Jamshedpur Motor Accessories Stores v. Union Of India And Others.

1. Whether the proviso to section 43B of the Income-tax Act, 1961 (hereinafter called the “Act”), inserted by the Finance Act, 1987, with effect from April 1, 1988, shall apply to an assessment proceeding in respect of the assessment year 1984-85 is the question involved in this application.

2. The fact of the matter lies in a very narrow compass.

3. The petitioner is a partnership firm and is an assessee under the Act as a registered firm. The petitioner maintains its accounts under the accounting system which is commonly known as the mercantile system of accounting and its accounting year is from January to December. For the accounting year January to December, 1983, the petitioner filed a return under the Act on August 30, 1984. In its return, it showed a net taxable income of Rs. 4,30,970.

4. In pursuance of a notice issued by respondent No. 3, the petitioner produced its books of account. Respondent No. 3 found that the statutory dues payable during the accounting year on account of Bihar sales tax, additional sales tax, Central sales tax, provident fund and family pension amounting to Rs. 21,15,885 had not been paid by the petitioner; this amount was added to the net income of the petitioner under section 43B of the Act. The order of assessment is contained in annexure-1 to the writ petition.

5. Dr. Pal, learned counsel appearing on behalf of the petitioner, firstly contended that section 43B of the Act is ultra vires the Constitution.

6. Having regard to the decisions in Mysore Kirloskar Ltd. v. Union of India [1986] 160 ITR 50 (Kar) and Srikakollu Subba Rao and Co. v. Union of India [1988] 173 ITR 708 (AP), he, however, did not press the same, but submitted that section 43B of the Act being a declaratory statute must be held to have retrospective operation as, otherwise, the same would be rendered ultra vires article 14 of the Constitution.

7. Learned counsel submitted that it was never the intention of Parliament, by introducing section 43B in the Act, not to give deduction of the amount also payable by an assessee by way of tax or by way of contribution to the provident fund or family pension scheme which has been paid within reasonable time after the expiry of the accounting year. He submitted that the correct interpretation of section 43B is that if an assessee has paid the dues under the aforesaid account before the due date applicable to an assessee for furnishing the return of income under section 139, the assessee shall be entitled to deduction of that amount. According to Dr. Pal, that that is the correct interpretation of section 43B will appear from the statement of the Finance Minister made in Parliament and also the purpose for which this section was introduced when the Finance Bill for the insertion of this section was introduced in 1983.

8. Mr. Debi Prasad, learned standing counsel, Central Government, on the other hand, submitted that the proviso cannot be given a retrospective effect as the same has come into force with effect from April 1, 1988, and thus the petitioner cannot get any benefit thereunder.

9. Learned counsel contended that, on a plain reading of section 43B of the Act, it would be evident that, in terms thereof, the petitioner is not entitled to claim any deduction on account of payment of sales tax as the said amount had not actually been paid by the assessee during the currency of the relevant accounting year.

10. Mr. Prasad submitted that section 43B of the Act is intra vires the Constitution of India as has been held in Mysore Kirloskar Ltd. v. Union of India [1986] 160 ITR 50 (Kar) and in Srikakollu S. Subba Rao and Co. v. Union of India [1988] 173 ITR 708 (AP).

11. It was further submitted that the special leave petition filed against the judgment of the Karnataka High Court in Mysore Kirloskar's case was dismissed by the Supreme Court of India on November 10, 1987.

12. Section 43B was inserted in the Act by the Finance Act, 1983, with effect from April 1, 1984. The section as it stood then read as follows:

“43B. Certain deductions to be only on actual payment.—Not-withstanding 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 employees,

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.

Explanation.— For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier 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.”

13. If the section is literally interpreted, the submission of Dr. Pal must fail, because it has been made clear therein that an assessee shall be entitled to claim deduction of such amount of sales tax, provident fund, etc., in that year only if such sum has been actually paid by him during the currency of the relevant accounting year, in this case by December 31, 1983.

14. It is not disputed that, in terms of section 15 of the Bihar Finance Act, a dealer is required to furnish a return of its transaction for each completed quarter on or before the end of the month following the end of the quarter and is also required to file an annual return for each year on or before July 31, of the following year. A dealer is further required to deposit the tax along with the return and if tax is paid, he is entitled to a rebate.

15. The petitioner, therefore, was entitled to file the annual return on or before July 31, 1984, for the accounting year 1983-84.

16. From the aforementioned provisions, it is further evident that the quarterly return for the quarter ending December 31, 1983, was to be filed by the petitioner on or before January 31, 1984. The petitioner, therefore, contended that as it is statutorily liable to deposit the sales tax in respect of the last quarter after the expiry of its accounting year, it would not be disentitled to claim allowance in relation thereto in terms of section 43B of the Act.

17. On the face of section 43B of the Act, the same appears to be harsh and manifestly unjust.

18. In this situation, it would be permissible and necessary to consider the object of insertion of section 43B of the Act as stated by the Finance Minister in his Budget Speech which is as follows [1983] 140 ITR (St.) 31:

“Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, for long periods of time. For the purpose of their income-tax assessments, they none the less claim the liability as deduction even as they take resort to legal action, thus depriving the Government of its dues while enjoying the benefit of non-payment. To curb such practices, I propose to provide that irrespective of the method of accounting followed by the taxpayer, a statutory liability will be allowed as a deduction in computing the taxable profits only in the year and to the extent it is actually paid. This would result in a revenue gain of Rs. 100 crores in a full year and Rs. 80 crores in 1983-84.”

19. It will thus appear from the Budget Speech of the Finance Minister that the object of section 43B was to refuse deduction to such an assessee in respect of provident fund, etc., where the assessee does not discharge his statutory liability, or where the assessee disputes his liability under the provisions of the Sales Tax Act.

20. In other words, an assessee who claims deduction on account of sales tax, provident fund, etc., without depositing the same and thus deprives the Government of its dues while enjoying the benefits of non-payment was not entitled to claim deduction of such an amount. There was no dispute at the Bar that section 43B was introduced not to give any benefit of deduction to unscrupulous assessees.

21. But how do we interpret the words “actually paid by him” appearing in the section? If it is to be interpreted, as submitted by Mr. Debi Prasad, that “actually paid” in this case will mean payment by the petitioner by December 31, 1983, we will require the petitioner to do an impossibility. Sales tax collected by the petitioner on December 31, 1983, could, under no circumstances, be deposited by it on that date, and the earliest that the petitioner could have deposited that amount was on January 1, 1984, which, admittedly, was not during the currency of the accounting year.

22. Mr. Pal submitted that the words “actually paid by him” would be clear from the provisos to section 43B inserted by the Finance Act, 1987, with effect from April 1, 1988. Mr. Debi Prasad submitted that the law as it stood on April 1, 1984, shall have to be looked into and applied, and any amendment made in section 43B which was not applicable to the assessment year from April 1, 1984, to March 31, 1985, cannot be looked into.

23. Let us read the original provisos introduced in section 43B by the Finance Act, 1987 (see [1987] 166 ITR (St.) 9):

“Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) 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:

Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36.”

24. It will appear from the first proviso that an assessee was entitled to claim deduction on account of payment of tax if he has actually paid it on or before the due date applicable to his case for furnishing the return of income. It will appear from the second proviso that an assessee was entitled to claim deduction on account of the provident fund, etc., if he has paid the same during the currency of the accounting year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36. Both the provisos have been amended by the Finance Act, 1989. The amendments to the first proviso are not material. In the second proviso, the words “during the previous year” have been deleted. The position under the second proviso is that an assessee may claim deduction on account of contribution to be made by him to provident fund, etc., in a particular accounting year if it was paid by him on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36. The object of deleting the words “during the previous year” was clarified in the Memorandum to the Finance Bill, 1989, which reads as follows [1989] 176 ITR (St.) 124:

“Under the existing provisions of section 43B of the Income-tax Act, it is also provided that any sum payable by the assessee as an employer by way of contribution to the provident fund or superannuation fund, etc., is not allowable as a deduction unless the same is paid ‘during the previous year on or before the due date’. The payment in respect of the last month of a previous year shall have to be made by the due date and cannot possibly be made in the previous year itself. It is, therefore, proposed that the words ‘during the previous year’ occurring in the second proviso to section 43B be deleted.”

25. So far as the insertion of the first proviso in section 43B in the Memorandum explaining the provisions in the Finance Bill, 1989, is concerned, the following was stated [1989] 176 ITR (St.) 123:

“Under the existing provisions of section 43B of the Income-tax Act, a deduction of 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 disallowance of the payment for the last quarter.”

(emphasis* added).

26. It will thus be noticed that it was found impossible for an assessee to comply with section 43B as it stood in the year 1984 and to make it workable, amendments in section 43B were introduced. The law, therefore, as it stands today is that if an assessee had paid the sales tax, additional sales tax, Central sales tax, etc., on or before the due date applicable in his case for furnishing the return of income, he shall be entitled to claim deduction of that amount with regard to the provident fund, family pension, etc., the assessee shall be entitled to claim deduction if the same has been paid on or before the due date. The advantage of the amendment to section 43B will be available to the petitioner only if it is held that although the amendments were inserted after April 1, 1984, the same shall apply to the cases in which the assessment year was 1984-85.

27. Amendments to section 43B which we have noticed above have either been introduced as a proviso or as an Explanation. Although the same has been labelled either as a proviso or as an Explanation, what is their purpose? To ascertain this, let us read Explanation 2, which is as follows:

“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 relevant law.”

28. This was inserted by the Finance Act, 1989, with effect from April 1, 1984.

29. In the Memorandum explaining the provisions in the Finance Bill, 1989, the following was stated about this Explanation : [1989] 176 ITR (St.) 123:

“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 round 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.”

(emphasis added).

Explanation 2 was treated as an interpretation clause. In S. Sundaram Pillai v. V.R Pattabhiraman, (1985) 1 SCC 591 : AIR 1985 SC 582, the Supreme Court considered the scope and ambit of the proviso and the Explanation. After noticing a number of cases, including authoritative books on the question, it was held that both a proviso and an Explanation may function as interpretation clauses.

30. We have already noticed above that, in the Memorandum explaining the provisions in the Finance Bill, 1989, Explanation 2 was stated to be an interpretation clause. Surely, under the two provisos, a class of assessees has not been carved out. Under both the provisos, the words “actually paid” have, in fact, been interpreted. The provisos are, therefore, to be held to be interpretation clauses, or clauses which explain what is meant by “actually paid”. The interpretation given to the words “actually paid” in the provisos is different from their literal interpretation. The provisos were inserted to clear doubts as to the meaning of “actually paid” in section 43B. The Finance Act, 1987, so far as the provisos are concerned, is an explanatory Act (see Keshavlal Jethalal Shah v. Mohanlal Bhagwandas, AIR 1968 SC 1336). If it was to explain the original section 43B, it would be without any object unless construed as retrospective in its operation. That such an interpretation is permissible has been stated by Craies on Statute Law, 7th edition, page 395.

31. It is no doubt true that, ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date, should be construed prospectively and not retrospectively (State of M.P v. Rameshwar Rathod, (1990) 4 SCC 21 : AIR 1990 SC 1849).

32. However, the matter shall stand on a different footing if the Act is merely an explanatory, clarificatory or declaratory statute (See para 4 of Rathod's case, (1990) 4 SCC 21 : AIR 1990 SC 1849).

33. The general presumption of prospective operation of law is stated in Maxwell on the Interpretation of Statutes (12th Edition), at page 215, in the following terms

“It is a fundamental rule of English law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication.”

34. Francis Bennion, in his Statutory Interpretation, at page 444, however, states: “It is too dogmatically framed and describes as a rule what is really no more than a presumption which may be outweighed by other factors.”

35. The learned author in section 115 of his treatise, at page 256, states: “The guides to legislative intention consist of various rules, principles, presumptions and linguistic canons applied at common law or laid down by statute for assisting in statutory interpretation.”

36. In Maunsell v. Olins, reported in [1975] 1 All ER 16. (HL) Lord Denning MR observed: “Let the advocates one after the other put the weights into the scales —‘the nicely calculated less or more’ but the judge at the end decides which way the balance tilts, be it ever so slightly.” (sic)

37. It is now well known that such interpretation should be preferred which upholds the constitutionality of the statute (See CWT v. Smt. Hashmatunnisa Begum [1989] 176 ITR 98 (SC)).

38. In Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402 (SC); (1990) 2 SCC 71, the Supreme Court held that a rule of reasonable construction should be followed and literal construction may be avoided if that defeats the manifest object and purport of the Act.

39. From what has been stated hereinbefore, it is absolutely clear that the first proviso to section 43B of the Act inserted by the Finance Act, 1987, was enacted in order to suppress the mischief, and for the purpose of giving relief to an assessee who is not an unscrupulous dealer.

40. The said Act, further, is explanatory in nature and thus had to be enacted for the purpose of supplying an obvious omission in a former statute, and thus the same would relate back to the time when the prior Act was passed (See R v. Dursley Inhabitants [1832] 110 English Reports 168).

41. Reed Dickerson in his ‘Interpretation and Application of Statutes’, at page 135, observed:

“The essence of the language is to reflect, express and perhaps even affect the conceptual matrix of established ideas and values that identifies the culture to which it belongs. For this reason, language has been called “conceptual map of human experience.”

42. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663, 692 (SC); (1987) 1 SCC 424, it was held as follows:

“Interpretation must depend on the text and the context. They are the basis of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at in the context of its enactment, with the glasses of the statute maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and every thing is in its place…”

43. If we interpret section 43B as inserted by the Finance Bill, 1983, to mean that deduction could be claimed only if payment of sales tax, provident fund, etc., was made in fact during the financial year of the assessee, we will require the assessee to do an impossibility, for, in this case, the petitioner could not have cleared its tax, provident fund, etc., liability for the financial year January to December, 1983, in December, 1983 itself. If it is to be literally interpreted, it must be struck down as it provides for doing an impossible act. But it can be upheld by holding that an assessee, like the petitioner, for the assessment year 1984-85 was entitled to have the benefit of the provisos introduced subsequent to 1984-85.

44. We are of the opinion that, upon a contextual interpretation of statutes,. the proviso to section 43B of the Act should be construed as retrospective in its operation and Explanation 2 thereto should be held to be subject to the said proviso. Explanation 2 appended to section 43B of the Act does not control the proviso thereto.

45. Such a construction will not only be in consonance with the rule of harmonious construction but shall advance the object and purport of insertion of the said proviso by the Finance Act, 1987.

46. In Mysore Kirloskar Ltd. [1986] 160 ITR 50 (Kar), it was held that section 43B was not violative of article 14 of the Constitution, and it does not unreasonably interfere with the freedom of trade and business guaranteed under article 19(1)(g) of the Constitution. We are not concerned with these articles in this case. Mysore Kirloskar Ltd.'s case [1986] 160 ITR 50 (Kar), has, therefore, no application to this case. In Srikakollu Subba Rao and Co. [1988] 173 ITR 708 (AP), the original section 43B inserted by the Finance Act, 1983, was interpreted. It was held in that case 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 under the relevant Sales Tax Act and other relevant Acts. Parliament took notice of such interpretation and introduced Explanation 2 which has been quoted above with effect from April, 1984, to nullify such an interpretation.

47. 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.

48. Keeping in view the interpretation that we have put on section 43B, for the purpose of allowing the claim of deduction made by the petitioner as sales tax, additional sales tax, Central sales tax, provident fund and family pension scheme, the assessment year of which was 1984-85, the factual position shall have to be ascertained from the books of account of the petitioner.

49. We are, therefore, of the opinion that, for this purpose, the matter may be decided by respondent No. 3, the Assessing Officer, afresh in the light of this judgment.

50. It may be mentioned that the petitioner preferred an appeal against the order of assessment and the appellate authority, taking note of the fact that the matter is pending consideration in this court, allowed the said appeal and remitted the matter to the assessing authority with a direction to abide by the result of this writ application. In this view of the matter, the order of assessment as contained in annexure 1 to the writ petition need not be quashed.

51. We allow this application and direct respondent No. 3 to pass a fresh order of assessment for the assessment year 1984-85 keeping in view the provisions of section 43B of the Income-tax Act as interpreted in this judgment. There will be no order as to costs.