By TIOL News Service

NEW DELHI, JULY 29, 2013: THE issues before the Bench are - Whether the claim of expenditure on the basis of accrued liability to pay cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958 could be disallowed by invoking Section 43B of the Income Tax Act; Whether from the Memorandum explaining the provisions in the Finance Bill, 1988, it can be safely concluded that the word “cess or duty” inserted in section 43B by amendment is not retrospective in nature; Whether the cess and cess surcharge fall within the characteristics of a tax, when they do not become part of the consolidated fund, but a part of the special funds; Whether tax collected is used for general public purpose whereas cess is for a specific purpose; Whether deposits received by the assessee from buyers on refundable basis towards possible levy of sales tax on packing charges and freight amounts to either collection "as sales tax" or collection "by way of tax" and Whether such amount can be considered as trading receipt and liable to be disallowed u/s 43B. And the verdict goes against the Revenue.

Facts of the case

A. Disallowance of cess and cess charges u/s 43B

The assessee had claimed expenditure in respect of AY 1985-86 as accrued liability to pay cess and cess surcharge u/s 115 and 116 respectively of the Tamil Nadu Panchayats Act, 1958. The AO disallowed the said claim by invoking the provisions of Section 43B of the Income Tax Act (the Act) on the ground that the cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958 had not actually been paid by the assessee during the previous year relating to the AY 1985-86. The assessee contended that no disallowance could be made as the said cess and cess surcharge was neither a tax nor duty. However, the CIT(A) confirmed the disallowance. In a further appeal before the Tribunal, the disallowance was deleted. The tribunal followed its earlier year's order in respect of AY 1984-85 wherein the tribunal had held that although cess was a tax for the purposes of the Constitution of India, it was not a tax within the meaning of Section 43B of the Act. The decision of the tribunal in respect of AY 1984-85 became the subject matter of an income tax reference u/s 256(1) of the Act at the instance of the revenue and was part of a batch of references which were before this Court. During the pendency of the reference in respect of AY 1984-85, the revenue, being aggrieved by the Tribunal's order in respect of AY 1985-86, filed a reference application for a reference to the High Court.

The Departmental Representative made a two-fold submission. He, first of all, submitted that the amendment introduced by the Finance Act, 1988 was clarificatory in nature and, therefore, the provisions of Section 43B(a) as introduced by the said Finance Act, 1988 would be retrospective in operation and would also apply to the AY 1985-86. The second argument was that in any event, a cess was a tax and de hors the amendment introduced by the Finance Act, 1988, the provisions of Section 43B(a) which were clearly applicable insofar as a tax was concerned would also apply to a cess. The DR placed reliance on the Budget Speech of the Finance Minister (1983-84). Section 43B was introduced into the said Act for the first time by virtue of the Finance Act, 1983 with effect from 01.04.1984. It was the contention of the DR that the purpose behind introduction of Section 43B was to curb the mischief whereby an assessee could claim a deduction in respect of an accrued statutory liability and yet not clear the same, thereby depriving the Government of its dues while enjoying the benefit of non-payment.

The DR then referred to the memorandum explaining the provisions in the Finance Bill, 1988 whereupon the amendment was brought about in Section 43B(a) so as to include ‘cess' and ‘fee' specifically. He submitted that the memorandum itself indicated that “as a matter of clarification”, the Finance Bill, 1988 made provision for the fact that cess or fee by whatever name called which had been imposed by any statutory authority, including a local authority, would also be allowed as a deduction “only if” these were actually paid. He relied on several Supreme Court decisions like India Cement Ltd. v. State of Tamil Nadu and H.R.S. Murthy v. Collector of Chittoor & Anr to substantiate the point that cess was nothing but a form of tax. He also relied on Allied Motors (P) Ltd. v. Commissioner of Income Tax, and submitted that the Supreme Court held that although the proviso had been inserted by virtue of the Finance Act, 1987, it was required to be treated as retrospective in operation, so that a reasonable interpretation could be given to the section as a whole.

The counsel for the assessee submitted that insofar as Section 43B was concerned, the said provision as it stood in respect of the AY 1985-86 did not include cess or fee (by whatever name called) and that provision was limited to tax or duty. Secondly, he submitted that while cess may be included in the expression of tax used in a generic and general sense as a part of overall taxation, it is not to be construed as a tax at least for the purpose of Section 43B as it stood at the relevant time. He further placed reliance on a Supreme Court decision in the case of Dewan Chand Builders and Contractors v. Union of India where the Supreme Court recognized the clear distinction between a cess and a tax. He further argued and attempted to distinguish one by one all the decisions cited by the DR.

B. Disallowance of refundable deposit u/s 43B

The assessee manufactured and marketed cement under the provisions of the Cement Control Order, 1982 under which prices were fixed. A retention price for freight was permitted under the Order of F.O.R. destination sales and the manufacturer was also permitted to include packing charges, excise duty, etc. in the price. The question whether sales tax could be levied on packing charges and freight was pending decision of the Supreme Court in the case of State of Tamil Nadu v. Ramco Cement Distribution Company (P) Ltd. Since the question had not been determined finally, the assessee informed its non-governmental buyers that they were compelled to provide for sales tax liability on freight and packing charges and thereby collected a deposit for this purpose from the said buyers. During the relevant previous year, the assessee collected security deposit towards possible levy of sales tax on freight and packing charges respectively. These amounts were included in the balance sheet of the company as security deposits to cover the possible levy of sales tax on freight element and packing charges in cement sale. Each invoice of the assessee in respect of its cement sales carried a footnote that security deposit towards possible levy of sales tax on packing charges and freight was refundable in the event of the levy of sales tax on packing charges and freight being ultimately held to be not justified.

The AO treated the said amount as a trading receipt and held that no deduction u/s 43B was allowable to the assessee inasmuch as the said amount had not been paid to the Government as tax. The AO therefore added the said amount to the assessable income of the assessee. The CIT(A)confirmed the AO's order, but was over turned by the Tribunal. The Tribunal concluded that the contingency deposits were collected on refundable basis and were also separately ledgerised in the assessee's account and the buyers were treated as depositors. In such circumstances, the said cannot be considered as collection of sales tax to be disallowed u/s 43B.

Having heard the parties, the High Court held that,

A. Disallowance of cess and cess charges u/s 43B

Retrospective or prospective

+ we shall first examine the issue as to whether the amendment introduced by the Finance Act, 1988 in Section 43B(a) of the said Act was clarificatory in nature or not. We have already noticed the argument of the counsel for the revenue based on the Budget Speech of the Finance Minister (1983-84) to indicate the purpose behind the introduction of Section 43B by virtue of the Finance Act, 1983. We have also set out the relevant portion of the memorandum explaining the provisions in the Finance Bill, 1988. There is no doubt that in that memorandum the expression used is that “as a matter of clarification” the Bill provides that cess or fee by whatever name called, which have been imposed by any statutory authority including a local authority, would also be allowed as a deduction only if they were actually paid. This would tend to give an impression that the amendment, whereby cess and fees were specifically included in Section 43B(a), was clarificatory in nature. However, that is put to rest by the concluding portion of paragraph 35 of the said memorandum which makes it clear that the amendment would take effect from 01.04.1989 and would accordingly apply to assessment year 1989-90 and subsequent years. Clearly, the intent was not to make the amendment retrospective;

+ on going through the above extract, we find that it contains three very important words – “substitute”, “new” and “extend”. These words indicate that the intention was to substitute the existing clause (a) of Section 43B by a “new” clause with the object of “extending” the scope of the section so as to cover any cess or fee by whatever name called. From this, it can be deduced that the amendment was by way of substitution and in order to extend the scope of the original section which, as it originally stood, did not cover cess or fee. Therefore, this is also an indication, that the amendment introduced in Section 43B(a) so as to extend its application to cess or fee, by whatever name called, was not clarificatory as suggested by the counsel for the revenue. The Notes on Clauses also indicated that the amendments would take effect from 01.04.1989 and would accordingly apply in relation to the assessment year 1989-90 and subsequent years. We may also refer to the Board Circular No.528 dated 16.12.1988 which was issued by the Central Board of Direct Taxes explaining the substance of the provisions relating to direct taxes in the Finance Act, 1988. Here, too, in paragraph 21.4, there is clear indication that the amendments would come into force with effect from 01.04.1989 and would apply in relation to assessment year 1989-90 and subsequent years;

Cess is same as tax

+ this takes us to the consideration of the issue as to whether cess is the same thing as a tax and that even though the word “cess” was not used in Section 43B(a) as it originally stood, it always included cess inasmuch as tax was covered in the said provision. We find ourselves in agreement with the submission made by Mr Mehta that the decision of the Supreme Court in India Cement Ltd. would not be of any help to the Revenue inasmuch as the issue there was entirely different. The focus in that decision was not on whether a cess was a tax or not but whether levy of cess on royalty was within the competence of the State Legislature;

+ we must also keep in mind that the Supreme Court was interpreting the Constitution as distinct from interpreting a provision of a statute. That there is a different approach in interpreting the Constitution and while interpreting a provision of an Act, is recognized by the Supreme Court in India Cement Ltd. itself. So, even if in a particular case, while interpreting the Constitution, the Supreme Court may have regarded cess to be generally a part of taxation, it does not mean that cess would be part of a tax when the said word i.e., ‘tax' is used in an Act such as the Income Tax Act which needs to be construed strictly. For this reason also, we feel that the Supreme Court decision in India Cement Ltd. would not be of any use to the revenue;

+ we must also keep in mind the decision of the Supreme Court in Om Prakash Agarwal where the three principle characteristics of tax, as recognized in Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt,

+ but, in the present case, the cess and cess surcharge do not fall within the characteristics of a tax. As pointed out in Dewan Chand Builders and Contractors, in the case of a cess there exists a reasonable nexus between the payer of a cess and the services rendered. In Dewan Chand Builders and Contractors, the Supreme Court had relied on Hingir Rampur Coal Co. Ltd. v. State of Orissa wherein it was recognized that there was really no generic difference between a tax and a fee inasmuch as both are compulsory exactions of money by public authority. However, where a tax was imposed for public purposes and need not be supported by any consideration of service rendered in return, a fee was levied essentially for services rendered and as such there was an element of quid pro quo between the person who pays the fee and the public authority which imposes it;

+ from the above it is apparent that the proceeds of the local cess are to be credited in distinct shares to the Panchayat Union (Education) Fund, the Town Panchayat Fund, the Village Panchayat Fund and the Panchayat Union Council Fund. It is apparent that the cess collected under the said Tamil Nadu Panchayats Act, 1958 does not become part of the consolidated fund but becomes part of the special funds under the Tamil Nadu Panchayats Act, 1958. Thus, an essential feature of a tax is nonexistent in the case of a cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958;

B. Disallowance of refundable deposit u/s 43B

+ but the facts of the present case are different. Here, the deposits that were received by the respondent/assessee were neither collected “as sales tax” nor were they collected “by way of tax”. They were simple deposits towards possible levy of sales tax on packing charges and freight. The footnote of each invoice specifically mentioned that the security deposit towards possible levy of sales tax on packing charges and freight was refundable in the event of the levy of sales tax on packing charges and freight being ultimately held to be not justified;

+ this takes us to consider the decision of a Constitution Bench of the Supreme Court in Mysore Spinning and Manufacturing Co. Ltd. In the context of the provisions of Section 11 of the Mysore Sales Tax Act, 1948, the question arose whether amounts received from purchasers by a registered dealer merely as deposits to be refunded to purchasers if the sales were held not liable to tax could be regarded as “collection by way of tax”. In that case, the assessee, a registered dealer, received certain amounts from its constituents merely by way of deposits on the express understanding or undertaking that the monies would be refunded to the constituents if the assessee was held not liable to include the relevant sales in its taxable turnover. The assessee held the amounts as a mere custodian. The Supreme Court held that the fact that fiscal control of the said amounts passed from the depositors to the assessee did not render the receipt a “collection by way of tax” of any amount in the context of Section 11(2) of the Mysore Sales Tax Act, 1948;

+ from the above, it is apparent that a deposit of the kind in the present case cannot be regarded as either a collection ‘by way of tax' or ‘as sales tax'. That being the position, the said deposits, to the extent of Rs.26,10,483/-, cannot be treated as trading receipts. The tribunal has correctly held that the decision of the Supreme Court in Mysore Spinning and Manufacturing Co. Ltd. would be applicable and those in Chowringhee Sales Bureau P. Ltd. Sinclair Murray and Co. Pvt. Ltd. are distinguishable and not applicable to the facts of the present case. Consequently, question No.2 is answered in the affirmative, in favour of the assessee and against the revenue.

(See 2013-TIOL-584 -HC- DEL -IT)