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TMI Blog2013 (7) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... loowance u/s 43B - Deposits from non governmental buyers - CIT held deposit as trading receipts and made disallowance u/s 43B - Tribunal deleted disallowance - Held that:- Where an amount is received merely by way of deposit, on the express understanding or undertaking as in these cases, the company held the money as a mere custodian, and on the fulfilment of the condition became a trustee for the depositor. It is sufficient to state that when once the tax authorities determined that the proceeds of the sales in question were not within the taxable turnover of the company, the beneficial ownership became vested in the depositors and the company ceased to have any right to continue to hold the moneys - Following decision of The State of Mysore and Another Versus Mysore Spinning and Manufacturing Co., Ltd. and Another [1960 (9) TMI 59 - SUPREME COURT OF INDIA] - Decided in favour of assessee. - ITR No. 58/1997 - - - Dated:- 23-7-2013 - Badar Durrez Ahmed, Acting Chief Justice And Justice V. K. Jain,JJ. For the Petitioner : Mr. Ravi Mehta, Advocate For the Respondent : Mr. Sanjeev Sabharwal, Advocate JUDGMENT Badar Durrez Ahmed, ACJ 1. This income tax referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voking the provisions of Section 43B of the said Act on the ground that the cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958 had not actually been paid by the respondent during the previous year relating to the assessment year 1985-86. The respondent was aggrieved by this inasmuch as according to the respondent, no disallowance could be made under Section 43B(a) of the said Act as the said cess and cess surcharge was neither a tax nor duty. However, the Commissioner of Income-tax (Appeals) confirmed the disallowance made by the assessing officer. In a further appeal before the Income Tax Appellate Tribunal being ITA No. 2916/Del/90, the said tribunal agreed with the contentions of the respondent/assessee and deleted the disallowance by virtue of an order dated 25.03.1994. The tribunal followed its earlier year s order in respect of assessment year 1984-85 wherein the tribunal had held that although cess was a tax for the purposes of the Constitution of India, it was not a tax within the meaning of Section 43B of the said Act as it stood at the relevant time. The decision of the tribunal in respect of assessment year 1984-85 became the subject matter of an income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him. 5. The said section 43B and, in particular, clause (a) thereof was amended by virtue of the Finance Act, 1988 which came into effect from 01.04.1989. The said section, after amendment, to the extent relevant for our purposes, reads as under:- 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) xxxxx xxxxx xxxxx xxxxx (c) xxxxx xxxxx xxxxx xxxxx (d) xxxxx xxxxx xxxxx xxxxx shall 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 previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. It can be seen from the above extract that the Finance Minister had specifically referred to statutory liabilities such as excise duty, employer s contribution to provident fund and employees state insurance scheme. Reflecting this sentiment, section 43B(a) referred to the statutory liability of a tax or duty, while Section 43B(b) referred to the 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. It was the contention of Mr Sabharwal that the purpose behind introduction of Section 43B was to curb the mischief whereby an assessee could claim a deduction in respect of an accrued statutory liability and yet not clear the same, thereby depriving the Government of its dues while enjoying the benefit of non-payment. 9. Mr Sabharwal then referred to the memorandum explaining the provisions in the Finance Bill, 1988 whereupon the amendment was brought about in Section 43B(a) so as to include cess and fee specifically. Paragraph 35 of the said memorandum reads as under (to the extent relevant): Modification of the provisions relating to deduction in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mr Sabharwal had placed reliance on a Calcutta High Court decision in the case of Commissioner of Income Tax v. Orient Paper and Industries Ltd.: 214 ITR 473 (Cal). In that case, the Calcutta High Court held that the amendment to Section 43B(a) whereby the expression, cess or fee, by whatever name called was added, was clarificatory and would have retrospective operation and would even apply to the assessment year 1984-85. 11. Mr Sabharwal then referred to the Supreme Court decision in India Cement Ltd. v. State of Tamil Nadu: 188 ITR 690 (SC), in an attempt to demonstrate that cess is equivalent to tax and therefore even though cess had not been specified in Section 43B(a) prior to its amendment with effect from 1.4.1989, it would always have been a part of tax and as such, section 43B as it originally stood would also have reference to cess inasmuch cess was included in tax. 12. Mr Sabharwal next referred to the Supreme Court decision in H.R.S. Murthy v. Collector of Chittoor Anr.: AIR 1965 SC 177 and submitted that in that case, the Supreme Court had concluded that land cess was nothing else but a tax on land. Therefore, according to Mr Sabharwal, cess and tax meant th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wan Chand Builders and Contractors v. Union of India: (2012) 1 SCC 101 where the Supreme Court recognized the clear distinction between a cess and a tax. Therefore, according to Mr Mehta, use of the word tax in Section 43B(a) does not, ipso facto, include a cess. There is no doubt that cess was introduced by virtue of the Finance Act, 1988 with effect from 01.04.1989, but that introduction was only prospective from assessment year 1989-90 onwards and not retrospective. He referred to the Finance Bill, 1988 as also the Board Circular No. 528 dated 16.12.1988 explaining the amendments introduced by the Finance Act, 1988. Mr Mehta submitted that the decision in Allied Motors (P) Ltd. (supra) cannot be applied in the present case because in that case, the introduction of the proviso was remedial in nature, to remedy an unintended consequence and was for the benefit of the assessees. It is in those special circumstances that the said proviso was construed as having retrospective effect. Here, the retrospectivity would work against the assessee and, in any event, the circumstances which existed in Allied Motors (P) Ltd. (supra) do not exist in the present case. As regards the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the decision of the Supreme Court in India Cement Ltd. (supra) was not applicable to the present case. According to him, the question in India Cement Ltd. (supra) was not whether cess was a tax or not, but whether the levy of cess on royalty was within the competence of the State Legislature. Therefore, according to Mr Mehta, the decision of the Supreme Court in India Cement Ltd. (supra) was clearly on an entirely different context and would not come to the aid of the revenue in the present case. 16. Mr Mehta also drew our attention to the provisions of the Tamil Nadu Panchayats Act, 1958 and, in particular, to sections 63, 64, 115, 116, 135 and 138 thereof to submit that the cess and cess surcharge under Sections 115 and 116 of that Act were clearly not in the nature of a tax keeping in mind the principle characteristics of a tax as mentioned in Om Prakash (supra). 17. We shall first examine the issue as to whether the amendment introduced by the Finance Act, 1988 in Section 43B(a) of the said Act was clarificatory in nature or not. We have already noticed the argument of the learned counsel for the revenue based on the Budget Speech of the Finance Minister (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses also indicated that the amendments would take effect from 01.04.1989 and would accordingly apply in relation to the assessment year 1989-90 and subsequent years. We may also refer to the Board Circular No.528 dated 16.12.1988 which was issued by the Central Board of Direct Taxes explaining the substance of the provisions relating to direct taxes in the Finance Act, 1988. Here, too, in paragraph 21.4, there is clear indication that the amendments would come into force with effect from 01.04.1989 and would apply in relation to assessment year 1989-90 and subsequent years. The said paragraph 21.4 reads as under: 21.4 These amendments will come into force with effect from 1st April, 1989, and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years. 19. We have also taken note of the fact that the High Courts of Andhra Pradesh, Madhya Pradesh and Rajasthan have all taken the view that the amendment introduced in Section 43B(a) by virtue of the Finance Act, 1988 would be prospective in operation and would not apply to assessment years prior to the assessment year 1989-90. Those decisions have been rendered in Phoolchand Lalith Kumar and Co. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld as imposed in exercise of jurisdiction under Entry 49 List II by the State Legislature. The Court held that the legislature went beyond its jurisdiction under Entry 49 List II and therefore the levy was clearly without the authority of law. 22. These observations whereby there is some indication that cess has been equated with tax have been sought to be relied upon by Mr Sabharwal. However, we reiterate that the Supreme Court was not exactly concerned with the question of whether a cess was a tax or not, in all cases. It was generally concerned with the concept of cess as a part of taxation. We must also keep in mind that the Supreme Court was interpreting the Constitution as distinct from interpreting a provision of a statute. That there is a different approach in interpreting the Constitution and while interpreting a provision of an Act, is recognized by the Supreme Court in India Cement Ltd. (supra) itself. The Supreme Court made the following observations in this context: Courts of law are enjoined to gather the meaning of the Constitution from the language used and although one should interpret the words of the Constitution on the same principles of interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue as to whether the cess levied under the scheme of the said Cess Act was a fee or a tax. In that context, the Supreme Court examined the concept of a tax and fee in the following manner: 25. The question whether a particular statutory impost is a tax or fee has arisen as a challenge in several cases before this Court, which in turn necessitated the demarcation between the concepts of cess , tax and fee . The characteristics of a fee, as distinct from tax, were explained as early as in Commr., Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt [AIR 1954 SC 282] (generally referred to as Shirur Mutt case ). The ratio of this decision has been consistently followed as a locus classicus in subsequent decisions dealing with the concept of fee and tax . 26. The Constitution Bench of this Court in Hingir Rampur Coal Co. Ltd. v. State of Orissa [AIR 1961 SC 459 : (1961) 2 SCR 537] was faced with the challenge to the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952, levying cess on the petitioner's colliery. The Bench explained different features of a tax , a fee and cess in the following passage: (Hingir Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom public service, and in essence is directly a part of it, different considerations may arise. In such a case it is necessary to enquire what is the primary object of the levy and the essential purpose which it is intended to achieve. Its primary object and the essential purpose must be distinguished from its ultimate or incidental results or consequences. That is the true test in determining the character of the levy. 28. On the basis of the above considerations, this Court in Hingir Rampur case[AIR 1961 SC 459 : (1961) 2 SCR 537] , examined the scheme of the Act impugned in that case in depth and opined that the primary and the principal object of the Act was to develop the mineral areas in the State and to assist in providing more efficient and extended exploitation of its mineral wealth. The cess levied did not become a part of the consolidated fund and was not subject to an appropriation in that behalf. It went into a special fund earmarked for carrying out the purpose of the Act and thus, its existence established a correlation between the cess and the purpose for which it was levied, satisfying the element of quid pro quo in the scheme. These features of the Act impress ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hirur Mutt: AIR 1954 SC 282 have been set out in the following manner: (i) that it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is a part of the common burden, the quantum of imposition upon the taxpayer depending generally upon the capacity of the taxpayer to pay. 26. The Supreme Court in Om Prakash Agarwal (supra) held that the cess under Section 3 of the Haryana Rural Development Fund Act, 1983 fell within the description of a tax because it fulfilled those characteristics. In this context, the Supreme Court observed as under: As mentioned earlier, a cess collected under section 3 of the Act is no doubt required to be credited to the Fund constituted under section 4(1)of the Act. The Fund, however, vests in the State Government and not in the municipality or a marketing committee or any other local authority having limited functions specified in the enactment under which it is constituted. The State Government is entitled under sub-section (5) of section 4 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act may as one of the members of the general public derive some benefit from the expenditure of the Fund incurred by the State Government. The benefit so derived by him is merely incidental to the fact that he happens to be a person residing in the State of Haryana. It is not the same as the benefit which a dealer in a market area would derive by the expenditure of its funds by a marketing committee or as the benefit which a person living in a town or a city would derive by the expenditure incurred by the municipality concerned. The fact that the Fund is created under the Act is a mere cloak to cover the true character of the levy in question. There is practically no difference between the Consolidated Fund which vests in the State and the Fund which also vests in the State. Amounts credited to the Consolidated Fund and the amounts credited to the Fund can both be spent practically on any public purpose almost throughout the State. In such a situation, it is difficult to hold that there exists any correlation between the amount paid by way of cess under the Act and the services rendered to the person from whom it is collected. The impost in these cases lacks the essential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very decision, the Supreme Court recognized the fact that depending on the context and purpose of levy, a cess may not be a tax. 28. Keeping these tests in mind, if we examine the provisions of the Tamil Nadu Panchayats Act, 1958, it will immediately become clear that the cess under Section 115 of the Tamil Nadu Panchayats Act, 1958 and the cess surcharge under Section 116 thereof cannot be regarded as a tax. Section 63 spells out the duty of the Panchayat to provide for certain matters. It stipulates that it shall be the duty of a Panchayat within the limits of its funds, to make reasonable provision for carrying out the requirement of the village or town in respect of the matters specified therein. Section 64 enables the Panchayat to make provisions, as it thinks fit, for carrying out the requirements of the village or town in respect of the matters specified in that section. Under Section 115 of the Tamil Nadu Panchayats Act, 1958, a local cess is to be levied in every panchayat development block at the rate of 45 naye paise on every rupee of land revenue payable to the Government in respect of any land for every fasli. Sub-section (4) of Section 115 spells out the manner in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Funds under Section 137 of the Tamil Nadu Panchayats Act, 1958. The expenditure is governed, inter alia, by Section 138 out of the monies received by the Panchayat Union Council, the Village Panchayat or the Town Panchayat. The expenditure from the Panchayat Fund and the Panchayat Union Fund is to be defrayed in the manner indicated in Section 139 of the Tamil Nadu Panchayats Act, 1958. In other words, none of the trappings of a tax as explained in Hingir Rampur Coal Co. Ltd. (supra), Kesoram Industries Ltd. (supra) and Dewan Chand Builders and Contractors (supra) existed in the present case. Therefore we are unable to agree with the submission of learned counsel for the revenue that the cess under Section 115 and cess surcharge under Section 116 of the Tamil Nadu Panchayats Act, 1958 could be regarded as a tax for the purposes of Section 43B. That being the case, the claim of expenditure on the basis of accrued liability to pay cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958 could not be disallowed by the revenue authorities by invoking Section 43B of the said Act as it was applicable to the assessment year 1985-86. Therefore, question No.1 is answered in the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Tamil Nadu v. Ramco Cement Distribution Company (P) Ltd.: (Civil Appeal Nos. 5306-5336/1985 and other connected matters). Since the question had not been determined finally, the respondent informed its non-governmental buyers that they were compelled to provide for sales tax liability on freight and packing charges and thereby collected a deposit for this purpose from the said buyers. During the relevant previous year, the respondent collected security deposit of Rs.9,58,967/- and Rs.16,51,516/- towards possible levy of sales tax on freight and packing charges respectively. These amounts were included in the balance sheet of the company as security deposits to cover the possible levy of sales tax on freight element and packing charges in cement sale. It also needs to be pointed out that each invoice of the respondent in respect of its cement sales carried the following footnote: Security deposit towards possible levy of sales tax on packing charges and freight refundable in the event of the levy of sales tax on packing charges and freight being ultimately held to be not justified. 33. The said contingency deposit collected on a refundable basis was separately ledgeri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the revenue were held to be distinguishable on facts. 34. Before us, Mr Sabharwal appearing on behalf of the revenue once again placed reliance on the decisions in Chowringhee Sales Bureau P. Ltd. (supra) and Sinclair Murray and Co. Pvt. Ltd. (supra) as also on the decision of the Kerala High Court in Commissioner of Income Tax v. United Cardamom Auctioners: 295 ITR 574 (Ker). On the other hand, Mr Ravi Mehta appearing on behalf of the respondent placed strong reliance on the Constitution Bench decision of the Supreme Court in the case of Mysore Spinning and Manufacturing Co. Ltd. (supra). He also referred to Dalmia Cement (Bharat) Ltd. (supra) and Siddheshwar Sahakari Sakhar Karkhana Ltd. v. Commissioner of Income Tax: 270 ITR 1 (SC). 35. In Chowringhee Sales Bureau P. Ltd. (supra), the appellant company was a dealer in furniture and also acted as an auctioneer. In respect of sales effected by the assessee as auctioneer, it realized a sum of Rs.32,986/- as sales tax in the year in question. The said amount was credited separately in its account books under the head sales tax collection account . The appellant company did not pay the amount of sales tax to the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dealer did not acquire any beneficial interest therein and that the sum of Rs.7,14,398/- collected by the appellant did not form part of its total income. However, the Calcutta High Court, on a reference, held that the sales tax collected was part of the trading receipt and was to be included in the appellant s total income. The Supreme Court, in Sinclair Murray and Co. Pvt. Ltd. (supra), affirmed the decision of the High Court and held that the amount collected by the appellant company as sales tax constituted its trading receipt and had to be included in its total income. It further held that if and when the appellant company paid the amount collected to the State Government or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of the sum so paid or refunded. In Sinclair Murray and Co. Pvt. Ltd. (supra), the Supreme Court also referred to the Constitution Bench decision in George Oakes (Private) Ltd. v. State of Madras: [1961] 12 STC 476 (SC) and referred to the following observations therein: " We think that these observations are apposite even in the context of the provisions of the Acts we are considering now, and there is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11(2) of the Mysore Sales Tax Act, 1948. The Supreme Court, inter alia, held as under:- ..We have already set out the questions referred, which would clearly indicate that the amounts were received by the Cement Marketing Co. and by the Mysore Spinning and Manufacturing Co. and the Minerva Mills Ltd. only as "a deposit" to cover a possible contingency of these companies being held liable to pay the tax. That this was the real nature of the transaction was never in dispute. Indeed even the Commissioner of Sales Tax in making the reference in the three cases made it clear that the amounts were received by the companies on the definite understanding and condition that they were to be held only "as deposits" to be refunded when the company in question was held not liable to include the relevant sales in its taxable turnover. The construction on which the Sales Tax Authorities proceeded was that the Act made no difference between one type of receipt and another, and that any receipt of money by a dealer from the purchaser was a "collection by way of tax" within s. 11(2) of the Act, provided it had some relation to sales tax, and that it mattered not that the receipt was merely a de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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