Delhi High Court

Addl. Cit vs Vestas Rrb India Ltd. on 28 May, 2004

Equivalent citations: 2005 92 ITD 2 Delhi

ORDER

B.R. Jain, A.M.

This appeal by the revenue against the order dated 297-2000 of learned CIT (A)-XIV, New Delhi raises the following grounds :

"1. On the facts and in the circumstances of the case, the learned CIT (A) has erred in holding that no disallowance could be made under section 43B in respect of late deposit of employers contribution to PF and simultaneously no addition could be made under section 2(24)(x) in respect of late deposit of employees contribution to PF although such deposits are required to be made within the due date as per the provisions of section 43B read with section 36(1)(va) of the Income Tax Act, 1961.

2. On the facts and in the circumstances of the case, the learned CIT (A) has erred in holding that the due date for deposit of PF is 20th (including 5 days grace period) of the following month in which salary is actually paid to the employees instead of 15th of the following month for which such salary is payable.

3. On the facts and in the circumstances of the case, the learned CIT (A) has erred in holding that out of sum entertainment expenditure amounting to Rs. 7,79,073 the assessed is entitled to deduct 25% of such expenditure incurred on staff members particularly when the assessed has failed to give the details of employees which requires examination as per Boards Circular No. 706 dated 18-7-1995.

4. The order of the assessing officer may be restored and the order of learned CIT(A) may be set aside with respect to the above mentioned grounds."

2. Ground Nos. 1 & 2 relate to deduction under section 43B read with section 36(1)(va) of the Income Tax Act, 1961 in respect of late deposit of employees contribution to PF and as well as late deposit of employers contribution.

3. Briefly the facts are that for the months of April 1996, December 1996 and March 1997 the employees contribution and employers contribution was deposited on the dates as under :

Month

Employees contribution

Employers contribution

Date of deposit

April, 1996

53,354

60,681

24-5-1996

December, 1996

51,646

58,824

21-1-1997

March, 1997

50,676

56,553

20-4-1997

1,55,676

1,76,058

4. The assessing officer required the assessed to explain as to why these payments made after the due date should not be disallowed under section 43B of the Act. The assesseds plea that due to financial crisis payment could not be made and delay may be condoned was not accepted as the assessing officer was of the view that for non-compliance of mandatory provisions as contained in section 43B and section 36(1)(va) of the Act, the deposit having not been made within the time specified, have to be disallowed.

5. The learned CIT (A), however, observed that due date for the purpose is within 15 days from the close of every month. The month is not defined under the scheme. It can mean either the month for which the salary is payable or the month in which the salary is actually paid. There being ambiguity benefit of doubt can be given to the assessed. He, therefore, held that the month to be taken is the month in which the salary has actually been paid and any payment up to 15th of that month following the month in which the salary was to be paid will have to be allowed. The Tribunals decision in Fluid Area India Ltd. v. Dy. CIT (1997) 63 ITD 182 (Bom) and Madras Radiators & Pressing Ltd. v. Dy. CIT (1996) 59 ITD 515 (Mad) were followed.

6. The learned CIT (A) was also of the view that PF Scheme, 1952 allowed five days grace period to the employer for payment of contribution to the fund where the employers have failed to pay within 15 days but have paid within 20 days, the deduction is allowable. Reliance was placed on the Bangalore Bench decision in Hunsur Plywood Works Ltd. v. Dy. CIT (1995) 54 ITD 394 (Bang). In view of this, he came to the conclusion that the payments have been made in time and directed the assessing officer to delete the addition.

7. The learned Departmental Representative contends that the learned CIT (A) was not justified in making the payment of salary as the basis for working out the delay. The Honble Madras High Court in the case of CIT v. Madras Radiators & Pressing Ltd. (2003) 264 ITR 620 (Mad) has already reversed the judgment of the Tribunal by holding that the Tribunal was not right in law in reckoning the date of payment (viz.,) 7th of the succeeding month as the date from which the due date of payment to the Government. The deduction has to be made with reference to the earning and the employee has to remit both the contributions to PF within 15 days from the close of the month for which the employees earned their salary i.e., salary payable.

8. On the other hand, the assesseds counsel contends that there is ambiguity in the provision of Act for which benefit should be allowed to him and in that light the decision taken by the learned CIT (A) cannot be disturbed.

9. We have heard the parties with reference to material on record and precedents referred. Essentially after the decision of Madras Radiators & Pressing Ltd. (supra) the decision taken by the Madras Bench of the Tribunal could not make the basis for allowing deduction. In the respondents case all the payments had been made prior to the due date specified for filing of the return of income. The payment for the month of March 1997 for Rs. 50,676 on account of employees contribution and Rs. 56,553 on account of employers contribution stood paid on 20-4-1997. In view of the Provident Fund Scheme, 1952 five days of grace period have to be allowed to employer for making contribution to the PF. The learned CIT (A) followed the decision in Hunsur Plywood Works Ltd. (supra) of Bangalore Bench of the Tribunal. The Honble Madras High Court in CIT v. Salem Co-operative Spg. Mills Ltd. (2002) 258 ITR 360 (Mad) has also taken a view by upholding that the amounts paid within the grace period Provided under the relevant statute were required to be deducted while computing the taxable income of the assessed. A similar view has also been expressed by the Honble Rajasthan High Court in CIT v. Shiv Dayal Radhey Shyam (2003) 259 ITR 147 (Raj) by observing that first proviso to section 43B of the Act inserted by the Finance Act, 1987 is retrospective and if the sales tax had been paid after the due date but during the grace period allowed under the Sales Tax Act that does not attract provisions of section 43B of the Act. In the appellants case the payments for the months of April 1996 and December 1996 have been made even after the grace period had expired. However, the proviso clause to section 43B stands amended by the Finance Act, 2003. Prior to the amendment of section 43B, the two provisos of section 43B read as under :

"Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (a) or clause (c) or clause (d) or clause (e) or clause (f), which is actually paid by the assessed 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 aforesaid and the evidence of such payment is furnished by the assessed along with such return.

Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due dates as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realized within fifteen days from the due date."

10. From the bare reading of the above it is revealed that the first proviso deals about. the allowance of certain expenditure on the payment basis. Whereas the second proviso restricts the deduction in respect of any sum payable by the assessed 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, unless it has been paid within the specified due date.

11. The Finance Act, 2003 has deleted the second proviso and amended the first proviso by the Finance Act, 2003 with effect from assessment year 2004-05 to be read as under :

"Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessed on or before 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 aforesaid and the evidence of such payment is furnished by the assessed along with such return."

12. This has an affect of deleting the specified clauses as mentioned in the first proviso. This also had the effect of bringing existing clause (b) at par in terms of allowability of expenses. Now as per the present provisions of section 43B the payment made by the employer towards contribution of PF, ESI, Gratuity, Superannuation and other welfare funds (hereinafter called employees welfare payments) are allowable if the same are paid before filing the return of income and necessary evidence of such payment is enclosed with the return of income. In other words now no disallowance of such payment would be made even if the same are made beyond the due dates prescribed in section 36(1)(va) (hereinafter called due date).

This amendment has been made to remove the hardship caused at present by the total disallowance of the amount paid for the welfare of employees, if the same had been paid after the due date. The amendment being curative in nature, would have a retrospective application. The Supreme Court approved this principal in respect of first proviso of section 43B itself in the case of Allied Motors (P) Ltd. v. CIT (1997) 224 ITR 677 (SC) by stating at page 687 as under :

"As observed by G.P. Singh in his principles of statutory interpretation, 4th Edn. Page 291, "It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended" in fact the amendment would not serve its object in such a situation, unless it is construed as retrospective."

Initially the first proviso was inserted in section 43B by the Finance Act, 1987 with effect from 1-4-1988. However, the assesseds contention was that since the proviso was inserted to remove the hardship, the same had retrospective operation and should be deemed to come into force from 1-4-1984 i.e. the date from which section 43B was inserted. This stood accepted in Allied Motors (P) Ltd.s case (supra). We have also come across a similar situation and therefore the principal approved by the Apex Court would also apply with equal force to the amended proviso, so as to have retrospective application of the amendment brought by Finance Act, 2003. Again in CIT v. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC) at page 652 Their Lordships quoted with approval the following extract from Justice G.P. Singh book as under :

"It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended."

13. We also feel it as our onerous duty to deal as to how the amendment is curative. In this regard we may point out that one of the rules of interpretation is to give due regard to the legislative history and background that led to the enactment of the section. This principle was laid down by Their Lordships of the Supreme Court in the case of Imperial Chit Funds (P) Ltd. v. Income Tax Officer (1996) 219 ITR 498 (SC).

14. In this background, a look to the Finance Bill 2003, paras 137 to 144 of the Finance Minister Budget Speech at 260 ITR (St) 26, 27, will show that the Finance Minister has pointed out to the setting up of the Task Force on Direct-Indirect taxes under the Chairmanship of Dr. Vijay Kelkar and gave due acknowledgement to the work of the Task Force as per para 140 of the Bill. Further in para 143 the Finance Minister has stated that the basic philosophy as laid down by these reports is sound. There is need to eventually move away from an exemption and discretion based system to a different, more current order. That is the ideal that the Task Force, particularly in respect of direct taxes have suggested. The Finance Minister in his speech also stated that the ideal presented by the task force is difficult to achieve in one leap. Finance Minister suggested that the suggestions of the Task Force be implemented in the gradual manner and in phases. In para 144 the Finance Minister has further stated that most of the suggestions made by the Task Force to eliminate procedural complexities, reduce paper work, simplify tax administration and to enhance efficiency, also integrate such tax proposals as the system can, at present absorb.

15. In a further paragraph the Finance Minister proposed the whole basket of reforms in tax administration based on Kelkar Committees report. For ready reference the Budget Speech at para 151 is reproduced below :

"In the area of tax administration, Government has initiated a whole basket of reforms, mainly on the basis of the recommendations of the Kelkar Committee. Some of the principal ones are :

(a) outstanding of non core activities of Income tax department, namely allotment of PAN and creation of data bank of high value transactions through tax information network.

(b) Immediate abolition of present discretion based system for selection of returns for scrutiny, this will be placed by a computer generated intelligent, random selection of only 2% of the returns, annually.

(c) Expanding the scope of taxpayer services, including extension of interactive voice response system to more cities and software for preparation of returns.

(d) Direct crediting of all refund to the bank account of the taxpayer, through electronic clearance system, but obviously only if the taxpayer furnishes a bank account number.

(e) Reduce the compliance cost to the taxpayer, through halving the number of forms presently used in furnishing of applications, returns etc. for the purposes of tax deduction and tax collection at source, from the present 42 to just 22. Honble Members if in only one attempt I could halve this headache, please reflect upon the immense possibilities that lie on this route.

(f) Immediate introduction of a one page only return from the individual taxpayers, having income from salary, house property and interest etc. This has already been devised and will come into operation from April 1, onwards.

(g) The Income Tax Act is being amended to enable electronic filing of returns.

(h) Abolition of tax clearance certificates currently needed by a person leaving India, or any person submitting a tender for a Government contract. Henceforth only expatriates who come to India in connection with business, profession or employment would have to furnish a guarantee from their employer, etc. in respect of the tax payable before they leave India. An Indian citizen, before leaving India, will only have to give his/her permanent account number, and the period of his/her intended visit abroad to the emigration authorities; and

(i) Simplifying the procedure and methods employed during the search and seizure and during survey by the Income Tax Department. First, hereafter stocks found during the course of a search and seizure operation will not be seized under any circumstances. Second, no confession shall be obtained during such search and seizure operations. Third, no survey operation will be authorized by an officer below the rank of Joint Commissioner of Income Tax. Finally books of account impounded during the survey will not be retained beyond then days, without the prior approval of the Chief Commissioner."

Besides the above a number of changes were made in the Income Tax Act based on the Kelkar Committees report as under :

1. Reintroduction to exemption from tax on Dividend income in the hands of shareholder.

2. Scrapping of Chapter XIV-B i.e., special provision relating to assessment of undisclosed income.

3. Amendment in section 36(1)(iii) inserting a proviso providing that interest paid on capital expenditure shall not be allowable.

4. Amendment in section 275 of the Income Tax Act providing that the penalties shall be levied after disposal of appeal by CIT(A)s and no wait shall be made of ITAT order.

5. No seizure of stock found during search and survey.

6. No statement to be extracted from assessed during search of surrender.

7. Removal of total disallowance of late payment of labour welfare payments.

16. The last item i.e., removal of total disallowance of late payment of labour welfare payments is in dispute before us. Final report of Kelkar Committee has been published in 126 Taxman (St) 1. Relevant extract at para 5.7 of the report at page No. 122 in this regard is reproduced as under so as to show that the amendment was made to do away the hardship caused by the total disallowance :

"The treatment of statutory liabilities.

In terms of the provisions of section 43B of the Income Tax Act, deduction for statutory payments relating to labour, taxes and state and public financial institutions are allowed as deductions, if they are paid during the financial year. However, under the provisions payment of taxes and interest to state and public financial institution are deemed to have been paid during the financial year even if they are paid by the due date of filing of return. Further if the liability is discharged in the subsequent year after the due date of filing of return, the payment is allowed as a deduction in the subsequent year. In the case of statutory payment relating to labour, the deduction for the payment is disallowed if such payment is made any time after the last date for payment of the labour related liability. Trade and industry across the country represented that the delayed payment of statutory liability related to labour should be accorded the same treatment as delayed payment of taxes and interest i.e., they should be allowed in the year of payment.

Since the objective of the proviso is to ensure that a taxpayer does not avail of any statutory liability without actually making a payment for the same, we are of the view that these objectives would be served if the deduction for the statutory liability relating to labour are allowed in the year of payment. The complete disallowance of such payments is too harsh a punishment for delayed payments. Therefore, we recommend that the deduction for delayed payment of statutory liability relating to labour should be allowed in the year of payment like delayed taxes and interest.

Since the amendment in proviso clause have been done to remove the hardship being caused due to total disallowance, the amendment becomes curative so as to be construed retrospectively.

17. There is also another angle to look at the problem. In case the amendment is not accepted to be operative retrospectively, then the amendment so brought into statute by the Finance Act 2003 would produce inequitable and illogical results. For instance in case of assesseds where there has been delay in labour welfare payments by a few days after the due date the same attracts total disallowance. However, in the case of an assessed who did not make payment and persisted with the default and deposits said amounts after 1-4-2004 he shall be eligible to the benefit of deduction after the date of amendment. This gives a premium on a persistent default vis a vis the small default. According to the rules of interpretation construction should be preferred to the literal construction. A reference to this is found in Apex Court decision in the following cases :

1. CIT v. AH. Gotla (1985) 156 ITR 3231 (SC)

2. Goodyear India Ltd. v. State of Haryana (1991) 188 ITR 402 (SC).

18. In J.H. Gotla's case (supra) the court in unequivocal words has stated as under :

"Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction."

19. Respectfully following this rule of equitable construction, the appellant would be eligible to deduction for all such payments which stand paid before the due date of filing of return.

20. In ground No. 3 the revenue challenges the deduction of 25% allowed from entertainment expenditure amounting to Rs. 7,79,073 on account of participation of staff members.

21. We have heard the parties with reference to material on record. The learned Departmental Representative did not point out any error in the order of learned CIT(A). The learned CIT (A) however followed the decision of the jurisdictional High Court in CIT v. Expo Machinery Ltd. (1991) 190 ITR 576 (Del). The Honble High Court upheld the decision of the Tribunal and in that case wherein the discharge of their official duty the employees of a company had their food along with the companys customers in a hotel, they take food while at work because it is their duty to entertain the customers of the company. Therefore, any expenditure incurred on the food and beverages of the employees without discharging their duty to entertain the customers of the company is to be excluded from the purview of section 37(2A) of the Act. The learned CIT(A) only estimated an amount of 25% as amount attributable towards the employees participation. The same is reasonable. No interference is considered necessary in the decision taken by him. This ground of the revenue also stands rejected.

22. In the result, the revenues appeal stands dismissed.