THE COMMISSIONER OF INCOMETAX, KOCHI vs. M/S.FORBAS, EWART PVT. LTD.

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.M.JOSEPH & THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN TUESDAY, THE 4TH DAY OF DECEMBER 2012/13TH AGRAHAYANA 1934 ITA.No. 104 of 2002 ( ) ----------------------- ITA.642/1996 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT(S)/APPELLANT/APPELLANT:: --------------------------------- THE COMMISSIONER OF INCOMETAX, KOCHI

BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT RESPONDENT(S)/RESPONDENT:: -------------------------- M/S.FORBAS, EWART PVT. LTD. COCHIN.

R BY ADV. SRI.A.K.JAYASANKAR NAMBIAR R BY ADV. SRI.ANIL D. NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20.09.2012, THE COURT ON 04.12.2012 DELIVERED THE FOLLOWING:

K.M. Joseph & K. Vinod Chandran, JJ ---------------------------------------------------- I.T.A No.104 of 2002 ---------------------------------------------------- Dated this the 4th day of December, 2012

J U D G M E N T K.Vinod Chandran, J The assessee, who is the respondent herein is a company engaged, inter alia, in tea and coffee brok-ing etc. The appeal relates to the assessment year 1993-94, wherein the Assessing Officer disallowed the claim of Rs.96,000/- with respect to the expenditure incurred for the maintenance of residential accommodation in the nature of guest house at Madras and Coimbatore and is also concerned with the dis-allowance of a sum of Rs.1,73,427/- representing the sales tax paid by the assessee, on the sale of tea in auction, for reason of the payment being made after the time limit provided under Section 43B. Both the disallowances were reversed by the first appellate authority and the reversal was confirmed in appeal by the Tribunal. 2. The Revenue raised the following questions of law in the above appeal:-

ITA 104/2002 : 2 : 1.Whether, on the facts and in the circumstances of the case the Tribunal is right in law in confirming the order of the Commissioner of Incometax (Appeals) directing the assessing officer to allow guest house expenses incurred by the assessee and depreciation on guest house as claimed by the assessee? 2.Whether, on the facts and in the circumstances of the case and also in the light of sub-section (5) of Section 37, the Tribunal is justified in law in interfering with the order of the assessing authority with reference to guest house issue/guest house expenditure? 3.Whether, on the facts and in the circumstances of the case the Tribunal is right in law in granting a deduction of sum of Rs.1,73,427/- representing the sales tax payment when the same

ITA 104/2002 : 3 : was paid after the time limit prescribed under Section 43B? 3.The first two questions related to the dis allowance of expenses incurred for maintenance of guest house. The first appellate authority found that the disallowance was with respect to the amount paid as rent in respect of one flat each maintained in Madras and Coimbatore for use by the directors and executives on their frequent visits to those cities. Though, the finding of the Assessing Officer that these flats are in the nature of guest houses was upheld, the first appellate authority directed the Assessing Officer to grant the same under Section 30, as being rent paid for premises occupied by the assessee for the purposes of business or profession. The first appellate authority relied on the decision of the Bombay High Court in CIT vs. Chase Bright Steel (1989) 177 ITR (124)Bom. Before the Tribunal, the department pointedly referred to sub-section 5 of Section 37, which though omitted by the Finance Act, 1997, with effect from 1.4.1998; was applicable to the assessment year in question. The Tribunal relying on a Calcutta High Court decision held that since the flats were kept ready for stay of the directors and executives of the company while on tour;

ITA 104/2002 : 4 : considering the difficulties faced in getting alternative accommodation, it cannot be treated as a guest house contemplated under Section 37(4) of the Income Tax Act, 1961. 4. The issue had been considered thread-bare by the Hon'ble Supreme Court in Britannia Industries Ltd. vs. Commissioner of Income Tax and another(2005)278 ITR 546 (SC). After extracting Section 37, the specific plea on behalf of the assessee that rent paid for premises in respect of buildings used for the purposes of business or profession being allowable under Section 30, such expenses could not again be referable to Section 37, especially, by virtue of the non obstante clause used in sub-section(1) of Section 37 was noticed. The Bombay High Court decision cited above was also urged in support of the contention of the assessee. The Supreme Court, however, found that having regard to the unambiguous bar incorporated under sub-section (4) of Section 37, the benefits indicated in Sections 30 to 36 although independent of Section 37, could not be related to the guest house maintained by the assessee. Though the expression “premises and buildings” referred to in Sections 30 to 32 was held to be including within its scope and ambit the

ITA 104/2002 : 5 : expression “residential accommodation including any accommodation in the nature of guest house” used in Section 37, it was found that the Legislature had purposefully drawn a distinction and thought it fit to exclude the expenses towards the

rent,

repairs

and

also

maintenance

of premises/accommodation used for the purpose of guest houses. In view of the binding precedent the questions of law raised as 1 and 2 are to be answered in favour of the Revenue and against the assessee. 5. The next question would be with respect to the dis- allowance of sales tax paid, which dis-allowance was by reason of the claim being beyond the time stipulated in Section 43B of the Income Tax Act. Section 43B, introduced by the Finance Act, 1983, with effect from 1.4.84 was enacted to dissuade tax payers from claiming deduction on the basis of provisions made for discharging statutory liabilities; without having actually discharged the same. The object was to prevent assessees from making provisions for statutory liabilities, without actually discharging the same and maintaining it as a provision in the books of accounts; while avoiding actual payments by invoking legal remedies or otherwise. Section 43B again was a non obstante clause, and

ITA 104/2002 : 6 : provided that a deduction otherwise allowable under this Act, inter alia, in respect of tax, duty, cess or fee shall be allowed only in computing the income referred to in Section 28 of that previous year in which such income is actually paid by the assessee; irrespective of the previous years in which the liability to pay the said sum was incurred. A mere provision thus would not entitle an assessee to make the claim, what was insisted upon was the factum of payment. 6. Subsequently, a proviso was introduced by the Finance Act, 1987, with effect from 1.4.1988 by which, if such tax, duties, cess or fee which was actually paid by the assessee on or before the due date for furnishing the return of income under sub-section(1) of Section 37, in respect of the previous year in which the liability accrued, then, on evidence of such payment being furnished the claim was allowable for the very same previous year. Hence even a payment made in the assessment year, with respect to a liability in the previous year; was allowable. This was in tune with the scheme of the Income Tax Act, 1961. The assessment year and the assessment made was with respect to the income of the previous year. The statutory duties of the previous year are those expenses incurred in the previous year. The proviso

ITA 104/2002 : 7 : recognises the fact that the payment of such statutory duties may not be mandated immediately on the liability being incurred. Hence, also keeping in mind the necessity for prompt payment of all statutory duties, it was provided that if such payments are made before the date for furnishing the return of income under the Income Tax Act, then, on proof of such payments, the deductions could be allowed in computing the income for the previous year itself. 7. In the instant case, the assessee, in pursuance of its business of tea bro-king, had conducted auction sale of tea to two exporters. The sale being one for export and being exempted as a penultimate sale; no tax was payable. However, the sales tax enactment to protect the sales tax revenue; provided that, if such exports were not made within the period of 9 months, then, the penultimate sale would no longer be that and would be liable to tax. This again was a methodology adopted in the sales tax enactment of the State to protect the interest of the Revenue and at the same time ensure that any due exemption to an assessee is not denied. The time granted of 9 months by the sales tax enactment of the State is admitted by the assessee. There is also no dispute that the date for furnishing the return of income under

ITA 104/2002 : 8 : Section 39, on the subject assessment year was 31.12.1993. The assessee made the sales tax payments only in January and February 1994. 8. The fact that the payments were made after the time provided under the proviso to Section 43B, according to us, would take the assessee out of the benefit conferred by the proviso. The proviso mandated payments before the date of furnishing of return of income under sub-section (1) of section 139 and evidence of such payments. Such evidence need be furnished along with the returns and such deduction should be claimed in the return. There cannot be any claim after the return is filed, for the simple reason of payment having not been effected before the date prescribed for furnishing of the return. 9. One other context which weighed with us was the fact that the assessee on its own admission, had conducted auction of tea between October 1992 and February 1993. The time of nine months granted to the assessee should necessarily have been from the date of auction sale conducted by the assessee. That nine months even going by the broad period in which the auction sale is admitted to have been conducted; would definitely fall well before the date for

ITA 104/2002 : 9 : furnishing of the return of income under the Income Tax Act, i.e., 31.12.1993. The order of the Tribunal confirming the order of the first appellate authority granting the deduction under the proviso to Section 43 B, is against the specific words employed in the proviso and the statutory mandate contained therein. The 3rd question of law also is hence answered against the assessee and in favour of the Revenue. 10. In view of the discussion above and the questions of law being answered against the assessee and in favour of the Revenue, the above appeal is allowed reversing the order of the first appellate authority as confirmed by the Income Tax Appellate Tribunal and restoring the order of assessment. Sd/- K.M. Joseph(Judge) Sd/- K. Vinod Chandran (Judge) jma //true copy// P.A to Judge