1986-VIL-70-ITAT-BLR

Equivalent Citation: TTJ 027, 052,

Income Tax Appellate Tribunal BANGALORE

Date: 25.08.1986

FOURTH INCOME TAX OFFICER.

Vs

SANJAY SALES SYNDICATE.

BENCH

Member(s)  : T. N. C. RANGARANJAN., B. V. VENKATRAMAIAH.

JUDGMENT

The appeal is by the Revenue. The assessee was keeping a separate account for sales tax. The sales-tax collected from the customers was being separately credited into the sales-tax account. The sales-collected in one month was being paid to the Government in the next month and corresponding debits were being made to the sales-tax accounting accordingly. The assessee was neither including sales tax in the sales nor claiming a deduction from the profit towards sales tax paid. This method of accounting has been regularly followed by the assessee and has been accepted by the Revenue. For the first time for the asst. yr. 1984-85, the ITO added sales-tax and sur-charge payable amounting to Rs. 2,904 to the income. This, he purported to do under s. 43B which was introduced w.e.f. 1st April, 1984. The assessee went in appeal. It was pleaded before the AAC that the amount does not come within the purview of s. 43B. The AAC held as follows:

"Section 43B stipulates that the deduction otherwise allowable under this Act in respect of any sum payable by the assessee by way of tax or duty shall be allowed only in the previous year in which the amount is actually paid. In the instant case, I find that this amount of Rs. 2,904 has not been brought into the profit and loss account. The two pronged arguments of Shri Nagin Khincha, the appellant's representative is that this has not been claimed as a deduction, and secondly that the amount is not yet payable, but becoming due for payment only on 25th of the subsequent month. I agree the amount has not been claimed as deduction and it would not be right to add this once again to the total income."

The revenue is in appeal.

2. It was argued by the ld. departmental representatives that it is well known that sales-tax forms part of the sales as held by the Supreme Court in the case of Chowringee Sales Bureau P. Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC). While the payments made upto and including Sept., 1983 do not require any adjustment as the assessee would get a deduction of the sales tax paid against the sales tax collected, the sales tax collected in the last month of the previous year will be added to the sales as usual but the corresponding benefit of deduction is denied to the assessee y virtue of s. 43B since the amount has not been paid. Prior to the introduction of s. 43B the situation was different. Whatever sales-tax was deducted on the principle of accrual even when the sales-tax was not paid or disputed. However, s. 43B has now introduced a change in the system of taxation. Irrespective of the system of accounting followed by the assessee no deduction towards such liabilities can be given unless they are actually paid during the previous year. He thus submitted that the order of the AAC should be reversed.

3. The ld. representatives of the assessee, however, submitted that s. 43B was not at all applicable to this case. The section refers to `any sum payable by the assessee by way of tax or duty under any law for the time being in force'. In the present case, the sales-tax collected in one month was payable only in the next month. The sum of Rs. 2,904 was not payable during the year. Therefore, s. 43B was not applicable. On the other hand, if the ITO held that the sum of Rs. 2,904 was to be added to the sales, the accrued liability of Rs. 2,904 had also to be deducted irrespective of s. 43B. Lastly, he submitted that according to the method of accounting regularly employed by the assessee, the sales tax could neither be added nor deducted from the income and thus making no different to the taxation of the assessee.

(i) Reliance was also placed on the decisions of the Supreme Court in CWT, Kanpur vs. J.K. Cotton Manufacturers Ltd. (1984) 39 CTR (SC) 158 : (1984) 146 ITR 552 (SC) and CWT, Gujarat vs. Kantilal Manilal (1985) 45 CTR (SC) 220 : (1985) 152 ITR 447 (SC).

4. We have heard both sides. Sec. 43B introduced by the Finance Act 1983 w.e.f. 1st April, 1984 reads as follows:

"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 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 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 s. 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 cl. (a) or cl. (b) of this section is allowed in computing the income referred to in s. 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."

In the Memo. Explaining the provisions in the Finance Bill 1983, it is stated as follows:

"59. Under the IT 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 out go are accounted for on the basis of accrued and not on the basis of actual disbursements or receipts. For the purposes of computation of profits and gains of business and profession, the IT 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 respect of excise duty, employers 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 (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.

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

5. We have now to consider whether sales-tax collected in Oct., 1983 by the assessee could be added to the assessee's income but at the same time the corresponding deduction towards liability is to be denied. In CWT vs. Kantilal Manilal (1985) 151 ITR 447 (SC) the demand notice for the asst. yrs. 1960-61 & 1961-62 were served on the assessee on 11th April, 1961 and 11th April, 1962. The assessee filed appeals against the assessments. The WTO denied the assessee's claim for deduction of the tax liabilities as a debt owned on the valuation dates, since the assessee had challenged the levy in appeal. Reliance was placed on s. 2(m)(iii)(a) of the WT Act. The Court held that since the debt could not be said to be outstanding on the valuation dates, the respective demand notices having been served after the relevant valuation dates, the first condition in s. 2(m)(iii)(a) was not satisfied and hence the claim for deduction could not be denied. The second condition that the levy should not be challenged, was not fulfilled, the Court having held that the date on which appeal was filed was of no consequence. The case is thus an authority only for the proposition that all tax debt could not be said to be outstanding unless the relevant demand notice is served on the assessee. This case may not be of any assistance to the assessee since we are concerned with the question whether a certain amount is payable by the assessee during the relevant previous year.

6. We next pass on to the other case, i.e. CWT, Kanpur vs. J.K. Cotton Manufacturers Ltd. (1984) 39 CTR (SC) 158 : (1984) 146 ITR 552 (SC). This is also a case under the WT Act. Here the expression "the amount of tax payable in consequence of an order" occurring in s. 2(m)(iii)(b) was considered. The concealed income and wealth of the assessee had been determined by the Investigation Commission. Time had been given for paying the tax in instalments. Although the concealed wealth was declared long after the valuation dates, the tax due on such concealed wealth become a debt deductible from the net wealth on the relevant valuation dates before which the concealed wealth had been earned. The exclusion stipulated in s. 2(m)(iii)(b) did not apply as they were not payable on the relevant date instalments having been granted. In other words, the payability was determined in the light of the instalment scheme while the accrual of debt was determined in accordance with general principles. In our opinion, this case is of direct application to the assessee. It follows that unless there is an order or a rule to pay a tax by a particular date the tax was not 'payable'. It is immaterial that the assessee if he wants can pay tax before the due date. But the last date on which he is permitted to pay is to be taken as the date on which tax is payable for, beyond that date, he is considered to be in default. Since sales-tax collected in one month was payable only in the next month in accordance with the scheme of the Sales-tax Act, it was not 'payable' in the month in which it was collected. Once this position is accepted, s. 43B does not become applicable, since the amount was not 'payable' in Oct., 1983.

7. Further, in accordance with the regular method of accounting adopted by the assessee, there was neither accrual of income nor accrual of liability. Although s. 43B says that the deduction shall not be allowed irrespective of the accrual of liability according to the method of accounting, it is to be understood that the accrual of liability is related to the accrual of income. Therefore, if, according to the method of accounting adopted by the assessee, there is accrual of income and also accrual of corresponding liability, the deduction of the latter can be denied if it is not paid in the previous years. In other words, the section applies to a case where there is accrual of `income' according to the system of accounting adopted by the assessee. If, according to the system adopted by the assessee, there is no accrual of income, the question of tinkering with the liability does not arise at all. Looked at from any angle, the order of the AAC does not require any modification.

8. The appeal filed by the Revenue is dismissed.

 

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