1. As to what is the impact and scope of the provisions contained in section 43B of the Income Tax Act, 1961 Income Tax Act is a matter which is required to be examined in this reference preferred under section 256(1) of the Act. The facts have been taken from IT Reference No. 44 of 1994, ie., CITv. Yashpal Garg & Co.
2. The sales tax collected by the assessee for the assessment years 1984-85 and 1985-86 was not deposited in the year in which it was collected. For the assessment year 1984-85, this amount has been indicated as Rs. 72,745. For the assessment year 1985-86, this amount is said to be Rs. 7,10,765. These amounts were actually paid in the years 1986-87 and 1987-88. The assessing officer while finalising the assessment under the Act came to the conclusion that the assessee is entitled to claim deduction vis-a-vis these payments in computing the income of that previous year in which the sales tax amount referred to above was actually paid. The matter was taken in the appeal. The appeal was dismissed. In further appeal taken before the Tribunal, the Tribunal came to the conclusion that the assessee was entitled to deduction in the previous year in which the sales tax was collected and not in the year in which payment was actually made. The appeal was allowed. It is in these circumstances the revenue submitted an application for formulating a question of law. It was submitted that the question of law does arise and this be referred so that the answer be given to the question, ie., as to whether the deduction was permissible only in the previous year in which the tax was actually paid or this was permissible in the relevant assessment year in which the assessment was made. The question of law which has been referred is being reproduced below:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 72,745 for the assessment year 1984-85 and Rs. 7,10,765 for the assessment year 1985-86 made by the assessing officer by invoking the provisions of section 43B of the Income Tax Act, 1961 ?'
3. Before noticing the submissions made by the learned counsels for the parties, it would be relevant to note the provisions of section 43B of the Act. These read as under:
'Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of
(a) any sum payable by the assessee by way of tax, duty, case or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (it) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution, in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : . . .'
4. Section 43B, as noticed above, was brought on the statute book by the Finance Act, 1983. This became effective from 1-4-1984. Therefore, this section would be applicable so far as two assessment years are concerned.
5. The learned counsel appearing for the revenue, submits that section 43B begins with a non obstante clause, and, therefore, this section is to prevail notwithstanding anything to the contrary contained in other provisions of the Act. It is also argued that sub-clause (a) deals with the tax, duty, cess and fee, by whatever name called and it is urged that it is to apply to all taxes, ie., sales tax as also to any tax paid under any other statute. it is also urged that whatever interpretation is given regarding sub-clause (a) would be attracted to sub-clauses (b), (c) and (a) also. It is submitted that on a plain reading of the Act, deduction with regard to the amount indicated in sub-clauses (a), (b), (c) and (a) is to be allowed in 'that previous year in which the sum is actually paid'. This stand of the revenue is countered by the learned counsel appearing for the assessee.
6. The decisions on which reliance has been placed by the learned counsel may now be noticed.
7. Kedarnath Jute Mfg. Co. Ltd v. CIT : [1971]82ITR363(SC) is the first authority on which reliance is being placed. In this case, the assessee-company followed the mercantile system of accounting. It incurred a liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessemnt year 1955-56. The sales tax demand was raised during the pendency of the income-tax assessment for that year. The Income Tax Officer rejected the claim of the assessee for deduction of that amount on the ground:
(i) that the assessee had contested the liability in appeals, and
(ii) that it had made no provision in its books with regard to the payment of that amount.
The departmental appeals were preferred. The assessee was unsuccessful. When the matter was taken up by the Supreme Court of India, the decision given by the- High Court and the income-tax authorities was reversed. It was observed that 'the assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776, being the amount of sales tax which was liable under the law to pay during the relevant accounting year.' This decision is, therefore, an authority for proposition that even though the sales tax liability was being disputed by the assessee but as this was a liability and was to be met, therefore, this was permissible deduction for the assessment year 1955-56. This is a decision on which much reliance has been placed by the assessee.
8. The learned counsel for the revenue, however, submits that this is a decision given on 17-8-1971 and would not determine the impact of section 43B, which is now under consideration.
9. Another decision which has been referred to is the one as Chowringhee Sales Bureau (P) Ltd. v. CIT : [1973]87ITR542(SC) . In the above case, the assessee, a private company dealing in furniture, also acted as an auctioneer. In respect of the sales effected by it as auctioneer, the assessee realised sales tax to the extent of Rs. 32,986. This amount was credited separately in this account book under the head 'Sales tax collection account'. The assessee did not pay this amount. It was not deposited even in the State Exchequer. The view expressed by the Supreme Court was that the amount collected as sales tax by the assessee in its character as an auctioneer, formed part of its trading or business receipts. It was indicated that the amount received as sales tax under the head 'Sales tax collection account', would not make any material difference. The assessee was held liable to pay the income-tax. This decision, however, does not deal with the question as to in which year the liability would arise. It may, however, be seen that the assessment year in the above case was 1960-6 1. During that year, the sales tax in question was realised. The only question was as to whether this amount could be excluded from the assessee's income or not. Even though, the income-tax authority decided in favour of the assessee, the Calcutta High Court took a contrary view and that view was affirmed by the Supreme Court of India.
10. Another decision which has been referred to is Chowringhee Sales Bureau (P.) Ltd. v. CIT : [1977]110ITR385(Cal) . In this case, the amount collected by the assessee as sales tax was held to be a part of its trading receipts. It was, however, held that the liability to pay sales tax arises the moment a sale or purchase is effected and an assessee who maintains accounts on mercantile system is entitled to deduction of his estimated liability to sales tax, even though they had not been paid to the sales tax authorities. This decision given by the Calcutta High Court follows what was said by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) and also Chowringhee Sales Bureau (P) Ltd 's case (supra).
11. The other authority which is being referred to in Indian Carbon Co. v. Inspecting Assistant Commissioner . The assessment year was 1984-85. The IAC while making assessment of the tax for the assessment year 1984-85 added a sum of Rs. 21,98,555 stating that the amount payable under the Sales Tax and the Central Sales Tax remained to be paid up to 30-6-1983 and as such, section 43B would be attracted and the amount would be added back. The amount of sales tax did appear in the balance sheet on the liability side of the company. The argument raised was that section 43B of the Act shall apply only when an assessee claims deduction in respect of any sum payable by the assessee by way of tax or duty payable PR7 under any law for the time being in force and, therefore, the Inspecting Assistant Commissioner could not make an order for addition. The question which was there before the Gauhati High Court was whether, on the facts and in the circumstances of the case, section 43B shall apply. The Gauhati High Court observed that section 43B declares that taxes and duties shall not be allowed as deduction from the income unless they are actually paid. It was observed that it removes the doubt as to the meaning of the word 'paid' according to the method of accounting regularly employed by an assessee, insofar as deduction is claimed in respect of any sum payable by way of tax or duty. It was, therefore, concluded that section 43B shall only be attracted when the assessee claims deduction for any sum payable by way of tax or duty under any law for the time being in force and as such, where no such deduction is claimed nor charge made to the profit or loss account, there was no question of disallowing the amount taken to the balance sheet on the liabilities side as well as of 'add back'. A perusal of the decision given by the Gauhati High Court makes it apparent that on the basis of the decision in Chowringhee Sales Bureau (P.) Ltd's case (supra), the view expressed was that the assessee would be entitled to claim deduction of the amount as and when the assessee paid it to the State Government. It was further observed that this principle stood reiterated in the later case - Sinclair Murray & Co. (P) Ltd. v. CIT : [1974]97ITR615(SC) . The question which arises in the present reference was not there before the Gauhati High Court and, therefore, this decision would not be attracted to the facts of this case. The other authority which has been relied upon is Jonnalla Narashimharao & Co. v. CIT : [1993]200ITR588(SC) . In this case, all that has been observed is that an amount collected as 'rusum' is a revenue receipt, also deductible as business expenditure in the same year. The assessment year in this regard was 1968-69. In this case it was held
(i) that so far as the amounts collected in the name of 'Rusum' are concerned, these constitute business receipts.
To this extent, the decision of the High Court was upheld;
(ii) that as the appellant was maintaining the accounts on the mercantile basis and as section 43B of the Act was not there during the particular assessment year 1968-69, though they had not been remitted in the previous year, the amounts were deductible as business expenditure for the assessment year 1968-69. In giving this decision, the Supreme Court of India followed earlier decision given in Kedarnath Jute Mfg. Co. Ltd's case (supra).Another decision which has been relied upon is Allied Motors (P) Ltd. v. CIT : [1997]224ITR677(SC) . This decision deals with section 43B. A perusal of the above decision would indicate that following propositions of law were laid down:
(i) that section 43B was inserted with effect from 1-4-1984 to discourage taxpayers who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident fund, etc., for long periods of time, but claimed deductions in that regard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous years;
(ii) that after the insertion of section 43B, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the assessee incurred the liability to pay the tax. However, an assessee who had collected sales tax in the last quarter of the accounting year and deposited it in the treasury within the statutory period falling in the next accounting year, was not entitled to claim any deduction for it. This was not intended by section 43B. To obviate this kind of unexpected outcome of section 43B, the first proviso was added in section 43B by the Finance Act, 1987. The proviso makes it clear that the section will not apply in relation to any sum which is actually paid by the assessee in the next accounting year, if it is paid on or before the due date for furnishing the return of income in respect of the previous year, in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with the return.
While giving the decision in the aforementioned case, the position prior to section 43B was taken note of. The effect of change brought by insertion of section 43B was explained. It was observed that this section is clearly aimed at curbing the activities of those taxpayers, who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident fund, etc., for long periods of time but claimed deduction in that regard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year. It was observed that 'it was to stop this mischief that section 43B was inserted.'
12. It is to be seen that decisions given in (i) Kedarnath Jute Mfg. Co. Ltd's case (supra), (ii) Chowringhee Sales Bureau (P.) Ltd, case (supra) : [1973]87ITR542(SC) , (iii) Chowringhee Sales Bureau (P.) Ltd. 's case (supra) : [1977]110ITR385(Cal) ; (iv) Indian Carbon Cos case (supra) and (v) Jonnalla Narashimharao & Co.'s case (supra) deal with the statutory provisions which were there before the insertion of section 43B referred to above. Therefore, these would not apply for interpreting the provisions of section 43B. As a matter of fact, the decision given in Jonnalla Narashirnharao & Cd.'s case (supra) does indicate that had the provisions of section 43B been given retrospective effect, then the position would have been different. As these provisions were held to be prospective in nature, therefore, the assessee was held entitled to claim deduction in the relevant year of assessment even though, they had not paid the tax in that year'. The direct authority on the point which interprets section 43B is the decision given in the case of Allied Motors (P.) Ltd. (supra). The malady which was existing and the remedy which was suggested was taken note of. It was after taking note of the above situation that it was observed that deductions would be permissible only in the assessment year previous to which payment is made.
13. We are of the opinion that the decision given in the case of Allied Motors (P) Ltd. (supra) is fully applicable to the facts of this case. Even otherwise, on plain reading of section 43B which begins with a non obstante clause, it becomes apparent that deduction is permissible for 'that previous year in which such a sum is actually paid'. Therefore, the question that the assessee was following mercantile system or was following some other system, is a matter which is wholly alien to the issue in question. In view of the above, the question is answered in favour of the revenue.
14. Disposed of accordingly.