S.43B -Un-necessary litigation by revenue an appeal before the Supreme Court on an issue which was well settled. S.43B must be omitted from the Income-tax Act

[CA DEV KUMAR KOTHARI]

Links and references:

Section 43B of Income-tax Act, 1961.

Commissioner of Income Tax II Versus M/s Modipon Ltd. 2017 (11) TMI 1429 - SUPREME COURT OF INDIA

CK Gangadharan & Anr. Versus Commissioner of Income Tax, Cochin 2008 (7) TMI 10 - SUPREME COURT

Commissioner of Income Tax Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd. 2013 (10) TMI 324 - SUPREME COURT

And various judgments referred to in above judgments.

S.43B - a brief discussion:

S.43B was inserted with a view to allow certain deductions only on the basis of actual payment. The section has been amended several time to increase scope of items covered by it and also to provide some relaxations from hardship.

A sum to which S.43B apply and which is otherwise allowable is to be allowed only in the year in which payment has actually been made. This is irrespective to the method of accounting followed by assessee.

While claiming deduction assessee has to very careful to claim deduction of all such sums actually paid in previous year relevant to the assessment year. If a sum actually paid in say first year is not claimed, then it will not be allowed in second or any other year.

Therefore, from the beginning of the S.43B that is assessment year 1984-85 the author had always suggested that all actual payments , governed by S.43B ,made within the previous year whether on accrual, or in advance or under protest or under some other circumstances, whether debited in P & L account or not should be claimed under S. 43B.

 It is also important that evidence of actual payment was also required to be filed with ROI till few years back and not such evidences are to be produced by assessee, as and when AO require. 

Therefore a payment actually made say on 31.03.2015 whether on accrual, or as advance or under protest is eligible for claim  for deduction only in assessment year 2015-16 for which relevant previous year is year ended 31.03.15 during which sum was actually paid whether debited in P & L account of PYE 31.03.15 or not.

Adjustments required under section 43B:

From the beginning of S.43B author had advised to make the following adjustments under section 43B:

To disallow

a. Sums debited in P & L account but not actually paid during previous year.

b. Sums claimed in earlier year on actual payment basis, but debited in P & L account.

To allow:

a. Sums actually paid during the previous year against old un-allowed liabilities not debited in P & L account. (including input credits like MODVAT/CENVAT/ ITC)

b. Sums actually paid (as advance or under protest) but not debited in P & L account but kept as advance.

c. Sums actually paid after end of previous year but before due date to file return u.s. 139 (by filing evidence of such payment). - (this is optional for assessee- he can claim as per proviso to S.43B  or in next year in  which actual payment is made).

Computations on above basis have generally been accepted by tax authorities.

Well settled position:

The above position is well settled and generally accepted by AO. In some years and in some cases disputes arose and in appeals the same were allowed in the year of actual payment by CIT(A) or ITAT and matter attained finality.

Case of Modipon - Supreme Courts observations about settled position, yet question considered on merit:

Paragraph 8 of judgment with highlights is reproduced below:

     8. We have considered the submissions made on behalf of the parties.

Notwithstanding the acceptance by the Revenue of the practice adopted by the assessee-Modipon Ltd. in all the assessment years except for the ones under dispute as enumerated above and the absence of any challenge to the decisions of the Delhi and the Punjab & Haryana High Courts, the present challenge would still be entertainable so long as it discloses a substantial question of law or an issue impacting public interest or the same has the potential of recurrence in future. The Revenue cannot be shut out from the present proceedings merely because of its acceptance of the practice of accounting adopted by the assessee or its acceptance of the decision of the two High Courts in question. An adjudication of the question(s) arising cannot be refused merely on the above basis. We will, therefore, have to proceed to answer the merits of the challenge made by the Revenue in the present appeals.

Approach of the  Supreme Court need to be reviewed:

With great respect author feels that the approach of the Supreme Court as adopted in the case of Modipon need to be reviewed for the following reasons:

a. The clear provision is clear that deduction shall be allowed only on actual payment and the assessee claimed only on that basis. If an advance payment is not claimed in year of payment then it cannot be allowed in other year. Therefore there was really no question of law.

b.There was not an issue which affect revenue over a period of time- a deduction allowed on actual payment basis ( even advance orunder protest payment) get reversed in subsequent year when such sum is debited to P & L account on accrual basis. Therefore there was no adverse impact on revenue if two years are considered.

c. The issue involved only had timing difference about deduction and it cannot be called an issue having adverse impact on revenue repeatedly. A deduction allowed in first year get reversed, generally in next year. Therefore, there was not much importance of the issue.

d. From facts of cases it was clearly found case that deduction was claimed based on actual payments in accordance with provision of S.43B. Actual payment is a matter of fact and therefore, fact found by Tribunal was to be accepted.

e. The Supreme Court, including through larger benches had already held that an issue which has attained finality should not be agitated again by revenue, unless there was just causes for not filing appeal in other cases relied on by tax payer which have attained finality in favour of assesee. For example:

A.   In CK Gangadharan & Anr. Versus Commissioner of Income Tax, Cochin 2008 (7) TMI 10 – SUPREME COURT ( larger bench of three judges bench) had observed and held inter alia following (with highlights added):

Quote:

“  1. By order dated 13.3.2008, a reference was made to larger Bench and that is how these cases are before us. The order, of reference, inter-alia, reads as follows: 

       " In view of the aforesaid position, we are of the opinion that matter requires consideration by a larger Bench to the extent whether revenue can be precluded from defending itself by relying upon the contrary decision.

     We make it clear that we are not doubting the correctness of the view taken by this Court in the cases of Union of India v. Kaumudini Narayan Dalal (2001)10 SCC 231, CIT v. Narendra Doshi (2004) 2 SCC 801 and CIT v. Shivsagar Estate (2004) 9 SCC 420 to the effect that if the revenue has not challenged the correctness of the law laid down by the High Court and accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assesses, without just cause.

Registry is directed to place the papers before the Hon'ble Chief Justice of India for appropriate orders."

xxxx

13. In answering the reference, we hold that merely because in some cases the revenue has not preferred appeal that does not operate as a bar for the revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher Court when divergent views are expressed by the Tribunals or the High Courts.”

B.   In Commissioner of Income Tax Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd. 2013 (10) TMI 324 - SUPREME COURT larger bench of three judges of the Supreme Court observed and held and as follows:

Quote:

               “ 32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax.There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.

33. For the aforesaid reasons, we dismiss the civil appeals with no order as to costs, but with the hope that the Revenue implements its litigation policy a little more practically and a little more seriously. “

Unquote:

f. There were no divergent views of High Courts on the issue. In fact there are no judgments of many of other High Courts, means that the revenue has accepted the issue in favour of assessee or in some cases assessee might have accepted adverse decision because sum was allowed in next year.

g. In fact in most of cases the position of deduction allowable in year of actual payment was accepted at assessment stage and there was no dispute.

In view of the two judgments of three judges of the Supreme Court, discussed earlier and other judgments referred to therein, it was not proper for the revenue to prefer appeal on the issue of allowability of advance payment of excise duty which was allowed in year of actual payment and disallowed in year in which such payment was debited in P & L account by assessee.

As in case of Excel Industries Ltd. and Mafatlal Industries the honourable Supreme Court could have also dismissed the appeal of revenue as the matter was decided as per clear language of S.43B and in any case it did not involve any material or significant loss to the revenue.

Fortunately, the Supreme Court has confirmed judgments of High Court. Judges being human being, it is very well known that many times judgment depends on how the case is presented by counsels and what type of approach, thinking and mood prevailed in minds of judges when they decided the issue. Delivering of judgment is not totally scientific and result cannot always be similar. We find that even the same judge may decide an issue differently, though on same facts and law but because of  different situations prevailing in two cases.

Suppose, if in this case Supreme Court had decided the issue against assessee it would have created lot of problems by rendering large number of assessment and appeal orders wrong because generally actual payments made have been allowed under section 43B.

Section 43B deserves to be deleted:

It is found that generally payments which are covered by S.43B are actually made though some time there may be delay due to business contingencies.

Non-payment of such sums have serious repercussion on business like workmen’s unrest, loss of goodwill, additional liability by way of late payment charges, interest, penalty and prosecutions etc.

There are other authorities to look after that such payments are made by business. For example for dues to or related with workers there are other authorities and unions, for banks and financial institution they have to be careful for timely recovery, in any case they hold security and mechanism for recovery, for tax, duty and cess also there are authorities to look after recovery.

In all such cases, if payment is not made on time, the business will be imposed with more burden.

Therefore, generally there are no cases of deliberate delays in payment of such sums.

Delays occur due to extraordinary reasons like regular losses, non-availability of funds, failure of business, etc. We have seen many cases in which such sums which remained un-paid for long time were paid when business turnaround and in many cases when though business failed, but liabilities were discharged by selling business assets.

From empirical studies it is noticed that so far tax collection is concerned, the provisions of section 43B has not made any positive impact. In fact in many situations taxpayers have got additional tax advantages by paying sums covered by S.43B in advance or by delaying payments. Such saving of tax in one year is not a saving when considered for two or more years.

Advantages of S.43B can be obtained in some situations for example, when:

a. there is change in rate of tax on normally computed income or on book profit

b. there is exceptional profit or exceptional loss in any year,

c. There will be discontinuation of some benefits by way of exemption, or deductions causing higher tax burden in future. In such cases one can delay payments and get deduction u.S. 43B when income is taxable or deductions are discontinued.

d. loss of assessee is lapsing for any reason likedelay in filing return, change in shareholding pattern or due to limitation on carry forward and set off etc

        S. 43B has un-necessarily caused taxation on un-real income. The impact is really not significant for the revenue over a period of time.

Furthermore, now-a-days most of related issues have become online and authorities and concerned parties are in a position to monitor them more closely.

Therefore, recovery of related sums must be left to concerned parties.

Section 43B is not friendly for tax administration for tax department and assessee. It is also not tax friendly for collection of revenue. In fact if properly used by assessee, S.43B can be used advantageously by assessee and can cause lot of disadvantages to revenue.

The Tax policy is that most of Return of Income are accepted u.s. 143.1 as per self-assessment. In such situation adjustments u.s. 43B can be a reason for scrutiny, reassessment, revision etc. Which only causes litigation but without any meaningful advantage for the revenue.

 Therefore, S.43B must be deleted.