R.M Mehta, A.M:— As both these appeals were heard together a consolidated order is passed for the sake of convenience. The grounds taken up in both these appeals are disposed off as under:

I.T.A No. 2700.Ahd/1986:

2. At the outset the learned counsel for the assessee stated that he did not wish to press ground No. 1 due to the smallness of the amount involved. This ground is accordingly rejected.

3. The second and third grounds which involve a common issue pertain to the provisions of s. 43B of the IT Act, 1961. The ITO in the course of the assessment proceedings added back a sum of Rs. 3,27,544 by invoking the provisions of s. 43B. On a scrutiny of the balance sheet he found that the aforesaid amount was shown as an outstanding liability on account of sales-tax. On being asked to explain, the assessee stated that the provisions of s. 43B were not applicable inasmuch as it was not claiming the payment of sales-tax as a deduction and the receipts and payments on that score were directly reflected in the balance sheet. The ITO rejected the aforesaid explanation on the ground that s. 43B clearly provided that payments on account of taxes and duties would be allowed only in the year of actual payment. The ITO also referred to the decisions of the Hon'ble Supreme Court in the cases of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, (1973) CTR (SC) 44 : (1973) 87 ITR 542 (SC) and Sinclair Murray and Co. P. Ltd. v. CIT, (1974) CTR (SC) 283 : (1974) 97 ITR 615 (SC) for the proposition that the amount realised as sales-tax formed part of the trading receipts although they stood credited to the “Sales-tax A/c”. The CIT(A) confirmed the addition made by the ITO.

4. The learned counsel for the assessee at the outset placed for our consideration relevant facts of the case and since these are not any different to those recorded by the authorities below, we need not reproduce them. He however highlighted the following:

(1) The amount under consideration represented the collections made during the last quarter of the accounting period and the sum in question had been paid over to the Govt. Account within the statutory period provided by the Sales-tax legislation applicable to the State of Gujarat.

(2) The retrospective amendment brought about by the Finance Act, 1989 by inserting Explanation 2 with retrospective effect from 1st April, 1.984 merely nullified the decision of the Anhdra Pradesh High Court in the case of S. Subba Rao and Co. v. Union of India, (1988) 71 CTR (AP) 34 : (1988) 173 ITR 708 (AP) but left in tact the decision of the Tribunal in the case of ITO v. Thakersi Babubhai and Co., (1986) 26 TTJ (Ahd) 517 : (1986) 18 ITD 593 (Ahd). That the facts of the present case were identical to those as dealt with by the Tribunal in the case of Thakersi Babubhai and Co. (supra).

(3) That the provisions of s. 43B were not introduced with the object of providing for the disallowance of Govt. dues which were deposited by the taxpayers within the time allowed under the respective State legislation.

(4) That the first proviso to s. 43B added by the Finance Act, 1987 clearly provided that in case the amount of any Govt. dues was paid before the due date for furnishing the return of income under s. 139(1), no disallowance was to be made in respect of such amount under the provisions of s. 43B. That the aforesaid first proviso was still a part of the Statute book and was meant to ensure that no undue hardship was caused to an assessee who discharged the liability to the Govt. in respect of his dues within time.

5. In summing up his arguments the learned counsel for the assessee made an impassioned plea for the necessary relief to be allowed vis-a-vis the addition made by the ITO by invoking the provisions of s. 43B.

6. The learned Departmental Representative on the other hand strongly supported the orders of the authorities below. According to him the ITO had rightly made the addition by invoking the provisions of s. 43B. He also invited our attention to Explanation 2 which had been inserted by the Finance Act, 1989 with retrospective effect from 1st April, 1984 with the futher submission that this nullified the decision of the Andhra Pradesh High Court in the case of Subba Rao. supra as also various decisions of the Tribunal. It was the further argument that insertion of the aforesaid Explanation clinched the issue in favour of the department in so far as the unpaid amount of sales-tax relating to the last quarter was concerned. The Departmental Representative also placed reliance on the two decisions of the Supreme Court supra which had been relied upon by the ITO in making the addition. As regards the first proviso to s. 43B the learned Departmental Representative stated that this was applicable only w.e.f 1st April, 1988 viz. asst. yr. 1988–89 and would not help the assessee in so far as the present asstt. year was concerned. He finally urged that the disallowance as made by the ITO and confirmed by the CIT(A) be maintained.

7. We have examined the rival submissions and have also perused the material available on record. The authorities cited at the bar have also been duly considered. It is an undisputed fact that the amount under consideration represents the collections on account of sales-tax for the last quarter of the accounting period. It is also an accepted fact that the amount has been paid over to the Govt. Account within the statutory period as provided by the relevant State legislation. We would however have to examine the assessee's case vis-a-vis the legislative intent in bringing on the statute book s. 43B. Further examination would also be required in respect of the changes introduced by various Finance Acts.

8. The Finance Minister in his Budget Speech for the year 1983–84 observed as follows vis-a-vis the provisions of s. 43B:

“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 period of time. For the purpose of their income-tax assessments, they nonetheless 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.” (1983) 140 ITR (Stat) 31)

9. The relevant portions of the memorandum explaining the provisions in the Finance Bill, 1983 are also worth reproducing:

“Disallowance of unpaid statutory liability:

59. Under the Income-tax Act, profits and gains of business and profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting, income and outgoing are accounted for on the basis of accrual and not on the basis of actual disbursements or receipts. For the purpose of computation of profits and gains of business and profession, the Income-tax Act defines the word “paid” to mean “actually paid or incurred” according to the method of accounting on the basis of which the profits or gains are computed.

60. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in rspect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc. for long periods of time, extending sometimes to several years. For the purpose of their Income-tax assessments, they claim 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 (‘rrespective) of whether such tax or duty is disputed or not or any sum payable by the asseessee 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 shall be allowed only in computing the income of that previous year in which such sum is actually paid by him.

61. This amendment takes effect from 1st April, 1984, and will accordingly apply in relation to the asst. yr. 1984–85 and subsequent years.”

(140 ITR (Statutes) Pg. 160)

10. It is apparent from the speech and the memorandum that the object of introducing s. 43B was to prevent the grant of deduction in respect of various Govt. dues and taxes where the taxpayers did not discharge their statutory liability or where the taxpayers disputed the liability under the provisions of the respective laws and kept back the payment for a long period The provisions of s. 43B were however not meant for disallowance of admitted sales-tax liability which had been paid within the time prescribed under the respective State legislation.

11. The aforesaid intention and purpose becomes further apparent from the insertion of the first proviso by the Finance Act. 1987 which provided that no disallowance was to be made in case the amount had been deposited within the time limit prescribed for the submission of the income-tax return under s. 139(1). In this connection we may refer to the relevant clause of the Finance Bill, 1987 as appearing in 165 ITR (St) at page 125:

“Clause 10 seeks to amend s. 43B of the Income-tax Act relating to allowability of certain expenses only on actual payment.

It is proposd to insert two provisos. The first proviso seeks to provide that the section shall not apply to any sum referred to in cl.(a) if the sum is actually paid on or before the date on which the return of income is due to bs furnished under sub-s.(1) of s. 139 for the previous year in which the liability to pay such sum was incurred.”

The recent insertion of the new Explanation 2 by the Finance Act, 1989 w.e.f 1st April, 1984 does not in any manner affect the non-applicability of the main provisions of s. 43B with regard to allowability of the sales-tax pertaining to the last quarter, which has been duly paid to the State Government before the due date of furnishing the return of income under s. 139(1) of the IT Act, 1961. It would be relevant at this stage to refer to the memorandum explaining the reasons which necessitated the insertion of the aforesaid Explanation in s. 43B by the Finance Bill, 3989 which appears at page 123 of 176 ITR (Statute):

“24. Under the existing provisions of s. 43B of the IT 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 s. 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 s. 139(1) of the IT Act, in respect of the asstt. 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 s. 43B will unnecessarily involve disallowances of the payment for the last quarter.”

(Emphasis italicised in print supplied)

The aforesaid extract clearly shows that the object behind introducing s. 43B was to provide for a tax disincentive by denying deduction in respect of a statutory liability which was not paid in time. The purpose was not to deny deduction of the amounts which were paid in time by the taxpayers. It was with a view to ensure that the original provisions of s. 43B did not result in unnecessary disallowance of the payment of sales-tax pertaining to the last quarter, the Finance Act, 1987 inserted the above proviso to s. 43B to obviate any unintended hardship likely to be caused to the taxpayers. The insertion of the aforesaid proviso by the Finance Act, 1987 clarifies the real intention of introducing the provisions of s. 43B.

12. A few words at this stage about the applicability of the aforesaid proviso which came into force w.e.f 1st April, 1988. We are of the view that the same would be applicable right from the inception, viz., the date from which s. 43B was introduced. The same was inserted with the sole object of explaining the real intent in introducing s. 43B and would be applicable from the time when s. 43B was introduced, viz., asst. yr. 1984–85.

13. We are also of the view that two decisions of the Supreme Court supra relied upon by the Departmental Representative would not be applicable to the facts of the present case. In both those cases the assessees disputed their liability before the authorities and did not deposit the amount of sales-tax realised by them in the State Exchequer and nor refunded the same to the customers.

14. In the final analysis we would hold that the provisions of s. 43B would not be applicable since the assessee has not only deposited the amount within the statutory time limit provided by the relevant State legislation but admittedly the amount in question has been deposited before the due date for furnishing the return of income under s. 139(1). We would accordingly delete the addition, direct the ITO to grant the necessary relief to the assessee The corresponding deduction allowed in the subsequent asst. yr. viz., 1985–86 would however stand withdrawn.

15. The only other remaining ground pertains to the levy of interest under s. 215. According to the learned counsel for the assessee the levy had come about only as a result of the huge addition made by the ITO vis-a-vis the provisions of s, 43B. According to him in case necessary relief was allowed on that score the charge of interest under s. 215 would disappear. The learned counsel also placed reliance on the decision of the Gujarat High Court in the case of ClT v. Bharat Machinery and Hardware Mart, (1982) 136 ITR 875 (Guj) for the proposition that no interest was chargeable at all. The learned Departmental Representative on the other hand strongly supported the order of the ITO in subjecting the assessee to the charge of interest under s. 215.

16. We have examined the rival submissions and are of the view that on the facts o the case consequential relief is called for in respect of the charge of interest under s. 215. This recomputation is necessitated as a result of the relief that we have allowed in respect of the main ground relating to the applicability of s. 43B. The ITO is directed to recalculate the interest chargeable under s. 215.

ITA No. 2101.Ahd/1986:

17. The memorandum of appeal states theree grounds for our consideration. The learned counsel for the assessee at the outset however withdrew ground Nos. 2 & 3 on account of the smallness of the amounts involved. These two grounds are accordingly rejected.

18. The only other ground which remains for our consideration is the addition to the trading account made by the ITO at Rs. 10,000 and reduced to Rs. 5,000 by the CIT(A).

19. The assessee in this case is engaged in the tea business on a wholesale basis. The ITO in the course of the assessment proceedings observed that there was a fall in the g.p rate from 7.2 % in the immediately preceding asstt. year to 5.8 % in the year under consideration. It was also noted that the assessee was not maintaining a day to day stock register. The ITO also requested the assessee to furnish the quantitative details in kilograms but these were not filed. The ITO however observed that the assessee had filed the quantitative tally in “boxes”. On being asked to explain the fall in the g.p the assessee vide its letter dt. 2nd Jan., 1986 stated as follows (as per ITO):

“there are so many reasons for increasing and decreasing in sales and g.p Some like—

a. Availability of goods in market

b. Government's import and export and other policies.

c. Pending orders for purchase of goods etc.”

The ITO however found the aforesaid Explanations to be of a general nature without mentioning therein the reasons for the fall in the g.p He also noted the absence of any evidence to substantiate the fall. Relying on the decision of the Calcutta High Court in the case of Howrah Trading Co. (P) Ltd., (1968) 67 ITR 582 (Cal), the ITO rejected the book results and made an addition of Rs. 10,000. The CIT(A) while confirming the action of the ITO reduced the addition to Rs. 5,000.

20. The learned counsel for the assessee at the outset stated that the sales effected by the assessee were only in boxes and the quantitative tally in this respect was duly filed with the ITO during the course of the assessment proceedings. It was also the further argument that the position of the books of accounts and records remained exactly the same as existed in the past and no new facts had been brought out by the ITO during the year under consideration. He also invited our attention to the reply furnished to the ITO during the course of the assessment proceedings wherein detailed reasons for the fall in the g.p rate had been given and stated that in the assessment order only part of the reply had been reproduced. According to him the sales of tea boxes were only to merchants on a wholesale basis and all the purchases and sales were fully vouched. It was the further argument that it was not possible to have fixed percentage of gross profit in this line of business and what had been stated to the ITO and reproduced by him in the assessment order were the various factors which effected the gross profit rate these being (i) availability of goods in the market, (ii) Government policies; and (iii) market conditions.

21. The learned counsel also invited our attention to page 59 of the paper book wherein was appended a chart giving the trading position right from asst. yr. 1977–78 upto asst. yr. 1985–86. It was stated that the g.p rate had been accepted all along in the past and that also in assessments framed by the ITO under s. 143(3). He invited specific reference to asst. yrs. 1981–82 and 1983–84 when g.p rates of 5.13 % and 5.64%, respectively, which were lower to the g.p rate disclosed during the asst. yr. under consideration, had been accepted. The learned counsel also referred to the fact that the nominal fall in the g.p rate was a bona fide one since there had been a tremendous increase in the sales from 10.47 lacs in asst. yr. 1984–85 to 53.67 lacs (approximately five times) in the asst. year under consideration. According to the learned counsel the decision of the Calcutta High Court in the case of Howrah Trading Co. (P) Ltd. (supra) relied upon by the ITO was not applicable to the facts of the present case. He finally made an impassioned plea for the trading results to be accepted in toto. The learned Departmental Representative on the other hand strongly supported the orders of the authorities below.

22. We have examined the rival submissions and have also perused the orders of the authorities below. It is an accepted fact that the state of the books of accounts and the records maintained by the assessee remain the same as in the earlier assessment years. It is also an accepted fact that the book results have been accepted all along in the past and even at g.p rates lower to the one as disclosed in the assessment year under consideration. It is also an admitted fact that the asessee is not dealing in loose tea but sells the same in sealed boxes. As observed by the ITO the quantitative tally in boxes was furnished during the course of the assessment proceedings. In our opinion, it is not possible to maintain a static g.p rate from year to year since this is primarily dependent on various factors, some within the control of the assessee and others not so. In such a case one has to consider the overall picture and decide whether the g.p rate disclosed is reasonable or not. On the facts of the present case, however we would opine that there was no basis to reject the books and maintain an addition to the trading results specially when the sales had increased tremendously and it was but natural that there would be a nominal decline in the g.p rate. We accordingly, cancel the addition of Rs. 5,000 maintained by the CIT(A).

23. In the result, both the appeals are partly allowed.