Under Section 154 is upheld. We may only refer to one authority in this connection i.e., India Woollen Textile Mills (P.) Ltd. v. CIT [1978] 111 ITR 205 (Punj. & Har.). In that case it has been held that where the statutory provision was completely lost sight of, the matter can be treated as an error apparent on the record and rectifiable.
6. The second part of the order is really giving effect to the provisions of Section 43B. In this part of the order the ITO must be satisfied that the facts of the case call for disallowance Under Section 43B. Herein the first issue which will have to be decided is whether the assessee has claimed any deduction in computing the income from business. The case of Shri Sodani is that no deduction at all has been claimed. We arc unable to accept this submission. It is now well settled that the amount collected by the assessee from the customers by way of sales-tax is also a trading receipt. Its character is determined at the point of receipt. This trading receipt cannot change its character merely because the assessee chose to credit it in the sales-tax payable account instead of trading account. Either way it would continue to be a trading receipt and could be brought to tax.
Prior to the introduction of Section 43B the crediting of the sales-tax receipt to another account made no difference at all in the ultimate computation of the total income. That was because the assessee could claim an exact equivalent amount as sales-tax liability. Thus the addition made torwords the income the amount collected as sales-tax would be neutralised by the deduction towards the liability to pay sales-tax.
7. The position altered after the introduction of Section 43B. This section allows deduction only on actual payment. Therefore, the position earlier that the sales-tax liabilities whether paid or not, could be deducted no longer apply. As against the entire liability which could have been prior to Section 43B deductible, now the assessee could get a deduction only on the actual payments made. Thus, the fact that the receipts and payments are credited and debited to another account is totally immaterial and irrelevant. Therefore, this reasoning would not help the assessee.
8. We must also consider the legislative changes introduced in Section 43B, so far as the sales-tax is concerned. There was representation to the Government that strict interpretation of Section 43B was leading to difficulties for the assessees in respect of sales-tax payments which had not yet fallen due as per the Sales-tax Rules and Acts. In order to mitigate this difficulty, the Finance Act, 1987 has introduced a proviso to the section. By this proviso it was made clear that the provisions of Section 43B would not be applicable if the assessee had made the payments of the sales-tax in respect of the last quarter or the last month of the accounting year before the day by which the income-tax return should be filed Under Section 139. However, the Legislature made it clear that this would come into effect only from the assessment year 1988-89.
9. The next change brought about in the Legislature was the introduction of the Explanation by the Finance Act, 1989. This was necessitated, as the memorandum explaining the provisions of the Bill states, to nullify certain decisions taken by the High Courts which had expressed a view that the sales-tax which had not yet fallen due for payment under the Sales-tax Acts and Rules cannot be disallowed Under Section 43B. One of the decisions on this point is the decision of the Hon'ble Andhra Pradesh in the case of Srikakollu Subba Rao & Co. v.Union of India [1988] 173 ITR 708/38 Taxman 272. The Explanation now provides that in determining whether the sales-tax is payabe or not within the accounting year, the Sales-tax Acts and Rules will not be relevant.
In this back-ground of the changes brought in by the Finance Act, 1987 and the Finance Act, 1989, two different arguments have to be considered. The first argument is that the proviso brought in by 1987 Finance Act is declaratory in character', and, therefore, it would apply for all the assessment years. We find it difficult to accept this submission. The characteristics of a declaratory Act has been stated by Craise and approved by the Supreme Court in Central Bank of India v.Their Workmen AIR For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what the Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word 'declared' as well as the word 'enacted'.
Apart from that, in his commentary Principles of Statutory Interpretation, Justice G.P. Singh has observed at page 290 : - But the use of the words 'it is declared' is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language 'shall be deemed always to have meant' is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous.
The above extracts refer to the declaratory Acts but the principle would be equally applicable to sections which are introduced by amendments to existing Acts. In order to have a declaratory Act, there should have been some doubts existing as to the meaning of the Statute or some judicial error. If we were to take only these preambles, it could be said that the proviso was declaratory. But Justice Singh also has pointed out that the Act or the section may introduce new rules of law and in that case it would not necessarily be retrospective.
Therefore, the nature of an enactment must be decided by looking into the substance. Now two points have to be noticed in this connection.
The first is that the 1987 amendment had deliberately made it applicable only from the assessment year 1988-89.
Thus, it was not the intention of the Parliament to make it applicable for the prior assessment years. Against this clear indication that it would be applied only from 1988 and not even from 1987-88, it would be difficult to say it was retrospective. The second point to be noticed is certain new limitations which would not have existed had it been declaratory, had been introduced. That is, the extension of time limit up to I he day of filing of the return under Section 139. This is totally alien to substantive provisions of Section 43B as it stood at that time.
10. We may now consider the Amendment in 1989. By this amendment an Explanation had been introduced which reads as follows : - For the purpose of Clause (a), as in force at all material times, 'any sum payable' means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
This has been specifically made retrospective from 1984-85. So its intention is very clear. Whereas the proviso discussed earlier deliberately made operative from 1988-89, this Explanation had deliberately been made retrospective from 1984-85. In this connection, we may also refer to the intention of the Parliament as expressed in the memorandum explaining the provisions in Finance Bill, 1989 : - 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 by cenying 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 the assessment year to which the aforesaid previous year relates. This proviso was introduced to remove the hardship caused to certain tax-payers who had represented that since the sales-tax for the last quarter cannot be paid within that previous year, the original provisions of Section 43B will unnecessarily involve disallowance of the payment for the last quarter.
Certain courts have interpreted the provisions of Section 43B in a manner which may negate the very operation of this section. The interpretation given by these courts revolves around the use of the words "any sum payable'. The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year.
This is against the legislative intent and it is, therefore, proved by way of a clarificatory amendment and for removal of doubts, that the words 'any sum payable', be defined to mean any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable.
The above explanatory memo especially the second paragraph makes it very clear that it was never the intention of the Legislature to exclude the liabilities to sales-tax which had not fallen due for payment before the end of the accounting year. The Legislature further says that it is clarificatory in nature. The observations of Justice Singh in his book Principles of Statutory Interpretation, referred earlier, would now clearly apply to this Explanation and not to the proviso. Explanation had been introduced to correct a judicial error.
We have already noticed that the amendment was made to neutralise certain decisions like that of the Andhra Pradesh High Court in Srikakollu Subba Rao & Co.'s case (supra). We have noticed that the amendment is clarificatory as the memorandum itself shows. Therefore, this Explanation introduced by 1989 Finance Act which expresses the intention of the Legislature and not the proviso.
11. In this connection a reference should be made to a decision of a Single Member in the case of Weld Craft (P.) Ltd. v. ITO 18 ITC 154.
The Bench had considered the amendment by the finance Act, 1989 and had held that the amendment will not have any effect. In coming to this decision a reference had been made to the memorandum explaining the provisions of the Finance Bill. We have already extracted that above, and, in our opinion, that supports the Department's contention. Apart from that a reference is also made to the decision of the Supreme Court in the case of 5. Sundaram Pillai v. V.R. Pallabiraman AIR 1985 SC 582 in which certain guidelines to the interpretation of Explanation has been given. They are reproduced below: It is now well settled that an Explanation added to a statutory provision is not a substantive provision in any sense of the term but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provisions.
(b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide, an additional support to the dominant...object of the Act in order to make it meaningful and purposeful; (d) an Explanation cannot in any way interfere with of change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation in order to suppress the mischief and advance the object of the fact it can help or assist the court in interpreting the true purport and intendment of the enactment; and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming a hindrance in the interpretation of the same'.
In our opinion, the interpretation given by us is absolutely in conformity with the guidelines of the Supreme Court. As stated above, the Explanation was explaining the intendment of the Legislature. It was never the intention that the Sales-tax Act and Rules would determine the date of payment. There was some vagueness or obscurity in the main provisions of Section 43B with regard to the expression 'any sum payable'. That has now been clarified by that Explanation. It also now provides additional support to the dominant object which is as explained by the memorandum to disallow any liability which has not actually been paid. Further, the Explanation was to suppress the mischief and advance the remedy.
12. The Tribunal's decision had emphasised that the Explanation would not take away any statutory right. It is true and we agree that the Explanation would not take away any statutory right, but when there was no statutory right given Under Section 43B there is no question of the Explanation trying to take away that right. In these circumstances, in our opinion, in view of the Explanation, the assessee would not be entitled to deduction of the outstanding liability to sales-tax. We may mention that we have not referred this matter to the Special Bench because the decision of the Tribunal is that of a Single Member whereas this appeal is being heard by Division Bench.
13. Shri Sodani then submitted that the amount which should actually be disallowed is not Rs. 17,440 but much less. We agree that the total collection during this year is of Rs. 16,261. The assessee had actually paid Rs. 7,409. So the amount out of this year's liability which is outstanding is only of Rs. 8,852. This is the amount which should be disallowed for the year 1984-85. Since this amount was actually paid in the accounting year relevant to the A.Y. 1985-86, the assessee would be entitled to the deduction of this amount for the A.Y. 1985-86 as a consequence of this order. The ITO will modify both the assessments accordingly.