Calcutta High Court
Hindustan Motors Limited vs Commissioner Of Income-Tax on 20 February, 1995
Equivalent citations: [1996]218ITR450(CAL)
Author: Ruma Pal
Bench: Ruma Pal
JUDGMENT K.C. Agrawal, C.J.
1. It is ray regret that I have not been able to agree with the answers given by Justice Ruma Pal on questions Nos. 1 and 2 referred to this court under Section 256(2) of the Income-tax Act, 1961. So far as question No. 3 is concerned, that does not merit any decision. Hence, I need not express my opinion on the same.
2. Since the facts have been elaborately and concisely mentioned by the learned judge, I need not repeat the same. The only controversy is whether interest payable under Section 61 of the Customs Act, 1962, attracts Section 43B of the Income-tax Act, 1961.
3. I record ray own reasons for the view which I have taken.
4. Section 43B of the Income-tax Act, 1961 :
Scope and effect :
Section 43B, relating to certain deductions to be only on actual payment, has, originally, been inserted by the Finance Act, 1983, with effect from April 1, 1984, i.e., for and from the assessment year 1984-85.
5. Scope and effect of originally inserted Section 43B have been explained in the following portion of the Memo Explaining the Provisions in the Finance Bill, 1983 (see [1983] 140 ITR (St.) 43, 141) and Department's Circular No. 372 (see [1984] 146 ITR (St.) 9, 34), dated December 8, 1983 :
"(xxvi) Disallowance of unpaid statutory liability - Section 43B. -
35.1. Under Section 145 of the Income-tax Act, 1961, profits and gains of business or 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 expenditure are accounted for on the basis of accrual and not on the basis of actual receipts or disbursements. For the purposes of computation of profits and gains of business or profession, Section 43(2) of the Income-tax Act defines the word 'paid' to mean 'actually paid or incurred' according to the method of accounting on the basis of which the profits or gains are computed.
35.2. Several cases have come to notice where taxpayers 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 periods 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.
35.3. To curb this practice, the Finance Act, 1983, has inserted a new Section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force 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 employees shall, irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.
35.4. The section also contains an Explanation for the removal of doubts. The Explanation provides that where a deduction in respect of any sum aforesaid is allowed in computing the income of any previous year, being a previous year relevant to the assessment year 1983-84, or any earlier assessment year, in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under Section 43B in respect of such sum on the ground that the sum has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a liability on account of tax or duty or in respect of any sum payable as contribution to any fund for the assessment year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed a deduction in the assessment year 1984-85, or any subsequent year on the ground that he has actually made a payment towards such liability in that year."
6. By the Finance Act, 1989, the second proviso to Section 43B has been substituted with effect from April 1, 1989, by a new proviso :
-- a new Explanation 2 has been inserted (with effect from April 1, 1984);
-- Explanation 2 has been renumbered (with effect from April 1, 1989) as Explanation 3; and
-- Explanation 3 has been renumbered (with effect from April 1, 1989) as Explanation 4.
7. The scope and effect of these amendments have been explained in the following portion of the Memorandum Explaining the Provisions of the Finance Bill, 1989 (see [1989] 176 ITR (St.) 112, 123) and Department's Circular No. 550 (see [1990] 182 ITR (St.) 114, 123), dated January 1, 1990, as under :
"Amendment of provisions relating to certain deductions to 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 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 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 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.
15.2. 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."
Section 43B, containing a non obstante clause-"Notwithstanding anything contained in any other provision of this Act", enacts provision of overriding nature. Under that section, a deduction otherwise allowable under this Act in respect of--
(a) any sum payable by the assesses by way of--
--(for and from the assessment year 1984-85) tax,
--(for and from the assessment year 1984-85) duty,
--(for and from the assessment year 1989-90) cess or
--(for and from the assessment year 1989-90) fee,
(b) (for and from the assessment year 1984-85) any sum payable by the assessee 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) (for and from the assessment year 1989-90) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission as per Section 36(1)(ii), or
(d) any sum payable by the assessee as interest on any loan or borrowing from--for and from the assessment year 1989-90) and financial institution (as defined) or-(for and from the assessment year 1991-92) a State Financial Corporation (as defined) or a State Industrial Investment Corporation (as defined), in accordance with the terms and conditions of the agreement such loan or borrowing, is to be allowed (irrespective of the previous year in which the liability to pay such sums 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.
8. On a perusal of the language of Section 43B, it is clear that it opens with a non obstante clause and 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 one examines the language of the section, it clearly brings out the intention of the Legislature that the deduction in respect of any tax or duty, etc., under any law would be an allowable deduction in computing the income under Section 28 of that previous 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 that 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 taken 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 already allowed in an earlier previous year. It is, therefore, clear that the assessee 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 (Lakhanpal National Ltd. v. ITO );
9. Re. Allowability of certain payment like interest on any loan or borrowings, etc. (under clause "d") is required to be actually paid during the relevant previous year itself so as to avail of deduction in respect thereof for the corresponding assessment years concerned.
10. By the Amendment made by the Finance Act, 1988, certain modification has been made to the said provision relating to deduction in respect of certain liabilities like payment of interest on loan. Scope and effect of this amendment have been explained in the following portion of the Memorandum Explaining the Provisions in the Finance Bill, 1988 (see [1988] 170 ITR (St.) 192-193) and the Department's Circular No. 528 (see [1989] 176 ITR (St.) 154, 165), dated December 16, 1988, as under :
"21.3. A marked tendency has been noticed that on one pretext or the other some taxpayers postpone the payment of interest on loans provided by the various financial institutions and thus the money recoverable by these institutions is used for business purposes even though it has been claimed as a deduction from the income. With a view to improve the liquidity position of the public financial institutions and to prevent misuse of the limited resource of finance available to trade and industry. Section 43B of the Income-tax Act has been amended to provide that any sum payable as interest on any loan or borrowing from any public financial institutions in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall not be allowed as a deduction if the same is not actually paid before the due date applicable in his case of furnishing the return of income. As per the new Explanation 3 to Section 43B of the Income-tax Act, the term 'public financial institution' shall have the same meaning as assigned to it in Section 4A of the Companies Act, 1956 (1 of 1956)."
11. By the Finance Act, 1990, Clause (d) of Section 43B has been amended and Explanation 4 has been substituted with effect from April" 1, 1991, in relation to the assessment years 1991-92 and subsequent years.
12. Clause (d) has been amended with a view to improve the liquidity position of the said financial institutions. As a result of such amendment, any sum payable by the assessee as interest on any loan or borrowing from the said financial corporation a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, shall also not be allowed, for and from the assessment year 1991-92 as deduction in the computation of profits and gains from the business or profession, if the sums are not already paid by the assessee before the due date applicable in his case for furnishing the return of income.
13. The scope and effect of the amendments made under Section 43B by the Finance Act, have also been elaborated in the following Department's Circular No. 572 (see [1990] 186 ITR (St.) 81, 94), dated August 3, 1990, as under:
"20. Under the existing provisions of Section 43B of the Income-tax Act, apart from certain other sums, a deduction in respect of any interest payable on any loan or borrowing from any public financial institution is allowed only if the same has been actually paid by the assessee before the due. date of filing. . . .
20.1. The scope of Section 43B has been enlarged to provide that any sum payable as interest or any loan or borrowings from any State Financial Corporation or State Industrial Investment Corporation shall also not be allowed as deduction if the same is not actually paid before the due date of filing of return."
14. Clause (d) of Section 43B speaks of only interest on any loan or borrowing from any public financial institution, etc., but not relating to any interest on any loan or borrowing from the third party. It is debatable whether interest on any loan or borrowing from the third party other than any public financial institution will come within the mischief of the said Clause (d) of Section 43B if the assessee maintains his account in the mercantile system, in view of the fact that Section 43B, being a special provision overriding any other provision of the Act including the provision of Section 145, operates only, in the limited sphere as contained in various Sub-clauses (a), (b), (c) and (d) of the said Section 43B. But, if the interest arises out of a statute and if it is construed to be a statutory liability, then, in that event, it is to be allowed (irrespective of the previous year in which the liability to pay the said 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 interest is actually paid by him. In this connection, the Department's Circular No. 372 (see [1984] 146 ITR (St.) 9), dated December 8, 1983, and No. 550 (see [1990] 182 ITR (St.) 114), dated January 1, 1990, referred to hereinabove and Explanation 2 explaining the word "any sum payable" clarifies the position.
15. The argument of the assessee that "interest payable under the Customs Act is not a statutory liability" does not appeal to me. A statutory liability is one that depends for its existence on the provisions of the statute and not on the contract of the parties. Interest payable was in the nature of penalty for illegally retaining possession of the warehouse and as such the amount payable was a statutory liability.
16. Questions Nos. 1 and 2 are answered against the assessee and in favour of the Department. Question No. 3 does not call for any answer.
Ruma Pal, J.
17. On the application of the assessee, three questions have been referred for determination under Section 256(2) of the Income-tax Act, 1961 (hereafter referred to as "the Act"). The questions are :
"1. Whether, on the facts and in the circumstances of the case, and proper interpretation of law, the Income-tax Appellate Tribunal was justified in holding that interest paid to the Customs Department is part and parcel of the customs duty and the provisions of Section 43B of the Act are applicable ?
2. If the answer to question No. 1 is in the negative then whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the liability of payment of interest to the Customs Department did not accrue or arise during the year?
3. Whether, on the facts and in the circumstances of the case and proper appreciation of facts and interpretation of the law, the Income-tax Appellate Tribunal was justified in holding that bad debts of Rs. 1,90,663 written off by the petitioner are not allowable?"
18. The first two questions are interconnected and the answer to the first will to some extent determine the second. The third question has not been pressed by counsel appearing for the assessee.
19. The moot point raised by the first two questions is whether interest on duty is to be allowed as a deductible expenditure only upon actual payment. There is no dispute that the petitioner follows the mercantile system of accounting and pays tax and claims deductions on the basis of incurred liability or accrued right, as the case may be, and not on actual receipt or payment. There is also no dispute that customs duty and the interest paid thereon are deductible expenditures under the Act.
20. The issue arises in connection with the assessment year 1985-86. In the previous year in question, the petitioner had imported goods which were warehoused under Section 59 of the Customs Act, 1962. The petitioner did not clear the imported goods from the warehouse and became liable to pay interest on the customs duty by reason of such delayed clearance under Section 61 of the Customs Act, 1962. Now, the liability to pay the customs duty and the interest thereon is to be met upon actual clearance of the goods under Section 15(1)(b) read with Section 68 of the Customs Act, 1962. In this case, the assessee had not cleared the goods during the period covered by the assessment year in question and as such had not made payment of either the duty or the interest on the imported goods.
21. According to the system of accounting followed by the assessee ordinarily it could have claimed deduction in respect of both the duty and the interest without making actual payment in respect of either, (see; Kedarnath Jute Manufacturing Co. Ltd, v. CIT ). But an inroad was made into this right of the assessee by the introduction of Section 43B by the Finance Act, 1983, The section was subjected to further change in 1989. However, we are concerned with the section as it stood during the assessment year in question, namely, 1985-86. Then Section 43B read 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 or duty 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, 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."
22. Therefore, an assessee following the mercantile system of accounting could no longer claim deduction in respect of duty or tax unless it was actually paid.
23. In this case, the assessee filed its return for the assessment year in question claiming deduction on account of its accrued liability to pay interest only but not in respect of the duty payable on the goods imported. The Income-tax Officer disallowed the claim for deduction on the ground that interest on duty was "duty" for the purpose of Section 43B and could be claimed as a deduction only upon actual payment. The assessee's appeal to the Commissioner was dismissed in so far as it related to this ground. The view of the Commissioner was confirmed, on a further appeal by the assessee, by the Appellate Tribunal. Hence, this reference.
24. The assessee says that the word "duty" in Section 43B must be given its plain meaning and should not be extended to include the payment of interest. The income-tax authorities say that the word "duty" in Section 43B of the Act includes the interest payable thereon. The judicial authorities have been cited on both the sides but in my opinion none of the decisions relied upon determines the exact issue confronting this court. The decisions may be referred to as pointers only.
25. Before considering the cases cited, to arrive at the proper meaning of Section 43B, it must be kept in mind that the words of a statute are first to be given their plain meaning and that it is only in cases of ambiguity or absurd result that the court would be justified in resorting to the known aids of interpretation and if necessary, read in or delete words. "The meaning of the statute, is primarily to be sought in the words used in the statute itself, which must, if they are plain and unambiguous, be applied as they stand", (see : Doypack Systems Pvt. Ltd. v. Union of India ). The question is should the court read in "and interest payable thereon" after the word "duty" in Section 43B.
26. On a plain reading of the provisions of Section 43B, the exception to the mercantile method of accounting was limited at the material time to "tax" and "duty". We are, in this case, concerned with the word "duty". The word has not been defined in the Act- In the Customs Act, 1962, the word has been defined in Section 2(15) as meaning duty of customs leviable under the Customs Act. As far as import is concerned the taxable event under Section 12 read with Section 2(23) of the Customs Act occurs upon the goods entering India. On the other hand, as far as the liability to pay interest is concerned, that arises only when the imported goods are warehoused and are not removed within the "free period" prescribed under the statute. The relevant section is Section 61, Sub-section (2), which reads :
"(2) Where any warehoused goods, specified in Clause (a) of Sub-section (1), remain in a warehouse beyond the period of one year, by reason of extension of the aforesaid period or otherwise, interest at such rate, as specified in Section 47 shall be payable on the amount of duty on the warehoused goods for the period from the expiry of the period of one year till the date of the clearance of the goods from the warehouse."
27. Thus, the incidence for the imposition of duty is different from the incidence for the imposition of interest.
28. Furthermore, the language of Section 61(2) and the scheme of the Customs Act would show that the element of duty is treated quite separately from the element of the kind of interest which is now being considered. The levy of, and exemption from, customs duties is dealt with under Chapter V whereas the liability to pay interest is contained in Chapter IX of the Customs Act.
29. Apart from the language of Section 61(2) which draws a clear distinction between the duty and the interest payable thereon, a similar distinction is made between duty and interest in Section 59 under which the goods are permitted to be warehoused. Section 59, in so far as it is relevant, reads :
"Section 59. Warehousing bond. -- (1) The importer of any goods specified in Clause (a) of Sub-section (1) of Section 61, which have been entered for warehousing and assessed to duty under Section 17 or Section 18 shall execute a bond binding himself in a sum equal to twice the amount of the duty assessed on such goods --
(a) to observe all the provisions of this Act and the rules and regulations in respect of such goods;
(b) to pay on or before a date specified in a notice of demand,--
(i) all duties, and interest, if any, payable under Sub-section (2) of Section 61;"
30. Similarly, Section 68 which deals with the clearance of warehoused goods for home consumption provides :
"Section 68. Clearance of warehoused goods for home consumption. -- The importer of any warehouse goods may clear them for home consumption if-
(a) a bill of entry for home consumption in respect of such goods has been presented in the prescribed form;
(b) the import duty leviable on such goods and all penalties, rent, interest, and other charges payable in respect of such goods have been paid; and
(c) an order for clearance of such goods for home consumption has been made by the proper officer"
31. It is apparent, therefore, that the Customs Act has differentiated between the payment of duty and the payment of the interest on such duty under Section 61 of the Customs Act and has not treated the word "duty" as including within itself the element of interest payable on account of warehousing.
32. It is to be emphasised that the liability to pay the interest under consideration in this case does not arise because of the failure to pay the customs duty per se, but because of the failure to remove the goods warehoused within the statutory period. It is really used as a disincentive to the utilisation of the storage facilities of the customs warehouse. The cause for the payment of interest is not the late payment of duty but the utilisation of the warehouse beyond the statutorily prescribed limit.
33. The Budget Speech of the Finance Minister in introducing Section 43B is itself ambiguous in this regard. The appropriate extract reads (see [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, employer's contribution to provident fund, Employees' State Insurance Scheme, for long period of time. For the purpose of their income-tax assessments, they none the less claim the liability as deduction even as they take resort to legal action, thus depriving the Government of its dues while enjoying the benefit of non-payment. To curb such practices, I propose 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."
34. If all statutory liabilities are to be included this would mean that the word "duty" would also include not only interest but also warehousing and other charges. Counsel for the Department rightly conceded that such a wide interpretation could not be given to the word. Thus a line will have to be drawn between duty as commonly understood and other incidental amounts payable by the importer under the statute.
35. The Notes on Clauses to the Finance Bill, 1983, do not take the matter further and only paraphrase the language of the new section.
36. In my opinion, therefore, the interest payable under Section 61(2) of the Customs Act, 1962, is not part of the duty of customs and I see no warrant to extend the plain meaning of the word "duty" to comprehend the phrase "and the interest payable under Section 61(2) of the Customs Act thereon". This conclusion, is supported by the views expressed by the authorities cited which are now considered.
37. The first decision cited is the case of Debabrata Basu v. State of West Bengal [1980] 84 CWN 90. S. Mukharji J. (as his Lordship, then was) was called upon to consider, inter alia, whether penalty or interest payable in respect of professional tax was tax, in order to determine whether the State Legislature had imposed tax exceeding the limit prescribed Under Article 276 of the Constitution. This was negatived on the principle that:
"Taxes are attracted on happenings of certain events which sometimes are called taxable events, like sale of goods, import of goods, export of goods, or possession of wealth or making of gifts, earning of income or, as in this case, carrying on of professions, trades or callings or employment. But neither penalty nor interest could be imposed on any of these contingencies. These can only be imposed on a further fact that is to say, either failure, deliberate or otherwise, to comply with the provisions of the Act or delay in making any payment required to be made under the Act. Therefore, the cause of action or the event which attracts penalty or interest and taxes are separate and different in their essential nature. Therefore, tax cannot be considered to be the same thing as penalty. It is only for the infraction of the provisions of the Act that penalty provision is attracted or delay in payment, interest can only be liable to be paid. If it is analysed from that point of view and specially in the light of Clause (26) of Article 366 of the Constitution which defines the expression tax, in my opinion, there is no doubt that penalty and the interest contemplated by different provisions cannot be considered as additional taxes which come within the limitation provided by Clause (2) of Article 276 of the Constitution."
38. In other words, "interest" was not included within the concept of "tax" because the circumstances under which the two are imposable are disparate.
39. The appeal from this decision was dismissed by the Division Bench. (Debabrata Basu v. State of West Bengal [1981] 85 CWN 133).
40. The next case is a decision of the Supreme Court in Bhor Industries Ltd. v. CIT [1961] 42 ITR 57. In that case, it was urged by the assessee-company that before determining the dividends payable by the company, along with the income-tax, the interest payable thereon should be deducted. This was negatived both by the High Court as well as the Supreme Court. In upholding the reasoning of the High Court, the Supreme Court said (at page 66) :
"The words of the sub-section are clear to show that interest as interest is added to the tax as determined. There is nothing to show that it is to be treated as tax, and it thus retains its character of interest but is recoverable along with the tax. Indeed, Section 29 of the Income-tax Act makes a distinction between tax, penalty and interest."
41. In the same way, the Karnataka High Court recognised a distinction between duty and interest in Soma Sundarams (Private) Ltd. v. CIT [1979] 116 ITR 620. The question related to the computation of super profits tax under the Super Profits Tax Act, 1963. Super profits tax was payable on the chargeable profits of the assessee. In computing the chargeable profits, the income-tax paid by the assessee was to be deducted. The assessee contended that interest payable on the income-tax should also be deducted in computing the chargeable profits: The Division Bench of the High Court said that interest payable on income-tax could not be termed as income-tax as it was, like a penalty, imposed in addition to income-tax for the purpose of enforcing levy of income-tax.
42. The nature of interest payable on tax was specifically considered in Khazan Chand v. State of Jammu and Kashmir , as a mode of recovery of tax and, therefore, not the tax itself.
43. Hence, a clear distinction has been drawn in all the cases noted above between the principal liability, viz., the "tax" and the interest payable thereon. It would be illogical not to draw the same distinction between another kind of principal liability, viz., "duty" and the interest payable thereon for the purposes of Section 43B of the Act more particularly because the interest in this case is contingent upon the happening of an event which has nothing to do with the reason for paying duty.
44. The Andhra Pradesh High Court in Srikakollu Subba Rao and Co. v. Union of India [1988] 173 ITR 708, while upholding the constitutional validity of Section 43B held that anything which is not tax or duty cannot come within the purview of that section. Accordingly, it was held that market cess was not a tax or duty and Section 43B had no application thereto. This view was followed by another Bench of the same High Court in CIT v. M.L. Agroproducts Pvt. Ltd. [1992] 197 ITR 485. The special leave petition from this judgment was dismissed by the Supreme Court (see [1991] 191 ITR (St.) 8).
45. Consequent to this decision, Section 43B was amended by specifically including "cess or fee, by whatever name called" after the words "tax, duty" with effect from April 1, 1989. However, the principle, at least for the assessment year in question, remains, that is, nothing which is not tax or duty can come within the purview of Section 43B.
46. In the case before us, the Tribunal held that interest payable on duty was duty for the purposes of Section 43B by relying on the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. The question before the Supreme Court was whether interest paid on cess was a penalty and, therefore, not a permissible deduction. The Supreme Court construed the provisions of Section 3(3) of the U. P. Sugarcane Cess Act, 1956, and concluded that interest paid on cess was not a penalty. It was in that context that the Supreme Court said (at page 433) :
"Now, the interest payable on an arrear of cess under Section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess 'carries' interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic under Section 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty, for which provision has been separately made by Section 3(5)."
47. The Supreme Court took care to say (at page 434);
".... we are concerned with a particular statutory scheme enacted in sections 3 and 4 of the Cess Act before us."
48. And again at page 435 of the Report;
"We are concerned solely with the nature of the liability to pay interest under Section 3(3) of the Cess Act."
49. The case is entirely distinguishable from the present case. In the first place, it was limited expressly to the provisions of the Cess Act. In the second place, the only issue before the Supreme Court was whether interest on cess under the provisions of that particular Act, was a penalty or not. The Supreme Court did not decide as a general principle that interest in every case under every statute forms part of the principal liability.
50. A decision of the Full Bench of the Patna High Court in CIT v. Sheo Kumari Debi [1986] 157 ITR 13 has been relied upon by learned counsel for the respondents to contend that the earlier approach that the taxing statutes must invariably be tilted in favour of the assessee has to be given a go-by. However, in determining the interpretation of Section 43B, I have not relied upon any presumption in favour of the assessee against the Revenue but have considered the matter objectively without a pre-con-ceived assumption of correctness in favour of either side.
51. Incidentally, the Full Bench of the Patna High Court distinguished a decision of the Supreme Court in that case by holding that a decision is only an authority for what it actually decides and that there was no warrant for the "abstruse proposition" that a word defined by the Supreme Court in a particular context must bear the same meaning in every statute.
52. On the basis of this reasoning and having regard to the language used by the Supreme Court in Mahalokshmi Sugar Mills Co.'s case [1980] 123 ITR 429 in my view, the Tribunal erred in reading this decision of the Supreme Court in the manner it did and wrongly extended what was stated by the Supreme Court in terms to be limited to the provisions of a particular statute, to the provisions of Section 43B.
53. I am unable to appreciate the contention of the Department that the word "duty" should include "interest on duty" by applying the principle of ejusdem generis. There is no scope for application of the principle of ejusdem generis to the provision of Section 43B as contended by the Department. The principle can only apply when there are general words following an enumeration of persons or things. In such cases, courts have held that the general words are coloured by the preceding words, provided that the preceding words form a particular genus or class. There were no such general words in Section 43B following the word "tax" and "duty" in Section 43B as it stood at the material time.
54. For the reasons aforesaid, I answer the first question referred in the negative and in favour of the assessee.
55. Question No. 2 relates to the provision for interest made by the assessee in the previous year. In its order, the Tribunal has found that the petitioner was liable to pay interest on the customs duty at 12 per cent. per annum as per Sections 59-61 of the Customs Act and notifications issued in pursuance of the aforesaid sections. It was also found that the interest had been worked out by the assessee at the rate notified by the Central Board of Excise and Customs and was automatically payable. However, the Tribunal held that the assessee could not treat the interest as an accrued liability because no actual payment had been made on the basis of the decision in Mahalakshmi Sugar Mills Co.'s case and also because in a subsequent year, the assessee had written back a portion of the amount which, according to the Tribunal revealed that the provision for interest was made on an estimated basis and was a conditional liability.
56. To the extent that the assessee was entitled to claim deduction in the normal course in respect of its accrued liability to make payment of interest under the mercantile system of accounting, the issue has already been decided in the assessee's favour. The further question, however, is whether the amount for which a provision had been made by the assessee was a conditional one as held by the Tribunal.
57. In my opinion having held that the interest was payable "automatically" on the duty by the assessee at the rates specified, the Tribunal contradicted itself in also finding that the liability to pay interest was a contingent one. It is to be noted that the Tribunal did not find that the calculation of interest by the assessee was incorrect. Furthermore, merely because a portion of the interest was written back in a subsequent year, it would not detract from the fact that the liability to pay the interest had accrued in the previous year in question. In Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, the Supreme Court held (at page 7) :
"The difficulty in the estimation thereof again would not convert an accrued liability into a conditional one, because it is always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case."
58. This view was also taken by a Bench of this court in CIT v. Swadeshi Mining and Manufacturing Co. Ltd. [1978] 112 ITR 276. In that case, the assessee had made a provision for payment of an amount as additional price payable in respect of sugar and claimed deduction for the amount in the previous year although the payment of the additional price was to be made only after it was quantified by the authority under the control order subsequently. The Central Government was also empowered to exempt payment of the additional price. It was contended on behalf of the Department that the liability was, therefore, a conditional and contingent one. The Division Bench held that although the payment of liability was deferred and might even be exempted, the assessee had in fact incurred the liability to pay the additional price in the previous year and the liability could not be said to be a contingent or conditional one.
59. In this case, the interest liability was to be computed for the entire period until clearance of the goods but would continuously accrue although payment would be made at a time at the time of clearance. Accordingly, and in view of the settled law on the issue, I hold that the Income-tax Appellate Tribunal's finding that the liability of payment of interest did not accrue or arise during the previous year in question was not justified.
60. For the reasons aforesaid, I answer the second question also in the negative and in favour of the assessee.
ORDER K.C. Agrawal, C.J.
61. In view of the difference of opinion between me and Justice Ruma Pal, the questions referred by the Income-tax Appellate Tribunal are referred to Justice Prabir Kumar Majumdar for his opinion under Section 259 of the Income-tax Act.
Prabir Kumar Majumdar, J.
62. This reference has been assigned to me by an order of the hon'ble Chief Justice on a difference of opinion between the two hon'ble judges of the Division Bench, presided over by the hon'ble Chief Justice.
63. The assessment year involved in this reference is 1985-86. The relevant previous year is the accounting year ended on March 31, 1985. The assessee follows the mercantile system of accounting.
64. On an application of the assessee, three questions have been referred for determination under Section 25G(2) of the Income-tax Act, 1961 (hereinafter referred to as "the said Act"). The questions are as follows :
"1. Whether, on the facts and in the circumstances of the case, and proper interpretation of law, the Income-tax Appellate Tribunal was justified in holding that interest paid to the Customs Department is part and parcel of the customs duty and the provisions of Section 43B of the Act are applicable ?
2. If the answer to question No. 1 is in the negative, then whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the liability of payment of interest to the Customs Department did not accrue or arise during the year ?
3. Whether, on the facts and in the circumstances of the case and proper appreciation of facts and interpretation of the law, the Income-tax Appellate Tribunal was justified in holding that bad debts of Rs. 1,90,663 written off by the petitioner are not allowable?"
65. The first two questions are interconnected and the answer to the first would, to some extent, determine the second. The third question has not been pressed by learned counsel appearing for the assessee.
66. The assessee is a limited company and the method of accounting adopted is the mercantile system. The accounting period relevant to the assessment year 1985-86 ended on March 31, 1985. During the course of assessment proceedings, the Assessing Officer on scrutiny of the details of interest account noticed that a sum of Rs. 28,86,369 was provided towards interest on customs duty on the basis of notification dated June 4, 1983. It was submitted on behalf of the assessee that at the time of taking delivery of the imported goods, the company may clear the materials after payment of customs duty or may opt for "under bond" scheme and store materials under the customs approved bonded warehouse. Subsequently, when the goods are released from the bonded warehouse the import duty is to be paid along with interest after a certain period. The assessee-company, therefore, made a provision of interest on customs duty of Rs. 3,13,79,936. The amount of interest is payable along with the customs duty.
67. The Assessing Officer had taken a view that the amount of interest is part and parcel of the customs duty and it has to be allowed as deduction only on actual payment basis in view of the provisions of Section 43B of the said Act. In taking such a view, the Assessing Officer had placed reliance on the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR429. In this case, it has been held that the interest payable on an arrear of cess/duty is in reality part and parcel of the liability to pay cess and such interest is an accretion to the cess. The Assessing Officer finally concluded that the assessee's claim should be disallowed as the amount was in the nature of a mere provision without there being an ascertained liability.
68. On an appeal taken by the assessee, the Commissioner of Income-tax (Appeals) took a view that interest under the Customs Act should be considered to be falling under Section 43B of the said Act. The Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer.
69. On further appeal to the Tribunal, the Tribunal also upheld the findings and conclusion of the assessing authority as also the Commissioner of Income-tax. The Tribunal also held that the ratio of the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 has rightly been applied by the lower authorities, by holding that the interest payable on the customs duty is part and parcel of the duty.
70. In this reference, I am concerned with Section 43B of the Income-tax Act, as it stood during the relevant assessment year being 1985-86. Section 43B of the said Act, as relevant for this reference, is as follows :
"43B. Certain deductions to be only on actual payment. -- Not-withstanding 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 or duty 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 the employees, 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."
71. In the instant case, the assessee is liable to pay interest on the warehoused goods under Section 61(2) of the Customs Act. Sub-section (2) of Section 61 of the Customs Act reads as follows :
"(2) Where any warehoused goods, specified in Clause (a) of Sub-section (1), remain in a warehouse beyond the period of one year, by reason of extension of the aforesaid period or otherwise, interest at such rate, as specified in Section 47 shall be payable on the amount of duty on the warehoused goods for the period from the expiry of the period of one year till the date of the clearance of the goods from the warehouse."
72. The word "duty" has not been defined in the Act. This has, however, been defined in the Customs Act, in Section 2(15) as meaning a duty of customs leviable under the Customs Act. Under the provisions of the Customs Act, the duty on goods imported is leviable under Section 12 in Chapter V of the Customs Act. Under Section 12 of the Customs Act, the duties of customs shall be levied on the goods imported into or exported from India. Therefore, under Section 12 of the Customs Act, the duty has to be levied on the importation of the goods and the word "import" is defined in Section 2(23) of the Customs Act meaning bringing into India from a place outside India. It would, therefore, appear that the duty is leviable when the goods are imported into India and it has to be paid on clearance of the goods. Therefore, the taxable event is importation of goods into India and the liability to pay such duty would arise on the clearance of such imported goods.
73. So far as the payment of "interest" is concerned, that will be under the relevant provisions of the Customs Act in Chapter IX. Chapter IX of the Customs Act deals with warehousing. Section 57 is the starting section in Chapter IX of the Customs Act. The liability to pay "interest" in respect of the warehoused goods would arise only when the imported goods are warehoused and not removed within the "free period" as contemplated by the provisions of Section 61 of the Customs Act.
74. It would, therefore, appear from the reading of the relevant provisions of the Customs Act as regards levy of duty, and charging interest, the incidence for imposition of duty is different from the incidence of imposition of interest. It would appear from Sub-section (2) of Section 61 of the Customs Act that the interest will be payable if the goods remain in the warehouse beyond the free time and computation of such interest would be in the manner as prescribed in the relevant provisions of the Customs Act.
75. It has been argued on behalf of the Revenue that the interest payable by the assessee under the Customs Act is the interest paid for delayed payment of duty. Therefore, as argued on behalf of the Revenue, such interest should be considered as part and parcel of the duty and, as such, the provisions of Section 43B are applicable. The assessee, however, argues that the "interest" is being paid for keeping imported goods in the warehouse beyond the free time and it is not "a sum payable by the assessee by way of tax or duty under any law for the time being in force", as contemplated by Section 43B of the Act. Therefore, as contended on behalf of the assessee, it cannot be said that interest is being paid by way of duty or the same is part and parcel of the duty as sought to be argued on behalf of the Revenue.
76. As it would appear from the scheme of the Customs Act, the duty is leviable when the goods are imported into India and the taxable event being importation of the goods into the territory of India, and the same is leviable under Section 12 of the Customs Act. The interest, as I have indicated above, is leviable under the Customs Act for warehousing the goods in the warehouse and which are not removed within the free time. It would also appear that there is no provision for payment of interest by way of penalty on the delayed payment of duty in the Customs Act, because, to my mind, such provision, is not necessary since the duty has to be paid at the time of clearance of the imported goods, if the goods are cleared at the point of importation, then the duty would have been payable then and there, and there would be no occasion for payment of interest. If the goods are allowed to remain in the port area or in the warehouse, then certain other charges have to be paid to the customs authorities by way of demurrage charges or by way of interest, etc., if the goods are warehoused after executing the bond under the relevant provisions in Chapter IX of the Customs Act. I am, therefore, of the view that both demurrage and interest are being charged for late clearance of the goods from the port area or the warehouse, but the same is not being charged for delayed payment of duty.
77. When this reference was being heard by the Division Bench, the hon'ble Chief Justice held in favour of the Revenue accepting the contention made on behalf of the Revenue. Justice Ruma Pal, however, differed from the views taken by the hon'ble Chief Justice. Justice Pal observed that the Customs Act has differentiated between the payment of duty and the payment of interest on such duty under Section 61 of the Customs Act and has not treated the word "duty" as including within itself the element of interest payable on account of warehousing. Justice Pal has also held that the interest is being charged for the failure on the part of the assessee to remove the goods warehoused within the statutory period. Therefore, according to Justice Pal, the cause for payment of interest is not late payment of the duty but utilisation of the warehouse beyond the statutorily prescribed limit.
78. I am inclined to accept the view taken by Justice Pal. As I have indicated above, considering the scheme of the Customs Act, it cannot be said that interest can be treated as part and parcel of the duty or the same is being paid by way of duty. The Revenue has placed reliance on the decision of the Supreme Court in Mahalakshmi Sugar Milt's case [1980] 123 ITR 429. In this case, the Supreme Court has observed that the interest payable on an arrear of cess under Section 3(3) of the U. P. Sugarcane Cess Act, 1956, is in reality part and parcel of the liability to pay cess. It is found by the Supreme Court that it is an accretion to the cess and arrear of cess carries interest. It will appear that the Supreme Court in this case confined itself solely to the nature of the liability to pay interest under the provisions of the said U. P. Sugarcane Cess Act, 1956.
79. In my view, this case of Mahalakshmi Sugar Mill is distinguishable from the present case. In my view, the interest was paid on cess because the cess was allowed to remain in arrears and there the interest to be paid was not for any other purpose but as the cess fell in arrears. Therefore, the interest would have to be paid together with arrears of cess, when paid. In the instant case before me, as I see it, the interest is being paid for keeping the imported goods in the warehouse and not cleared within the prescribed period. In the instant case, the interest is not to be paid for arrear dues or for delayed payment of dues, because under the Customs Act, the duty is payable on the importation of goods under the provisions contained in Chapter V of the Customs Act, whereas the interest is being paid for keeping the goods in the warehouse beyond the prescribed period under the provisions in Chapter IX of the Customs Act. It also appears to me that the Supreme Court in Mahalakshmi Sugar Mill's case [1980] 123 ITR 429 does not lay down any proposition by way of general application that interest in every case under any statute payable along with tax or duty forms part of the tax or duty.
80. Justice Ruma Pal in the judgment has referred to other Supreme Court decisions which I need not refer to in detail. In Bhor Industries v. CIT , it was urged by the assessee that before determining the dividends payable by the company, the interest payable along with the tax should be deducted. The Supreme Court negatived this contention and held that there was nothing to show that the interest was to be treated as tax. Here, in this reference, the interest is to be paid in addition to the duty payable on the importation of the goods at the time of clearance of the same.
81. In the instant reference, the hon'ble Chief Justice in his judgment found on a perusal of the language of the Section 43B of the Act that the non obstante clause in Section 43B of the Act meant that it controlled the operation of other provisions of the Act and irrespective of the other provisions. Section 43B would have overriding effect. It has also been observed by the hon'ble Chief Justice that a deduction in respect of any interest can only be allowed if the same has actually been paid by the assessee in the relevant assessment year. It is also held by the hon'ble Chief Justice that the interest payable is in the nature of penalty for illegally retaining possession of the warehouse and, as such, the amount payable was a statutory liability. The hon'ble Chief Justice, therefore, answered questions Nos. 1 and 2 against the assessee and in favour of the Revenue.
82. As I have stated above, on an examination of the relevant provisions of the Customs Act, it cannot be said that the interest payable for keeping the imported goods in the customs warehouse beyond the statutory period is part and parcel of the duty payable on importation of the goods. The word "duty" cannot be treated as including within itself the element of "interest" payable on account of warehousing beyond the statutory period. The levy of duty on importation of the goods and the levy of interest on account of warehoused goods are two distinct and separate liabilities arising. In two different events.
83. I am afraid, I do not feel inclined to agree with the answer put by the hon'ble Chief Justice. I accept and agree with the answer proposed by the hon'ble Justice Ruma Pal.
84. As regards question No. 2, the assessing authority took the view that the unpaid amount of interest, liability payable to the Customs Department cannot be allowed on the ground of non-accrual of liability and there is no actual payment in the previous year as contemplated by Section 43B of the Act. It is contended on behalf of the assessee that the claim of the assessee for revenue deduction of interest on customs duty does not attract the provisions of Section 43B of the Act and the deduction should be allowable. I also agree with the answer to question No. 2 as proposed by the hon'ble Justice Pal. This deduction is otherwise allowable.
85. Let the matter now be placed before the appropriate Division Bench for necessary orders.