Motors (P) Ltd. Vs. Commissioner of Income-Tax, Delhi  INSC 262 (10 March 1997)
AHMADI, SUJATA V. MANOHAR, K. VENKATASWAMI
Tax Reference No.1/94, CA Nos. 3175/91 and 2380/91)
V. Manohar, J.
two Income-tax References which are before us deal with a common question
relating to the interpretation of Section 43B of the Income-tax Act, 1961. The
references have been made under Section 256(1) of the Income-tax Act, 1961.
the same question arises in the two civil appeals also these appeals have been
heard along with these references.
the sake of convenience, we are taking the statement of the case in Income-tax
Reference No.2 of 1993.
following question has been referred to us under Section 256(1):- "Whether
on the facts and in the circumstances of the case, the sales-tax collected by
the assessee and paid after the end of the relevant previous year but within
the time allowed under the relevant sales-tax law is to be Income-Tax Act, 1961
while computing the business income of the said previous year "? The
relevant assessment year is 1984-85, the relevant accounting period being the
year ending on 30th of June, 1983. The assessee filed the return declaring an
income of Rs. 1,91,940/-. The Income-Tax Officer, however, disallowed, inter alia,
deduction claimed by the assessee of an amount of Rs. 5,78.240/- which was on
account of sales-tax collected by the assessee for the last quarter of the
relevant accounting year. This amount was payable within 30 days of the end of
the quarter. The deduction which was claimed by the assessee was disallowed by
the Income-tax Officer under Section 43B of the Income-tax Act, 1961 which was
inserted in the statute with effect from 1.4.1984. The assessee filed an appeal
before the Commissioner of Income- Tax (Appeals), inter alia, in respect of
the appeal was dismissed. The assessee filed an appeal before the Income-Tax
Appellate Tribunal. The tribunal also dismissed the appeal on the basis of the
judgments of the Delhi High Court in the case of Sanghi Motors v. Union of
India (187 ITR 703) and Escorts Ltd. v.
Union of India & Ors. (189 ITR 81).
Hence the present reference has come before us. One of the judgment relied upon
by the tribunal was the judgment in the case of Escorts Ltd. v. Union of India
(supra). Civil Appeal No.
(NT) of 1991 is an appeal from the decision of the Delhi High Court in the
above case which is being heard along with the present tax-references.
relevant provisions of Section 43B for our purpose ar as follows :- "43B:-
Certain deductions to be only on actual payment -- Notwithstanding anything
contained in any other provision of this Act, a deduction otherwise allowable
under this Act in respect of -- (a) any sum payable by the assessee by way of
tax, duty, cess or fee, by whatever name called, under any law for the time
being in force, or (b) ............................
be allowed (irrespective of the previous year in which the liability to pay
such sum was incurred by the assessee according to the method of accounting
regularly employed by him) only in computing the income referred to in section
28 of that previous year fin which such sum in actually paid by him :
Provided that nothing contained in this section shall apply in relation to any
sum referred to in clause (a) or clause (c) or clause (d) which is actually
paid by the assessee on or before the due date applicable in his case for
furnishing the return of income under sub-section (1) of section 139 in respect
of the previous year in which the liability to pay such sum was incurred as
aforesaid and the evidence of such payment is furnished by the assessee along
with such return :
1 - ..........
Explanation 2 -- For the purposes of clause (a), as in force at all material
times, 'any sum payable means a sum for which the assessee incurred liability
in the previous year even though such sum might not have been payable within
that year under the relevant law.
3 - .............
4 - ............." Section 43B was inserted in the Income-tax Act, 1961
with effect from 1.4.1984. The section, as it originally stood, did not contain
the two provisos. The first proviso has been set out above. The proviso was
inserted by the Finance Act of 1987 which came into effect from 1.4.1988.
2 has been added subsequently by the Finance Act of 1989 but with retrospective
effect from 1.4.1984. In these References and appeals we are concerned with the
application of Section 43B as it stood before the provisos were added.
to the insertion of Section 43B in the Income Tax Act, 1961, income chargeable
under the head 'profits and gains' of business or profession was computable in
accordance with the method of accounting regularly employed by the assessee as
per Section 145 of the Income-tax Act, 1961. An assessee who had adopted the
mercantile system of accounting would be entitled to account for his income and
expenditure on the basis of accrual and not on the basis of actual receipt or
disbursement. After insertion of Section 43B, however, even if the assessee had
regularly adopted mercantile system of accounting, the amount of tax payable by
the assessee could be deducted only in the year in which the assessee incurred
the liability to pay that tax. Hence an assessee (as in the present case), who
had collected sales-tax in the last quarter of the previous accounting year and
deposited it in the treasury within the statutory period falling in the next
accounting year, would not be entitled to claim any deduction for it. The
sales-tax so collected will form a part of the assessee's income. To obviate
this kind of unexpected outcome of section 43B, the first proviso was added in
Section 43B by the Finance Act of 1987. The proviso makes it clear that the
Section will not apply in relation to any sum which is actually paid by the assessee
in the next accounting year if it is paid on or before the due date for
furnishing the return of income in respect of the previous year in which the
liability to pay such sum was incurred and the evidence of such payment is
furnished by the assessee along with the return.
proviso, however, was not on the statute book when the assessments were made in
respect of these assessees since the assessments pertain to assessment year
prior to the insertion of the proviso in Section 43B. The assessees, however,
contend that the proviso should be given effect to retrospectively from the
date when section 43B became a part of the Income-tax Act, 1961, as it is
intended to obviate unexpected hardships in the application of Section 43B.
under stand the circumstances in which section 43B came to be inserted in the Income-tax
Act and the mischief which it sought to prevent, it is necessary to look at the
memorandum explaining the provisions in the Finance Bill of 1983 [(1983) 140
ITR (St.) 160] :- "59. Under the Income-tax Act, profits and gains of
business and profession are computed in accordance with the method of
accounting regularly employed by the assessee. Broadly stated, under the
mercantile system of accounting, income and outgo are accounted for on the
basis of accrual and not on the basis of actual disbursements or receipts.
the purposes of computation of profits and gains of business and profession,
the Income-tax act defines the word 'paid' to mean 'actually paid or incurred'
according to the method of accounting on the basis of which the profits or gains
Several cases have come to notice where tax payers do not discharge their
statutory liability such as in respect of excise duty, employer's contribution
to provident fund, Employees' State Insurance Scheme, etc.. for long period of
time, extending sometimes to several years. For the purpose of their income-tax
assessments, they claim the liability as deduction on the ground that they
maintain accounts on mercantile or accrual basis. On the other hand they
dispute the liability and do not discharge the same. For some reason or the
other undisputed liabilities also are not paid. To curb this practice, it is
proposed to proved that deduction for any sum payable by the assessee by way of
tax or duty under any law for the time being in force (irrespective of whether
such tax or duty is disputed or not) or any sum payable by the assessee as an
employer by way of contribution to any provident fund, or superannuation fund
or gratuity fund or any other fund for the welfare of computing the income of
that previous year in which such sum is actually paid by him." The Budget
Speech of the Finance Minister for the year 1983-84, reproduced in (1983) 140
ITR (St.) 31, is to the same effect.
43B was, therefore, clearly aimed at curbing the activities of those tax payers
who did not discharge their statutory liability of payment of excise duty,
employer's contribution to provident fund etc. for long periods of time but
claimed deductions in that regard from their income on the ground that the liability
to pay these amounts had been incurred by them in the relevant previous year.
It was to stop this mischief that Section 43B was inserted. It was clearly not realised
that the language in which Section 43B was worded would cause hardship to those
tax payers who had paid sales-tax within the statutory period prescribed for
this payment, although the payment so made by them did not fall in the relevant
could be paid only in the next quarter which fell in the next accounting year.
Therefore, even when the sales-tax had in fact been paid by the assessee within
the statutory period prescribed for its payment and prior to the filing of the
income tax return, these assessees were unwittingly prevented from claiming a
legitimate deduction in respect of the tax paid by them. This was not intended
by Section 43B.
the first proviso was inserted in Section 43B. The amendment which was made by
the Finance Act of 1987 in Section 43B by inserting, inter alia, the first
proviso, was remedial in nature, designed to eliminate unintended consequences
which may cause undue hardship to the assessee and which made the provision
unworkable or unjust in a specific situation.
to the curative nature of the amendment made by the Finance Act of 1987 it has
been submitted before us that the proviso which is inserted by the amending
Finance Act of 1987 should be given retrospective effect and be read as forming
a part of Section 43B from its inception. This submission has taken support
from decisions of a number of High Courts before whom this question came up for
consideration. The High Courts of Calcutta, Gujarat, Karnataka, Orissa, Gauhati, Rajasthan, Andhara Pradesh, Patna and Kerala appear to have taken the
view that the proviso must be given retrospective effect. Some of these High
courts have held that "sum payable" under Section 43B(a) refers only
to the sum payable in the same accounting year thus excluding sales tax payable
in the next accounting year from the ambit of Section 43B(a). The Delhi High
Court has taken a contrary view holding that the first proviso to Section 43B
operates only prospectively. We will refer only to some of these judgments.
2 was added to Section 43B by the Finance Act of 1989 with retrospective effect
from 1.4.1984. The Memorandum explaining the reasons for introducing
Explanation 2, states inter alia, as follows [(1989) 176 ITR (St.) 123] :-
"24. Under the existing provisions of section 43B of the Income-tax Act, a
deduction for any sum payable by way of tax, duty cess or fee, etc., is allowed
on actual payment basis only. The objective behind these provisions is to
provide for a tax disincentive by denying deduction in respect of a statutory
liability which is not paid in time. The Finance Act, 1987, inserted a proviso
to section 43B to provide that any sum payable by way of tax or duty, etc.,
liability for which was incurred in the previous year will he allowed as a
deduction, if it is actually paid by the due date of furnishing the return
under Section 139(1) of the Income-tax Act, in respect of the assessment year
to which the aforesaid previous year relates. This proviso was introduced to
remove the hardship caused to certain taxpayers who had represented that since
the sales-tax for the last quarter cannot be paid within that previous of
section 43B will unnecessarily involve disallowance of the payment for the last
courts have interpreted the provisions of section 43B in a manner which may
negate the very operations of his section. The interpretation given by these
courts revolves around the use of the words 'any sum payable'.
interpretation given to these words is that amount payable in a particular year
should also be statutorily payable under the relevant statute in the same year.
is against the legislative intent and it is, therefore, proposed, by way of a clarificatory
amendment and for removal of doubts, that the words 'any sum payable' be
defined to mean any sum, liability for which has been incurred by the taxpayer
during the previous year irrespective of the date by which such sum is
amendment will take effect from April 1, 1984." While interpreting Section 43B without the first
proviso some of the High Courts, in order to prevent undue hardship to the assessee,
had taken the view that Section 43B would not be attracted unless the sum
payable by the assessee by way of tax, duty, cess or fee was payable in the
same accounting year. If the tax was payable in the next accounting year,
Section 43B would not be attracted. This was done in order to prevent any undue
hardship to assessees such as the ones before us. The memorandum of reasons
takes note of the combined effect of Section 43B and the first proviso inserted
by the Finance Act, 1987. After referring to the fact that the first proviso
now removes the hardship caused to such tax payers it explains the insertion of
Explanation 2 as being for the purpose of removing any ambiguity about the term
'any sum payable' under clause (a) of Section 43B. This Explanation is made
retrospective. The Memorandum seems to proceed on the basis that Section 43B
read with the proviso takes care of the hardship situation and hence
Explanation 2 can be inserted with retrospective effect to make clear the ambit
of Section 43B(a). Therefore, Section 43B(a), the first proviso of Section 43B
and Explanation 2 have to be read together as giving effect to the true
intention of Section 43B. If Explanation 2 is retrospective, the first proviso
will have to be so construed. Read in this light also, the proviso has to be
read into Section 43B from its inception along with Explanation 2.
position is reinforced by a departmental Circular No.
dated 1st of January 1990, [(1990) 182 ITR (St.)
114, 123] :- "AMENDMENT OF PROVISIONS RELATING OF CERTAIN DEDUCTIONOT BE
ALLOWED ONLY ON ACTUAL PAYMENT.
Under the existing provisions of section 43B of the Income-Tax Act, 1961, a
deduction for any sum payable by way of tax, duty, cess or fee, etc., is
allowed on actual payment basis only. The objective behind these provisions is
to provide for a tax disincentive by 'statutory liability' which is not paid in
time. The Finance Act, 1987, inserted a proviso to section 43B to provide that
any sum payable liability for which was incurred in the previsous year will be
allowed as a deduction, if it is actually paid by the due date of furnishing
the return under Section 139(1) of the Income-tax Act, in respect of assessment
year to which the aforesaid previous year relates.
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.
courts have interpreted the provisions of section 43B in a manner which may
negate the very operation of this section. The interpretation given by these
courts revolves around the use of the words ' any sum payable'. The interpretation
given to these words is that the amount payable in a particular year should
also be statutorily payable under the relevant statute in the same year. Thus,
the sales tax in respect of sales made in the last quarter was held to be
totally outside the purview of section 43B since the same is not statutorily
payable in the financial year to which it relates. This is against the
legislative intent and, therefore, by way of inserting an Explanation, it has
been clarified that the words 'any sum payable' shall mean any sum, liability
for which has been incurred by the taxpayer during the previous year
irrespective of the date by which such sum is statutorily payable
........" The departmental understanding also appears to be that Section
43B, the proviso and Explanation 2 have to be read together as expressing the
true intention of Section 43B.
2 has been expressly made retrospective. The first proviso, however, cannot be
isolated from Explanation 2 and the main body of Section 43B. without the first
proviso, Explanation 2 would not obviate the hardship or the unintended
consequences of Section 43B. The proviso supplies an obvious omission. But for
this proviso the ambit of Section 43B becomes unduly wide bringing within the
scope those payments which were not intended to be prohibited from the category
of permissible deductions.
case of Goodyear India Ltd. v. State of Haryana and Anr. (188 ITR 402) this court said that he rule of reasonable
construction must be applied while construing a statute. Literal construction
should be avoided if it defeats the manifest object and purpose of the Act.
in the well known words of Judge learned Hand, one cannot make a fortress out
of the dictionary; and should remember that statutes have some purpose and
object to accomplish whose sympathetic and imaginative discovery is the surest
guide to their meaning. In the case of R.B. Jodha Mal Kuthiala v. Commissioner
of Income-tax, Punjab, jammu & Kashmir and Himachal
Pradesh (82 ITR 570), this Court said that one should apply the rule of
reasonable interpretation. A proviso which is inserted to remedy unintended
consequences and to made the provision workable, a proviso which supplies an
obvious omission in the section and is required to be read into the section to
give the section a reasonable interpretation, requires to be treated as
retrospective in operation so that a reasonable interpretation can be given to
the section as a whole.
view has been accepted by a number of High Court.
case of Commissioner of Income-Tax v. Chandulal Venichand ( 209 ITR 7),
the Gujarat High Court has held that he first proviso to section 43B is
retrospective and sales-tax for the last quarter paid before the filing of the
return for the assessment year is deductable. This decision deals with
assessment year 1984-85. The Calcutta High Court in the case of Commissioner of
Income-tax v. Sri Jagannath Steel Corporation ( 191 ITR 676), has taken a
similar view holding that the statutory liability for sales-tax actually
discharge after the expiry of accounting year in compliance with the relevant
stature is entitled to deduction under Section 43B. The High Court has held the
amendment to be clarificatory and, therefore, retrospective.
Gujarat High Court in the above case held the amendment to be curative and
explanatory and hence retrospective. The Patna High Court has also held the
amendment inserting the first proviso to be explanatory in the case of Jamshedpur
Motor Accessories Stores v. union of India and Ors. ( 189 ITR 70.), It was held that amendment inserting
first proviso to be retrospective. The special leave petition from this
decision of the Patna High Court was dismissed. The view of the Delhi High
Court, therefore, that the first proviso to section 43B will be available only
prospectively does not appear to be correct. As observed by G.P. Singh in his
Principles of statutory Interpretation, 4th Edn. Page 291, "It is well
settled that if a statute curative or merely declaratory of the previous law
retrospective operation is generally intended." In fact the amendment
would not serve its object in such a situation unless it is construed as
retrospective. The view, therefore, taken by the Delhi High Court cannot be
premises the appeals are allowed and the Income- tax references are answered in
favour of the assessees and against the revenue. In the circumstances, however,
there will be no order as to costs.