S. 43B of the Income-tax Act
provides that deductions otherwise allowable in respect of certain sums payable
shall be allowed only in the previous year in which such sums are actually paid,
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.
All the clauses of S. 43B
(other than clause c) start with the term ‘any sum payable’. The meaning of the
term ‘any sum payable’ has been the subject-matter of conflicting decisions of
High Courts. Some Courts held that no disallowance could take place u/s.43B
where the liability towards the expenditure had arisen but time for payment was
not due. As against this few Courts had held that the deduction for an
expenditure of the specified nature would be allowed only on actual payment of
dues. In order to avoid any further conflict, an amendment has been made vide
the Finance Act, 1989 with retrospective effect form 1-4-1984 by insertion of an
Explanation 2 to provide for the meaning of the said term ‘any sum payable. The
scope of the Explanation however is restricted to clause (a) of S. 43B. Clause
(a) of S. 43B deals with tax, duty, cess or fee and this clause when read with
the Explanation 2 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.
The meaning of the term ‘any
sum payable’ has as noted been the subject-matter of conflicting decisions of
High Courts. The issue which has arisen has been whether such term includes
amounts in respect of liability which has accrued but is not due for payment.
The Andhra Pradesh High Court, in the context of clause (a) prior to the
insertion of Explanation 2, held that the term means only such items which have
become due for payment, and not items which have accrued but not become due for
payment and therefore no disallowance prior to the insertion of the Explanation
2 was possible for claims of expenditure which were due but not payable. On the
other hand, the Delhi High Court, in the context of clause (d) relating to
interest on loans or borrowings from financial institutions, has recently held
that the term includes all amounts in respect of which liability has been
incurred, irrespective of whether such amounts are due for payment or not and
accordingly, the claim for allowance of an expenditure would not be allowed
unless it was actually paid.
Srikakollu Subba Rao’s
case :
The issue first came up
before the Andhra Pradesh High Court in the case of Srikakollu Rao & Co. v.
Union of India, 173 ITR 708.
In this case, the assessee
had challenged the provisions of S. 43B, which had been then recently introduced
with effect from A.Y. 1984-85. Besides challenging the Constitutional validity
of the provisions, the assessee contended that the provisions did not apply to
sales tax. It was further argued that the liability to pay sales tax for the
month of March 1984, which had been disallowed u/s.43B, could not have been so
disallowed.
On behalf of the assessee,
it was pointed out that under the Andhra Pradesh sales tax rules, such tax was
to be paid by the 25th day of the succeeding month. It was urged that where the
statute itself prescribes the date of payment, no exception could be taken,
acting u/s.43B, that the amount was not paid, rendering a justification for its
disallowance. It was urged that S. 43B can have no application to cases where
the statutory liability which was incurred in the accounting year is also not
payable, according to the statute, in the same accounting year.
The Andhra Pradesh High
Court, while accepting these contentions observed that according to it, not only
should the liability to pay the tax be incurred in the accounting year, but the
amount should also be statutory ‘payable’ in the accounting year. According to
the High Court,
S. 43B itself was clear to that extent — it referred to the ‘sum payable’. The
Andhra Pradesh High Court observed that if the Legislature intended, it should
have so provided that any sum for the payment of which liability was incurred by
the assessee would not be allowed unless such sum was actually paid.
Further, keeping in mind the
object for which S. 43B was enacted, the Andhra Pradesh High Court held that it
was difficult to subscribe to the view that a routine application of that
provision was called for in cases where the taxes and duties for the payment of
which liability was incurred in the accounting year were not statutorily payable
in that accounting year. In fact, the Andhra Pradesh High Court noted the
subsequent amendment permitting the deduction of taxes and duties paid before
the due date of filing of the income tax return as evidence that taxes and
duties not statutorily payable during the accounting year did not fall to be
disallowed u/s.43B.
The Andhra Pradesh High
Court therefore held that the term ‘sum payable’ meant not only cases where the
liability was incurred, but which were also actually payable within the year.
Accordingly, the Andhra Pradesh High Court held that S. 43B did not apply to the
amounts not due for payment within the year.
Triveni Engineering’s case :
The issue again recently
came up before the Delhi High Court in the case of Triveni Engineering &
Industries Ltd. v. CIT, 320 ITR 430.
In this case pertaining to
A.Y. 1991-92, the assessee had taken a loan from Industrial Finance Corporation
of India (‘IFCI’). As per the terms of the loan, the repayment of the loan along
with interest thereon was to be made in five yearly instalments payable from
November 1996 to November 2000. The assessee provided for the interest accrued
on the loan till the end of the previous year ended 31st March 1991. The
assessing officer disallowed such interest.
The Commissioner (Appeals)
confirmed the disallowance of interest and further held that the claim of
interest was not allowable in terms of S. 43B(d).
Before the Delhi High Court, the assessee claimed that it was entitled to claim interest because interest accrues daily and it accrued as per the mercantile system of accounting adopted by the assessee with respect to the loan obtained by it from IFCI.
The Delhi High Court observed that merely because the interest was debited in the books of account maintained on a Mercantile basis could not mean that the interest had become due and accrued, because admittedly the interest liability would not become due during the relevant previous year but only in November 1996. According to the Delhi High Court, interest could not be said to have ac-crued to become due and payable in the relevant previous year. The Delhi High Court observed that the stand of the assessee was incongruous because on the one hand it claimed that interest became due and accrued in the relevant previous year, however, in the same breath it admitted that the same would be due and payable only with effect from November 1996. According to the Delhi High Court, the concept of debiting the books maintained on the mercantile basis was on the principle that the payment had become due and payable and, since it had become payable, it was therefore debited in the books of account. According to the Court, admittedly the interest was not due and payable from the relevant previous year.
The Delhi High Court observed that S. 43B directly and categorically disentitled the assessee from claiming benefit of interest deduction with respect to interest due and payable to financial institution till the interest was actually paid. According to the Delhi High Court, S. 43B made it abundantly clear that interest can only be allowed when it was actually paid and not merely because it was due as per the method of accounting adopted by the assessee. The Delhi High Court was of the view that any other interpretation that the interest should be allowed even when not actually paid would defeat the very purpose of S. 43B.
The Delhi High Court felt that the view taken by the Andhra Pradesh High Court, that where the amount was not due for payment before the end of the relevant previous year such amount, though having accrued, could not be disallowed u/s.43B, could not be accepted by it, as it would negate the intention of existence of S. 43B and would render otiose the expression ‘actually paid’ occurring in S. 43B. In view of the categorical language used in S. 43B(d), the Delhi High Court was of the view that it need not refer to the other subsections and exceptions of S. 43B.
The Delhi High Court therefore upheld the disallowance of interest accrued but not due under the provisions of S. 43B.
Observations:
Subsequent to the decision of the Andhra Pradesh High Court in the case of Srikakollu Subba Rao, Explanation 2 to S. 43B was inserted by the Finance Act 1989 with retrospective effect from 1 April 1984. This explanation, clarifies that ‘any sum payable’ would include sums which were not payable within the year under the relevant law, and therefore to that extent nullifies the decision of the Andhra Pradesh High Court. It is however relevant to note that the scope of the said explanation, is restricted in it’s application only to clause (a) of S. 43B, i.e., to any sum payable by way of tax, duty, cess or fee. It is consciously not extended to other clauses of S. 43B, though the language used in those clauses is also identical. At the time when Explanation 2 was inserted, S. 43B already contained clauses(b) and (d) as well, which also used the term ‘any sum payable’. It therefore appears that the conscious intention was to make the expression applicable specifically and only to clause (a) and not to any other clauses of S. 43B. Even when clauses (e) and (f) were inserted in S. 43B, Explanation 2 was not amended to cover these clauses.
The view taken by the Delhi High Court, that allowing the claim for expenditure without actual payment of interest accrued but not due would defeat the very purpose of S. 43B and render it otiose, also does not seem to be justified. When S. 43B was inserted, the purpose for insertion of S. 43B was explained by the Honourable Finance Minister in his budget speech of 1983-84 as under:
“Several cases have come to notice where tax-payers 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 purposes 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.”
A similar reasoning has been given in the explanatory memorandum explaining the provisions of the Finance Bill, 1983. The intention therefore seems to have been to cover cases of non-payment over long periods of time, and not amounts which are not due for payment. S. 43B would continue to apply to such sums which have become due for payment, but have not yet been paid.
Further support for the fact that amounts not due for payment were not intended to be covered by S. 43B can be gauged from the first proviso to S. 43B, which excludes amounts paid before the due date of the filing of the return of income from the applicability of S. 43B.
The better view of the matter therefore seems to be the view taken by the Andhra Pradesh High Court, that the meaning of the term ‘any sum payable’ does not include amounts not due for payment, other than taxes, duties, cesses or fees covered by clause (a).
