Commissioner of Income Tax vs Vijay Foundary and Engg. Works

Dipak Misra J.

The Income Tax Appellate Tribunal on the basis of the direction issued by this Court u/s 256(2) in M. C. C. No. 71 of 1994 dated 9-7-1996, has sent the statement of facts of the case pertaining to the following question:

Whether on the facts and in the circumstances of the case, the Tribunal was justified in law to hold that deduction claimed by the Assessee towards unpaid liability of sales tax at Rs. 49,697 were allowable deduction u/s 43B of the Income Tax Act ?

The facts which are necessary to be stated are that the Assessee during the accounting period purporting to the year 1984-85 had collected the sales tax but did not make payment to the extent of Rs. 49,697 within the last date of the accounting period.

The original assessment year was completed u/s 143(3) on 30-3-1985, on the basis of total income of Rs. 1,21,000. The assessing officer noted that the Assessee had made provisions for payment of sales tax to the extent of Rs. 40,796 and provident fund of Rs. 8,901 and these items were disallowable u/s 43B of the Act but it was not so done at the time of original assessment and the mistake being apparent notices u/s 154 of the Act deserved to be issued and he accordingly so did. When the matter stood thus, the Commissioner of Income Tax invoked the jurisdiction u/s 263 of the Act and expressed the opinion that the order of assessment passed by the assessing officer was erroneous and prejudicial to the interests of the revenue, The Commissioner eventually did not advert with regard to the payment of provident fund. He restricted the amount to the delayed payment of sales tax and remanded the matter to the assessing officer for passing an order of fresh assessment. After the order of the Commissioner passed u/s 263 of the Act, the assessing officer passed a fresh order of assessment and disallowed both the items, namely, sales tax and the provident fund amounting to Rs. 49,697.

Being dissatisfied with the aforesaid order, an appeal was preferred before the Commissioner (Appeals). The appellate authority did not accept the contentions of the Assessee and dismissed the appeal. Being aggrieved by the order of the Commissioner of Income Tax (Appeals), the Assessee preferred two appeals one against the original order dated 12-3-1987, and the other against the order passed on 4-11-1991. The Tribunal addressed to the singular issue whether the forums below were justified in law confirming an addition of Rs. 49,697 on account of sales tax and provident fund when the same had been paid within time.

On considering the rival stands and placing reliance on the decisions rendered in the cases of Commissioner of Income Tax Vs. Sri Jagannath Steel Corporation, and Jamshedpur Motor Accessories Stores Vs. Union of India (UOI) and Others, , the Tribunal came to hold as under:

In the meantime, the fresh assessment was framed and disallowance of Rs. 49,697 was made by the assessing officer, in consonance with the view taken by the Commissioner of Income Tax. The assessment order was endorsed by the Commissioner (Appeals) in first appeal. The Assessee came in appeal before the Tribunal against the said order of the Commissioner (Appeals). The Tribunal following the preponderance of judicial opinion on the subject held that the addition was uncalled for. The Tribunal, therefore, cancelled the order of the Commissioner of Income Tax u/s 263 and as such the appeal against the order of the Commissioner (Appeals) arising out of subsequent assessment order, became infructuous. It is to be seen that it is nobodys case that the Assessee is not entitled to the said deduction. The dispute is only as to whether the deduction is allowable in the assessment year 1984-85 or in the succeeding assessment year 1985-86. That depends upon the interpretation to the proviso to Section 43B inserted by the Finance Act, 1987, with effect from 1-4-1988. The preponderance of judicial opinion is that it is retrospective in operation. The Tribunal has followed the same. The revenue is not at all affected by that interpretation, since the said allowance has to be allowed in any of the assessment years. The question is, therefore, academic in nature. The application is, therefore, dismissed.

We have heard Mr. Rohit Arya, learned senior counsel with Mr. Sanjay Lal for the revenue. Despite service of notice, none has appeared on behalf of the Assessee.

It is submitted by Mr. Arya, learned senior counsel for the revenue, that the Tribunal has grossly erred by placing reliance on the decisions rendered by the Patna High Court as the said decision runs counter to the dictum of the Apex Court in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, and Sinclaire Murray and Co. (P) Ltd. Vs. The Commissioner of Income Tax, Calcutta, . It is urged by him that when the tax has been collected and not paid, the deduction is not allowable and the Tribunal has totally erred by extending the benefit.

To appreciate the submissions put forth by Mr. Arya, it is appropriate to refer to the relevant part of Section 43B. was inserted by the Finance Act, 1983, with effect from 1-4-1984. The requisite part of Section 43B which is relevant for the present purpose is reproduced below:

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, duty, cess or fee, by whatever name called, 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 employees, or

(c) any sum referred to in Clause (ii) of Sub-section (1) of Section 36, or

(d) any sum payable by the Assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State Industrial Investment Corporation in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

(e) any sum payable by the Assessee as interest on any loan or advances from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f) any sum payable by the Assessee as an employer in lieu of any leave at the credit of his employee,

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 is actually paid by him:

Provided that nothing contained in this section shall apply in relation to any sum 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 payment is furnished by the Assessee along with such return.

In Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, , the Apex Court has held that as the amount of sales tax was received by the Assessee in its character as an auctioneer and hence the amount should be held to form a part of its trading or business receipt and as such liable to be included in his business income and tax in payable being in the form of trading receipt.

In the case of Sinclaire Murray and Co. (P) Ltd. Vs. The Commissioner of Income Tax, Calcutta, a two judge Bench of the Apex Ccourt has held that the amount collected by an Assessee towards sales tax constituted its trading receipt, and is to be included in its total income and if the Assessee fails to pay the amount collected to the State Government any refund thereof would be prejudicial to the interests of the revenue, he cannot be entitled to claim the sum so paid or refunded. Be it noted, both the decisions were rendered before the amended provision came into existence. In the case of Commissioner of Income Tax Vs. Sri Jagannath Steel Corporation, a Division Bench of the Calcutta High Court took note of the amended provision engrafted u/s 43B and the Budget Speech of the Finance Minister and thereafter expressed the view as under (page 680):

But the question still remains as to whether the provision in Section 43B is applicable to a case where the statutory liability has been discharged by the Assessee within the period prescribed under the law even though such payment is made after the close of the relevant previous year. In other words, the question is whether tax or duty if paid by the Assessee in terms of the statute imposing obligation to pay such tax or duty, even though such payment is made in the next succeeding previous year, the Assessee is entitled to deduction of such liability for the assessment year relevant to the previous year in which such liability was incurred. We are concerned with the central sales tax law. The provisions of the sales tax law of the State will apply mutatis mutandis in relation to filing of returns and provisional assessment, advance payment of tax, etc., under the central sales tax law.

After so stating, the Bench considered the proviso which was inserted by the Finance Act, 1987. It is worth noting that there were initially two provisos and both the provisos were amended by the Finance Act, 1985, The second proviso which stood amended by the Finance Act, 1989, whereby the words "during previous year" stood clarified. This is perceptible from the Finance Bill, 1989, which has been referred to in (1989) 176 ITR 123. Relying on all the amended provisos the Calcutta High Court expressed the opinion that the provision which was inserted was explanatory, clarifkatory and declaratory. Placing such construction on the proviso, it has been held as under (page 686):

The provisos and the Explanation added to Section 43B supplied an omission and were intended to remove an impossibility of performance and, therefore, cannot be said to be prospective in operation. If Section 43B is interpreted as it originally stood in the manner in which the revenue sought to urge that deduction could be claimed only upon actual payment of sales tax, etc., during the previous year, it would require the Assessee to do an impossible act because the Assessee could not have paid its tax liability in the previous year ending on 31-31-984, in March, 1984, itself in respect of a quarter ending on the last date of the previous year. Inconsistency, if any, can be avoided by holding that although the provisos have been introduced subsequent to the assessment year 1984-85, they would relate back to the time when the original provision was inserted. In other words, in our view, upon a textual interpretation of the provisos and the Explanation, it must be held that the benefit of deduction will be allowed so long as the Assessee makes the payment of the tax which could not have been paid in the previous year even if the Assessee intended to pay because to the statutory requirement governing such payment. However, the Assessee will be entitled to the benefit of such deduction if the liability is discharged before filing the return which would advance the object, purport and intention of Section 43B as amended. The benefit of deduction in such cases should not be confined only to the assessment year 1984-85, but should be extended to the subsequent assessment years also. In this case, the liability was required to be discharged or could only have been discharged by the Assessee after the expiry of the accounting year within 30 days from the end of the accounting year and, accordingly, this amount for the particular quarter was not actually payable within the accounting year under the relevant law.

In Jamshedpur Motor Accessories Stores Vs. Union of India (UOI) and Others, , after referring to the earliest amendment, i.e., 1-4-1984, it has been held that it was a clarificatory amendment and any sum payable has to be given a meaning to the liability which has been incurred by the tax payer during the previous year irrespective of the date by which the sum is statutorily payable. After so expressing, the Bench has proceeded to hold as under (page 80):

It is, therefore, held that the Petitioner was entitled to claim deduction of such sum on account of Bihar sales tax, additional sales tax and Central sales tax, if actually paid by it on or before the due date applicable to it for furnishing its return of income under Sub-section (1) of Section 139. With regard to the amount on account of provident fund and family pension scheme if it was paid on or before the due date as defined in the Explanation below Clause (va) of Sub-section (1) of Section 36 the Petitioner shall be entitled to claim deduction of the same.

From the aforesaid pronouncement of law, the provision as envisaged u/s 43B is clarificatory and retroactive. In the case at hand, the amount was paid within the permissible date as per the Explanation. Hence, the view taken by the Tribunal is correct.

The controversy can be looked from another angle. It is not disputed by Mr. Arya that the tax impact is Rs. 15,508. The Division Bench of the Bombay High Court in the case of The Commissioner of Income Tax Vs. Pithwa Engg. Works, while referring to the circular issued by the Central Board of Direct Taxes has come to hold as under (page 520):

The above instructions dated 27-3-2000, reflect the policy decision taken by the Board not to raise questions of law where the tax effect is less than the amount prescribed in the above with a view to reduce litigations before the High Courts and the Supreme Court. The said circular is binding on the revenue though learned Counsel tried to contend that the said circular is not applicable to old referred cases. However, he could not take his submission to a logical end.

In the case of CIT v. Shri Rameshchand Rathore (I. T. A. No. 106 of 1999, decided on 12-9-2003), a Division Bench of this Court has expressed the opinion as under:

Ordinarily, we would have adverted to the aforesaid questions whether they involve substantial questions of law or not. Mr. Sumit Nema, learned Counsel who was present for the Assessee on the first occasion has brought to the notice of this Court that the tax impact is Rs. 18,000 and it does not have such a repercussion that warrants delineation by this Court. In support of his submission he has placed reliance on the decision rendered in the case of Assr. CIT v. Aradhana Oil Mills (2002) 30 ITC 446.

Judged from both the angles, we are of the considered opinion that the reference has to be answered in the affirmative in favour of the Assessee and against the revenue.