1999 (8) TMI 957 - HC - Income Tax

Summary

Issues Involved:
1. Impact and scope of section 43B of the Income-tax Act, 1961.
2. Whether the deduction for sales tax collected but not paid in the same year is permissible in the year of collection or the year of payment.

Detailed Analysis:

1. Impact and Scope of Section 43B of the Income-tax Act, 1961:
Section 43B was introduced by the Finance Act, 1983, effective from 1-4-1984. It states that deductions for certain expenses, including taxes, duties, and contributions to employee welfare funds, are allowable only in the year they are actually paid, regardless of the accounting method employed by the assessee. The section begins with a non obstante clause, indicating its precedence over other provisions of the Act.

2. Deduction for Sales Tax Collected but Not Paid in the Same Year:
The core issue is whether the deduction for sales tax collected by the assessee in the assessment years 1984-85 and 1985-86, but paid in subsequent years, should be allowed in the year of collection or the year of payment.

Arguments and Precedents:
- Revenue's Argument: The revenue argued that section 43B, with its non obstante clause, mandates that deductions for taxes, including sales tax, are allowable only in the year they are actually paid, not when they are collected.
- Assessee's Argument: The assessee contended, based on earlier judgments, that the deduction should be allowed in the year of collection, following the mercantile system of accounting.

Key Judgments Cited:
1. Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971): The Supreme Court held that an assessee maintaining mercantile accounts could claim a deduction for sales tax liability in the year it was incurred, even if disputed and not paid.
2. Chowringhee Sales Bureau (P.) Ltd. v. CIT (1973 and 1977): The Supreme Court and Calcutta High Court held that sales tax collected forms part of business receipts and liability to pay arises at the time of sale, deductible even if not paid in the same year.
3. Indian Carbon Co. v. IAC (1993): The Gauhati High Court held that section 43B applies only when an assessee claims a deduction for taxes payable, not when merely shown as a liability.
4. Allied Motors (P.) Ltd. v. CIT (1997): The Supreme Court clarified that section 43B aimed to curb the practice of claiming deductions for unpaid statutory liabilities and allowed deductions only in the year of actual payment. The first proviso to section 43B, added by the Finance Act, 1987, permits deductions if the payment is made by the due date for filing the return.

Court's Conclusion:
The court concluded that the earlier judgments (Kedarnath Jute, Chowringhee Sales Bureau, Indian Carbon, and Jonnalla Narashimharao) dealt with periods before the introduction of section 43B. The decision in Allied Motors (P.) Ltd. directly interprets section 43B, emphasizing that deductions are permissible only in the year of actual payment. Thus, the court held that the deduction for sales tax collected in assessment years 1984-85 and 1985-86 is allowable only in the years when the tax was actually paid (1986-87 and 1987-88).

Judgment:
The question was answered in favor of the revenue, affirming that deductions under section 43B are allowable only in the year of actual payment, not in the year of collection, regardless of the accounting method employed by the assessee.