I.T.A Nos. 1088 of 2006 connected with I.T.A Nos. 37, 2849 and 2902 of 2005 and 51, 542, 560, 1087 and 1199 of 2006
Decided on July 3, 2007
The Judgment of the Court was delivered by
Gopala Gowda, J.:— These appeals are filed by the Revenue questioning the impugned orders passed by the Income-tax Appellate Tribunal in Appeal No. I.T.A 1713.Bang./2005, dated March 17, 2006, framing the following substantial questions of law.
“1. Whether the Tribunal was correct in holding that the contributions made by the assessee to PF and ESI are allowable deduction even though it is made beyond the stipulated period as contemplated under the mandatory provisions of section 36(1)(va) read with section 2(24)(x) and section 43B of the Act as the same was paid by the asses-see on or before the due date for furnishing the return of income as per section 139(1) of the Act?
2. Whether the Tribunal was correct in holding that the amendment to section 43B of the Act which had been introduced by the Finance Act, 2003, with effect from April 1, 2004, should be read retrospectively and should be understood as if section 43B would not be applicable to the assessee in the light of the judgment of the apex court in Allied Motors (P) Ltd. v. Commissioner Of Income Tax, Delhi, [1997] 224 ITR 677 ?”
2. We have extracted the substantial questions of law only in one appeal, viz., I.T.A No. 1088/2006 since other appeals are connected. Learned counsel Sri M.V Seshachala appearing for the appellants, has called in question the orders passed by the Appellate Tribunal by placing reliance upon the mandatory provision of section 36(1)(va) read with section 2(24)(x), and section 43B(b) of the Income-tax Act, he has contended that the contributions should have been made within the specified date by the assessee to avail of the relief of deduction from gross income. In support of his contention he has also placed reliance upon the decision of the apex court reported in [1997] 224 ITR 677 in the case of Allied Motors (P) Ltd. v. Commissioner Of Income Tax, Delhi, paragraph 60 of the said decision reads thus (page 682)
“60. 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 income-tax 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.”
(emphasis1 made by this court)
3. Regarding section 43B, it is further held in the said decision as follows (page 682):
“Section 43B was, therefore, clearly aimed at curbing the activities of those taxpayers, who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident fund, etc., for long periods of time but claimed deductions in that regard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year. It was to stop this mischief that section 43B was inserted. It was clearly not realised that the language in which section 43B was worded would cause hardship to those taxpayers who had paid sales tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This was because the sales tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales tax had in fact been paid by the assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence, the first proviso was inserted in section 43B. The amendment which was made by the Finance Act of 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.”
4. In the light of the above decision he submitted that the employer's contribution payable by the assessee towards PF or superannuation fund or gratuity fund or any other fund for the welfare of the employees, though they are liable for deduction under section 36(1)(va) read with section 2(24)(x) of the Act, the same can be claimed deduction by the assessee only if the contribution is paid within the due date for claiming exemption under the aforesaid provisions of the Act. He has also placed reliance upon various Division Bench judgments of different High Courts, viz., Calcutta, Madras, Kerala and Rajasthan High Courts in support of the aforesaid legal submissions to contend that in these cases the respondents/assessees who are the employers were/are statutorily liable to pay PF contribution to its employees under the provisions of the Provident Funds Act, the same were not paid by them within the due date payable under the provisions of the Act. Therefore, it has been held by the Assessing Officer that they are not entitled to claim deduction under the provision of section 43B clause (b) for the amount of contributions payable by them under section 36(1)(va) read with section 2(24)(x) of the Act. With reference to the said decisions, he requests this court to answer the above substantial questions of law framed by this court in favour of the Revenue by setting aside the impugned orders passed by the Appellate Tribunal in the Appeals filed by the assessees.
5. On behalf of the assessee/respondents, learned counsel Sri Partha-sarathy, Dr. R.B Krishna, Smt. Nitya, have sought to justify the orders passed by the Appellate Tribunal by placing strong reliance upon the above provisions of the Act and the decision of the apex court in Allied Motors P. Ltd., [1997] 224 ITR 677.
6. Learned counsel for the respondents Sri Parthasarathy has made the submissions placing strong reliance upon the provision of section 36(1)(va) and section 43B(b).
7. In support of their contention, learned counsel has invited our attention to the judgment of the apex court in the case of Allied Motors (P) Ltd. v. Commissioner Of Income Tax, Delhi reported in [1997] 224 ITR 677 particularly with reference to the proviso of section 43B clause (b) at paragraph 60 extracted from the Finance Bill of 1983. He invited our attention to the provision in the Finance Bill of 1983 which reads thus (page 682):
“59. Under the Income-tax 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 out go 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 Income-tax 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.”
8. Learned counsel for the respondents have submitted that the object and intendment of insertion of section 43B, by way of amendment to the Act by the Finance Act with effect from April 1, 1984, stipulates, notwithstanding anything contained in the provisions of the Income-tax Act a deduction is allowable in respect of any sum payable by the assessee as an employer by way of contribution towards PF or other funds referred to under clause (b) of section 43B of the Act. He submitted that section 43B was inserted to the Act to curb the practice of non-payment of undisputed statutory liabilities by the assessees for the welfare of employees. Further, he has contended, reliance placed by learned counsel for the Revenue upon the decisions of various High Courts were all rendered prior to amendment of section 43B before deletion of the second proviso to the above provision by the Finance Act, 2003, with effect from April 1, 2004. He also placed strong reliance upon the deletion of clauses of alphabetical letters referred to in the first proviso to the above provision such as clause (a) or (c) or (d) or (e) or (f). Learned counsel Sri Parthasarathy, appearing for the respondents in some of the appeals, has also placed reliance upon another decision of the Supreme Court reported in [2002] 257 ITR 338, General Finance Co. v. CIT (Asst.) in support of his legal contention that the word “removed” or “omitted” occurring in the statutory provision of the first proviso to section 43B of the Act are omitted by way of amendment. The “omission” is different from “repeal” as held by the Constitution Benches of the Supreme Court of India in the cases reported in Rayala Corporation P. Ltd. v. Director of Enforcement, (1969) 2 SCC 412 : AIR 1970 SC 494 and Kolhapur Canesugar Works Ltd. v. Union of India, (2000) 2 SCC 536 : AIR 2000 SC 811 and the Act will not apply to omission of a provision but only to repeal. Therefore, he contends that the removal of letter (a) or (c) or (d) or (e) or (f) which was numbered as sub-clauses occurred in the first proviso to section 43B of the Act were not there from the date of the Income-tax Act has come into force as the above clauses were omitted by way of amendment in the first proviso.
9. Learned counsel Dr. R.B Krishna, appearing for some of the respondents in the connected appeals has strongly placed strong reliance upon the provisions of section 43B wherein it provides certain deductions as provided under clause (b) should 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. Therefore, the legal submissions made on behalf of the Revenue to satisfy the statutory liability of payment of PF amount under the provisions of the statutory enactment of the Provident Funds Act need not be paid within the due date for claiming deduction of that amount in the returns submitted by the respondents in these appeals. Therefore, the submission made by learned counsel for the Revenue is wholly untenable in law and the substantial questions of law as framed do not arise in these appeals, therefore the same has to be answered against the Revenue.
10. The above submissions of learned counsel for the assessee in these appeals is adopted by the other learned counsel for the assessees in the connected appeals.
11. After hearing learned counsel for the parties, we have carefully examined the above statutory provisions of the Act including the definition of sections 2(24)(x) and section 36(1)(va) and 436(b), which read thus:
“2.(24) ‘income’ includes,—…
(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees.”
“36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—….
(va) any sum received by the assessee from any of his employees to which the provisions sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date.
Explanation.—Fur the purposes of this clause, ‘due date’ means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.”
12. This clause is inserted by the Finance Act with effect from April 1, 1988. The Explanation to this clause is read very carefully. “Due date” has been explained stating that: means the date by which the assessee is required as an employer to credit contribution to the employees' account in the relevant fund under any Act, rule or order or notification issued thereunder or under any standing order, award, contract of service or otherwise.” Prior to the above clause was inserted to section 36 giving statutory deductions of payment of tax under the provisions of the Act, section 43B(b) was inserted by the Finance Act, 1983, which came into force with effect from April 1, 1984. Therefore, again the provision of section 43B(b) clearly provides that notwithstanding anything contained in the other provisions of the Act including section 36(1) clause (va) of the Act, even prior to the insertion of that clause the assessee is entitled to get statutory benefit of deduction of payment of tax from the Revenue. If that provision is read along with the first proviso of the said section which was inserted by the Finance Act, 1987, which came into effect from April 1, 1988, the letters numbered as clause (a), or clause (c) or clause (d) or clause (e) or clause (f) are omitted from the above proviso and therefore deduction towards the employees contribution paid can be claimed by the assessee. The Explanation to clause (va) of section 36(1) of the Income-tax Act further makes it very clear that the amount actually paid by the assessee on or before the due date applicable in this case at the time of submitting returns of income under section 139 of the Act to the Revenue in respect of the previous year can be claimed by the assessees for deduction out of their gross income. The above said statutory provisions of the Income-tax Act abundantly makes it clear that, the contention urged on behalf of the Revenue that deduction from out of gross income for payment of tax at the time of submission of returns under section 139 is permissible only if the statutory liability of payment of provident fund or other contribution funds referred to in clause (b) are paid within the due date under the respective statutory enactments by the assessees as contended by learned counsel for the Revenue is not tenable in law and therefore the same cannot be accepted by us.
13. Learned counsel Sri Parthasarathy and D??? Krishna appearing for the respondents, also drew our attention to the deletion of the second proviso to section 43B of the Income-tax Act by the Finance Act, 2003, which provision has come into force, with effect from April 1, 2004. The reliance placed upon the decision of the apex court in Allied Motors (P) Ltd. v. Commissioner Of Income Tax, Delhi, [1997] 224 ITR 677 and also on the decision in General Finance Co. v. CIT (Asst.), [2002] 257 ITR 338 (SC) in respect of applicability of section 43B(b) and also omission of clause (a) or (c) or (d) or (e) or (f) referred to above occurred in the first proviso to section 43B, supports the case of the assessees and also relevant paragraphs extracted from Allied Motor's case, [1997] 224 ITR 677 and paragraph 59 referred to supra in this judgment from the Finance Bill with all fours supports the case of the assessee/respondents. Therefore, we have to answer the substantial question of law No. 1 framed by this court in these appeals at the instance of the Revenue against them, viz., in the negative. Accordingly, we answer the substantial question No. 1 framed in these appeals in the negative.
14. As regards the second question framed in I.T.A No. 560/2006, learned counsel Sri M.V Seshachala, fairly submitted that the same is answered by this court in the case of CIT v. Bharat Earth Movers Ltd. reported in [2004] 268 ITR 232 against the Revenue. Hence, in this case also the second question is answered against the Revenue. In the result, all appeals are dismissed.
15. The Revenue is directed to accept the payment of ESI and PF contributions paid by the assessees and give the deductions of that amount in favour of the respondents/assessees as claimed by them in their returns.