Income Tax Appellate Tribunal - Hyderabad
Nageswara Rice Working Co. vs Income-Tax Officer. on 24 February, 1989
Equivalent citations: [1989]30ITD143(HYD)
ORDER
Per Shri K. S. Vishwanathan, Accountant Member-In this appeal, the assessee a registered firm running a rice mill has taken objections to two additions sustained by the Commissioner (Appeals). The first item which we consider is Rs. 11,302. The assessee had to pay market cess in respect of paddy purchased during the accounting year. The total cess payable was Rs. 14,560. Now the cess payable in respect of the assessee, this payment is due only in the next year and therefore the provisions of section 43B would not be applicable. The assessee had no objection for the addition of Rs. 11,302 i.e., Rs. 14,560-Rs. 3,258. The Income-tax Officer how ever considered that the entire amount of Rs. 14,560 is to be disallowed under s. 43B.
2. The assessee appealed. The Commissioner (Appeals) held that section 43B bars claim for deduction in respect of tax or duty and the market cess was neither tax nor duty. He, therefore, accepted the assessees contention to the extent of Rs. 3,258. However, with regard to the balance amount of Rs. 11,301 he expressed his opinion that the assessee cannot claim this deduction in appeal because he had already to be assessed thereon.
3. It is against this finding that the assessee has come on appeal. Now it is quite clear in view of this Benchs decision in the case of ITO v. Sree Dhanalakshmi Rice Co. [1986] 19 ITD 601 that the market cess is neither tax nor duty and would not come under the purview of section 43B. That being so, the entire amount of Rs. 14,560 should have been allowed as business expenditure. The reason given by the Commissioner (Appeals) for not entertaining the assessees appeal for deleting this amount is that the assessee had already added back the market cess in the return disclosing it as income and it would not be proper to take up the matter in appeal. Now the proposition that an amount agreed to be assessed cannot be agitated later in appeal has its limitations. Where certain facts have to be ascertained and on ascertaining the facts, the assessee had come forward for inclusion of the amount, there cannot be a question of the assessee going back on the agreement to included the amount for assessment. However, where there is no dispute on facts and the assessee had conceded the amount for assessment on an erroneous appreciation of the position of law, it is open for the assessee to take up the matter in appeal. In such cases, the only point the appellate authority has to see is the question of law regarding allowability. In considering such an issue, the Commissioner (Appeals) will not be acting beyond his jurisdiction. We, therefore, hold that the assessee is entitled to the deduction of Rs. 11,300 also.
4. The second issue is the provision made for sales-tax amounting to Rs. 13,000. The accounting year followed by the assessee is the year ending 20th December, 1983. In respect of the purchase of paddy and sale of rice, the assessee is liable to pay sales-tax. The Income-tax Officer found that the assessee had made a provision towards the liability to pay sales-tax and this amount of Rs. 13,000 was debited to the P & L A/c. It was claimed before the Income-tax Officer that the provisions of section 43B will not be applicable because this amount represents the liability to pay sales-tax in respect of the sales made in the last month of the accounting year and this sales-tax is due for payment only by 15th of January, 1984. Since it has not yet fallen due for payment in the accounting year it was claimed that the prohibition in section 43B will not be applicable. The Income-tax Officer did not accept this contention.
5. The assessee appealed. It was contended that the provision related to the month December, 1983 and it can be legally paid only during the month of January, 1984. The accounting period of the assessee ended on 20-12-1983 and for this period of 20 days, it was not possible to quantify the demand. It was submitted that the sales tax under the Andhre Pradesh General Seles Tax Act for December month can be paid only 15th day of the succeeding month. The Commissioner after considering this submission held that the prohibition against allowance of provision of tax under the mercantile system of accounting is categorical and clear. According to him, the said tax would be allowed only when the amount determined to be payable is actually paid. He, therefore, confirmed the disallowance.
6. The assessee on further appeal had made three different pleas. The first plea made by him is what was already stated before the Commissioner (Appeals). As per this submission, the prohibition in section 43B would apply only when a tax or duty has already fallen due for payment within the accounting year and the assessee has not paid it. It, therefore, follows accounting to the assessee, that where the payment this not fallen due, the provisions of section 43B would not apply. The second submission is that any tax or duty payable and which is outstanding after 1-4-1984 would be is hit by this section. In other words, where a provision for payment is made and the payment also is effected before 31-3-1984 it will not attract the provisions of section 43B. The third submission is that the provisions would be applicable only in respect of expenditure or liability claimed after 1-4-1984. In support of these propositions, the assessee had relied on certain authorities.
7. The first proposition which we consider is that the expression "any sum payable" found in section 43B would refer to a sum which has already fallen due for payment. It will not affect a liability where the payment has not yet fallen due. In this case, the sales-tax for the last 20 days in the accounting year has fallen due for payment only on 15th of January. Now there are certain decisions by the Tribunal which supported the assessees contention. In the case of S. Govindaraja Reddiar v. ITO [1986] 19 ITD 177 (Coch.), the Tribunal has held that section 43B comes into play only when the tax has accrued and became due for payment in the accounting year and the assessee had not paid the same. It was held that it will not have any application in case where the time for discharge of the tax is not over by the end of the accounting year. Similar decision has been given by the Ahmedabad Bench in the case of ITO v. Thakersi Babubhai & Co. [1986] 18 ITD 593 and the decision of Cuttack Bench in Kapoor Motor Engg. (P). Ltd. v. ITO [1987] 21 ITD 4. In all these decisions, the expression "any sum payable" had been taken to mean any sum which had become payable according to the statutory provisions governing the assessment and collection of that tax. In this connection, it will be useful to refer to the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240. We are not concerned with the facts of the case but we are concerned with the interpretation of the section given by their Lordships which is found at page 246 :
"On a perusal of the language of section 43B, it is clear that it opens with a non-obstanie clause which means that it controls the operation of other provisions of the Act and irrespective of the other provisions, section 43B will have overriding effect. Keeping this in mind, if we examine the language of the section, it clearly brings out the intention of the Legislature that the deduction in respect of any tax or duty under any law would be an allowable deduction in competing the in come under section 28 of that pervious year in which such sum is actually paid by the assessee. The intention is made more specific by providing that it would be so 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 the assessee. This clearly makes out that even if the mercantile method of accounting is employed and the liability to pay might have accrued which would give the assessee a right to obtain deduction, in view of the specific language of the section, the assessee would not be entitled to get deduction merely on accrual of the liability to pay the tax or duty, but would be so entitled to get deduction only on actual payment of tax or duty. The Legislature has also take care by providing an Explanation that the assessee shall not be entitled to any deduction under section 43B of the Act in respect of such sum in computing the income of the previous year in which such sum is clearly paid by him in case a deduction in respect of any such sum was allowed in the previous year. It is, therefore, clear that the assessed shall not be entitled to get the benefit twice i.e., at the time when the liability arises and also at the time when the actual payment is made. In view of the specific language of the section that deduction of the amount as mentioned in clauses (a) and (b) of section 43B would be allowed in the previous year in which such sum is paid, there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee."
The above passage makes it clear that the emphasis in section 43B is not so much on the expression any sum payable but on the provision which state that the sum shall be allowed in computing the income of that previous year in which such sum is actually paid. Thus, the emphasis is on actual payment. There may be some doubts as to whether the expression any some payable would include a sum which has not fallen due. All those doubts are set at naught if the section is read fully and completely and not in a truncated manner. In our opinion, therefore, it is entirely beyond the issue to dispute whether any sum payable would include payment which has not fallen due.
8. Now it will be seen that whereas certain Tribunal decisions are supporting the assessee, the High Courts decision is clearly supporting the departments contention. Under these circumstances, it is very easy for us to see which decision we should follow. Clearly the decision of the High Court is to be followed.
9. Further, the expression payable appearing in the section has to be understood in the context in which it found. The same section uses the expression "actually paid". So the expression payable is in contrast to the expression "acctually paid". It should not be construed in the narrow meaning of an amount for which the date of payment has already fallen due. There are a large number of instances wherein the expression "paid" had been taken to mean "payable" and vice versa. Section 16(2) of the Income-tax Act, 1922 had used the expression "paid" and the Supreme Court while interpreting this word in J. Dalmia v. CIT [1964] 53 ITR 83 observed that "expression paid in section 16(2) does not contemplate actual receipt of the divided by the member. In general, dividend may be said to be paid within the meaning of section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the members entitled thereto." Here, the Supreme Court was interpreting the word to include "payable". Again, the expression "paid" came for interpretation in the case of CIT v. L. W. Russel [1964] 53 ITR 91 (SC). In Explanation 1 to section 7 of the 1922 Act the word paid was interpreted to mean ever receipt by the employee from the employer whether it was due to him or not. The Madras High Court in the case of G. D. Narendra v. CIT [1972] 85 ITR 647 was interpreting the word "paid" occuring in section 50 of the Estate Duty Act. It was held that the word is to be under stood in the context and in the light of the Chapter for which the provision has been made. They pointed out that the word "paid" must be taken to mean payable. Otherwise, it was observed an unsatisfactory start of affairs would result.
10. The object of introducing section 43B can be found out from the Finance Ministers speech as well as the notes on the clauses. The Finance Ministers speech is found in [1983] 140 ITR (St.) 31.
"Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employers contribution to provident fund, Employees State Insurance Scheme for long period of time. For the purpose of their Income-tax assessments, they nonetheless claim the liability as deduction even as they taken resort to legal action, thus depriving the Government of its dues while enjoying the benefit of nonpayment. To curb such practices I purpose to provide that irrespective of the method of accounting followed by the taxpayer, a statutory liability will be allowed as a deduction in computing the taxable profits only in the year and to the extent it is actually paid. This would result in a revenue gain of Rs. 100 crores in a full year and Rs. 80 crores in 1983-84."
It will be seen from the above quoting that the intention of the Parliament was to allow deduction only when it is actually paid and that is irrespective of the mode of accounting followed. Now under the mercantile system of accounting the liability is taken as accrued whether the date for discharge of that liability is at a further date or not. Merchantile system is comprehensive enough to take liabilities the discharge of which has fallen due as well as liabilities which had not fallen due. Both would be included in merchantile system. Irrespective of that system being followed the intention of section 43B is to allow deduction only on actual payment.
11. We may also refer to the principle in interpreting the statues which require the Courts to advance remedy, when specific provision has been brought in a curb an evil. In this case, the provision had been brought in only to prevent the assessees getting deduction for statutory liabilities without making any payment. The interpretation to be given to section 43B would be to advance this remedy.
12. In this connection, we may also refer to the amendment to section 43B brought in by the Finance Act, 1987. This amendment makes it clear that where a payment is actually made on the dates on which it was payable then the provisions of section 43B would not be applicable. If the intention of the legislature was to exclude from the purview of section 43B as it stood for asst. year, such liabilities which has not yet fallen due the amendment would be unnessary. Obviously that was the position and that is why an amendment was found necessary.
13. The next submission is understood by us in this way. The provisions of section 43B has come into effect from 1-4-1984. That means any payment which has fallen due and which was also discharged before 1-4- 1984 will not be affected by this provision. The third contention that the section would apply only to the expenditure incurred after 1-4-1984 is also similar and can be considered together. In support of this contention, certain Tribunal decisions have been relied on. One of them is the case of Satyanarayana Swamy [IT Appeal No. 106 (Hyd) of 1985 dated 22-9-1986]. As per this authority if a payment is made long before the date on which the section came into force the provision will not be applicable.
14. The provisions of section 43B were inserted by the Finance Act, 1983 and it was given effect from 1-4-1984. It is on the statute book from 1- 4-1984. The question is whether this provision which has come into the statute book on 1-4-1984 would be applicable to the assessment of 1984- 85 irrespective of the date on which the impugned expenditure was incurred. The Supreme Court in Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 had observed as follows :
"It is well settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessment of that year."
That being the settled position, it is clear that the law as it stood on 1st April, 1984 would be applicable for the asst. year 1984-85. It is immaterial when the expenditure was incurred by the assessee. What is to be seen is that what provision of law would be applicable to the asst. year. On that point, it is quite clear that the law as it stands on 1-4- 1984 which includes section 43B would be applicable. This position as laid down by the Supreme Court cannot be altered merely because different assessees have different accounting years and therefore different dates of incurring the expenditure.
15. In this connection, we may refer to the decision of the Special Bench of the Tribunal in the case of Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (Bom.). In that case, the accounting year of the assessee was the year ended 30-6-1975 assessable for the asst.. year 1976-77. The provisions of section 40A (8) had come on the statute book on 1-4-1976. The Income-tax Officer had applied this provision and disallowed a part of the interest payments. The parallel between these two would be clear when we remember that in this case the Income-tax Officer had disallowed a part of the sales tax liability and the Special Bench case a part of the interest. Thus, in both cases part of the expenditure was disallowed. It was submitted that section 40A (8) having been introduced w.e.f. 1-4-1976 would be applicable to the expenditure incurred on payment of interest from that date and not to be interest paid prior to that date and as the assessees previous year relating to the asst. year 1976-77 ended on 30-6-1975 the provisions of section 40A (8) were inapplicable. The Special Bench referred to well settled principles laid down by the Supreme Court in Karimtharuvi Tea Estate Ltd.s case (supra), and other cases and pointed out that the principle is well settled that the provisions of the amended Act as on 1st April of the assessment year would be applicable irrespective of the date on which the expenditure or receipts were incurred or accrued. The Special Bench after referring to the decisions on that point observed as follows :
"35. Applying the said rules to the case before us, we do not see how the provision for disallowance of interest under section 40A (8) is not applicable to the assessment year 1976-77. We are, therefore, unable to accept Sri Dasturs argument that literal construction of section 40A (8) would lead to absurd and anomalous results. Sri Dastur has not spelt out what absurd or anomalous results he visualized and we are unable to see any such results. According to us, the provisions of section 40A (8) do not lead to any absurd or anomalous results and the intention of the Legislature is quite clear that the said provisions are to apply in the assessment year 1976-77 and, therefore, the said provisions would apply, irrespective of the fact as to which previous year the particular assessee follows and so long as the previous year followed by the assessee would be relevant for the assessment year 1976-77, the provisions of section 40A (8) would apply to that particular assessee. We have already noted that the Legislature had given the assessees one years notice by introducing the said provision in the Finance Act, 1975 though it was applicable for the assessment year 1976-77. Therefore, the submission of Sri Dastur that an assessee should be given adequate notice to arrange his affairs, though legally not correct, is still factually invlaid because the Parliament did give one years advance notice to the assessees to arrange their affairs. The Parliament has plenary powers to legislate prospectively as well as retrospectively and there is no limitation on the Parliaments power to direct from which date a particular fiscal provision would operate. It is true that in some cases the Parliament does specify a date from which date the said provision is to come into force. For example, under section 40A (3) in respect of disallowance of payment of Rs. 2,500 or more not paid by a crossed cheque, the Parliament did specify that payments made after 31-3-1969 would be hit by the said provision. However, the Parliament has also specified in respect of a number of other fiscal provisions, particularly annual amendments to the 1961 Act brought through the Finance Acts that certain provisions would be applicable with effect from specified assessment years. This is a well recognised and much used method of amendment of the Act. We cannot arrogate to overselves the power to sit in judgment over the wisdom of introducing a particular fiscal provision with effect from a particular assessment year and we have to give effect to the clear legislative intention as expressed by the Parliament through the amendment to the Act. It is not for us to twist the fiscal provision on the ground that literal construction of the fiscal provision would result in hardship or that the particular assessee did not get sufficient advance notice to arrange his affairs in the light of the amendment. Nor can we import purposive approach to hold that though section 40A (8) was clearly directed to be operative with effect from 1-4-1976 for the assessment year 1976-77, yet, according to us, it would apply only to expenditure on interest incurred after 1-4-1976. For the foregoing reasons, we are, therefore, unable to accept the assessees contentions based on the view taken by the Madras Bench.
36. In the result, we uphold the Commissioner (Appeals)s order that section 40A (8) was applicable in the asst. year 1976-77 and, therefore, the disallowance made by the ITO stands upheld."
It may be noted that the provisions of section 43B were brought in by Finance Act, 1983. Therefore, the public fully well knew in 1983 itself that the taxes which were not paid may not be allowed as a deduction. The Parliament had given one full year before it was made effective from 1-4-1984.
16. For these reasons, we are of opinion that the Commissioner is justified in not allowing the provision for sales tax as a deduction.
17. The appeal is partly allowed.
Per Shri T. V. Rajagopala Rao, Judicial Member - I had the occasion to peruse the order of my learned Brother dated 6-7-1987. I am entirely in agreement with my learned Brother as far as the first issue regarding market cess is concerned and hold for the reasons already recorded by him that the assessee is entitled to the deduction of Rs. 11,300.
2. Regarding the second issue relating to the provision made for sales- tax amounting to Rs. 13,000 I express my inability to agree with my learned Brother for the following reasons.
3. The assessment year involved is 1984-85 for which the previous year ended by 20-12-1983. Milling paddy and selling rice and other by- products is the business carried on by the assessee. The assessee is a partnership firm comprised of seven partners and admittedly the assessee made a provision of Rs. 13,000. liable to pay towards sales-tax. It was stated before us that the provision represents the liability to pay sales-tax in respect of the sales made in the last month of the accounting year and the sales-tax is due for payment only by 15-1-1984. It claimed that since it was not fallen due in the accounting year the prohibition in section 43B of I. T. Act will not be applicable. This contention was negatived by the Income-tax Officer as well as CIT (A), Visakhapatnam. The correctness and the legality of this action on the part of the lower authorities is questioned before us in this assessees appeal.
4. In CIT v. Isthmian Steamship Lines [1951] 20 ITR 572, the Supreme Court held that in income-tax matters the law to be applied is the law in force in the assessment year, unless otherwise stated or implied. The subject matter of assessment is the income which is earned during the previous year. The previous year is different from the assessment year. In Isthmian Steamship Lines case (supra) the facts were that there was some unanbsorbed depreciation at the end of year 1938-39. The question was whether it could be treated as allowable depreciation for assessment years 1941-42, 1942-43 and 1943-44. Section 10(2) (vi) of the Indian Income-tax Act, 1922, was amended by the Amending Act of 1939 with effect from 1-4-1940. The provision of s. 10(2) (vi) of the Act after being amended by the Act of 1939 read as follows :
"Such profits or gains equivalent (where the assets are ships other than ships ordinarily plying on inland waters), to such percentage... prescribed (and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed) :
Provided that- (a) No change.
(b) Where full.... any year, not being a year which ended prior to the 1st day of April, 1939, owing.... for succeeding year;
(c) No change."
In the opinion of the Supreme Court they were concerned with two dates (i) 1-4-1940 when the Act came into force, and (ii) 1-4-1939 which is the date mentioned in the amended proviso. The first question to be answered according to the Supreme Court is whether these dates are to be applied to the accounting year or the year of assessment. While answering this question their Lordships stated that they (the above dates) must be held to apply to the assessment year because in income- tax matters the law to be applied is the law in force in the assessment year unless otherwise stated or implied. They held that the first datum line therefore affected only the assessment year 1940-41, because the amendment did not come into force till the 1st of April, 1940. That means that the old law applied to every assessment year up to and including the assessment year 1939-40.
5. Now let us apply the ratio of the Honble Supreme Court to the facts before us. Section 43B was inserted by the Finance Act, 1983, with effect from 1-4-1984. As far as it is relevant for our purpose it reads follows :
"43B. Notwithstanding anything contained in any other provisions of this Act, a deduction otherwise allowable under this Act in respect of-
(a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or
(b)... ** ** ** 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 actulally paid by him."
Now in this case though the previous year ended on 20-12-1983 the sales tax was paid on 15-1-1984. Both 20-12-1983 and 15-1-1984 fall much prior to 1-4-1984 from which date only section 43B comes into operation. Section 43B is not a charging section. The consequences of the said section are penal inasmuch as it speaks of disallowance of provisions made towards tax or duty payable for which the liability was incurred or became payable. In my opinion, firstly, section 43B applies to the provisions made only on or from 1-4-1984 and it does not concern itself with either payments or provisions made prior to that date. This provision which deals with disallowance which is otherwise admissible should be strictly construed. Even assuming for a while that section 43B would have to be applied as the subject matter of the assessment is the income earned in a previous year and as the law applicable thereto is that of the assessment year, even then, in my humble opinion, we have to take into consideration the events which occurred till the commencement of the assessment year. To put it more explicitly one is entitled to take into consideration even the payment of tax which occurred beyond the previous year i.e., 20-1-1984 but before the 1st day of the assessment year to judge the applicability or otherwise of s. 43B. The following proviso was inserted as proviso No. 1 under s. 43B by Finance Act, 1987, with effect from 1-4-1988 :
"Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) which is actually paid by the assessee on or before the due date applicable in his case for furnishin 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 :"
If we apply the proviso to the facts before us even if the payment is made in discharge of sales-tax liability on or before 30-6-1984 it should be allowed as a deduction despite the fact that the payment was made quite beyond the relevant previous year. The only condition imposed by the proviso is that the payment should relate to a liability which arose in the relevant previous year. Therefore, in my humble opinion, the proviso clarified the real intention of the Legislature in enacting section 43B.
6. As the intendment of the first proviso referred to above is clarificatory of the provisions of section 43B, even though it was introduced by the Finance Act, 1987, with effect from 1-4-1988 it should be followed with respect to the preceding assessment years also in order to avoid unnecessary litigations. In this respect we are already fortified by the view expressed by the Andhra Pradesh High Court in the case on N. T. R. Estate v. CIT [1986] 157 ITR 285, where their Lordships while considering the case before them, relating to assessment years 1973-74 and 1974-75, applied the exposition of law found in the Explanations 2 and 3 inserted in section 40(b) by section 10 of the Taxation Laws (Amendment) Act, 1984, which came into effect from 1-4-1985. Speaking about the effect of the Explanations 2 and 3 their Lordships held as follows at pages 289-290 :
It is well to bear in mind that in the Statement of Objects and Reasons introducing the Taxation Laws (Amendment) Bill, 1984, it has been specifically mentioned that the amendments introduced in the Bill are intended mainly to streamline procedure in the interest of better work management, avoid inconvenience to tax-payers, reduce litigation, remove certain anomlies in and retionalise some of the provisions of these enactments and counteract tax avoidance and tax evasion. We consider that the present amendment to section 40(b) of the Act through Explanations 2 and 3 above referred to is to avoid inconvenience to taxpayers, reduce litigation and in that view, the spirit of Explanations 2 and 3 introduced by the Taxation Laws (Amendment) Bill, 1984, should be followed with respect to the preceding assessment year also in order to avoid unnecessary litigation. It cannot be gainsaid that the Legislature was fully aware of the conflict of judicial opinion in this matter among the various High Courts in the country and the present amendment to section 40(b) through Explanations 2 and 3 following the decisions of some High Courts, is good only from the assessment year 1985-86 and ceased to be so for the preceding assessment years. In our opinion, Explanations 2 and 3 are merely clarificatory in character and must, therefore, govern the assessments prior to the assessment year 1986-87 also."
In the Memo explaining the provisions in the Finance Bill, 1987, it is stated as follows as can be seen from [1987] 165 ITR (St.) 156 :
"Under the existing provisions of section 43B any statutory liability outstanding as on the last date of the previous year, is not deductible for purposes of computation of income. It is proposed to insert two provisos in this section. The first proviso seeks to provide that the section shall not apply in respect of the payments of any tax or duty under any law if the sum is actually paid on or before the date on which the return of income is due to be furnished under section 139(1) for the previous year in which the liability to pay such sum was incurred."
Having regard to the above explanation for the introduction of the proviso and also having regard to the Andhra Pradesh High Court decision in N. T. R. Estates case (supra), I feel that the first proviso to se ction 43B clarifies the real intendment of section 43B and it would amply justify the conclusion which I had reached viz., that while considering the allowability or otherwise of the sales tax provision of Rs. 13,000 under section 43B the fact of payment of the same on 19-1-1984 can be validly taken into consideration. All the essentials of the first proviso to section 43B are fulfilled in this case. It is no doubt true that the first proviso should come into force only from 1-4-1988 but because it only clarifies the real intendment of section 43B it can as well as applied to earlier assessment years. In such an event there is no difficulty for us to apply the first proviso above quoted while considering the case under assessment year 1984-85 also. If the first proviso is to govern the facts of the case then inasmuch as the payment is made on 19-1-1984 for which the liability was incurred for the last 15 days of the close of the previous year and as 19-1-1984 is much prior to 30-6-1984 for which is the last date available to the assessee to file its return of income, and inasmuch as the payment of sales-tax of Rs. 13,000 was never doubted by the department, the said amount should be held to be a legitimate deduction as it does not come within the teeth of section 43B.
7. In our orders passed in Sree Satyanarayana Swamy Rice Mill v. ITO [IT Appeal No. 106 (Hyd.) of 1985 dated 22-9-1986] for assessment year 1984- 85 I along with Sri G. Santhanam the learned Accountant Member held the following, while allowing a similar provision made by the assessee :
"It is authoritatively held by the Honble Supreme Court that the sales- tax liability arises as and when the sales took place and the assessee who follows the mercantile system of accounting is entitled to deduct from the profit and loss account of the business such liability (sales-tax) which had accured during the period for which the profit and loss accounts are being computed. Now, we have to compute the profit and gains of the assessee-firm and while computing the profit and gains the Sales-tax liability i.e., incurred by the assessee on the sales effected or paid during the relevant accounting year constitutes allowable deduction as per the abovesaid Supreme Court decision. Thus, the decision was not at all altered by section 43B which came into effect only from 1-4-1984 and it does not apply prior to 1-4-1984. Incurring liability is one thing and payment of amounts in discharge of that liability is another. The date of payment does not have any relevance, while claiming deduction, in the case of assessee who follows a mercantile system of accounting. Even dates of payment were taken into consideration, it was paid only on 19-1-1984 which is long before 1-4- 1984. Therefore in out opinion, the lower authorities went wrong in disallowing the provision of Rs. 30,500 claimed towards sales-tax liability by applying of provisions of such section 43B of the Income- tax Act."
A copy of this order is filed before us at pages 15 to 18 of the paper compilation in this appeal.
8. Under the circumstances narrated above I hold that the amount of Rs. 13,000 should be allowed as a legitimate deduction while computing its income for assessment year 1984-85 and on this point the appeal should succeed.
REFERENCE U/S 255(4) OF THE I. T. ACT, 1961 Since there was a difference of opinion on the following points between the Members who heard the appeal, we refer the points to the President through the Vice President for hearing by a Third Member :
1. "Whether, on the facts and in the circumstances of the case, can the provisions of section 43B would be applicable to the sales-tax dues in respect of the accounting year ended 31-12-1983 and which fell for payment in January, 1984 ?"
2. "Can the amendment to section 43B by the Finance Act, 1987 be taken into account in interpreting the provisions of section for the asst. year 1984-85 ?"
THIRD MEMBER ORDER Per Shri Ch. G. Krishnamurthy, President - In this appeal filed by the assessee, one of the questions that arose for decision before the Bench was whether the Commissioner of Income-tax (Appeals), Visakhapatnam, was right in confirming the disallowance of Rs. 13,000 representing the provision made in Sales-tax Account by invoking the provisions of section 43B of the Income-tax Act, 1961.
2. This appeal relates to the assessment year 1984-85 the previous year for which ended on 20-12-1983. The point taken up by the assessee before the revenue was that the liability to pay the sales tax did not crystallise before the end of the year and under the provisions of the Sales-tax Act under which this liability came to be paid, statutorily fixed time was available to make the payment which expired within a short period after the end of the previous year, and as such the crystallisation of liability did not take place although the liability to pay the sum arose which had to be allowed as a deduction under sec. 37 of the Income-tax Act notwithstanding the provisions of section 43B. The Income-tax Officer as well as the Commissioner of Income-tax (Appeals) rejected this contention and disallowed the claim.
3. When the matter came in appeal before the Tribunal, the learned Members of the Tribunal who heard the appeal could not agree upon the conclusion. While the learned Accountant Member in a very detailed order held that the provisions of sec 43B were clearly attracted and that the amount was not allowable as a deduction, the learned Judicial Member in an equally detailed order took the opposite view. That was how a difference of opinion arose between the Members which has been referred to the Third Member. The points of difference referred to the Third Member precisely are;
1. "Whether, on the facts and in the circumstances of the case, can the provisions of section 43B would be applicable to the sales-tax dues in respect of the accounting year ended 31-12-1983 and which fell for payment in January, 1984 ?"
2. "Can the amendment to section 43B by the Finance Act, 1987, be taken into account in interpreting the provisions of section for the asst. year 1984-85 ?"
4. My task is now made easier by a decision of the Andhra Pradesh High Court is Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708, which is binding on me, whereunder the Honble High Court held that section 43B of the Income-tax Act, 1961, which was inserted with effect from 1-4-1984, provides that certain deductions are allowable only on actual payment, that the two items of expenses selected by the Legislature represent indirect taxes because the taxpayers were not burdened to pay this category of taxes from out of their own coffers as they were entitled to collect the same from the consumers to whom they sold goods and then make over the payment of the taxes so collected to the exchequer, thus acting only a conduit pipe between the taxpayer and the Government and that by reason of the method of accounting employed, they should not be allowed to gain an advantage of collecting the tax, retaining it with them and yet not pay to the Government on the ground of some dispute or the other, but at the same time claim it as a deduction for the other, but at the same time claim it as a deduction for the purpose of income-tax and this mischief was rightly and legitimately curbed by the Legislature by enacting section 43B of the Income-tax Act. While the assessee had the use of the funds collected from the public by way of taxes, the Government was deprived of its dues by this process. After thus explaining the object of the introduction of the section and the mischief which it sought to prevent, the High Court applied itself to the point as to when and how this provision becomes applicable. It then laid down (an per hear-note) :
"In order to apply the provisions of section 43B, not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year. Section 43B itself is clear to this extent. It refers to the sum payable in clauses (a) and (b). The amendment with effect from April 1, 1988, permitting the deduction of taxes and duties paid before the filing of income-tax returns makes this clear."
Thus it was held that the sales-tax payable for the month of March 1984 could not be disallowed under section 43B. In that case, the Honourable High Court had to decide whether liability to pay sales-tax had statutorily arisen under the provisions of the Andhra Pradesh Sales-tax where the assessee files monthly returns in A2 forms. Referring to rule 17 of the Andhra Pradesh Sales Tax Rules, 1957, which categorically provided that the tax in relation to the return shall be paid before the 25th of the succeeding month, the High Court held that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year and that the amount payable after 25 days did not become payable within the accounting year. It is now an undisputed fact in this case that the sum in question was not statutorily required to be paid before the end of the accounting year but was payable only a little thereafter with the result that the amount did not statutorily become payable in the accounting year. Therefore, to the facts of this case the decision of the Andhra Pradesh High Court clearly applies and applying with respect the decision of the Andhra Pradesh High Court, I hold that the view taken by the learned Judicial Member is the correct view although I am not discussing the other reasons advanced by him nor do I wish to go into the reasons advanced by the learned Accountant Member so as to adjudge their correctness or otherwise.
5. The Departmental Representative, Sri P. Radhakrishna Murthy, fairly conceded that the decision of the Andhra Pradesh High Court squarely applies and the case is fully covered by it and that he has no other argument to address and that he had to say that he would not subscribe to the views expressed by the learned Judicial Member.
6. This matter will now go before the regular Bench for disposal according to the opinion of the majority.