[2013] 37 taxmann.com 279 (Article)
Even Duckworth-Lewis Method [Section 43B] requires Minimum Overs Beforehand [Section 37(1)]
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HEMANT O SHARMA | J.V. MENON |
CA | IRS, ACIT (TDS) |
Introduction
1. The scope of this article is limited to examining the applicability of the method of accounting for the claim of deduction in respect of sums payable as appearing in clause (a) of section 43B, specially when Explanation 2 states that "any sum payable" means a sum for which theassessee incurred liability in the previous year, even though such sum might not have been payable within that year under the relevant law.
The issue for examination
2. The issue is, when an assessee follows cash method of accounting "whether in respect of the liability to pay such sums, which have been incurred in the previous year, say 2012-13, when such sums have been actually paid before the due date applicable in case of furnishing the return of income under section 139(1) of assessment year 2013-14, can the assessee claim deduction towards such sums in the determination of Income for assessment year 2013-14, relevant to previous year 2012-13?"
Relevant provisions
3. Section 145 allows an assessee to maintain books of account by any of the methods — mercantile or cash. Income would then be determined in accordance with the method of accounting generally employed by the assessee. In case an assessee follows mercantile method of accounting, section 145 does not necessitate an assessee to pay the expenses remaining outstanding in the accounts at the end of the year for the expenses to be eligible as deductions. The assessee can account for the outstanding salary, rent, professional fees, etc., on 31st March, 2013, and allow it to remain outstanding for any length of time& yet be eligible for deduction towards these expenses in determining the income for assessment year 2013-14.
However, in the context of sums appearing in clause (a) of section 43B, (i.e., tax, cess, duty or fee) the section allows deduction towards these sums only in the previous year in which such sums were actually paid by the assessee, irrespective of the previous year in which the liability to pay such sums was incurred according to method of accounting regularly employed by the assessee.
Section 43B has a proviso, the effect of which is to relent the clutches of the section (which allows such sums on payment basis) and lend benevolence to such sums, the liability for which has been incurred in the previous year, allowing the deduction towards such sums in the determination of income for the assessment year 2013-14, provided that condition appearing therein (that of paying such sums within the time allowed to file the return of income under section 139(1)) is met & the evidence of such payment is furnished by the assessee along with such return. However, the liability to pay such sums should necessarily have been incurred in the previous year 2012-13, for such sums to be eligible for deduction in determination of income for assessment year 2013-14.
4. Comments on section 43B
4.1 Non-obstante clause of section 43B - The Hon'ble Supreme Court in Union of India v. G M Kokil AIR 1984 SC 1022 stated that "Anon-obstante clause is a legislative device which is usually employed to give over-riding effect to certain provision over some contrary provision that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions."
Section 43B starts with a non-obstante clause, meaning thereby that section 43B would gain precedence over other sections of the Act. Thenon-obstante clause, with which section 43B commences, authorizes the violation of the other sections of the Act, so that the object sought to be accomplished by non-obstante clause is achieved. In the process of allowing deduction towards such expenses appearing in section 43B, the other sections such as section 145 would certainly necessitate over-ruling or relaxation, so that the purpose sought to be accomplished by section 43B does not get frustrated.
4.2 Clause (a) of section 43B - Section 43B was inserted in the Act by the Finance Act, 1983, w.e.f. 1st April, 1984. The clause (a) of section 43B, in its present form, was substituted by the Finance Act, 1988, w.e.f. 1st April, 1989 and reads as follows:
"Certain deductions to be only on actual payment.
43B. Notwithstanding anything containedin 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, duty, cess or fee, by whatever name called, under any law for the time being in force, or] ……..
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 section 28 of that previous year in which such sum is actually paid by him."
In other words, irrespective of the method of accounting regularly employed by the assessee, such sum would be allowed as deduction only in the year in which such sum is actually paid by him. Simply put, "actual payment" would be the basis for claiming of deduction of such sum.
Section 43B nowhere necessitates that such liability be accounted for in the books of account in the previous year for it to qualify for deduction. section 43B nowhere prescribes the method of accounting to be deployed in the determination of income. Irrespective of the method of accounting followed by the assessee (whether Mercantile or Cash), section 43B allows its breach, with its non-obstante beginning. It dictates the ignoring of the method of accounting, whether cash or mercantile. If the amount is paid in any later previous year the deduction will be available in computing the income of that previous year in which such sum is actually paid by him, i.e., deduction of such sums would be allowed only on payment basis.
In fact, the decision of the Hon'ble Madras HC in case of Chemicals & Plastics India Ltd. v. CIT [2002] 125 Taxman 648, supports the view that a sum may not be debited to the profit & loss account for it to be eligible as deduction. The existence of liability is necessary to claim the deduction towards such sum — accounting such sums in the books, even when the assessee is following mercantile method of accounting, does not become a prerequisite to claim deduction of such sums. If accounting of such sums in the books does not become necessary, the method of accounting cannot decide the deductibility of such sums.
In the humble view of the authors, "irrespective of the previous year in which the liability to pay such sum was incurred by the assesseeaccording to the method of accounting regularly employed by him", clearly refers to ignoring even the mercantile method of accounting, which may be used to record such sums as expenses in the books, if such sums remain unpaid at the end of the accounting year.
4.3 Proviso to section 43B
The section has a proviso which states as under :
Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaidand the evidence of such payment is furnished by the assessee along withsuch return.
| (i) | The proviso says that in case such sums are actually paid before the due date of filing thereturn of income under section 139(1), for the previous year in which the liability to pay such sum was incurred, the assessee would be allowed the deduction towards such sum in determination of income for the previous year in which the liability to pay such sum was incurred, and not in determinationof the income of the previous year in which the liability was actually paid by the assessee. | |
| (ii) | "Such return" obviously relates to the return of the income for the previous year in which the liability to pay such sum was incurred, which return has to be filed before the time allowed in section 139(1). "Such Return" does not mean the return of the previous year in which such sums are actually paid. |
4.4 Explanation 2 to section 43B
[Explanation 2.—For the purposes of clause (a), as in force at all material times, "any sum payable" 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.]
"Any sum payable" does not refer to the accounting of the liability in the books of account of the previous year. It refers to the incurring of the liability by the assessee in the previous year. It also does not refer to the sums outstanding at the end of the previous year. Emphasis is laid on incurring the liability in the previous year and not to the accounting of the same in the previous year according to the method of accounting regularly employed by the assessee. The Explanation is emphatic in its assertion that the liability towards such sum has to be incurred in the previous year, though such sum may actually be payable in accordance with the relevant law in a later previous year and not in that previous year in which the liability was incurred by the assessee.
In fact, the section itself persuades the assessee to ignore the method of accounting regularly followed by him in context of deductibility of such sums. Since the section persuades the assessee to ignore the accounting method to claim deduction of such sums, it has prescribed methodology as enunciated in section 43B to claim such sums as deduction.
The intention of the Legislature seems to be clear-ignore the method of accounting in respect of such sums but avail of deduction in accordance with section 43B dictates.
As a natural corollary it follows that, if such sums have been paid in advance, for which no liability is incurred in the previous year,no deduction can be claimed towards such sums in determination of the income of the assessment year relevant to the previous year in which such sums were paid, even if the assessee follows cash method of accounting. Needless to state that even if the assessee follows mercantile method of accounting, no deduction towards such advance payment of such sums can be claimed, primarily for the reason that no liability was incurred in the previous year.
In case an assesssee makes payments towards such sums in advance in any earlier previous year there should be no reason for disallowance of such sums in the year of incurring of liability, irrespective of the method of accounting followed by the assessee, as such sum has been paid before the due date applicable in his case for furnishing the return of income for the year in which the liability is incurred.
5. Case Laws
5.1 Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. - It is important to refer to the judgment of the Special Bench of the Tribunal in case of Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. [2007] 107 ITD 343 (Chd.), wherein the Special Bench stated that :the expression 'irrespective of the previous year' used in section 43B dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression 'irrespective' means lacking relation, regardless of what is mentioned. Here the subject mentioned is 'previous year'. It means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the liability is dispensed with by the statute, while concentration is made on the point of actual payment of the sum to the treasury of the Government. [Para 39].
In this context the Hon'ble ITAT answered the following questions:
| (a) | Whether for claiming deduction under section 43B, in respect of payment of excise duty, it is not necessary that liability to pay duty must be incurred first and only thereafter, payment of such duty is made - Held, yes | |
| (b) | Whether, therefore, deduction for tax, excise duty, etc., is allowable under section 43B on payment basis before incurring liability to pay such amounts - Held, yes |
5.2 Maruti Udyog Ltd. v. Dy. CIT - Equally forceful is the decision of the Delhi Bench of ITAT in case of Maruti Udyog Ltd. v. Dy. CIT[2005] 92 ITD 119, wherein the Hon'ble Tribunal answered the following questions :
| (a) | Whether incurring of liability to pay taxes/duties is condition precedent for invoking provisions of section 43B - Held, yes | |
| (b) | Whether advance payment in case of taxes or duties without incurring liability to pay such taxes or duties cannot be allowed as deduction under section 43B - Held, yes | |
| (c) | Whether advance payment of duty cannot be considered as expenditure since it is neither irretrievably gone, as it is liable to be refunded if ultimately liability is not incurred, nor relate to existing liability, and if such sum is not deductible under section 37(1), question of allowing any deduction under section 43B does not arise - Held, yes |
Analysis
6. The authors would like to express that the view expressed by the Delhi Bench in case of Maruti Udyog (supra), in view of the specific language used in the Explanation 2 and in the main section as well, seems to be, with due apologies to the Special Bench (supra), the correct view. The expenditure should be as per the main section, be a deduction otherwise allowable under this Act. It is difficult to conceive that an advance payment towards such sums appearing in clause (a) would qualify as an expense.
If the deduction towards such sums, in case an assessee follows mercantile method of accounting, was to be allowed irrespective of date of payment of such sums, there would hardly remain any incentive for assessees to pay even such sums. They may be tempted to delay or altogether avoid the payments of such sums, as they have already been allowed the deduction for such sums in determination of their taxable incomes. The Hon'ble Special Bench (supra) had expressed a similar fear. The revenue certainly does not intend to promote such conduct amongst the assessees, hence, no deduction is allowed if the payment is not made even within the time allowed to file the return under section 139(1), even if the liability is incurred during the previous year in which the sum gets accounted for in the books based on mercantile method.
When an assessee follows mercantile method of accounting, the revenue does not want the actual payments of its dues from assessee,towards which the assessee has incurred the liability in the previous year, towards sums appearing in clause (a) of section 43B be delayed beyond the return filing date, hence, no deduction is allowed towards such sums if the actual payment is delayed beyond that date. This position is not altered even if the assessee follows cash method of accounting.
Conclusion
7. The cardinal rule applicable to allow the deduction is incurring the liability by the assessee in the previous year and the actual payments of such sums before the time allowed to file the return under section 139(1) of the previous year in which the liability to pay such sum was incurred by the assessee.
Therefore, in author's opinion expenditure should be deductible first under section 37(1) before it can be allowed as deduction under section 43B on actual payment. This position is akin to Duckworth-Lewis Method in a Cricket Match which requires the first team to bowl atleast 20 Overs in ODIs and 5 Overs in T20.
Regards
Prarthana Jalan
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