Income-tax---

----Business expenditure---Deduction of tax or duty only on actual payment-- Amendment of section 43-B of Indian Income Tax Act, 1961 by Indian Finance Act, 1989---Section as amended should be considered for assessment year 1984-85---Case remanded.

Section 43-B of the Income-tax Act, 1961, after amendment by the Direct Tax Laws (Amendment) Act, 1987, the Finance Act, 1988, and the Finance Act, 1989, and Explanation 2 to the section which took effect from April 1, 1984, should be considered for the assessment year 1984-85.

Srikakollu Subba Rao and Co. v. Union of India (1988) 173 ITR 708 (AP ) ref.

P.K. Ravindranatha Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

P. Balachandran for the Assessee.

JUDGMENT

K. S. PARIPOORNAN, J.---At the instance of the Revenue, the following common question of law has been referred by the Income-tax Appellate Tribunal for the decision of this Court in the above three connected cases:

"Whether, on the facts and in the circumstances of the case, the amount of unpaid tax collected in the last month of the previous year under consideration which was not claimed as a deduction while computing the income under the Income-tax Act is taxable by invoking the provisions of section 43-B of the Income-tax Act, 1961?"

The assessees in the three cases are different firms. But, all the cases relate to the assessment year 1984-85. The accounting period, in the case of the assessee which is the subject-matter of Income-tax Reference No.211 of 1987, is 1158 M.E. But, in the case of the other two assessees, the accounting period ended by March 31, 1984. The assessment year in all the three cases is 1984-85. All the assessees had collected amounts by way of sales tax during the relevant accounting period. The collections of the last month of the previous year were not paid during the year to the Government. They were not debited to the profit and loss account. They were not claimed as deduction while computing the income taxable under the Income-tax Act. But, the same were shown as sales tax payable in the balance-sheet. 1n substance, the aforesaid sums are sales tax collected during the accounting period, but remain unpaid on the last date of the accounting period. Admittedly, the amount so collected had not become due and payable to the State Government on the last date of the accounting period. They were payable only on a later date. It is common ground that the assessees paid t-he amounts on the dates when payments were due as per the statute. The amounts were not paid on or before the last date of the accounting period, since the time for the discharge of the tax was not over by then. In all the cases, the assessing authority held that such sums collected, but not paid before the last date of the accounting period, will attract section 43-B of the Income Tax Act. This section was inserted in the statute with effect from April 1, 1984. In effect, the decision of the assessing authority was that only actual payments made towards tax collected alone could be allowed as deduction. Since it was not so in these cases, such collections made, but remained unpaid on the last date of the accounting period, were treated as the assessee's income, in all the three cases. In. appeals, the Commissioner of Income-tax (Appeals) held that section 43-B of the Act is inapplicable in these cases. The Revenue took up the matter in further appeals before the Income -tax Appellate Tribunal. By a common order dated July 31, 1986, the Income -tax Appellate Tribunal dismissed the appeals filed by the Revenue. The Appellate Tribunal did so by following its earlier order in the case of S. Govindaraja Reddiar, Quilon I.T.A. No. 20/Coch/ 1986). The Appellate Tribunal held that section 43-B of the Act came into play only when the tax has accrued and became due for payment in the accounting year and the assessee had not paid the same within the accounting year and that it will not have any application in cases where the time for the discharge of tax was not over by the end of the accounting year. It is thereafter at the instance of the Revenue that the Income-tax Appellate Tribunal has referred the common question of law formulated herein above, in all the three cases, for the decision of this Court.

We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the respondents/assessees, Mr. P. Balachandran. Counsel for the assessees/respondents referred to us section 43-B of the Act as it was inserted in the statute book on April 1, 1984, and the notes on relevant clauses in the Finance Bill relating thereto, to contend that section 43-B of the Act is inapplicable herein. The relevant Notes on Clauses appear in (1983) 140 ITR (St.) 160. Reliance was also placed on the decision of the Andhra Pradesh High Court in Srikakollu Subba Rao and Co. v. Union of India (1988) 173 ITR 708, and the observations at pages 718 and 719 to contend that, in order to.hold that section 43-B is applicable, not only should the liability to pay the tax or duty be incurred in the accounting year but the amount should also be statutorily payable in the accounting year itself.

Counsel for the Revenue drew our attention to section 43-B of the Act as it was originally inserted and also the amendments made thereto by the Direct Tax Laws (Amendment) Act, 1987, the Finance Act, 1988, and the Finance Act, 1989. It was submitted that the amendment made in 1989 by the Finance Act, 1989, whereby the second proviso to section 43-B was substituted as it exists today, took effect from April 1, 1989. It was further submitted that Explanation 2, as it exists today, inserted and substituted by the Finance Act, 1989, is deemed to have been inserted with effect from April 1, 1984. Counsel for the Revenue submitted that, in view of Explanation 2 to section 43-B of the Act, which took effect from April 1, 1984, the observations contained in the decision of the Andhra Pradesh High Court in Srikakollu Subba Rao and Co.'s case (1988) 173 ITR 708 at pages 718 and 719 have been superseded. In effect, the result is that section 43-B of the Act will apply where the liability to pay the tax or duty was incurred in the accounting year for which the amount was collected and the amount was actually paid by the assessee, though such amount might not have been payable on or before the last date of there accounting period. It was submitted that Explanation 2 inserted by the Finance Act, 1989, took effect from April 1, 1984, and it has completely altered the law on the subject. Incidentally, reference was also made to the circular of the Central Board of Direct Taxes (Circular No.528, dated 16-12-1988) printed in (1989) 176 ITR (St.) 154, 165. The relevant Notes on Clauses of the Finance Bill, 1989, are seen in (1989) 176 ITR (St.) at pages 123 and 124.

In these cases, when the Appellate Tribunal, rendcred its decision in the appeals on July 31, 1986. it construed the provisions of section 43-B of the Act as it stood then, unhampered by the amendments effected in the statute by the Direct Tax Laws (Amendment) Act, 1987, the Finance Act, 1988, and the Finance Act, 1989. The amendments so introduced later in section 43-B of the Act have made great inroads. In particular, the Finance Act, 1989, has inserted Explanation 2 with effect from April 1, 1984, and the said Explanation is applicable in the three cases on hand. The effect of these amendments, and, in particular, the change effected by the Finance Act of 1989, is virtually to supersede the earlier legal position. The Appellate Tribunal had no opportunity to consider the proper law applicable in these cases, for the assessment year 1984-85, since the later amendments, with retrospective effect, were not available at the time when the decision in the appeals was rendered.

In all the circumstances of the case, we are of the view that section 43-B of the Act, after the amendment by the Direct Tax Laws (Amendment) Act, 1987, the Finance Act, 1988, and the Finance Act, 1989, and Explanation 2 to the section which took effect from April 1, 1984, should be considered to give effect to the proper provisions of law applicable in the A instant cases. It should be so done by the Appellate Tribunal, the final fact finding authority, on the basis of the facts available before it. Therefore, we decline to answer the question referred to this Court in the above three cases. At the same time, we direct the Income-tax Appellate Tribunal to restore the three appeals (I.TA. Nos. 20, 26 and 31/Coch/1986) to file and decide the matter afresh in accordance with law.

The references are disposed of as above.

A copy of this judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal Cochin Bench.

M.BA./1570/T Order accordingly.