Disallowance u/s. 40A(9) for Statutory Corporations cannot be made as their Service Regulations have ‘force of law’ – ITAT Pune

ITAT PUNE

Appeal No.

S.No.	ITA No	Asst. Year
1.	382/PN/07	2003- 04
2.	794/PN/07	2004- 05
3.	1 372/PN/07	2005- 06

Decided on – 23.08.2011

ORDER

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.

3. We shall first deal with the appeal of the assessee for the assessment year 2005-06. The substantive controversy in the captioned appeals relates to the allowability of the contribution amounting to Rs 16,77,170/- made by the assessee to MSWC Karmachari Welfare Fund in terms of the provisions of section 40A(9) of the Act. As per the Revenue, such contribution is hit by the provisions of section 40A(9) of the Act, which read as under:“40A(9):No deduction shall be allowed in respect of any sum paid y the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (10 of section 36, or as required by or under any other law for the time being in force.”

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 dis allowance envisaged under section 40A(9) of the Act. In order to appreciate the case set up by the assessee, the following discussion is relevant.

5. The appellant before us is a Corporation established by the State Government in exercise of the powers conferred by section 28 of the Agricultural Produce (Development and Warehousing) Corporation Act, 1956 (28 of 1956). It is a statutory body wholly controlled and managed by the Government. The appellant Corporation contributed a sum of Rs 16,77,170/- during the assessment year 2005-06 to a Karmachari Welfare Fund and the said Trust was spending the contributions exclusively for the welfare of the employees of the Corporation and their family members. It is stated that all the office bearers of the said Trust are out of the employees of the appellant Corporation and the disbursements are in terms of the scheme formulated by the Trust. As per the appellant, since it is a State Government undertaking under the control of Co­operation and Rural Development Department of the Government of Maharashtra, the contribution in question is in accordance with the directive issued by the Government of Maharashtra and therefore, the contributions carry an obligation of law and, as such, are covered by the exceptions provided in section 40A(9) of the Act.

6. Before us, learned Counsel for the assessee has vehemently pointed out that the contribution has been made in terms of the Board Resolution and the understanding with the Karmachari Welfare Fund which is backed by the standing approval given by the Co-operation and Rural Development Department, Government of Maharashtra. It has been pointed out that such contributions have been paid out by the assessee Corporation for a number of years in the past. It is pointed out that the payments are governed by the Maharashtra State Warehousing Corporation (Staff) Service Regulations, which are created with the previous sanction of the Government of Maharashtra, a copy of such Service Regulations has been placed on record. It was submitted that such regulations which govern the terms and conditions of service including pay, allowances and other benefits of the employees, carry a statutory force and therefore any payment made by the appellant in terms of the said Regulations fall within the meaning of the words, “as required by or under any other law for the time being in force” appearing in section 40A(9) of the Act, and thus the impugned amount is covered by the exceptions to section 40A(9) of the Act.

  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 dis allowance envisaged in section 40A(9) of the Act is subject to certain exceptions. As per the said exceptions, no dis allowance 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 judgement of the Honourable 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 Honourable 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 Honourable 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 judgement of the Honourable 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 provide, 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.”

11. The Honourable Supreme Court held that the regulations framed by the Corporations, being framed under the statutory provisions would have the force of law. The Honourable Supreme Court further went on to hold that there was no distinction on principle between a person directly under the employment of the Government and a person under the employment of an agency or instrumentality of the Government or a Corporation, set up under a statute or incorporated but wholly owned by the Government.

12. In the background of the legal position explained by the Honourable Supreme Court, in our view, the 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 dis allowable in terms of section 40A(9) of the Act.

13. As a result thereof, the order of the Commissioner of Income-tax (Appeals) is set aside and the Assessing Officer is directed to delete the impugned addition.

14. In the other two appeals pertaining to the assessment year 2002-03 and 2003-04, the issue involved is similar relating to the contribution made by the assessee to the MSW Karmachari Welfare Fund. The only exception is that while filing the return of income the assessee suo motu disallowed the sum subject to a Note attached thereon whereby the dis allowance u/s 40A(9) was sought to be assailed. The Commissioner of Income-tax (Appeals) has held that since the assessee has made a dis allowance in the return of income suo motu such a claim could not be entertained during assessment proceedings as according to him, the claim could have been raised by the assessee only after making an amendment to the return of income. Even before us, similar objection has been raised by the Revenue and reliance has also been placed on the judgement of the Honourable Supreme Court in the case of Goetze (India) Ltd. v. CIT 284 ITR 323 (SC).

15. The appellant has pointed out that the claim has been raised by way of foot note in the computation statement attached to the Return of income and such a claim was eligible to be entertained following the decision of the Hon’ble Bombay High court in the case of CWT v. Apar Ltd. 267 ITR 705 (Bom).

16. We have carefully considered the rival submissions on this aspect. In our view, the Commissioner of Income-tax (Appeals) was not justified in refusing to entertain the claim of the assessee against the dis allowance under section 40A(9) of the Act. Quite clearly the assessee had filed its return of income wherein dis allowance was made under section 40A(9) qua the impugned amount; so however, a caveat was also appended in the very same return of income contained in the computation statement resisting the dis allowance on a point of law. Quite clearly, it emerges that the dis allowance was made in the return without prejudice to its lawful right to assail the applicability of section 40A(9) qua the impugned amount. This clearly implied that the assessee was denying its liability to be assessed under the Act qua the impugned amount and certainly this invested the assessee with a right to appeal before the Commissioner of Income-tax (Appeals). Therefore, in our view, the Commissioner of Income-tax (Appeals) erred in not entertaining the grievance raised by the assessee. In this context, we may refer to the judgement of the Honourable Delhi High Court in the case of CIT v Bharat General Reinsurance Co. Ltd. 81 ITR 303 (Del) wherein the assessee had included in the return of income certain dividend income and in appeal assessee claimed that the dividend income did not pertain to the stated assessment year and objected to its assessment. As per the Honourable High Court the factum of the assessee itself including the income in the return was of no effect as there was no estoppel against the assessee challenging the validity of taxing such income. The Honourable High Court further went on to hold that merely because the assessee wrongly included the amount in the return in a particular year it would not confer jurisdiction on the Department to tax that income even though legally it was not permissible to do so. To the similar effect is the ratio propounded by the Honourable jurisdictional High Court in the case of Apar Ltd (supra) referred by the learned Counsel before us. Following the aforesaid parity of reasoning, we therefore find no merit in the objection raised by the Revenue. In so far as the reliance placed by the Revenue in the case of Goteze (India) Ltd. (supra) is concerned, the same in our view does not help the Revenue in the present case. In the said case it had been opined that a claim cannot be made without filing a return of income. In this case, factually speaking the assessee filed a return staking a claim by way of a Note in the Computation statement. Therefore, it is not a case where the claim is otiose of the return of income. Therefore, the ratio of the judgement of the Honourable Supreme Court in the case of Goteze (I) Ltd. (supra) is inapplicable in the present case.

17. Since it was a common point between the parties that the facts and circumstances of the dispute in the assessment years 2003-04 and 2004-05 stand on a similar footing as has been considered by us for assessment year 2005-06, therefore, our decision given therein applies mutatis mutandis to the assessment years 2003-04 and 2004-05 also. Resultant, we allow this Ground of appeal of the assessee.

18. For the assessment year 2003-04, the assessee has raised following Additional Ground No. 2:

“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 judgement of the Honourable 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.