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Total Number of Subscribers: 1635 |
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Date: 10th March 2010 |
Compiled by: M Sathya Kumar |
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Introduction: With
a view to prevent assessees from claiming deduction in respect of statutory liabilities,
etc. even when they are disputed and not paid to appropriate authority, S.
43B was introduced w.e.f. A.Y. 1984-85. The provision, effectively, provides
that deduction in respect of items specified therein will be allowed only on
the basis of actual payment. Though originally the provision was introduced
to cover statutory liabilities within its ambit, subsequently, the scope
thereof is widened from time to time to include within its net bonus and
commission payment to employees as well as interest payable to financial
institutions, etc. Lastly, to nullify the effect of the judgment of the Apex
Court in the case of Bharat Earth Movers Ltd. (245 ITR 428), even the
employers’ liability in respect of provision for leave salary has also
been brought within its ambit. Unfortunately, at the initial state, the
provisions are introduced in the Income-tax Act (the Act) for a specific
purpose (many times justifiable) and then, the scope thereof gets widened to
unrelated items even if the judiciary explains the correct effects of the
provisions originally introduced. S. 43B is a classic example of this nature. Large
number of litigations were found on the effect of provision of S. 43B and
finally, an attempt was made to carry out some rationalisation in the provision
by the Finance Act, 1987, which introduced the first ‘proviso’ to
S.43B w.e.f. A.Y. 1988-89 (hereinafter referred to as the said
‘proviso’). This is inserted with a view to provide deduction of
statutory dues, etc. at the end of the previous year if, they are actually
paid by the assessee on or before the ‘due date’ applicable in
his case for furnishing the return of income u/s.139(1) (hereinafter referred
to as ‘due date’) in respect of previous year in which the
liability to pay such dues was incurred with certain further conditions with
which we are not concerned in this write-up. Accordingly, with this
rationalisation, such amount of outstanding at the year end and paid by the
relevant ‘due date’ became eligible for deduction under the said
‘proviso’, which was made effective from 1-4-1988. However, this
‘proviso’, at that time, did not apply to items covered
(contribution to P.F., etc.) under clause (b) of S. 43B, under which the
conditions for allowing deductions were most stringent. In the context of
this ‘proviso’, the Apex Court in the case of Allied Motors (P)
Ltd. (224 ITR 677) took the view that though the ‘proviso’ is
introduced by the Finance Act, 1987 w.e.f. 1-4-1988, the same will apply
retrospectively and the benefit thereof will be available even in respect of
the assessment year prior to A.Y. 1988-89. The effect of this judgment was
considered in this column in the May, 1997 issue of the Journal. Presently,
S. 43B covers various items listed in clauses (a) to (f). Till the amendment was
made by the Finance Act, 2003 (w.e.f. 1-4-2004), the said
‘proviso’ was applicable to all the clauses of S. 43B except
clause (b) of S. 43B. Contribution to employees welfare fund (such as P.F.,
etc.) was governed by 2nd proviso to S. 43B, under which the payment thereof
was required to be made by the due date under the relevant law, rule, etc. in
the manner provided in the said 2nd proviso. S.
43B(b) covers the employers’ contribution to any Provident Fund (P.F.)
or Superannuation Fund or Gratuity Fund or any other fund for the welfare of
the employees (hereinafter referred to as contribution to employees welfare
fund). As stated in The
issue was under debate as to whether the amendment of 2003 will apply to the
assessment years prior to A.Y. 2004-05 as the amendment was expressly made
effective from 1-4-2004. After this amendment, various Benches of the
Tribunal started taking a view that the amendment is clarificatory in nature
and is applicable retrospectively even to assessment years prior to A.Y.
2004-05. For this, reliance was being placed on the judgment of the Apex
Court in the case of Allied Motors (P) Ltd. referred to in Para 1.2 above.
Subsequently, the Apex Court in the case of Vinay Cement Ltd. (213 CTR 268)
dismissed the SLP filed by the Department against the judgment of the Gauhati
High Court in the case of George Williamson (Assam) Ltd. (284 ITR 619) in a
case dealing with the assessment year prior to A.Y. 2004-05, by stating that
the assessee will be entitled to claim the benefit in S. 43B for that period
particularly in view of the fact that he has made the contribution to P.F.
before filing of the return. Many of the High Courts also took similar view
that the amendment of 2003 is clarificatory in nature and is applicable to
assessment years prior to A.Y. 2004-05 [Ref. : 297 ITR 320 (Del.), 313
ITR 144 (Mad.), 313 ITR 161 (Del.), 213 CTR 269 (Kar.) etc.]. However, the
Bombay High Court in the case of Pamwi Tissues Limited (313 ITR 137) took a
view that the said amendment of 2003 is applicable only from the A.Y.
2004-05. This was followed by the Bombay High Court in other cases also.
Therefore, the debate continued and the assessees within the jurisdiction of
the Bombay High Court were suffering the disallowance for the prior years in
such cases. Recently,
the CIT v. Pamwi Tissues Limited, 313 ITR 137
(Bom.) : The
issue referred to in "The
substantial question of law which arises in the present appeal is regarding
the correct interpretation of S. 43B, S. 2(24)(x) read with S. 36(1)(va) and
as to the claim of deductions as claimed by the assessee in respect of the
PF, EPF and ESIC contributions especially in the facts and circumstances of
the case and in law." On
behalf of the Revenue, it was contended that insofar as the provident fund
dues are concerned, the amendment is made applicable from the A.Y. 2004-05.
In the earlier years, the employers’ contribution to P.F., if not paid
within the due date under the relevant law, was not eligible for deduction.
For this, reliance was placed on the judgment of the Bombay High Court in the
case of Godavari (Mannar) Sahakari Sakhar Karkhana Ltd. (298 ITR 149). On
behalf of the assessee, attention was drawn to the judgment of Gauhati High
Court in the case of George Williamson (Assam) Limited (supra) to
contend that while considering the same issues for the A.Y. 1992-93, the
issue was decided in favour of the assessee following the earlier judgments
of the same High Court in other cases. It was further pointed out that the
Revenue preferred Special Leave Petition (SLP) in the Supreme Court in the
case reported as Vinay Cement Limited and the SLP was dismissed.
Consequently, the said judgment of the Gauhati High Court in the case of
George Williamson ( After
considering the contentions of both the sides, the High Court decided the
issue against the assessee and allowed the appeal filed by the Revenue with
the following observations [Page 139] : "In
our opinion, the dismissal of the special leave petition as held in CIT v.
Vinay Cement Ltd., (2009) 313 ITR (St.) 1 cannot be said to be the law
decided. In State of Orissa v. M. D. Illyas, (2006) 1 SCC 275, the
Supreme Court has held that a decision is a precedent on its own facts and
that for a judgment to be a precedent it must contain the three basis
postulates. A finding of material facts, direct and inferential. An
inferential finding of fact is the inference which the Judge draws from the
direct or perceptible facts; (ii) statements of the principles of law
applicable to the legal problems disclosed by the facts; and (iii) judgment
based on the individual effect of the above." In
view of the above judgment of the Bombay High Court, the view also prevailed
that the said amendment of 2003 is prospective and applicable only from the
A.Y. 2004-05. CIT v. Alom Extrusions Limited, 2009 TIOL 125 SC
IT : The
issue referred to in Para 1.5 above came up for consideration before the Apex
Court in a batch of civil appeals with the lead matter in the case of Alom
Extrusion Ltd. For the purpose of deciding the issue, the Court noted the
first and the second provisos prior to the amendment of 2003 and the said
‘proviso’ (the first proviso) after such amendment. For
the purpose of deciding the issue, the Court considered the scheme of the Act
and the historical background and the object of introduction of the
provisions of S. 43B. The Court also referred to the earlier amendments made
in 1988 with introduction of the first and second provisos. The Court also
noted further amendment made in 1989 in the second proviso dealing with the
items covered in S. 43B(b) (i.e., contribution to employees welfare
funds). After considering the same, the Court stated that it becomes clear
that prior to the amendment of 2003, the employer was entitled to deduction
only if the contribution stands credited on or before the due date given in
the Provident Fund Act on account of second proviso to S. 43B. This created
further difficulties and as a result of representations made by the industry,
the amendment of 2003 was carried out which deleted the second proviso and
also made first proviso applicable to contribution to employees welfare funds
referred to in S. 43B(b). On
behalf of the Department, it was, inter alia, contended that even
between 1988 and 2004, the Parliament had maintained a clear dichotomy
between tax, duty, etc. on one hand and contribution to employees welfare
funds on the other. This dichotomy continued up to 1st April, 2004 and hence,
the Parliament consciously kept that dichotomy alive up to that date by
making the amendment of 2003 effective from 1-4-2004. Accordingly, the
amendment of 2003 should be read as amendatory and not as curative. Disagreeing
with the argument of the Department, the Court stated that there is no merit
in the appeals filed by the Department for various reasons such as :
originally S. 43B was introduced from 1-4-1984 with certain objectives and
the conditions thereof were relaxed in 1988 in the context of tax, duty and
other items [except for contribution to employees welfare funds covered in S.
43B(b)] to remove the hardships. This relaxation appears to have not been
made applicable to contribution to employees welfare funds for the reason
that the employers should not sit on the collected contributions and deprive
the workmen of the rightful benefits under Social Welfare Legislations by delaying
payment of contribution to welfare funds. The Court then further observed as
under : "However,
as stated above, the second proviso resulted in implementation problems,
which have been mentioned hereinabove, and which resulted in the enactment of
Finance Act, 2003, deleting the second proviso and bringing about uniformity
in the first proviso by equating tax, duty, cess and fee with contributions
to welfare funds. Once this uniformity is brought about in the first proviso,
then, in our view, the Finance Act, 2003, which is made applicable by the
Parliament only with effect from 1st April, 2004, would become curative in
nature, hence, it would apply retrospectively with effect from 1st April,
1988." The
Court then referred to the judgment of the Apex Court in the case of Allied
Motors (P) Ltd. (supra) in which the amendment made by the Finance
Act, 1987 w.e.f. 1-4-1988 (referred to in Para 1.2 above) was held as
retrospective in nature. After considering the said judgment , the Court
finally decided the issue in favour of the assessees and held as under : "Moreover,
the judgment in Allied Motors (P) Limited (supra) is delivered by a
Bench of three learned Judges, which is binding on us. Accordingly, we hold
that the Finance Act, 2003, will operate retrospectively with effect from 1st
April, 1988 [when the first proviso stood inserted]." To
support its conclusion, the Court also drew support from another judgment of
the "Lastly,
we may point out the hardship and the invidious discrimination which would be
caused to the assessee(s) if the contention of the Department is to be
accepted that the Finance Act, 2003, to the above extent, operated
prospectively. Take an example — in the present case, the respondents
have deposited the contributions with the R.P.F.C. after 31st March (end of
accounting year) but before filing of the Returns under the Income-tax Act
and the date of payment falls after the due date under the Employees’
Provident Fund Act, they will be denied deduction for all times. In view of
the second proviso, which stood on the statute book at the relevant time,
each of such assessee(s) would not be entitled to deduction u/s.43-B of the
Act for all times. They would lose the benefit of deduction even in the year
of account in which they pay the contributions to the welfare funds, whereas
a defaulter, who fails to pay the contribution to the welfare fund right up
to 1st April, 2004, and who pays the contribution after 1st April, 2004,
would get the benefit of deduction u/s.43-B of the Act. In our view,
therefore, the Finance Act, 2003, to the extent indicated above, should be
read as retrospective. It would, therefore, operate from 1st April, 1988,
when the first proviso was introduced. It is true that the Parliament has
explicitly stated that the Finance Act, 2003, will operate with effect from
1st April, 2004. However, the matter before us involves the principle of
construction to be placed on the provisions of Finance Act, 2003." Conclusion : In
view of the above judgment of the In
many cases, especially within the jurisdiction of the Bombay High Court, the
assessees have suffered disallowances and the matters are pending. In such
cases, the assessees will be entitled to get the benefits of such deductions. Article
by Kishor Karia Chartered Accountant |
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