Andhra Pradesh H.C : These writ petitions give rise to certain common questions of law and it will be convenient to dispose of them together.

Counsel Appeared

T. Anantha Babu, M.J. Swamy, D. Manmohan, Ch. V.S Murthy, Ch. Sreerama Rao, I. Venkaranarayana, D. Panduranga & G.V. Sitarama Rao, for the Petitioners : M.S.N. Murthy & Krishna Koundinya, for the Respondents

Y.V. ANJANEYULU, J.:

These writ petitions give rise to certain common questions of law and it will be convenient to dispose of them together.

2. By the Finance Act, 1983, s. 43B of the IT Act, 1961 (“the Act”), was inserted and the provision came into force w.e.f. 1st April, 1984. The main challenge in these writ petitions is that this provision is unconstitutional inasmuch as it is violative of Arts. 14 and 19(1)(g) of the Constitution. The relevant provision is extracted below: “43B. Certain deductions to be only on actual payment.—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 fund or any other fund for the welfare 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 Budget Speech of 1983-84, this is what the Honourable Finance Minister had stated concerning the aforesaid provision newly inserted in the Act : “Several cases have come to notice where taxpayers 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 purpose of their IT 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.”

3. In the memorandum explaining the provisions in the Finance Bill, 1983, the following explanation is given for inserting the above provision : “Disallowance of unpaid statutory liability : 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 outgo are accounted for on the basis of accrual 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. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees’ State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their IT 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. This amendment takes effect from 1st April, 1984, and will accordingly apply in relation to the asst. yr. 1984-85 and subsequent years.”

4. Shri Anantha Babu, leading the arguments, raised the following contentions : ‘‘(i) The provision is violative of Art. 14 and Art. 19(1)(g) of the Constitution and should, therefore, be struck down; (ii) The provision is not applicable to “sales-tax”; (iii) In any event, as the provision came into force on 1st April, 1984, it cannot be applied in respect of claims for deduction up to and including 31st March, 1984. The provision is applicable for the asst. yr. 1985-86 for which the corresponding financial year commences on 1st April, 1984.”

5. The constitutional validity of the provision is questioned on the following grounds: It is pointed out that most of the businessmen maintain accounts on what is known as “mercantile system”, which has been recognised by the Act as a regular system of accounting adopted by the assessees for offering for assessment purposes, profits and gains from business. Sec. 145 of the Act statutorily gave recognition to this method of accounting and it is only in a case where the method of accounting applied by the assessee is such that correct profits cannot be deduced from the accounts, liberty is given to the ITO to determine the profits without having regard to the method of accounting followed by the assessee. It is explained that in the mercantile system of accounting, businessmen are entitled to claim deduction of liabilities for expenses incurred by them although they remain unpaid just as they account for the profits and gains accruing in the year of account, although they may not have been actually received. It is stated that this is the essence of the mercantile system of accounting which has been recognized both for income-tax purposes as well as accounting purposes as the most scientific system to maintain accounts. Learned counsel pointed out that s. 43B made inroads into this well and long-established system of accounting and renders the system inoperative in regard to two items of expenses. These expenses are “taxes and duties” of which liability was incurred in the accounting year but nevertheless remained unpaid at the end of the accounting year for a variety of reasons. It is stated that in choosing these two items of expenses and declaring that they will be allowed only when the liabilities are actually paid, the Legislature has acted arbitrarily. Learned counsel submits that there is no reason why discrimination should be made between other items of expenditure incurred by an assessee but not paid (which qualify for deduction) and statutory liabilities like taxes and duties which were also incurred during the accounting year but remained unpaid. According to learned counsel, the classification of expenses as above is unreasonable, as it is not founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group. It is also urged that the differentia has no rational relation to the object sought to be achieved by the provision incorporated w.e.f. 1st April, 1984. It is, therefore, stated that the classification of the expenses incurred by an assessee into the two categories above mentioned is impermissible and violates equal protection of laws. Learned counsel also pointed out that the assessees carrying on business incurring expenses other than taxes and duties are treated differently and an invidious discrimination is shown against the assessees carrying on business incurring liabilities to pay taxes and duties. Learned counsel claims that this is hostile discrimination. It is further submitted that in choosing “taxes and duties” for a special treatment under s. 43B, the Legislature acted arbitrarily. Learned counsel submits that where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is, therefore, violative of Art. 14. It is submitted that Art. 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment. By discriminating “taxes and duties” and making a separate provision concerning the allowance of these two items of expenses, fairness and equality of treatment have become a casualty, contends Shri Anantha Babu, the learned counsel.

We are unable to accept the submissions of learned counsel. We have already referred to the statement of the Hon’ble Finance Minister in the Budget Speech and also to the memorandum explaining the Finance Bill which bring out the reasons for inserting s. 43B in the statute book. The two items of expenses selected by the Legislature represent indirect taxes. Tax-payers are not burdened to pay this category of taxes from out of their own coffers. They are entitled to collect the same from the consumers to whom they sell goods and then make over the payment of the taxes collected to the exchequer. They are merely a conduit pipe through which the indirect taxes flow from the consuming public to the public exchequer. A businessman has no greater function in regard to these matters than to merely pay to the Government whatever is collected form the public. Experience has shown that businessmen, resourceful as they are and guided by the ingenuity of legal advice, turned the situation to their advantage. While on the one hand, businessmen had freely collected sales-tax, excise and customs duties, etc., from the public to whom goods were supplied, they refused to part with these funds in favour of the public exchequer raising a plethora of contentions. In one case, sales-tax is collected on the goods sold. In another case, excise and customs duties were duly incorporated for the purpose of determining the assessable value of the goods sold and approval of the authorities of excise and customs was obtained for the relevant price- lists. Goods were sold at the prices approved by the authorities and the duties were collected. Yet, contentions were raised that sales-tax, excise duty and customs duty are not liable to be paid under the law in respect of certain transactions and the amounts collected were not made over to the exchequer but were kept with the businessmen.

In view of the existing disputes, either the authorities or Courts intervened to stay the disputed taxes till the disposal of the appeals with the result that these disputed taxes and duties remained unpaid for a number of years and, in the meantime, the businessmen made best use of the public funds remaining in their hands. That is not all. The taxes and duties collected but remaining unpaid to the Government on account of orders of stay, etc., were claimed as a deduction for income-tax purposes setting up an attractive plea that the accounts are made up on mercantile system and, consequently, the disputed taxes and duties constituted legitimate deductions as the liability to pay the same was incurred in the accounting years concerned, albeit the amounts were not actually paid. The Revenue was told that in a system of mercantile accounting, actual payment is unnecessary and the profits and gains under the head “Profits and gains of business or profession” would have, therefore, to be computed deducting these taxes and duties. Thus, on the one hand, the businessmen had free use of the funds collected from the public by way of taxes for the ostensible purpose of making them over to the public exchequer and at the same time secured tax reliefs without paying the same. The provisions of law, as they stood at the relevant time, could not remedy the situation and the result was that “taxes and duties” aggregating to thousands of crores of rupees lay in the hands of the taxpayers while the Government was reeling under the pressure of finding moneys to discharge commitments. That was the alarming situation when the Legislature felt concerned to find a remedy to the problem. The result was that s. 43B was inserted in the Act which has the effect of compelling the assessees to pay the disputed taxes which they had otherwise collected from the consuming public, if they wanted such amounts to be deducted by way of expenses. The Legislature did not act unreasonably in making a wholesome change that all expenses incurred by an assessee maintaining accounts under the mercantile system would not be deducted unless the expenditure was actually paid out. In choosing only the statutory liabilities by way of taxes and duties for a special treatment under s. 43B, the Legislature had shown awareness of the growing incidence of public funds being caught up in the hands of the business community. It was for this reason that “taxes and duties” were chosen for a special treatment and we do not see any hostile discrimination or arbitrariness violating Art. 14 in the Legislature so acting. Shri Anantha Babu, learned counsel for the petitioner, puts it attractively that a businessman collecting “taxes and duties” is in no sense an agent of the Government and when he collects the tax or duty, as the case may be, he collects in the same way he does the sale price of the goods and the “taxes and duties” coming into his hands, like the sale price, were his own moneys. There was nothing immoral, contends learned counsel, in the businessman refusing to pay these taxes if the relevant statute does not empower the payment of the same. By all means, the businessman was entitled to keep the moneys in his hands but to render a final account as soon as the dispute was settled. According to learned counsel, this is inherent in the system of maintaining accounts on the mercantile basis and no blame can be attached personally to a businessman if “taxes and duties” collected remained in his hands for some time, pursuant to legitimate orders obtained from the Courts and authorities. Speaking legally, perhaps, no exception can be taken to the proposition made out by learned counsel. But public interest demands that something should be done to remedy a situation like that. “Taxes and duties” collected by a businessman are not intended to be used as his working capital. He undoubtedly holds them in trust either for payment to the Government or for repayment to the persons from whom they are collected if the levy is held to be illegal. In a real sense, he is a custodian of the funds. There is no reason why the custody of such funds, till matters were finally decided, should not have been entrusted to the Government itself as, undoubtedly, the Government would be obliged to repay the moneys so entrusted for custody with interest, if eventually Courts hold that the levy was illegal. There was no provision under which a businessman could be compelled to deliver custody of such disputed funds. Sec. 43B perhaps answers this in a limited way.

We do not think learned counsel is correct in contending that as between the assessees carrying on business any discrimination is made out in so far as the deductibility of the two items are concerned. While all other expenses continue to be allowed on the basis of incurring the liability without actual payment, only “taxes and duties” are subjected to a special requirement regarding actual payment and this special requirement is common to all assessees carrying on business. The question of deducting “taxes and duties” in the case of non-business assessees does not arise. We are, therefore, not satisfied with the contention that s. 43B practices any discrimination. We do not also find any infirmity in the classification as it has a nexus with the object sought to be achieved.

We are not satisfied with the challenge to the provision under Art. 19(1)(g) either. There is no fetter, as far as we can see, on the freedom of businessmen to carry on their respective occupations, trades or businesses. The declaration that “taxes and duties” shall not be allowed as a deduction unless they are paid does not have the effect and consequence of placing any restrictions on the business activities. Even if one should think that the provision places a restriction on the exercise of the right, it is, in our opinion, a reasonable restriction within the meaning of cl. (g) of Art. 19 of the Constitution.

We find that the question concerning the constitutional validity of s. 43B came up before the Karnataka High Court in Mysore Kirloskar Ltd. vs. Union of India & Ors. (1986) 53 CTR (Kar) 128 : (1986) 160 ITR 50 (Kar) : TC19R.706. The Karnataka High Court upheld the validity of the provision holding that it is not violative of either Art. 14 or Art. 19(1)(g). We may point out that petitions for special leave to appeal against the judgment of the Karnataka High Court in Mysore Kirloskar Ltd.’s case (supra), were rejected by the Supreme Court on 10th Nov., 1987 [vide brief report appearing in (1988) 169 ITR (St) 13]. The report would also indicate that writ petitions filed under Art. 32 of the Constitution challenging the vires of s. 43B in the case of Mohan Aluminium (P) Ltd. vs. ITO (WP No. 1009 of 1986 and WP No. 199 of 1987) were dismissed by the Supreme Court. Having regard to the above, we reject the contention of Shri Anantha Babu concerning the constitutional validity of s. 43B. This contention was raised in all the other cases too and we accordingly reject this contention in all those cases. We may mention that no separate arguments were advanced in the other cases and the arguments of Shri Anantha Babu were adopted.

The next contention of Shri Anantha Babu is that, in any event, s. 43B can have no application to deduction of sales-tax. It is claimed that sales-tax is not designated specifically as an item of expenditure in computing the profits and gains from business. It is pointed out that the deductibility of sales-tax as a business expenditure is referable to s. 37 which provides that all expenditure incurred by an assessee wholly and exclusively for the purpose of business was to be allowed. In the absence of any specific provision relating to the deduction of sales- tax, learned counsel contends, the provision relating to the payment of taxes for securing deduction does not apply to sales-tax. We do not see why. Once it is accepted that sales-tax is allowed as expenditure under s. 37, then the provision relating to actual payment under s. 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. In our opinion, this contention has no force at all. That leaves one more contention urged by Shri Anantha Babu to be considered. It is pointed out that s. 43B came into force from 1st April, 1984, although it was introduced by the Finance Act, 1983. It is urged that the real effect of the provision coming into force on 1st April, 1984, is that the restrictions in s. 43B apply only to expenditure by way of “taxes and duties” incurred on or after 1st April, 1984. According to learned counsel, all expenses by way of taxes up to and including 31st March, 1984, fall to be allowed without reference to s. 43B. We are unable to agree. The declaration that the provision comes into force on 1st April, 1984, is to ensure that on the first day of the asst. yr. 1984-85, the provision is in the statute book. It is settled law for purposes of income-tax that the law as it stood on the first day of the relevant assessment year governs the assessment proceedings for that year, although the income liable to be assessed relates to the previous year relevant to that assessment year. In the Statement of Objects which we have extracted above, it is clearly indicated that the provision comes into force from the asst. yr. 198485. We have no doubt that this is the correct position in law and the newly inserted provision in s. 43B is applicable for the asst. yr. 1984-85.

The above are the contentions raised by Shri Anantha Babu in WP No. 7207 of 1984. As we have rejected all the contentions raised, the said writ petition stands dismissed. The aforesaid contentions in all the remaining writ petitions also stand rejected.

We shall now deal with the additional points which were pressed before us for consideration in the other writ petitions.

Shri M.J. Swamy, learned counsel for the petitions in WP Nos. 14218, 14220 and 14222 of 1984, invited our attention to the assessment orders passed in those cases. One of the items disallowed is “market cess”. The disallowance was made on the ground that it was not paid during the accounting year and it was categorically mentioned that the disallowance was made in terms of s. 43B. Similar disallowances were also made in the other writ petitions. It is not necessary to give details of the amounts disallowed. The contention of learned counsel is that “market cess” is not in the nature of either tax or duty and, consequently, it cannot be disallowed on the ground of nonpayment under s. 43B. We are inclined to uphold this contention as it is covered directly by the decision of the Supreme Court in Om Prakash Agarwal vs. Giri Raj Kishori (1987) 164 ITR 376 (SC). We, therefore, hold that deduction on account of “market cess”, liability for the payment of which was incurred in the accounting year relevant to the assessment year under consideration, cannot be disallowed on the ground that it was not paid before the close of the accounting year. The provisions of s. 43B have no application to “market cess”. The ITO’s shall make appropriate modifications to the assessment made in the hands of the petitioners wherever such disallowance has been made.

17. One other contention addressed to us is that the liability to pay sales-tax for the month of March, 1984, was disallowed in terms of s. 43B in all the cases before us. Shri Swamy, learned counsel, pointed out that the petitioners filed A2 monthly returns according to which they pay the taxes. Our attention has been invited to r. 17 of the A.P. Sales-tax Rules, 1957, which, in terms, provides that the tax in relation to the return shall be paid before the 25th day of the succeeding month. It is urged that where the statute itself prescribes the date of payment, no exception could be taken, acting under s. 43B, that the amount was not paid rendering justification for its disallowance. It is 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. We find considerable force in the contention of Shri Swamy. In order to apply the provisions of s. 43B, it seems to us that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily “payable” in the accounting year. Sec. 43B itself is clear to this extent. It refers to the “sum payable” in cl. (a) as well as in cl. (b). 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 is actually paid. Keeping in mind the object for which s. 43B was enacted, it is difficult to subscribe to the view that a routine application of that provision is 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. If, under the provisions of any statute, a tax or duty is payable after the close of the accounting year, different considerations would prevail and it may not be open to the ITO to disallow tax or duty which is statutorily payable after the accounting year. In fact, the amendment brought about, which is coming into force on 1st April, 1988, permitting the deduction of taxes and duties paid before the filing of the IT returns clearly supports the view that “taxes and duties” not statutorily payable during the accounting year do not fall to be disallowed under s. 43B. (Emphasis, italicised in print, supplied)

18. The petitions in all the cases (other than the petitions in WP No. 7207 of 1984) raised the aforesaid plea and complained that in their assessments for the year 1984-85, disallowance of the sales-tax payable for the month of March, 1984, was made under s. 43B, although such sales-tax is payable on or before 25th April, 1984. The ITOs concerned shall verify the aforesaid claim of the petitions and, if found true, make appropriate modification of the assessments already made allowing the sales- tax for the month of March, 1984.

19. In the result, WP No. 7207 of 1984 is dismissed but, in the circumstances, without costs. All the other writ petitions are partly allowed to the extent indicated above but without costs.

Advocate’s fee Rs. 250 in each case.

[Citation : 173 ITR 708]