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December 8, 2020

Is sales-tax collected and paid after the end of the year but within the time allowed under the sales-tax law is to be disallowed under section 43B?

by CA Shivam Jaiswal in Income Tax

Is sales-tax collected and paid after the end of the year but within the time allowed under the sales-tax law is to be disallowed under section 43B?

While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assesses are required to pay taxes on such expenditures by adding it back to the net profits.

According to Section 43B, certain deductions are only allowed on actual payment. As per Clause (a) of the said section, 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 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 previous year in which such sum in actually paid by him.

Let us refer to the case of Allied Motors (P) Ltd vs Commissioner of Income-Tax (1997), where the main issue under consideration was whether the sales-tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales-tax law is to be disallowed under section 43B or not.

Facts of the Case:

  • The assessee filed the return but the Income-Tax Officer, however, disallowed the deduction claimed by the assessee which was on account of sales-tax collected by the assessee for the last quarter of the relevant accounting year.
  • This amount was payable within 30 days of the end of the quarter. The deduction which was claimed by the assessee was disallowed by the Income-tax Officer under Section 43B of the Income-tax Act, 1961 which was inserted in the statute with effect from 1.4.1984.
  • The assessee filed an appeal before the Commissioner of Income- Tax (Appeals) [CIT(A)], in respect of this disallowance. However, the appeal was dismissed.
  • The assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT).
  • ITAT also dismissed the appeal on the basis of the judgments of the Delhi High Court in the case of Sanghi Motors v. Union of India and Escorts Ltd. v. Union of India & Ors.
  • Hence a reference came before the Supreme Court (SC)

Observations of the Supreme Court (SC)

  • Section 43B was aimed at curbing the activities of those taxpayers who did not discharge their statutory liability of payment of excise duty, employer’s contribution to provident fund, etc., for long periods of time but claimed deductions from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year.
  • It was to stop this mischief that section 43B was inserted. It was clearly not realised that the language in which section 43B was worded would cause hardship to those taxpayers who had paid sales-tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year.
  • This was because the sales-tax collected pertained to the last quarter of the relevant accounting year.
  • It could be paid only in the next quarter which fell in the next accounting year.
  • Therefore, even when the sales-tax had in fact been paid by assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessee’s were unwittingly prevented from claiming a legitimate deduction in respect of the tax paid by them.
  • This was not intended by section 43B. Hence the first proviso was inserted in section 43B.
  • The amendment which was made by the Finance Act, 1987 in section 43B by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation.
  • A proviso which was inserted to remedy unintended consequences and to make the provision workable, a proviso which supplied an obvious omission in the section and was required to be read into the section to give the section a reasonable interpretation, was required to be treated as retrospective in operation so that a reasonable interpretation could be given to the section as a whole.
  • Looking to the curative nature of the amendment made by the Finance Act, 1987 it could be said that the proviso which was inserted by the amending Finance Act, 1987 should be given retrospective effect and be read as forming a part of section 43B from its inception.
  • The expression “any sum payable” in clause (a) of section 43B was open to the interpretation that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year.
  • Explanation 2 was, therefore, added by the Finance Act, 1989, with retrospective effect from April 1, 1984, for the purpose of removing any ambiguity about the term “any sum payable’’ under clause (a) of section 43B.

Conclusion by Supreme Court (SC)

  • Section 43B(a), the first proviso and Explanation 2 had to be read together as giving effect to the true intention of section 43B.
  • Explanation 2 being retrospective, the first proviso has also to be so construed.
  • Without the first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of Section 43B.
  • The proviso supplied an obvious omission.
  • But for this proviso the ambit of section 43B became unduly wide bringing within its scope those payments which were not intended to be prohibited from the category of permissible deductions.
  • The first proviso to section 43B, therefore, had to be treated as retrospective. The rule of reasonable construction must be applied while construing a statute.

In conclusion, certain deductions are allowed on actual payment such as Tax, duty, cess or fees. Proviso clarifying that sums paid after accounting year but before due date for submission of return deductible is to be treated as retrospective.

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