Facts

The ITO disallowed a deduction claimed by the assessee of an amount which   was on account of sales-tax collected by the assessee for the last quarter of the relevant accounting year. This amount was payable within 30 days of the end of  the quarter. The disallowance was made under section 43B, which was inserted    in the statute with effect from 1-4-1984. The Commissioner confirmed the disallowance. The Tribunal also dismissed the appeal of the assessee on the basis  of the judgments of the Delhi High Court in the case of Sanghi Motors v.  Union    of India [1991] 187 ITR 703 and Escorts Ltd. v.  UOI [1991] 189 ITR 81. Hence       a reference came up before the Court.

Issue

Whether the sales-tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales-tax   law is to be disallowed under section 43B?

View

Section 43B was aimed at curbing the activities of those taxpayers who did   not discharge their statutory liability of payment of excise duty, employer’s contribution to provident fund, etc., for long periods of time but claimed deductions from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year. It  was to  stop this mischief that section 43B was inserted. It was clearly not realised that    the language in which section 43B was worded would cause hardship to those taxpayers who had paid sales-tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This was because the sales-tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales-tax had in fact been paid by assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence the first proviso was inserted  in section 43B. The amendment which was made by the Finance Act, 1987 in

section 43B by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation.

A proviso which is inserted to remedy unintended consequences and to make    the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. Looking to the curative nature of the amendment made by the Finance Act, 1987 it can be said  that the proviso which is inserted by the amending Finance Act, 1987 should be given retrospective effect and be read as forming a part of section 43B from its inception.

The expression “any sum payable” in clause (a) of section 43B was open to   the interpretation that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Explanation 2 was, therefore, added by the Finance Act, 1989, with retrospective effect from April 1, 1984, for the purpose of removing any ambiguity about the term “any    sum payable’’ under clause (a) of section 43B.

Held

Section 43B(a), the first proviso and Explanation 2  have  to  be  read  together as giving effect to the true intention of section 43B. Explanation 2 being retrospective, the first proviso has also to be so construed. Without the first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of S. 43B. The proviso supplies an obvious omission. But for this proviso the ambit of section 43B becomes unduly wide bringing within its scope those payments which were not intended to be prohibited from the category of permissible deductions. The first proviso to section 43B, therefore, has to be treated as retrospective. The rule of reasonable construction must be applied while construing a statute. (AY.1984-85) (TR No. 2 of 1993 dt. 10-3-1997)

Editorial : Followed in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC) and CIT v. Calcutta Export Company [2018] 404 ITR 654 (SC). Decision in Escorts Ltd. v. UOI (1991) 189 ITR 81 (Delhi) (HC) reversed.

“People cannot hurt you without your permission.”