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PETITIONER: ALLIED MOTORS (P) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, DELHI.

DATE OF JUDGMENT:       10/03/1997

BENCH: A.M. AHMADI, SUJATA V. MANOHAR, K. VENKATASWAMI

ACT:

HEADNOTE:

JUDGMENT:  (With Tax Reference No.1/94, CA Nos. 3175/91 and 2380/91)                       J U D G M E N T Mrs. Sujata V. Manohar, J.      The two  Income-tax References which are before us deal with a  common question  relating to  the interpretation  of Section 43B of the Income-tax Act, 1961. The references have been made  under Section 256(1) of the Income-tax Act, 1961. Since the same question arises in the two civil appeals also these appeals  have been  heard along with these references. For the  sake of convenience, we are taking the statement of the case in Income-tax Reference No.2 of 1993.      The following  question has  been referred  to us under Section 256(1):-      "Whether on  the facts  and in  the      circumstances  of   the  case,  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 Income-Tax      Act,  1961   while  computing   the      business   income   of   the   said      previous year "?      The relevant  assessment year  is 1984-85, the relevant accounting period  being the  year ending  on 30th  of June, 1983. The  assessee filed  the return declaring an income of Rs. 1,91,940/-. The Income-Tax Officer, however, disallowed, inter alia,  deduction claimed  by the assessee of an amount of  Rs.   5,78.240/-  which  was  on  account  of  sales-tax collected by  the assessee  for  the  last  quarter  of  the relevant accounting  year. This amount was payable within 30 days of  the end  of the  quarter. The  deduction which  was claimed by  the assessee  was disallowed  by the  Income-tax Officer under  Section 43B of the Income-tax Act, 1961 which was inserted  in the  statute with effect from 1.4.1984. The assessee filed  an appeal before the Commissioner of Income- Tax (Appeals), inter alia, in respect of this  disallowance. However, the  appeal was  dismissed. The  assessee filed  an appeal  before   the  Income-Tax   Appellate  Tribunal.  The tribunal also  dismissed the  appeal on  the  basis  of  the

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judgments of  the Delhi  High Court  in the  case  of Sanghi Motors v.  Union of  India (187 ITR 703) and Escorts Ltd. v. Union   of India  & Ors.  (189 ITR   81).  Hence the present reference has  come before  us. One  of the  judgment relied upon by  the tribunal  was the   judgment  in  the  case  of Escorts Ltd.  v. Union  of India  (supra). Civil  Appeal No. 3175 (NT)  of 1991  is an  appeal from  the decision  of the Delhi High  Court in  the above  case which  is being  heard along with the present tax-references.      The relevant provisions of  Section 43B for our purpose ar as follows :-      "43B:-  Certain  deductions  to  be      only on actual payment --           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, cess or fee,      by whatever  name called, under any      law for the time being in force, or      (b) ............................      (c) ............................      (d) ............................      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      fin which such sum in actually paid      by him :      -    Provided     that      nothing      contained  in  this  section  shall      apply  in   relation  to   any  sum      referred to in clause (a) or clause      (c) or clause (d) which is actually      paid by  the assessee  on or before      the due date applicable in his case      for furnishing the return of income      under sub-section  (1)  of  section      139 in respect of the previous year      in which  the liability to pay such      sum was  incurred as  aforesaid and      the evidence  of  such  payment  is      furnished  by  the  assessee  along      with such return :      Provided further .........      Explanation 1 - ..........      - -  Explanation  2   --  For   the      purposes 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.      Explanation 3 - .............      Explanation 4 - ............."      Section 43B  was inserted  in the  Income-tax Act, 1961 with effect  from 1.4.1984.  The section,  as it  originally stood, did  not contain  the two provisos. The first proviso

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has been  set out  above. The  proviso was  inserted by  the Finance Act  of 1987  which came  into effect from 1.4.1988. Explanation 2 has been added subsequently by the Finance Act of 1989  but with  retrospective effect  from  1.4.1984.  In these References  and appeals  we  are  concerned  with  the application of  Section 43B  as it stood before the provisos were added.      Prior to the insertion of Section 43B in the Income Tax Act, 1961,  income chargeable  under the  head ’profits  and gains’  of   business  or   profession  was   computable  in accordance with  the method of accounting regularly employed by the  assessee as  per Section  145 of the Income-tax Act, 1961. An  assessee who  had adopted the mercantile system of accounting would  be entitled  to account for his income and expenditure on  the basis of accrual and not on the basis of actual receipt  or disbursement.  After insertion of Section 43B, however,  even if  the assessee  had regularly  adopted mercantile system  of accounting,  the amount of tax payable by the  assessee could be deducted only in the year in which the assessee  incurred the  liability to pay that tax. Hence an assessee  (as in  the present  case), who  had  collected sales-tax in  the last  quarter of  the previous  accounting year and  deposited it  in the treasury within the statutory period falling  in the  next accounting  year, would  not be entitled to  claim any  deduction for  it. The  sales-tax so collected will  form a  part of  the assessee’s  income.  To obviate this  kind of unexpected outcome of section 43B, the first proviso was added in Section 43B by the Finance Act of 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.      The proviso,  however, was not on the statute book when the assessments  were made  in respect  of  these  assessees since the  assessments pertain  to assessment  year prior to the insertion  of the proviso in Section 43B. The assessees, however, contend  that the proviso should be given effect to retrospectively from the date when section 43B became a part of the  Income-tax Act,  1961, as  it is intended to obviate unexpected hardships in the application of Section 43B.      To under  stand the  circumstances in which section 43B came to  be inserted  in the Income-tax Act and the mischief which it  sought to  prevent, it is necessary to look at the memorandum explaining  the provisions in the Finance Bill of 1983 [(1983) 140 ITR (St.) 160] :-      "59.  Under   the  Income-tax  Act,      profits and  gains of  business and      profession    are    computed    in      accordance  with   the  method   of      accounting  regularly  employed  by      the assessee. Broadly stated, under      the    mercantile     system     of      accounting, income  and  outgo  are      accounted  for   on  the  basis  of      accrual and  not on  the  basis  of      actual disbursements  or  receipts.      for the  purposes of computation of      profits and  gains of  business and      profession,  the   Income-tax   act      defines the  word  ’paid’  to  mean      ’actually   paid    or    incurred’      according   to    the   method   of

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    accounting on  the basis  of  which      the profits or gains are computed.      60.  Several  cases  have  come  to      notice  where  tax  payers  do  not      discharge their statutory liability      such as  in respect of excise duty,      employer’s     contribution      to      provident  fund,  Employees’  State      Insurance Scheme,  etc..  for  long      period of time, extending sometimes      to several  years. For  the purpose      of  their  income-tax  assessments,      they   claim   the   liability   as      deduction on  the ground  that they      maintain accounts  on mercantile or      accrual basis.  On the  other  hand      they dispute  the liability  and do      not discharge  the same.  For  some      reason  or   the  other  undisputed      liabilities also  are not  paid. To      curb this  practice, it is proposed      to proved  that deduction  for  any      sum payable  by the assessee by way      of tax  or duty  under any  law for      the    time    being    in    force      (irrespective of  whether such  tax      or duty  is disputed or not) or 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  computing the income of      that previous  year in  which  such      sum is actually paid by him."      The Budget  Speech of the Finance Minister for the year 1983-84, reproduced  in (1983)  140 ITR  (St.) 31, is to the same effect.      Section 43B  was, therefore,  clearly aimed  at curbing the activities  of those  tax payers  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 year. It  was to  stop this  mischief that  Section 43B  was inserted. It  was clearly  not realised that the language in which Section  43B was  worded would cause hardship to those tax payers  who had  paid  sales-tax  within  the  statutory period prescribed  for this payment, although the payment so made by  them did  not fall in the relevant accounting year. It could  be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales-tax had in fact  been paid  by the  assessee  within  the  statutory period prescribed for its payment and prior to the filing of the income  tax return,  these  assessees  were  unwittingly prevented from claiming a legitimate deduction in respect of the tax  paid by them. This was not intended by Section 43B. Hence the  first proviso  was inserted  in Section  43B. The amendment which  was made  by the  Finance Act  of  1987  in Section 43B by inserting, inter alia, the first proviso, was remedial  in   nature,  designed   to  eliminate  unintended consequences which  may cause undue hardship to the assessee and which  made the  provision unworkable  or  unjust  in  a specific situation.

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    Looking to the curative nature of the amendment made by the Finance Act of 1987 it has been submitted before us that the proviso which is inserted by the amending Finance Act of 1987 should  be given  retrospective effect  and be  read as forming a  part of  Section 43B  from  its  inception.  This submission has  taken support  from decisions of a number of High  Courts   before  whom   this  question   came  up  for consideration.  The   High  Courts   of  Calcutta,  Gujarat, Karnataka,  Orissa,  Gauhati,  Rajasthan,  Andhara  Pradesh, Patna and  Kerala appear  to have  taken the  view that  the proviso must  be given  retrospective effect.  Some of these High courts  have held  that  "sum  payable"  under  Section 43B(a) refers only to the sum payable in the same accounting year thus excluding sales tax payable in the next accounting year from  the ambit of Section 43B(a). The Delhi High Court has taken  a contrary view holding that the first proviso to Section 43B  operates only prospectively. We will refer only to some of these judgments.      Explanation 2  was added  to Section 43B by the Finance Act of  1989 with  retrospective effect  from 1.4.1984.  The Memorandum   explaining    the   reasons   for   introducing Explanation 2, states inter alia, as follows [(1989) 176 ITR (St.) 123] :-           "24.   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 behind  these  provisions      is   to    provide   for    a   tax      disincentive by  denying  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 he  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      taxpayers who  had represented that      since the  sales-tax for  the  last      quarter cannot  be paid within that      previous  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 operations  of his      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 amount  payable in a      particular  year   should  also  be

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    statutorily   payable   under   the      relevant statute  in the same year.      This  is  against  the  legislative      intent  and   it   is,   therefore,      proposed, 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.           This   amendment   will   take      effect from April 1, 1984."      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. The memorandum of reasons takes note of  the combined  effect of  Section 43B  and the first proviso inserted  by the  Finance Act, 1987. After referring to the  fact that the first proviso now removes the hardship caused to  such tax  payers it  explains  the  insertion  of Explanation 2  as being  for the  purpose  of  removing  any ambiguity about  the term ’any sum payable’ under clause (a) of Section  43B. This Explanation is made retrospective. The Memorandum seems  to proceed  on the  basis that Section 43B read with  the proviso  takes care of the hardship situation and hence  Explanation 2  can be inserted with retrospective effect to make clear the ambit of Section 43B(a). Therefore, Section  43B(a),  the  first  proviso  of  Section  43B  and Explanation 2  have to  be read together as giving effect to the true  intention of  Section 43B.  If  Explanation  2  is retrospective,  the   first  proviso  will  have  to  be  so construed. Read  in this  light also,  the proviso has to be read  into   Section  43B  from  its  inception  along  with Explanation 2. This position  is reinforced  by a departmental Circular No. 550 dated  1st of  January 1990,  [(1990) 182 ITR (St.) 114, 123] :-           "AMENDMENT    OF    PROVISIONS      RELATING OF CERTAIN DEDUCTION OT BE      ALLOWED ONLY ON ACTUAL PAYMENT.           15.1   Under    the   existing      provisions of  section 43B  of  the      Income-Tax Act,  1961, a  deduction      for any  sum payable by way of tax,      duty, cess or fee, etc., is allowed      on actual  payment basis  only. The      objective behind  these  provisions      is   to    provide   for    a   tax      disincentive     by      ’statutory      liability’ which  is  not  paid  in      time.  The   Finance   Act,   1987,      inserted a  proviso to  section 43B      to provide  that  any  sum  payable      liability for which was incurred in      the previsous  year will be allowed      as a  deduction, if  it is actually      paid by  the due date of furnishing

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    the return  under Section 139(1) of      the Income-tax  Act, in  respect of      assessment  year   to   which   the      aforesaid  previous  year  relates.      This  proviso   was  introduced  to      remove  the   hardship  caused   to      certain    taxpayers     who    had      represented that  since  the  sales      tax for  the last quarter cannot be      paid within  the 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.  Thus,   the  sales   tax  in      respect of  sales made  in the last      quarter  was  held  to  be  totally      outside the  purview of section 43B      since the  same is  not statutorily      payable in  the financial  year  to      which it  relates. This  is against      the  legislative      intent   and,      therefore, by  way of  inserting an      Explanation, it  has been clarified      that the  words ’any   sum payable’      shall 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 departmental  understanding also appears to be that Section 43B,  the proviso  and Explanation 2 have to be read together as  expressing the  true intention  of Section 43B. Explanation 2  has been  expressly made  retrospective.  The first proviso,  however, cannot be isolated from Explanation 2 and  the main   body  of Section  43B. without  the  first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of Section 43B. The proviso supplies an obvious  omission. But  for this  proviso  the  ambit  of Section 43B  becomes unduly  wide bringing  within the scope those payments which were not intended to be prohibited from the category of permissible deductions.      In the  case of Goodyear India Ltd. v. State of Haryana and Anr.  (188 ITR  402) this  court said  that he  rule  of reasonable construction  must be  applied while construing a statute.  Literal  construction  should  be  avoided  if  it defeats the manifest object and purpose of the Act.      Therefore, in  the well  known words  of Judge  learned Hand, one  cannot make a fortress out of the dictionary; and should remember  that statutes  have some purpose and object to accomplish  whose sympathetic  and imaginative  discovery is the  surest guide  to their  meaning. In the case of R.B.

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Jodha Mal  Kuthiala v.  Commissioner of  Income-tax, Punjab, jammu &  Kashmir and  Himachal Pradesh  (82 ITR  570),  this Court said  that one  should apply  the rule  of  reasonable interpretation.  A  proviso  which  is  inserted  to  remedy unintended consequences  and to made the provision workable, a proviso  which supplies an obvious omission in the section and is  required to  be read  into the  section to  give the section a  reasonable interpretation, requires to be treated as  retrospective   in  operation   so  that   a  reasonable interpretation can be given to the section as a whole.      This view  has been accepted by a number of High Court. In the  case of  Commissioner  of  Income-Tax  v.  Chandulal Venichand ([1994]  209 ITR  7), the  Gujarat High  Court has held that  he 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  deductable.  This decision deals  with assessment  year 1984-85.  The Calcutta High Court  in the case of Commissioner of Income-tax v. Sri Jagannath Steel  Corporation ([1991] 191 ITR 676), has taken a similar  view holding  that the  statutory  liability  for sales-tax actually  discharge after the expiry of accounting year in  compliance with the relevant stature 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 and Ors. ([1991] 189 ITR  70.), It  was held  that 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  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. In  the circumstances,  however, there will be no order as to costs.