Allied Motors (p) Ltd. v. Commissioner of Income Tax, Delhi
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ALLIED MOTORS (P) LTD. v. C.I.T. [MRS. SUJATA V. MANO HAR, J.] 783
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MRS. SUJATA V. MANOHAR, J. The two Income-tax References A
which are before us deal with a common question relating to the interpreta-
tion of Section 43B of the Income-tax Act, 1961. The references have been
made under Section 256(1) of the Income- tax Act, 1961. Since the same
question arises in the two civil appeals also these appeals have been heard
along with these references. For the sake of convenience, we are taking the B
statement of the case in Income-tax Reference No. 2 of 1993.
The following question has been referred to us under Section
256(1):-
"Whether on the facts and in the circumstances of the case, the C
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 of the
Income-tax Act, 1961 while computing the business income of the
said previous year?"
The relevant assessment year is 1984-85, the relevant accounting period
being the year ending on 30th of June, 1983. The assessee filed the return
declaring an income of Rs. 1,91,940. The Income-tax Officer, however,
disallowed, inter alia, deduction claimed by the assessee of an amount of .
Rs. 5,78,240 which was on account of sales-tax collected by the assessee for E
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), inter alia, in respect of this disallowance. How- F
ever, the appeal was dismissed. The assessee filed an appeal before the
Income-tax Appellate Tribunal. The tribunal 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, (187 ITR 703) and Escorts Ltd. v. Union of India
& Ors., (189 ITR 81). Hence the present reference has come before us. G
One of the judgments relied upon by the tribunal was the judgment in the
case of Escorts Ltd. v. Union of India, (supra). Civil Appeal No. 3175 (NT)
of 1991 is an appeal from the decision of the Delhi High Court in the above
case which is being heard along with the present tax-references.
The relevant provisions of Section 43B for our purposes are as H
A follows:-
"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
B 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
c (b)
(c)
(d), ··········
shall be allowed (irrespective of the p~evious 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 is actually paid by him :
*Provided that nothing contained in this section shall apply in
relation to any sum referred to in clause (a) or clause (c) or clause
( d) which is actually paid by the assessee on or before the due
date· applicable in his case for furnishing the return of income
under sub-section (1) of section 139 in respect of the previous year
in which the liability to pay such sum was incurred as aforesaid
and the evidence of such paymc::nt is furnished by the assessee
along with the suc:h return :
Provided further ......... .
G Explanation 1 - .......... .
**Explanation 2 -- For the purposes of clause (a), as in force at
all material times, 'any sum payable means a sum for which the
assessee incurred liability in the previous year even though such
sum might not have been payable within that year under the
H relevant Jaw.
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ALLIED MOTORS (P) LTD. v. C.l.T. [MRS. SUJATA V. MANOHAR, J.j 785
Explanation 3 - .......... . A
Explanation 4 -.......... .
Section 43B was inserted in the Income-tax Act, 1961 with effect from
1.4.1984. The section, as it originally stood, did not contain the two
provisos. The first proviso has been set out above. This proviso was inserted B
by the Finance Act of 1987 which came into effect from 1.4.1988. Explana
tion 2 has been added subsequently by the Finance Act of 1989 but with
retrospective effect from 1.4.1984. In these References and appeals we are
concerned with the application of Section 43B as it stood before the
provisos were added. C
Prior to the insertion of Section 43B in the Income-tax Act, 1961,
income chargeable under the head 'profits and gains' of business or profes
sion was computable in accordance with the method of accounting regular
ly employed by the assessce as per Section 145 of the Income-tax Act, 1961.
An assessee who had adopted the mercantile system of accounting would D
be entitled to account for his income and expenditure on the basis of
accrual and not on the basis of actual receipt or disbursement. After
insertion of Section 43B, hQwever, even if the assessee had regularly
adopted mercantile system of accounting, the amount of tax payable by the
assessee could be deducted only in the year in which the sum was actually
paid and not in the year in which the assessee incurred the liability to pay E
that tax. Hence an assessee .(as in the present case), who had collected
sales-tax in the last quarter of the previous accounting year and deposited
it in the treasury within the statutory period falling in the next accounting
year, would not be entitled to claim any deduction for it. The sales-tax so
collected will form a part of the assessee's income. To obviate this kind of F
unexpected outcome of Section 43B, the first proviso was added in Section
43B by the Finance Act of 1987. The proviso makes it clear that the Section
will not apply in relation to any sum which is actually paid by the assessee
in the next accounting year if it is paid on or before the due date for
furnishing the return of income in respect of the previous year in which the G
liability to pay such sum was incurred and the evidence of such payment
is furnished by the assessee along with the return.
The proviso, however, was not on the statute book when the assess
ments were made in respect of these assessees since the assessments
,pertain to assessment years prior to the insertion of the proviso in Section H
A 43B. The assessees, however, contend that the proviso should be given
effect to retrospectively from the date when Section 43B became a part of
the Income-tax Act, 1961, as it is intended to obviate unexpected hardships
in the application of Section 43B.
To understand the circumstances in which Section 43B came to be
inserted in the Income-tax Act and the mischief which it sought to prevent,
. it is necessary to look at the memorandum explaining the provisions in the
Finance Bill of 1983 [(1983) 140 ITR (St.) 160] :-
"59. Under the Income-tax Act, profits and gains of business and
profession are computed in accordance with the method of ac
counting regularly employed by the assessee. Broadly stated, under
the mercantile system of accounting, income and outgo are ac
counted for on the basis of accrual and not on the basis of actual
disbursements or receipts. For the purposes of computation of
profits and gains of business and profession, the Income-tax Act
defines the word 'paid' to mean 'actually paid or incurred' accord-
; ing to the method of accounting on the basis of which the profits
or gains are computed.
60. Several cases have come to notice where tax payers do not
discharge their statutory liability such as in respect of excise duty,
employer's contribution to provident fund, Employees' State In
surance Scheme, etc. for long period of time, extending sometimes
to several years. For the purpose of their income-tax assessments,
they cla.im the liability as deduction on the ground that they
maintain accounts on mercantile or accrual basis. On the other
hand they dispute the liability and do not discharge the same. For
some reason or the other, undisputed liabilities also are not paid.
• To curb this practice, it is proposed to provide that deduction for
any sum payable by the assessee by way of tax or duty under any
law for the time being in force (irrespective of whether such tax
or duty is disputed or not) or 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 employees shall be allowed only in computing the
income of that previous year in which such sum is actually paid by
him."
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ALLIED MOTORS (P) LTD. v. C.I.T. [MRS. SUJATA V. MANO HAR, J.]787
The Budget Speech of the Finance Minister for the year 1983-84, A
reproduced in (1983) 140 ITR (St.) 31, is to the same effect.
Section 43B was, therefore, clearly aimed at curbing the activities of
those tax payers who did not discharge their statutory liability of payment
of excise duty, employer's contribution to provident fund etc. for long B
periods of time but claimed deductions in that regard 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 tax payers who had
paid sales-tax within the statutory period prescribed for this payment, C
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 the assessee within the statutory period prescribed D
for its payment and prior to the filing of the income tax return, these
assessees 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 of 1987 in Section 43B by inserting, inter alia, E
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.
Looking to the curative nature of the amendment made by the
Finance Act of 1987 it has been submitted before us that the proviso which
is inserted by the amending Finance Act of 1987 should be given retrospec-
tive effect and be rea.d as forming a part of Section 43B from its inception.
This submission has taken support from decisions of a number of High
Court~ before whom this question came up for consideration. The High
Courts of Calcutta, Gujarat, Karnataka, Orissa, Gauhati, Rajasthan, G
Andhra Pradesh, Patna and Kerala appear to have taken the view that the
proviso must be given retrospective effect. Some of these High Courts have
held that "sum payable" under Section 43B(a) refers only to the sum
payable in the same accounting year, thus excluding sales tax payable in
the next accounting year from the ambit of Section 43B(a). The Delhi High H
A Court has taken a contrary view holding that the first proviso to Section
43B operates only prospectively. We will refer only to some of these
judgments.
Explanation 2 was added to Section 43B by the Finance Act of 1989
B with retrospective effect from 1.4.1984. The Memorandum explaining the
reasons for introducing Explanation 2, states, inter alia, as follows [(1989)
176 ITR (St.) 123] :-
"24. Under the existing provisions of section 43B of the Income
tax Act, a deduction for any sum payable by way of tax, duty, cess
or fee, etc., is allowed on actual payment basis only. The objective
behind these provisions is to provide for a tax disincentive by
denying deduction in respect of a statutory liability which is not
paid in time. The Finance Act, 1987, inserted a proviso to section
43B to provide that any sum payable 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 hardship caused to
certain taxpayers 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 disal
lowance of the payment for the last quarter.
Certain courts have interpreted the provisions of section 43B
in a manner which may negate the very operation of this section.
The interpretation given by these courts revolves around the use
of the words 'any sum payable'. The interpretation given to these
words is that the amount payable in a particular year should also
be statutorily payable under the relevant statute in the same year.
This is against the legislative intent and it is, therefore, proposed,
by way of a clarificatory amendment and for removal of doubts,
that the words 'any sum payable' be defined to mean any sum,
liability for which has been incurred by the taxpayer during the
previous year irrespective of the date by which such sum is
statutorily payable.
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ALLIED MOTORS (P) LTD. v. C.I.T. (MRS. SUJATA V. MANO HAR, J.] 789
This amendment will take effect from April 1, 1984."
While interpreting Section 43B without the first proviso some of the High
Courts, in order to prevent undue hardship to the assessee, had taken the
view that Section 43B would not be attracted unless the sum payable by
the assessee by way of tax, duty,. cess or fee was payable in the same B
accounting year. If the tax was payable in the next accounting year, Section
43B would not be attracted. This was done in order to prevent any undue
hardship to assessees such as the ones before us. The memorandum of
reasons takes note of the combined effect of Section 43B and the first
proviso inserted by the Finance Act, 1987. After referring to the fact that
the first proviso now removes the hardship caused to such tax payers it C
explains the insertion of Explanation 2 as being for the purpose of remov-
ing any ambiguity about the term 'any sum payable' under clause (a) of
Section 43B. This Explanation is made retrospective. The Memorandum
seems to proceed on the basis that Section 43B read with the proviso takes
care of the hardship situation and hence Explanation 2 can be inserted with D
retrospective effect to make clear the ambit of Section 43B( a). Therefore,
Section 43B( a), the first proviso to Section 43B and Explanation 2 have to
be read together as giving effect to the true intention of Section 43B. If
Explanation 2 is refrospective, the first proviso will have to be so construed.
Read in this light also, the proviso has to be read into Section 43B from
its inception along with Explanation 2. E
This position is reinforced by a departmental Circular No. 550 dated
1st of January 1990, [(1990) 182 ITR (St.) 114, 123] :-
"AMENDMENT OF PROVISIONS RELATING TO CER
TAIN DEDUCTIONS TO BE ALLOWED ONLY ON ACTUAL F
PAYMENT:
15.1 Under the existing provisions of section 43B of the In
come-tax Act 1961, a deduction for any sum payable by way of tax,
duty cess or fee, etc., is allowed on actual payment basis only. The G
objective behind these provisions is to provide for a tax disincentive·
by denying deduction in respect of a 'statutory liability' which is
not paid in time. The Finance Act, 1987, inserted a proviso· to
seCtion 43B to provide that any sum payable by way of tax or duty,
etc., liability for which was incurred in the previous year will be· H
790 SUPREME COURT REPORTS (1997] 2 S.C.R.
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 hardship
caused to certain taxpayers who had represented that since the
sales tax for the last quarter cannot be paid within the previous
year, the original provisions of section 43B will unnecessarily
involve disallowance of the payment for the last quarter.
Certain courts have interpreted the provisions of section 43B
in a manner which may negate the very operation of this section.
The interpretation given by these courts revolves around the use
of the words 'any sum payable'. The interpretation given to these
words is that the amount payable in a particular year should also
be statutorily payable under the relevant statute in the same year.
Thus, the sales tax in respect of sales made in the last quarter was.
held to be totally outside the purview of section 43B since the same\
is not statutorily payable in the financial year to which it relates.
This is against the legislative intent and, therefore, by way of
inserting an Explanation, it has been clarified· that the words 'any
sum payable' shall mean any sum, liability for which has been
incurred by the taxpayer during the previous year irrespective of
the. date by which such sum is statutorily payable ........ "
The departmental understanding also appears to be that Section 43B,
the proviso and Explanation 2 have to be read together as expressing the
true intention of Section 43B. Explanation 2 has been expressly made
retrospective. The first proviso, however, cannot be isolated from Explana
tion 2 and the main body of Section 43B. Without the first proviso,
Explanation 2 would not obviate the hardship or the unintended conse
quences of Section 43B. The proviso supplies an obvious omission. But for
this proviso the ambit of Section 43B becomes unduly wide bringing within
G its scope those payments which were not intended to be prohibited from
the category of permissible deductions.
In the case of Goodyear India Ltd. v. State of Haryana and Anr. (188)
ITR 402 this Court said that the rule of reasonable construction must be
H applied while construing a statute. Literal construction should be avo~ded
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ALLIED MOTORS (P) LTD. v. C.l.T. [MRS. SUJATA V. MANO HAR, J.] 791
if it defeats the manifest object and purpose of the Act.
Therefore, in the well known words of Judge Learned Hand, one
cannot make a fortress out of the dictionary; and should remember that
statutes have some purpose and object to accomplish whose sympathetic
and imaginative discovery is the surest guide to their meaning. In the case B
of R.B Jodha Mal Kuthiala v. Commissioner of Income-Tax, Punjab, Jammu
& Kashmir and Himachal Pradesh, (82) ITR 570, this Court said that one
should apply the rule of reasonable interpretation. A proviso which is
inserted to remedy unintended consequences and to make the provision
workable, a proviso which supplies an obvious omission in the section and
is required to be read into the section to give the section a reasonable C
interpretation, requires to be treated as retrospective in operation so that
a reasonable interpretation can be given to the section as a whole.
This view has beer. accepted by a number of High Courts. In the case
of Commissioner of Income-Tax v. Chandulal Venichand, [1994] 209 ITR 7, D
the Gujarat High Court has held that the first proviso to Section 43B is
retrospective and sales-tax for the last quarter paid before the filing of the
return for the assessment year is deductable. This decision deals with
assessment year 1984-85. The Calcutta High Court in the case of Commis
sioner of Income-Tax v. Sri Jagannath Steel Corporation, [1991] 191 ITR 676, E
has taken a similar view holding that the statutory liability for sales-tax
actually discharged after the expiry of the accounting year in compliance
with the relevant statute is entitled to deduction under Section 43B. The
High Court has held ·the amendment to be clarificatory and, therefore,
retrospective. The Gujarat High Court in the above case held the amend- F
ment to be curative and explanatory and hence retrospective. The Patna
High Court has also held the amendment inserting the first proviso to be
explanatory in the case of Jamshedpur Motor Accessories Stores v. Union of
India and Ors., [1991] 189 ITR 70. It has held the amendment inserting first
proviso to be retrospective. The special leave petition from this decision of
the Patna High Court was dismissed. The view of the Delhi High Court, G
therefore, that ·the first proviso to Section 43B will be available only
prospectively does not appear to be correct. As observed by G .P. Singh in
his Principles of Statutory Interpretation, 4th Edn. Page 291, "It is well
settled that if a statute is curative or merely declaratory of the previous law
retrospective operation is generally intended." In fact the ·amendment H
A wm1ld not serve its object in such a situation unless it is construed as .
retrospective. The view, therefore, taken by the Delhi High Court cannot
be sustained.
In the premises the appeals are allowed and the Income-tax refer
ences are answered in favour of the assessees and against the revenue.· In
B the circumstances, however, there will be no order as to costs.
v.s.s. Appeals allowed.
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