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TMI Blog1990 (12) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... t the outset, the learned Standing Counsel for the Revenue, Shri B. Gupta, placed before us a copy of a recent decision of the Hon'ble Delhi High Court in the case of Sanghi Motors Civil Writ Petition No. 2692 of 1990 dated 22-8-1990 which reads as under :--- "The challenge in this writ petition is to Section 43B of the Income-tax Act as in force with effect from1-4-1984. The petitioner is a dealer in motor vehicle and its accounting year is the calendar year. In respect of the assessment year 1985-86, the accounting year ended on 31st of December 1984. With regard to the sales made for the quarter ending31st December 1984, the petitioner paid sales-tax on31-1-1985. The petitioner, however, claimed a deduction of the payment of sales-tax in the accounting year relevant to the assessment year 1985-86. The ITO while applying section 43B disallowed the said deduction claimed and added back the amount. On the basis of the said add back additional tax has been sought to be recovered from the petitioner. It is also contended that proceedings for penalty and levy of interest have also been initiated. Section 43B as it stood in the assessment year 1985-86 reads as under :--- "Notwithst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the following assessment year, in the present case. The provision of law is very clear and unambiguous. There are various provisions under the Income-tax Act where it has been stipulated that deductions would be allowed, in certain cases, only when the disbursements are actually made by the assessee. We do not find this to be an arbitrary exercise of power or any arbitrary provision. It is well known that books of account are maintained either on mercantile basis or on cash basis. The legislature has thought fit that, with regard to the payment of sales-tax, the deduction is to be allowed only when the payment of sales-tax is actually made. Such a provision is not unknown to the Income-tax Act and we do not find it unreasonable or arbitrary. It is submitted by Dr. Singhvi that the petitioner is being subjected to penalty proceedings and interest is also being charged. Whether the penalty is leviable or not is a matter to be gone into in those proceedings, which are independent and distinct from the assessment proceedings. We would not like to comment on that. All that has to be seen is whether the provision of law is clear and if it is, then it was up to the assessee to follow it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1971] 82 ITR 363, some of the taxpayers, who were following mercantile system of accounting, claimed deduction of statutory liabilities like Sales-tax, Central Excise etc. etc. on accrual basis. However, at the same time, they were challenging such liabilities in the court of law on one pretext or other and obtained stay of demand raised by the appropriate authorities under Sales-Tax, Central Excise etc. etc. In other words, these tax payers used to get deduction of such liabilities in computing the taxable income under the Act and at the same time, retained the money with them. In order to curb such practice, section 43B was brought on the statute with effect from 1-4-1984 by the Finance Act 1983, which reads as under :--- "43B. 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 the employees, shall be allowed (irre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le" occurring in the said section as under : "It is urged that section 43B can have no application to cases where the statutory liability which was incurred in the accounting year is also not payable according to the statute in the same accounting year. We find considerable force in the contention of Shri Swami. In order to apply the provisions of section 43B, it seems to us that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily 'payable' in the accounting year (emphasis supplied). Section 43B itself is clear to this extent. It refers to the 'sum payable' in clause (a) as well as in clause (b). If the Legislature intended, it should have so provided that any sum for the payment of which liability was incurred by the assessee would not be allowed unless such sum is actually paid. Keeping in mind the object for which section 43B was enacted, it is difficult to subscribe to the view that a routine application of that provision is called for in cases where the 'taxes and duties' for the payment of which liability was incurred in the accounting year, were not statutorily payable in that accounting year. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not accepted then the tax-payers like his assessee, would be in a worse position in view of the provisions of section 115J of the Act, whereby a tax-payer is required to pay 30% by way of tax on his gross profit, even though he has to pay the last quarter of sales-tax and other statutory dues after the end of the relevant previous year. In other words, according to him, the purport of sections 43B and 115J of the Act read together, is to share the cash flow with the Govt. Such sharing could only be of the net profits, after taking into account the entire statutory liabilities of the relevant previous year. For various submissions made by him, Shri Ganesan referred to the decision in the cases of K.P. Varghese v. ITO [1981] 131 ITR 597 at page 598 (SC), Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC), Srikakollu Subba Rao Co.'s case and Mysore Kirloskar Ltd. v. Union of India [1986] 160 ITR 50/26 Taxman 739 (Kar.). He, therefore, urged that we should approve the order of the Tribunal in the case of ITO v. K.S. Lokhandwala [1989] 31 ITD 305 (Ahd.). According to him, the order of the Tribunal in the case of Jitaji Chunilal v. ITO [1990] 34 ITD 347 (Indore) requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Almal [1977] 106 ITR 743 (Cal.), Mithilesh Kumari v. Prem Behari Khare [1989] 177 ITR 97 at page 99 (SC), CIT v. Madurai Mill Co. Ltd. [1973] 89 ITR 45 at page 51 (SC) and CIT v. Indo-Mercantile Bank Ltd. [1959] 36 ITR 1 (SC) to urge that keeping in mind the purpose for which the said proviso was inserted, there is no escape but to hold that its effect has to be given retroactively right from 1-4-1984, i.e., from the assessment year 1984-85 onwards and cannot be restricted to the assessment year 1988-89 and subsequent assessment years. He also referred to pages 221 and 395 of Craies on Statute Law (6th Edition) wherein the purpose of a proviso in a section has been discussed. In this view of the matter, he strongly urged that not much importance should be given to the date, namely,1-4-1988, except that the said proviso was inserted on that date. 11. Shri Vaish, appearing for second Intervener, namely, M/s. Food Specialities, apart from adopting the arguments of his predecessors, referred to second proviso to section 54E of the Act, which, according to him, is analogous to the proviso to section 43B of the Act, with which we are concerned and stated that in the case of S. Gopal Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction, the same could not be thrust upon him only, with a view to disallowing it by invoking the provisions of section 43B of the Act. He also submitted that in law, there is a clear distinction between the retro-active and retrospective legislation. The former, in its operation, takes or acts backward from its effective date, while the latter has same effect as to past transactions as to future ones. In this connection, he referred to page 221 of Words and Phrases Permanent Edition 37A. He also referred to the decision in the cases of Mithilesh Kumari at page 107 and Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220/40 Taxman 43 at pages 234 to 236 (Kar.). According to him, since the proviso to section 43B of the Act would be applicable to all the proceedings pending on1-4-88, the question of its retrospective effect does not arise. He further submitted that there is no conflict between the main provisions of section 43B of the Act, the proviso brought on the statute on1-4-1988and Explanation 2 inserted by the Finance Act 1989. In fact, according to Shri Syali, all the three have not only to be construed harmoniously but are capable of such construction. He further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice or Rule nisi should be issued'. In fact, the Hon'ble High Court did not think it necessary to give an opportunity to the Revenue to make its submissions. Relying on the decision of the Hon'ble Supreme Court in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262, he submitted that the law as on 1st day of April of the assessment year would be applicable to that assessment year. Since the proviso to section 43B of the Act was brought on the statute with effect from1-4-88, it was applicable to the assessment year 1988-89 and subsequent assessment years and cannot be applied to the assessment years prior to the assessment year 1988-89. The decision in the case of Ahmedabad Mfg. Calico Printing Co. Ltd. does not further the case of the assessee as the fact --- situation obtaining in that case is quite different from the one obtaining in the case of the assessee. According to Shri Gupta, the proviso inserted from1-4-1988could, at best, be called a concession given by the legislature and, therefore, it cannot be given a retro-active retrospective effect, as urged on behalf of the tax-payers. He further submitted that even the decision in the case of S. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on behalf of the assessee and the Interveners that they have not liked the said decision. In fact, we have been told that since the Hon'ble High Court was pleased to dismiss the petition in limine, we are not bound by that decision. We wonder if the decision had gone in favour of the tax-payer, whether such arguments would have allowed to be made on behalf of the revenue. We are quite sure that in such a situation, the counsel for the tax-payers would have strongly urged that since the matter is fully concluded by the decision of the jurisdictional High Court, there is no scope for any argument left. Be that as it may, we, being a subordinate authority, would not like to venture upon the task of establishing that there is some scope of arguments as the Hon'ble High Court has not considered some of the possible aspects of the matter including unintended hardships of the tax-payers, for no fault of theirs. In our opinion, it would be clearly a judicial impropriety if we are persuaded to do so and tempted to such persuasion. It would be clear from the said decision of the Hon'ble High Court that even prior to insertion of Explanation 2, a tax-payer would be entitled to deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending assessments. Further it is also their case that Explanation 2 will not operate to nullify the benefit or concession given by the proviso. It was also argued that the fields of operation of the proviso and the Explanation are separate. There may be some overlapping in some cases as conceded by Shri Sharma, but he had stated that the Explanation would cover that part of the period after the expiry of the period mentioned in the proviso. Shri Vaish's submission is slightly different. Accordingly to him, in some cases, where the sum payable has not yet fallen due on the last day of the accounting year, the assessee might be entitled to the deduction even though the entire demand is disputed. It is to cover such instances that the Explanation would be made operative. 18. We will have to consider the position in law at four stages. First, what was the position in law prior to the introduction of section 43B. Second, what is the position after the introduction of the section under attack. Third, how is the position changed after the introduction of the proviso by the Finance Act 1977 and, four, to what extent has the Explanation altered the position. 19. As regards the positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled 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 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." Similar view is expressed by the Karnataka High Court in the case of Mysore Kirloskar Ltd. The decision of the Andhra Pradesh High Court in the case of Srikakollu Subbarao Co. related also to this stage, i.e., the introduction of section 43B into the statute without the proviso or the Explanation. They were mainly concerned with the legislative competence of the amendment. They have held that the amendment was valid. Towards the end of the judgment at page 718, they have considered the meaning ascribed to the word 'payable' appearing in the section. They have interpreted that word to mean, payable as per the statute imposing the liability. This judgment was given on3-3-1988. By that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. Even if it is declaratory, whether the intention of the legislature was that the benefit should be given to assessments prior to 1988-89 also. A Number of decisions have been cited to show how declaratory statutes are always retrospective. It is a settled position in law that no statute shall be construed to have restrospective operation unless such a construction appears very clearly at the time of the passing of the Act or arises by necessary and distinct implication. There is nothing mentioned in the proviso that it would be retrospective. On the other hand, the legislature had taken care to see that it applies only from1-4-1988. Against the very specific mention of the date of its operation, it is very difficult to say that it was intended to apply retrospectively either by construction or by necessary implication. It is in this connection that we must consider the submission that the Act being declaratory has to be retrospective. First of all, it must be proved that the Act is declaratory. We do not find any material to say that the proviso is declaratory. The requirements to consider an amendment or a statute as declaratory, as laid down by the Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 hardships caused to certain tax payers who had represented that since the sales-tax for the last quarter cannot be paid within that previous year, the original provisions of section 43B will unnecessarily involve disallowance of the payment for the last quarter." 27. There is nothing in the above extract to show that it was declaratory of a law as it stood even before the introduction of the proviso. The law as it stood before, could never have implied that imposts like the sales-tax and Central Excise would be admissible as deduction if it is paid within the date by which the return under section 139(1) was due. The law as it stood earlier, would consider the admissibility of a liability mainly on the ground, whether it has accrued or arisen. For the first time, that consideration has been set aside for a consideration of actual payment. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipt in certain specified investments and the assessee in that case, has not been given the compensation at all. So it was impossible for him to have complied with the provisions of section 54E. It is because of this strange circumstances that the High Court was persuaded to give retrospective operation. There is no such impossibility envisaged in section 43B. The assessee is not being denied deduction in the year in which he had paid the tax. Shri Vaish had also pointed out to certain hardships caused by a strict interpretation of this provision. It is unnecessary for us to point out that hardships can never be a deciding factor in interpreting the provisions of law. 32. Shri Syali had brought out the distinction between retrospective and retro-active provisions. We have already held that it will be neither retrospective nor retro-active. He had referred to the Supreme Court decision in Mithilesh Kumari's case to show how a benami act was held retro-active. The Supreme Court has explained there, that there were sufficient indications if the Act itself which prohibited either filing of suit or putting up defence in respect of matters which had already been concluded prior to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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