1989 (9) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 43B of the IT Act, 1961 regarding sales-tax liability.
2. Levy of interest under Section 215.
3. Addition to the trading account due to a fall in the gross profit rate.

Issue-wise Detailed Analysis:

1. Applicability of Section 43B of the IT Act, 1961 regarding sales-tax liability:

The primary issue in both appeals was the addition of Rs. 3,27,544 under Section 43B of the IT Act, 1961 by the Income Tax Officer (ITO). The ITO added this amount during the assessment proceedings, stating that it was an outstanding liability on account of sales-tax, and according to Section 43B, payments on account of taxes and duties would be allowed only in the year of actual payment. The assessee argued that the amount was not claimed as a deduction and was directly reflected in the balance-sheet. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the addition.

The assessee highlighted that the amount represented collections made during the last quarter of the accounting period and had been paid to the Government within the statutory period provided by the Sales-tax legislation applicable to the State of Gujarat. The retrospective amendment by the Finance Act, 1989, which inserted Explanation 2 with retrospective effect from 1st April, 1984, nullified the Andhra Pradesh High Court decision in S. Subba Rao & Co. Ors. vs. Union of India & Ors. but left intact the Tribunal's decision in ITO vs. Thakersi Babubhai & Co. The assessee argued that Section 43B was not intended to disallow government dues deposited within the time allowed under the respective State legislation and that the first proviso to Section 43B, added by the Finance Act, 1987, ensured no disallowance if the amount was paid before the due date for furnishing the return of income under Section 139(1).

The Departmental Representative supported the orders of the authorities below, stating that the ITO rightly made the addition by invoking Section 43B. He argued that Explanation 2, inserted by the Finance Act, 1989, nullified the Andhra Pradesh High Court decision and various Tribunal decisions, clinching the issue in favor of the Department. The first proviso to Section 43B was applicable only from 1st April, 1988, and would not help the assessee for the present assessment year.

Upon examining the submissions and the material on record, the Tribunal noted that the amount represented collections on account of sales-tax for the last quarter and was paid to the Government within the statutory period. The Tribunal referred to the Finance Minister's Budget Speech for 1983-84 and the memorandum explaining the provisions in the Finance Bill, 1983, which indicated that Section 43B aimed to prevent the grant of deduction for government dues and taxes where taxpayers did not discharge their statutory liability or disputed the liability. The provisions were not meant to disallow admitted sales-tax liability paid within the time prescribed under the respective State legislation.

The Tribunal concluded that the provisions of Section 43B would not be applicable since the assessee deposited the amount within the statutory time-limit and before the due date for furnishing the return of income under Section 139(1). The addition was deleted, and the necessary relief was granted to the assessee. The corresponding deduction allowed in the subsequent assessment year (1985-86) would be withdrawn.

2. Levy of interest under Section 215:

The only other remaining ground pertained to the levy of interest under Section 215. The assessee argued that the levy resulted from the huge addition made by the ITO under Section 43B and that if relief was granted on that score, the charge of interest under Section 215 would disappear. The assessee relied on the Gujarat High Court decision in CIT vs. Bharat Machinery & Hardware Mart for the proposition that no interest was chargeable. The Departmental Representative supported the ITO's order subjecting the assessee to the charge of interest under Section 215.

The Tribunal concluded that consequential relief was called for in respect of the charge of interest under Section 215, necessitated by the relief allowed regarding the applicability of Section 43B. The ITO was directed to recalculate the interest chargeable under Section 215.

3. Addition to the trading account due to a fall in the gross profit rate:

In ITA No. 2701/Ahd/1986, the only remaining ground was the addition to the trading account made by the ITO at Rs. 10,000, reduced to Rs. 5,000 by the CIT(A). The assessee, engaged in the tea business on a wholesale basis, experienced a fall in the gross profit (g.p.) rate from 7.2% in the preceding assessment year to 5.8% in the year under consideration. The ITO noted the absence of a day-to-day stock register and quantitative details in kilograms. The assessee explained the fall in the g.p. rate as due to factors like availability of goods in the market, government policies, and market conditions. The ITO found the explanation general and unsubstantiated, rejecting the book results and making an addition of Rs. 10,000. The CIT(A) reduced the addition to Rs. 5,000.

The assessee argued that the sales were only in boxes, and the quantitative tally in this respect was filed with the ITO. The state of the books of accounts and records remained the same as in the past, and no new facts were brought out by the ITO. The g.p. rate had been accepted in the past, even at lower rates. The nominal fall in the g.p. rate was bona fide, given the tremendous increase in sales.

The Tribunal noted that the state of the books of accounts and records remained the same as in earlier assessment years, and the book results had been accepted in the past. The assessee sold tea in sealed boxes, and the quantitative tally in boxes was furnished during the assessment proceedings. The Tribunal opined that it was not possible to maintain a static g.p. rate from year to year due to various factors. On the facts of the present case, there was no basis to reject the books and maintain an addition to the trading results, especially given the tremendous increase in sales. The addition of Rs. 5,000 maintained by the CIT(A) was deleted.

Conclusion:

Both appeals were partly allowed. The addition under Section 43B was deleted, and the corresponding deduction allowed in the subsequent assessment year was withdrawn. Consequential relief was granted in respect of the charge of interest under Section 215, and the ITO was directed to recalculate the interest. The addition to the trading account was deleted.