Judgment about Employees Contributions - in case of Checkmate (SC) – need reconsideration – part 1

[DEV KUMAR KOTHARI]

Judgment about Employees Contributions - in case of Checkmate (SC) – need reconsideration – part 1

Section 2.24.x – employees contribution – judgment of honorable Supreme Court  in case of Checkmate Services P. Ltd – Vital points missed by Counsels / judges hence  need reconsideration part 1.

Judgment under study:

CHECKMATE SERVICES P. LTD. VERSUS COMMISSIONER OF INCOME TAX-1 - 2022 (10) TMI 617 - SUPREME COURT

Earlier judgment not correctly applied:

COMMISSIONER OF INCOME TAX VERSUS M/S. ALOM EXTRUSIONS LIMITED - 2009 (11) TMI 27 - SUPREME COURT

Judgment about majority views , not referred and not applied:

COMMISSIONER OF INCOME-TAX VERSUS PJ CHEMICALS LIMITED (AND OTHER APPEALS) - 1994 (9) TMI 1 - SUPREME COURT

Alom Extrusions (supra.)

The  judgment in case of Alom Extrusion  was not correctly presented and / or  applied:

On reading of the judgment and numbering various cases mentioned therein we find that the judgment dealt with 18 appeals as follows:

COMMISSIONER OF INCOME TAX VERSUS M/S. ALOM EXTRUSIONS LIMITED - 2009 (11) TMI 27 - SUPREME COURT

    With

1.  Civil Appeal No.7770/2009 @ S.L.P. (C) No.17835/2008,

2. Civil Appeal No.7765/2009 @ S.L.P. (C) No.28521/2008,

3. Civil Appeal No.7769/2009 @ S.L.P. (C) No.6844/2008, Civil

4. Appeal No.7767/2009 @ S.L.P. (C) No.9589/2008, Civil

5. Appeal No.7756/2009 @ S.L.P. (C) No.9590/2008, Civil

6. Appeal No.7766/2009 @ S.L.P. (C) No.9591/2008, Civil

7. Appeal No.7763/2009 @ S.L.P. (C) No.14363/2008, Civil

8. Appeal No.7764/2009 @ S.L.P. (C) No.17840/2008, Civil

9. Appeal No.7758/2009 @ S.L.P. (C) No.20012/2009, Civil

10.Appeal No.7762/2009 @ S.L.P. (C) No.1344/2009, Civil

11 .Appeal No.7755/2009 @ S.L.P. (C) No.20581/2008, Civil

12. Appeal No.7757/2009 @ S.L.P. (C) No.18380/2009, Civil

13. Appeal No.7760/2009 @ S.L.P. (C) No.3759/2009, Civil

14. Appeal No.7754/2009 @ S.L.P. (C) No.21067/2009, Civil

15. Appeal No.7759/2009 @ S.L.P. (C) No.25174/2009, Civil

16. Appeal No.7768/2009 @ S.L.P. (C) No.30587/2008 and Civil

17. Appeal No.7761/2009 @ S.L.P. (C) No.1476/2009.

Above serial numbers added by author thus   total cases 1 +17 = 18 were decided. It appears that 16 appeals were preferred by revenue and two appeals were preferred by assessee.

On reading of judgment in case of Alom Extrusions (supra.) we find that Word ‘Employees’ , Section 2 (24) and section 2(24) (x)   appeared  as follows:

"Income" has been defined under Section 2(24) of the Act to include profits and gains. Under Section 2(24)(x), any sum received by the assessee from his employees as contributions to provident fund/superannuation fund or any fund set up under Employees' State Insurance Act, 1948, or any other fund for welfare of such employees constituted income. This is the reason why every assessee(s) [employer(s)] was entitled to deduction even prior to 1st April, 1984, on Merchantile System of Accounting as business expenditure by making provision in his Books of Accounts in that regard. In other words, if an assessee(s)-employer(s) is maintaining his books on Accrual System of Accounting, even after collecting the contribution from his employee(s) and even without remitting the amount to the Regional Provident Fund Commissioner [R.P.F.C.], the assessee(s) would be entitled to deduction as business expense by making a provision to that effect in his Books of Accounts. The same situation arose prior to 1st April, 1984, in the context of assessees collecting sales tax and other indirect taxes from their respective customers and claiming deduction only by making provision in their Books without actually remitting the amount to the exchequer.

Section and S. 36 (1) (va)  appeared  as follows:

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 date 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."

"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 during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36."

Vide Finance Act, 1988, the second proviso came to be inserted. It reads as follows:

"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 during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36."

At this stage, we also quote hereinbelow the Explanation below clause (va) of sub-section (1) of Section 36:

"Explanation.-- For 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."

However, the second proviso stood further amended vide Finance Act, 1989, with effect from 1st April, 1989, which reads as under:

"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 date 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 realised within fifteen days from the due date."

Therefore, it is clear that in case of Alom Extruxions provisions of S.2(24)x) and 36 (1) (va) in relation to employees contributions were specifically considered.

Therefore, with due respect for all concerned  author feels that  the  judgment in case of Alom Extrusion  was not correctly presented and / or  applied.

In case of Checkmate (supra.) the honorable Supreme Court has observed / held as follows:

 Paragraph 45

45. A reading of the judgment in Alom Extrusions, would reveal that this court, did not consider Sections 2(24)(x) and 36(1)(va). Furthermore, the separate provisions in Section 36(1) for employers’ contribution and employees’ contribution, too went unnoticed. ....

Majority views of High Courts:

In case of Checkmate we find the following  submissions  and observations:

11. Reliance was placed upon the judgment in Alom Extrustions to say that this court was alive to the inconvenience caused to the assesses, if the Revenue’s contention was to be accepted that the Finance Act, 2003 was operative prospectively. It was submitted that the ratio and logic in Alom Extrustions was followed by no less than forty High Courts. Examples include the Allahabad High Court in SAGUN FOUNDRY PRIVATE LIMITED VERSUS COMMISSIONER OF INCOME TAX, KANPUR - 2016 (12) TMI 1479 - ALLAHABAD HIGH COURT; the Rajasthan High Court in COMMISSIONER OF INCOME TAX VERSUS M/S. STATE BANK OF BIKANER & JAIPUR AND JAIPUR VIDYUT VITARAN NIGAM LTD. - 2014 (5) TMI 222 - RAJASTHAN HIGH COURT; the Karnataka High Court in M/S ESSAE TERAOKA PVT LTD VERSUS DEPUTY COMMISSIONER OF INCOME-TAX - 2014 (3) TMI 386 - KARNATAKA HIGH COURT; and the Himachal Pradesh High Court in COMMISSIONER OF INCOME TAX, SHIMLA VERSUS M/S NIPSO POLYFABRIKS LTD. - 2012 (11) TMI 592 - HIMACHAL PRADESH HIGH COURT.

12. It was submitted that only the impugned judgments of the Gujarat High Court and Kerala High Court in COMMISSIONER OF INCOME-TAX VERSUS MERCHEM LTD. - 2010 (1) TMI 949 - KERALA HIGH COURT have taken a different view and distinguished Alom Extrusions. It was submitted that views of the Gujarat and Kerela High Court were incorrect....

Per author:

As discussed from the judgment in case of Alom Extrusions we find that S. 2(24)  and  S. 2(24) (x) , employees contributions,  amendment relating to deposits of employees contributions etc. were specifically mentioned and considered.

It may be that the substantial question of law involved therein was not related to these provisions,  or employees contributions, but fact  remain that these were specifically mentioned and  considered in case of Alom Extrusions.

Majority views of High Courts  is preferable in tax matters

As was informed to honorable Supreme Court in case of Check mate, 40 High Courts have applied decision in case of Alom Extrusions and decided issue in favor of assessee. And that only 2 High Courts have distinguished it and decided against assessee.

At this stage author recalled memory and read several judgments about majority issues adopted by Courts. The observations and judgment  of honorable Supreme Court in the following case is directly on this issue:

From judgment in case of  PJ CHEMICALS LIMITED (AND OTHER APPEALS) supra

On a consideration of the matter the view that commends itself as acceptable is the one which has commended itself to the majority of the High Courts. It is, of course, not the numerical strength that prevails--though the fact that a particular view has commended itself to a majority of the High Courts in the country is a matter for consideration--but the tensile strength of the acceptable logic in those decisions. It is aptly said that "a judge who announces a decision must be able to demonstrate that he began from recognized legal principles and reasoned in an intellectually coherent and politically neutral way to his result". In the present case the reasoning underlying, and implicit in, the conclusion reached by the majority of the High Courts cannot be said to be an unreasonable view and on a preponderance of preferability that view commends itself particularly in the context of a taxing statute. The expression "actual cost" needs to be interpreted liberally. The subsidy of the nature we are concerned with, does not partake of the incidents which attract the conditions for their deductibility from "actual cost".

The Government subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the "actual cost". We should prefer the reasoning of the majority of the High Courts to the one found acceptable by the High Court of Punjab and Haryana.

In the result, we affirm the judgments of the High Courts which have answered the question against the Revenue and dismiss the first batch of appeals and allow the second batch preferred by the assessee and in reversal of the opinion of the High Court, answer the question referred against the Revenue.

Per author:

As discussed from the judgment in case of Alom Extrusions we find that S. 2(24)  and  S. 2(24) (x) , employees contributions,  amendment relating to deposits of employees contributions etc. were specifically mentioned and considered.

It may be that the substantial question of law involved therein was not related to these provisions,  or employees contributions, but fact  remain that these were specifically mentioned and  considered in case of Alom Extrusions.

Majority views of High Courts  is preferable in tax matters as was decided long ago by the Supreme Court  case of P.J.Chemicals (supra.)

Therefore, there appears  necessity for reconsideration of  observations in paragraph 45, in  case of Checkmate relating to  employees contributions and also judgment bcause:

a.  We find that in all  cases Tribunals  initially decided issue in favor of assessee

b. most of High Courts decided in favor of assessee.

3. Two  High Courts who did not apply Alom Extrusions SC did not apply majority view of High Courts and in a way did not apply rules laid down in case of  PJ Chemicals (SC) .

4. Honorable Supreme Court in case of Checkmate did not apply and follow rule laid down in case of PJ Chemicals (SC)  about preferability of majority views adopted by High Courts