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THE COMMISSIONER OF INCOME TAX, COCHIN Versus M/s MERCHEM LIMITED

2015 (9) TMI 560 - KERLA HIGH COURT

Disallowance under Sec.36(1)(va) r/w Sec.2(24)(x) - remittance of employees' contribution to Provident Fund and ESI has been delayed beyond the due date of payment prescribed under the respective Acts - ITAT deleted the addition - Held that:- If the intention of a particular provision of a statute can be gathered from the language used by the legislation, then we are bound to abide by the language used therein in order to ascertain the intention. We are also of the opinion that there was a clear .....

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er legal infirmity in classifying the contributions of employees and employer in the matter of crediting the same to the appropriate statutory authorities.

In that view of the matter, we are of the considered opinion that the view taken by the Tribunal which affirmed the decision of the 1st Appellate Authority that the Respondent was entitled to get deduction of the contributions received from the employees if paid on or before the filing of the return under Sec. 139(1) was not correc .....

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itled to deduction of such amount in computing the income referred to in section 28 if such sum is not credited by the assessee to the employees' account in the relevant fund or funds on or before the due date as per explanation to section 36(1)(va) of the Act - By deleting Second Proviso to section 43B by Finance Act, 2003, it cannot be said that Section 36(1) (va) is amended and/or explanation below clause (va) of sub-section (1) of section 36 is deleted, which is with respect to employees' co .....

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Tribunal has affirmed the order of the C.I.T (Appeals) and deleted an amount of ₹ 34,41,659/- added by the Assessing Officer under Sec.36(1)(va) r/w Sec.2(24)(x). 2. Brief facts necessary for the disposal of this appeal are as follows: Respondent was engaged in the business of manufacture and sale of Rubber Chemicals. It had filed return of income for the assessment year 2010-11, disclosing an income of ₹ 9,92,16,240/-. The return was processed under Sec.143(1) of the Income Tax Act .....

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ns were invited and overruling the objections raised, Assessing Officer disallowed deduction of the aforesaid amounts under Sec.36(1)(va) r/w Sec.2(24)(x) of the Income Tax Act. 3. Aggrieved by the order of the Assessing Officer, Respondent took up the matter before the Appellate Authority, basically contending that the Assessing Officer was not justified in disallowing the expenditure of employees' contribution invoking provisions of Sec.36(1)(va). It was further contended that the ratio of .....

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led for deduction under Sec.43B of the Income Tax Act. Therefore the addition made by the Assessing Officer in that regard was deleted. 4. Aggrieved by the order of the 1st Appellate Authority, Revenue preferred appeal before the Tribunal. Tribunal affirmed the order of the 1st Appellate Authority and held that the date of remittance of the contribution was within the due date for filing the return of income under Sec.139(1) of the Act for the assessment year under consideration. It was further .....

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s of law were raised for consideration: "1. (a) Whether, on the facts and in the circumstances of the case, the assessee whose contribution towards PF/ESI is not in consonance with the provisions of the Explanation to section 36(1)(va) is entitled to claim deduction of the same under Sec.43B of the Income Tax Act? (b) If the answer to the above question is in the negative cannot the Revenue treat the amount as income under Section 2(24)(x) of the Income Tax Act? 2. Is not the order of the T .....

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r/w Sec.2(24)(x), since a specific provision is made for treating the employees contribution towards PF, ESI etc. etc. The learned Senior Counsel has further contended that the Respondent had not credited the sum received towards the employees contribution to the employees' account in the relevant fund on or before the due date prescribed under Explanation to Sec.36(1)(va) and therefore the Respondent shall not be entitled to deduction as such, though they deposited the amount before the du .....

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wn by the Gujarat High Court in 'Commissioner of Income-Tax v. Gujarat State Road Transport Corporation' [(2014) 366 ITR 170 (Guj)]. 7. Learned Senior Counsel for the Revenue has invited our attention to paragraph 7 of the judgment in 'Gujarat State Road Transport Corporation's case' (supra) and contended that the issue involved therein was with respect to the employees contribution to Provident Fund Account, ESI etc. etc. as provided under Sec.36(1)(va) and Explanation 1 of .....

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able and further that aforesaid provisions are different and distinct and were governing different situations with respect to contributions referred supra on account of employer and employee respctively. Therefore, the learned Senior Counsel contended that Sec.43B cannot be made applicable under any circumstances to a situation with respect to Sec.36(1)(va) of the Income Tax Act and in that view of the matter, findings of the Appellate Tribunal that the Respondent was entitled to get deduction f .....

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mendatory and whether it was retrospective or prospective in operation. Therefore, learned Senior Counsel contended that the proposition of law laid down in the said judgment could not be taken to have arrived at a conclusion with regard to the payment of employee's contribution which was provided under Sec.36(1) (va) of the Act. It was also contended that the judgment of the Gujarat High Court cited supra has taken into account the judgment of the Apex Court in 'Alom Extrusions case' .....

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essee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of the ESI Act or any other fund for the welfare of such employees shall be treated as an "income". Section 36 of the Act deals with the deductions in computing the income referred to in section 28 and as per section 36(1)(va) such sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, .....

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Act. Section 43B is with respect to certain deductions only on actual payment. It provides that notwithstanding anything contained in any other provisions of the Act, a deduction otherwise liable under the Act in respect of ...(B) 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 the employees in computing the income referred to in section 28 of that previous year in which such .....

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ble in his case for furnishing 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 and the evidence of such payment is furnished by the assessee along with such return. It also further provided that no deduction shall, in respect of any sum referred to in clause (B), i.e., with respect to the employer's contribution, be allowed unless such sum is actually been paid in cash or by issue of cheque or draft or .....

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ause (b) of section 43B, if any sum towards the employer's contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of the income under sub-section (1) of section 139, the assessee would be entitled to deduction under Sec.43B on actual payment and such deduction would be admissible for the accounting year. However, it .....

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is required to be confined to Section 43B alone and the deletion of the second proviso to section 43B, vide the amendment pursuant to the Finance Act, 2003, cannot be made applicable with respect to section 36(1)(va) of the Act. Therefore, any sum with respect to the employees' contribution as mentioned in section 36(1)(va), the assessee shall be entitled to the deduction of such sum towards the employees' contribution if the same is deposited in the accounts of the concerned employees a .....

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n 36(1)(va) is not deleted and is still on the statute and is required to be complied with. Merely because with respect to the employer's contribution the second proviso to section 43B which provided that even with respect to the employer's contribution (section 43B(b)), the assessee was required to credit the amount in the relevant fund under the PF Act or any other fund for the welfare of the employees on or before the due date under the relevant Act, is deleted, it cannot be said that .....

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g the condition as mentioned under section 36(1)(va), the assessee shall be entitled to deduction with respect to such employees' contribution. Section 2(24)(x) refers to any sum received by the assessee from his employees as contribution and does not refer to the employer's contribution. Under the circumstances and so long as and with respect to any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies, the a .....

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due date mentioned in the Explanation to section 36(1)(va), the assessee shall not be entitled to deductions of such amount in computing the income referred to in section 28 of the Act." 10. It was further contended that, on a reading of the above extracted portion of the judgment of the Gujarat High Court, it was clear that so far as the amount recovered by assessee towards contribution of the employees to the Provident Fund and ESI are concerned, Sec.36(1)(va) was applicable and if the c .....

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employer's contribution under Sec.43B(b) in the relevant fund for the welfare of the employees on or before the due date under the relevant Act, was deleted, it cannot be said that Sec.36(1)(va) was also amended and/Explanation to Sec.36(1) (va) has been deleted/or amended. 11. Learned Senior Counsel for the Revenue has also invited our attention to the decisions reported in 'Commissioner of Income-Tax v. South India Corporation Ltd. [(2000) 242 ITR 114], 'Commissioner of Income-Tax .....

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r the PF and ESI Acts. 12. Even though the assessment years considered in those judgments were before the Finance Act, 2003 was introduced, these judgments have clearly drawn a distinction between Sec.36(1)(va) and Sec.43B of the Act. In 'South India Corporation Ltd. case' (supra), at page 118 held as follows: "Learned counsel for the assessee submitted that if payment is permissible to be made with damages after a prescribed period, the same is not unauthorised payment and in view .....

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f the assessee credits the amount to the employee's account in the relevant fund on or before the date by which he is legally or contractually required to do so. The right to deduction would be lost even if the sum is credited after the due date. It cannot be an indefinite date left to the choice of the assessee. It is to be noted that under the main provision of section 43B of the Act, the payments made during the currency of the financial year relevant to the assessment year qualify for de .....

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e is nothing repugnant between the main provision and the proviso. They operate in different situations. The view of the Tribunal that payment having been made before the close of the financial year, qualifies for deduction is indefensible." 13. On the contrary learned counsel for the Respondent contended that the Respondent was paying the salary and wages during the second week of every month and in the case of contribution towards PF and ESI, the amount would become due for payment within .....

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dent can claim deduction under the head subject to the condition that the outstanding statutory payments as shown in the balance as at the end of the relevant previous year were made within the time permitted under Sec.139(1) as prescribed under Sec.43B of the Income Tax Act. 14. Learned counsel for the Respondent, further contended that since Sec.43B takes in both employee's as well as employer's contribution, even if statutory deductions are made by the Respondent during the relevant d .....

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nsequent to the deletion of the second proviso to Sec.43B of the Act with effect from 01.04.2004 by the Finance Act, 2003, which stipulated that contributions to the Provident Fund and ESI should be made within the time mentioned under Sec.36(1)(va), was retrospective from 01.04.1989 as held in 'Alom Extrusions' (supra) and that the PF and ESI contribution received from the employees were remitted before the due date for filing of return under Sec.139 of the Income Tax Act, there shall n .....

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pex Court held that the Finance Act, 2003 will operate retrospectively with effect from 01.04.1988 when the first proviso stood inserted, the Respondent was entitled to get deduction for the contributions of the employees received since the same were paid before the filing of the return under Sec.139(1) of the Act. Learned counsel has invited our attention to paragraph 10 of the judgment and contended that even though in the decision cited supra, the Hon'ble Apex Court was considering the qu .....

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d our attention to 'Commissioner of Income Tax v. AIMIL Ltd. & Ors.' [(2010) 321 ITR 508 (Del.)], 'Commissioner of Income-Tax v. State Bank of Bikaner & Jaipur' [(2014) 363 ITR 70 (Rajasthan)], Essae Teraoka (P) Ltd. v. Deputy Commissioner of Income Tax' [(2014) 366 ITR 408 (Karn.), 'Commissioner of Income-Tax v. South India Corporation Ltd.' [(2000) 242 ITR 114 (Ker.], 'Commissioner of Income Tax v. Ghatge Patil Transports Ltd.' [(2014) 368 ITR 749 (B .....

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tracted. "36. Other deductions.-(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- x x x x x x x x x x x x x x (va) any sum received by the assessee from any of his employees to which the provisions of 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 da .....

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deduction otherwise allowable under this Act in respect of- x x x x x x (b) 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 the employees, or x x x x x x x x x x x x shall 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) only in computing the income .....

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with such return." 18. On a reading of Sec.36(1)(va), what we find is that any sum received by the assessee from his employees to which the provisions of sub-clause (x) of clause (24) of Sec.2 apply was credited by the assessee to the employees' Account in the relevant Fund or Funds on or before the due date prescribed under Explanation 1 to Sec.36(1)(va), is entitled to deduction. According to us, it thus means that Sec.36(1)(va) takes care of contribution received on account of the e .....

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nce Act, 1948 (34 of 1948), or any other fund for the welfare of such employees." 19. Therefore, income of the assessee includes any sum received by the assessee from his employee as contribution to any Provident Fund or superannuation fund or funds 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. According to us, on a reading of Sec.36(1)(va) along with Sec.2(24)(x), it is categoric and clear that .....

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ec.36(1)(va) of the Act. According to us, so far as Sec.43B (b) is concerned, it takes care of only the contribution payable by the employer/assessee to the respective fund. Therefore, in that circumstances, Sec.36(1) (va) and Sec.43B(b) operate in different fields i.e. the former takes care of employee's contribution and the latter employer's contribution. The assessee was entitled to get the benefit of deduction under Sec.43B(b) as provided under the proviso thereto only with regard to .....

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such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return." Further, in Explanation 1 to Sec.43B also, the phraseology used persuade us to think that Sec.43B can be applied to the contribution payable by the assessee as an employer, which reads thus: " x x x x x x x For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed .....

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ent has admittedly not paid the deduction so made within the due date as provided under Sec.36(1)(va), the Respondent was not entitled to get deduction of the amounts deducted thereunder for and on behalf of the employees. 20. In view of the reliance placed by various High Courts in 'Alom Extrusions' (supra), to arrive at a conclusion that the assessees therein were liable to pay both the employees as well as employer's contribution on or before filing of return under Sec.139(1) only .....

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rospectively with effect from 1st April, 1988?". 21. Therefore, the question that was considered in Alom Extrusions' case' was whether omission of second proviso to Sec.43B of the Income Tax Act by the Finance Act, 2003, operated with effect from 1st April, 2004 or retrospectively with effect from 1st April, 1988. Therefore, the question raised in this appeal has nothing to do with the question considered in the said decision. It is true that Sec.2 (24)(x) as well as Sec.36(1)(va) w .....

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credited on or before the due date given in the Provident Fund Act. However, the second proviso once again created further difficulties. In many of the companies, financial year ended on 31st March, which did not coincide with the accounting period of R.P.F.C. For example, in many case, the time to make contribution to R.P.F.C. ended after due date for filing of returns. Therefore, the industry once again made representation to the Ministry of Finance and, taking cognizance of this difficulty, .....

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nuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force w.e.f. 1st April, 2004. x x x x x x x x x x x x x x x x" 22. Therefore, on a reading of the afore-extracted portion of the judgment, it is clear that the Apex Court had considered only the question relating to the effect of the amendment so made and found that amendment was curative in nature and therefore that it operated retrospectively from 1st April, 1988. 23 .....

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ocial welfare legislations by delaying payment of contributions to the welfare funds. It was also held that consequent to the implementation problems of the second proviso to Sec.43B resulted in 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 and therefore the Finance Act, 2003 which was made applicable by the Parliament only with effect from 1st April, 2004 woul .....

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ntion of the learned counsel for the assessee that since Sec.43B commences with a non-obstante clause, Sec.36(1) (va) stood excluded, cannot be sustained. According to us, the findings of the Apex Court towards the latter part of paragraph 15 makes the intention and purpose behind the amendment brought about to Sec.43B clear and it reads thus: "15. x x x x x x x x x x x x x x Accordingly, we hold that Finance Act, 2003, will operate retrospectively w.e.f. 1st April, 1988 (when the first pro .....

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e 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 under Sec.43B 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 .....

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"We should find out the intention from the language used by the legislature and if strict literal construction leads to an absurd result, i.e. a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these .....

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bed under the relevant statutes. Then again the learned counsel contended that on a reading of Sec.43B(b), any sum "payable by the assessee as an employer" by way of contribution to any provident fund meant payment of both employees contribution and employer's contribution, by the employer and therefore the assessee was entitled to pay both contributions together on or before the filing of the return under Sec.139(1) of the Act. We are unable to accept the said contention advanced .....

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, respectively. 27. So far as the decisions cited by the learned counsel for the assessee referred to in paragraph 15 of this judgment were concerned, it is true that in the said judgments, the High Courts were considering the question of remittance of the contributions received from the employee as well as the employer and held that the contributions received from the employee were also liable to be paid to the respective statutory authorities under the PF and ESI Act on or before the filing of .....

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ld not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morris in 'Harrington v. British Railways Board'. Circumstantial flexibility, one addit .....

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ed towards contribution of the employee was money belonging to the employee and the assessee was not entitled to utilise the said fund and enrich himself. So also, both the provisions supra will co-exist harmoniously without disturbing each other. Therefore, the distinction drawn to credit the amount of the employer and the employee was with a clear objective and there is no illegality or other legal infirmity in classifying the contributions of employees and employer in the matter of crediting .....

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