Section 43B

Business disallowance - Certain deductions

to be allowed only on actual payment

Provision is constitutionally valid

Constitutional validity - Section 43B is constitutionally valid - Mysore Kirloskar Ltd. v. Union of India [1986] 160 ITR 50 (Kar.)/Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708 (AP).

Explanation to clause (va) of sub-section (1) of section 36 and provisos to section 43B are not violative of article 14 of the Constitution of India. - Hitech (India) (P.) Ltd. v. Union of India [1997] 227 ITR 446/94 Taxman 454 (AP).

Explanation 2 is not arbitrary or discriminatory nor violative of the fundamental rights, and is not in conflict with any of the provisions of the Constitution - Escorts Ltd. v. Union of India [1991] 189 ITR 81 (Delhi).

The 1987 amendment

Amendment made by Finance Act, 1987 is retrospective in nature - 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.

Looking to the curative nature of the amendment made by the Finance Act, 1987 it can be said that the proviso which was 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 - Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205/224 ITR 677 (SC).

[Note : Same view taken earlier in the cases of CIT v. Jagannath Steel Corpn. [1991] 191 ITR 676 (Cal.)/Jamshedpur Motor Accesso­ries Stores v. Union of India [1991] 189 ITR 70 (Pat.)/CIT v. Govindaraja Reddiar [1991] 187 ITR 417 (Ker.)/CIT v. Chandulal Venichand [1994] 209 ITR 7 (Guj.)].

Sales tax

Deduction of sales tax is admissible only in year of actual payment - Once it is accepted that sales tax is allowed as ex­penditure under section 37, then the provision relating to actual payment under section 43B applies to sales tax as much as it applies to any other tax. It is not relevant that there is no specific provision in the Act regarding deduction of sales tax as an expenditure - Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708 (AP).

In view of section 43B, deduction of sales tax can be claimed only in the year in which the payment is actually made, and cannot be allowed as per the principles of the mercantile system of accounting - Sanghi Motors v. Union of India [1991] 187 ITR 703 (Delhi).

Provision will not apply to sales tax collected and kept in deposit - Where the assessee collected from its purchaser-dealers the difference between the sales tax payable as registered dealers and the sales tax payable as unregistered dealers and, pending-production of declarations by them, kept the amount in a separate deposit account, the collection by the assessee would be  in its essential nature a mere deposit to be released on the reci­procity of release of declaration would form by the purchasing deal­ers. This collection of sales tax would be the deposit of security not partaking the character of trading receipt. That being the case, section 43B could not have application to such amount - CIT v. Ellenbarrie Industrial Gases Ltd. [1994] 208 ITR 67 (Cal.).

Circular No. 496 - CBDT Circular No. 496, dated 25-9-1987 stating that sales tax paid under Deferred Payment Scheme cannot be disallowed under section 43B has retrospective effect - CIT v. K.N. Oil Industries [1997] 226 ITR 547/95 Taxman 557 (MP).

In a case where deferred sales tax was treated as interest-free loan granted to assessee - The provisions of CBDT Circular dated 25-9-1987 will apply only if a State Government had amended its Sales Tax Act to provide that the sales tax that was deferred under an incentive scheme framed by it would be treated as actually paid, so as to meet the requirements of section 43B of the Income-tax Act, 1961.

Where notice did not appear to have been taken of the Gujarat Sales Tax Act, 1969, to ascertain whether or not there was such an amendment, a question of law would arise from the Tribunal’s order directing the Assessing Officer to allow the claim of the assessee in respect of unpaid sales tax if the same was covered by the specific scheme of the Gujarat Government whereby the deferred payment scheme was converted into interest-free loan and the High Court was not justified in declining to call a reference from the order of the Tribunal - CIT v. Gujarat Polycrete Pvt. Ltd. [2000] 246 ITR 463 (SC).

Customs/excise duty

Deduction is allowable only in year of actual payment - In view of the specific language of section 43B, amounts of customs duty and excise duty on value of closing stock should be allowed as deduction in the assessment year relating to the previous year in which it was actually paid, even though assessment of closing stock of that year would be in the subsequent assessment year - Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240 (Guj.).

Provision will not apply to interest paid for retention of goods - The interest payable to the customs department for keeping the imported goods in the custom warehouse beyond the statutory period is not part and parcel of the duty payable on importation of goods, and hence, section 43B will not apply to such interest payments and no disallowance should be made by invoking that provision - Hindustan Motors Ltd. v. CIT [1996] 218 ITR 450 (Cal.).

State finance tax - In view of the Explanation 2 to section 43B of the Income-tax Act, 1961, the Tribunal was justified in law in directing the Assessing Officer to allow the claim for deduction of Assam Finance tax, if the payment was found to have been made before 31-7-1984, though the relevant previous year ended on 30-6-1984. - Assam Carbon Products Ltd. v. CIT [1997] 224 ITR 57/93 Taxman 729 (Gau.).

Fee/duty, etc. - Price/consideration/licence fee which the assessee is required to pay to the State Government for taking the permission/licence to manufacture country spirit under section 2(10) of the Bengal Excise Act, 1909, read with rules 2 and 6 of the West Bengal Excise (Manufacture of Country Spirit in Labelled and Capsuled Bottles) Rules, 1979, Cannot be construed as fee or duty or cess or tax within the meaning of section 43B(a) - CIT v. Varas International (P.) Ltd. [1997] 225 ITR 831 (Cal.).

Market cess

Provision will not apply to market cess - In view of the Supreme Court decision in the case of Om Prakash Agarwal v. Giri Raj Kishori [1987] 164 ITR 376 (SC), it is clear that provision of sec­tion 43B has no application to market cess. - Srikakollu Subba Rao & Co. v. Union of India (supra).

Mandi fee

Mandi fee is not ‘tax’ or ‘duty’ so as to attract section 43B - Mandi fee is not a tax or duty within the meaning of section 43B(a) and, as such, provisions of section 43B cannot be invoked to disallow outstanding balance on mandi fee account - CIT v. Mohanlal Mishrilal & Sons [1996] 87 Taxman 194 (MP)/CIT v. Dinesh Kumar Gordhan Lal [1996] 135 CTR (MP) 481/CIT v. Mansukhlal Prahjibhai & Co. [1997] 227 ITD 429 (MP).

Mandi fee is paid by the trader and person who enjoys the facili­ty of mandi because some services are rendered by the mandi and, therefore, merely because there is a compulsion for payment of fee, that cannot be taken to be a tax as the same is being col­lected for the services rendered to the traders and persons taking the benefit of the mandi - CIT v. Mohansingh & Sons [1995] 216 ITR 432 (MP).

Royalty

Provision will not apply to royalty for extraction of minerals - The Supreme Court had taken the view in the cases of India Ce­ments Ltd. v. State of Tamil Nadu AIR 1990 SC 85 and State of MP v. Mahalaxmi Fabric Mills Ltd. AIR 1995 (SC) 1621, that royalty paid to the State for extraction of minerals from land is not ‘price’ but a ‘tax’, and as such a cess on royalty would be a tax on royalty. Hence, section 43B would apply to unpaid liability towards payment of royalty - CIT v. Gorelal Dubey [1996] 89 Taxman 49 (MP).

Provident fund payments

In cases of payments relating to provident fund, etc., a time-limit has been fixed under section 43B and amount is deductible only if assessee credits amount to employees’ account in relevant fund on or before date by which he is legally or contractually required to do so, and right to claim deduction will be lost if sum is credited after due date - CIT v. South India Corpn. Ltd.  [2000] 108 Taxman 322 (Ker.).

Where employer's contribution towards provident fund was due for the period ending 31-3-1985 and, admittedly, it was actually paid on 15-4-1985, the assessee could not claim deduction thereof in assessment year 1985-86 in view of the provisions contained under section 43B. - Kerala State Financial Enterprises Ltd. v. CIT [1997] 93 Taxman 627/225 ITR 999 (Ker.)

Gratuity

Provision for the relevant previous year cannot be disallowed - In case a provision for gratuity is made for payment to the retiring employees in respect of previous year it is not neces­sary that actual payment has to be made and if such amount is earmarked for such payment, it cannot disallowed under section 43B - George Williamson (Assam) Ltd. v. CIT [1997] 94 Taxman 424/228 ITR 343 (Gau.).

Kist

Kist/rental payable under the Karnataka Excise Act could not be considered to be in the nature of tax, duty, cess or fee to which the provisions of section 43B are attracted. The kist amount payable to the Government by the assessee could not be brought within the purview of section 43B. It is a different matter that the licensees are not paying the rent in time for which it is only the Legislature which could intervene and not the courts - CIT v. Sri Balaji & Co. [2000] 246 ITR 750 (Kar.).