Disallowance u/s. 40A(9) for Statutory Corporations cannot be made as their Service Regulations have ‘force of law’ – ITAT Pune
Maharashtra State Warehousing Corporation vs. ACIT (ITAT Pune) – Service Regulations framed by the appellant Corporation for the terms and conditions of employment and services of their employees carry a statutory force. In this context, we have perused the Maharashtra State Staff Warehousing Corporation (Staff) Service Regulations and find that the same have been framed with the previous sanction of the Government of the Maharashtra in exercise of the powers conferred by section 42 of the Warehousing Corporation Act, 1962 (58 of 1962). Therefore, the impugned contribution made by the appellant as an employer towards the Karmachari Welfare Fund falls within the expression ‘as required by or under any other law’ for the purposes of section 40A(9) of the Act. As a consequence, such an amount is not disallowable in terms of section 40A(9) of the Act.
Decided on – 23.08.2011
PER SHRI G. S. PANNU, AM:
Since a common issue is involved in all these three captioned appeals pertaining to same assessee, the appeals were heard together and are being disposed off by way of a consolidated order for the sake of convenience and brevity.
2. The common issue involved in the appeals for the assessment years is with regard to the disallowance under section 40A(9) of the Income-tax Act, 1961 (in short “the Act”) made by the Assessing Officer with respect to the contributions made by the assessee to MSW Karmachari Welfare Fund. The assessee is a Corporation established under the provisions of Agricultural Produce (Development and Warehousing) Corporation Act, 1956 (28 of 1956) and carries on the business of warehousing. The assessee has a total of 17 warehousing centres with a total storage capacity of 1,25,475 metric tones.
4. The provisions of section 40A(9) of the Act prescribe that no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting up or formation of or as a contribution to any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act 1860 or other institutions for any purpose. Undoubtedly, n the present case the assessee has a contribution as an employer to MSWC Karmachari Welfare Fund (hereinafter referred to as ‘Karmachari Welfare Fund’) which is a public charity trust registered under the Bombay Public Trust Act 1950. The object of the said Trust is to provide medical and educational aid to the employees of the assessee corporation including their family members. There is no dispute that, in principle, the contribution by the assessee is covered within the provisions of section 40A(9) of the Act. However, the case set up by the assessee is that such contribution falls in the exceptions provided in section 40A(9) of the Act. The exceptions provided in section 40A(9) of the Act are in relation to the sums paid for the purposes and to the extent provided under clauses (iv) and (v) of section 36(1) or as required by or under any other law for the time being in force. The plea of the assessee is that the stated contribution to the Karmachari Welfare Fund has been made in terms of the law in force and therefore the same should not suffer the disallowance envisaged under section 40A(9) of the Act. In order to appreciate the case set up by the assessee, the following discussion is relevant.
7. In support of his submissions, the learned Counsel has relied upon the following judgments:
(i) AIR 1967 (SC)1989 (V 54 66) Roshanlal v. Union of India;
(ii) (1980) 3 Supreme Court Cases 459 Managing Director, Uttar Pradesh Warehousing Corporation and Anr v. Vijay Narayan Vajpayee; and,
(iii) AIR 1975 SC 131 Sukhdev Singh & Ors v Bhagatram Sardar Singh Raguvansi & Anr. Etc.
8. On the other hand, the learned Departmental Representative, appearing for the Revenue has defended the order of the Commissioner of Income-tax (Appeals) by pointing out that the payment in question is in terms of an agreement/understanding between the Board of Directors and the employees union and the same cannot be said to be “required by or under any other law for the time being in force” for the purposes of section 40A(9) of the Act. According to the learned Departmental Representative, the contribution in question has been made in terms of a contractual obligation and the assessee is not obliged under any law to make such payment so as to fall within the exceptions provided in section 40A(9) of the Act.
9. We have carefully considered the rival submissions. A perusal of section 40A(9), which has been extracted by us elsewhere in the order brings out that it seeks to disallow sums paid by the assessee as an employer to the entities prescribed therein. In the present case, it is not in dispute that the assessee has incurred the expenditure of Rs 16,77,170/- by way of contribution to the Karmachari Welfare Fund, as an employer, and therefore, its deductibility is governed by the provisions of section 40A(9) of the Act. The disallowance envisaged in section 40A(9) of the Act is subject to certain exceptions. As per the said exceptions, no disallowance would be made where such sum is paid: (i) for the purpose and to the extent provided under clauses (iv) or (v) of section 36(1) of the Act; or, (ii) as required by or under any other law for the time being in force. The claim of the assessee is that the contribution to the Karmachari Welfare Fund in question is covered by the second exception provided in section 40A(9) of the Act, as it has been paid as mandated by law.
10. In order to test the efficacy of the assessee’s plea, the moot question to be addressed is as to whether the Regulations in terms of which the payment has been made by the assessee, carry the force of law or not. In this connection, we may refer to the judgment of the Hon’ble Supreme Court in the case of U P Warehousing Corporation (supra) relied upon by the appellant before us. The status of the entity before the Hon’ble Supreme Court was analogous to that of the appellant before us. As has been observed earlier, the appellant is a Corporation established by the State Government in exercise of the powers conferred by sub-sections (1) & (3) of section 28 of the Agricultural Produce (Development & Warehousing) Corporation Act, 1956 (28 of 1956), which was subsequently replaced by Warehousing Corporation Act, 1962 (58 of 1962). The appellant is a statutory body fully controlled and managed by the Government. The entity before the Hon’ble Supreme Court was also a similarly established Corporation, being a statutory body wholly controlled and managed by the State Government of U.P. The Hon’ble Supreme Court referred to its earlier decision in the case of Sukhdev Singh (supra) and addressed the question as to whether the Regulations of such a statutory corporation, providing, inter alia, for the terms and conditions of employment and services of their employees carry a force of law or not. Another allied question was as to whether such statutory corporations are “State” within the meaning of Article 12 of the Constitution. Nevertheless the pertinent question was whether the regulations providing for the terms and conditions of employment and conditions of service have the force of law or not? In this connection, the following portion of the judgment of the Hon’ble Supreme Court is worthy of notice:
“The statutory bodies in that case were :Oil and Natural Gas Commission, Industrial Finance Corporation and Life Insurance Corporation. All the three bodies were created under separate statutes enacted by the Central Legislature. It was clear from the Oil and Natural Gas Commission Act, 1954, that the commission created by it, acts as an agency of the Central Government. Similarly, by virtue of the Industrial Finance Corporation Act, 1948, the Finance Corporation is under the control and management of the Central Government. The Life Insurance Corporation is similarly owned and managed by the government and can be dissolved only by the government in view of the provisions of the Life Insurance Act, 1956. All the three statutes constitution the three statutory corporations enabled them to make regulations which pro0vide, inter alia, for the terms and conditions of employment and services of their employees. Questions arose, (i) whether the regulations have the force of law, and (ii) whether the statutory corporations are ‘State’within the meaning of Article 12 of the Constitution? Ray, C.J., speaking for himself and Chandrachud and Gupta, JJ., held that the regulations framed by these statutory bodies for the purpose of defining the duties, conduct and conditions of its employees have the force of law. The form and content of the contract with a particular employee is prescriptive and statutory. The notable feature is that these statutory bodies have no free hand in framing the conditions and terms of service of their employees. They are bound to apply the terms and conditions as laid down in the regulations. These regulations are not only binding on the authority but also on the public. They give the employees a statutory status and impose obligations on the statutory authorities, who cannot deviate from the conditions of service.”
“It may please be held that in view of the retrospective insertion of Explanation 6 to section 43(6) of the I. T. Act 1961 by the Finance Act 2008, the appellant is entitled to claim depreciation on various assets on the basis of book values of assets as appearing in its Books of account and not on the basis of written down values of various assets as computed by the appellant from time to time in his returns of income and the learned AO may please be directed to compute and grant the depreciation allowance accordingly. The ld AO may please be further directed to allow the depreciation on Warehouses by treating the same as Plant.”
19. The learned Counsel for the assessee requested that the above Additional Ground may be admitted in view of the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Corporation Ltd. v. CIT (229 ITR 383) (SC) as it is a pure question of law and does not involve investigation into fresh facts. The learned Counsel for submitted that in view of the retrospective insertion of Explanation 6 to section 43(6) by the Finance Act, 2008, the assessee is entitled to claim depreciation on various assets on the basis of book values of assets as appearing in its Books of account and that the Assessing Officer may be directed to compute and grant depreciation allowance accordingly. It was further submitted that the Assessing Officer may also be directed to grant depreciation on Warehouses by treating the same as plant. On the other hand, the learned Departmental Representative objected to such admission of Additional Ground of appeal.
20. After hearing both the parties, and in view of the judgment of the Hon’ble Supreme Court in the case of National Thermal Corporation Ltd. (supra), we admit the Additional Ground raised by the assessee for the assessment year 2003-04 as it is a pure question of law and does not involve investigations into new facts and consequently, remit this issue to the file of the Assessing Officer to decide the same after factual appreciation and in accordance with law, after giving the assessee a reasonable opportunity of being heard.
21. In the result, the appeals of the assessee are allowed.
Decision pronounced in the open court on this 23rd day of August, 2011.