Amendment to Section 43B on deduction of contribution for PF, superannuation fund, gratuity fund etc is retrospective

Summary:- Supreme Court in its recent ruling in a batch of cases  (SC) [AIT-2009-450- SC] represented by the lead case of Alom Extrusions Ltd. (Taxpayer) as to whether amendment to Section 43B (Section) of the Indian Tax Law (ITL), enacted with effect from 1 April 2004, is retrospectively applicable. This amendment was introduced to rationalize the tax deduction of the employer’s contribution to provident fund, superannuation fund, gratuity fund and such other funds for the welfare of employees (social security contributions).The SC held that the amendment, being curative in nature, should be construed as retrospectively applicable from 1 April 1988.

Background and facts of the case

• The Section introduced from 1 April 1984, inter alia, stipulates that the following sums shall be allowed as deduction in the tax year of incurrence of the liability or the tax year in which they are actually paid, whichever is later: (1) Tax, duty, cess or fee such as sales tax, excise duty, customs duty etc. (statutory dues) (2) Social security contributions.
• The Section was amended with effect from 1 April 1988 to remove hardships and unintended consequences arising on implementation. As regards statutory dues, a proviso was inserted so that they would be allowed as deduction in the tax year of incurrence of liability if they are paid on or before the due date for filing of income tax return for that year (the first proviso).

• As regards social security contributions, another proviso was inserted from 1 April 1988 so that no deduction shall be allowed if they are not paid on or before the statutory due date prescribed in the relevant social security legislation (the second proviso). The Finance Act, 2003 deleted the second proviso with effect from 1 April 2004 (i.e. tax year 2003-04 onwards) to align the deduction of the social security contributions at par with the statutory dues.

• The Taxpayer, in its assessment relating to a tax year prior to 1 April 2004, took the position that the omission of the second proviso applies retrospectively from 1 April 1988 i.e. the date of insertion of the first proviso, to claim the deduction of the social security contributions.

• The Tax Authority took the position that the second proviso applies prospectively from 1 April 2004, as enacted by the Finance Act, 2003, and disallowed the claim.

• As there were conflicting rulings of various High Courts on the subject, the matter was placed before the SC in a batch of cases filed by the Tax Authority and the taxpayers.

Contentions of the Taxpayer

• The omission of the second proviso, though enacted from 1 April 2004, applies retrospectively from 1 April 1988.

• The legislature amended the Section to bring the deductibility of the social security contributions at par with the statutory dues. The amendment is, therefore, curative in nature for the removal of anomalies and hardships.

Contentions of the Tax Authority

• The legislature has expressly omitted the second proviso with effect from 1 April 2004 and, hence, the amendment is prospective.

• From 1 April 1988 to 1 April 2004, the Section maintained a clear dichotomy between deductibility of the statutory dues and the social security contributions. Thus, the legislative intent is to omit the second proviso, effective from 1 April 2004. The amendment is amendatory and not curative so as to have retrospective effect from 1 April 1988.

Ruling of the SC

The SC held in favor of the Taxpayer, by adopting the following reasons:

• The Section, as originally inserted with effect from 1 April 1984, has the underlying object of allowing the deduction for the statutory dues and the social security contributions on actual payment basis, regardless of the mercantile system of accounting followed by the taxpayers.

• However, post-insertion of the Section, the legislature took cognizance that the tax year may not coincide with the due dates prescribed under the relevant legislations governing the statutory dues or the social security contributions. Hence, the legislature inserted the first proviso, effective from 1 April 1988, to give relief to the taxpayers.

• However, the scope of the first proviso was confined to the statutory dues only. The intention may have been to continue with the disincentive to the taxpayers who default in the payment of the social security contributions.

• Subsequently, the legislature realized that there were implementation problems and hardships faced by the taxpayers on account of the mismatch between the statutory due dates, under the relevant legislations governing the social security contributions, and the date of closure of the tax year. As the second proviso was omitted to resolve this problem, the amendment is curative in nature.

• If the omission of the second proviso is not considered to operate retrospectively f rom 1 April 1988, there would be hardship and invidious discrimination between the taxpayers who belatedly make payments subsequent to and those who have made such belated payments prior to 1 April 2004, as the former would be allowed the deduction whereas the latter would be denied the same.

• Earlier, in the context of the statutory dues, the first proviso was inserted with effect from 1 April 1988 to give similar relaxation for the deduction of the statutory dues. In that context, this Court held, in the case of Allied Motors (P) Ltd.^E1], that the first proviso was curative in nature and applied retrospectively from 1 April 1984. It was held that the first proviso: (1) was inserted to remedy unintended consequences and to make the Section workable.(2) supplied an obvious omission in the Section.(3)is required to be read into the Section to give the Section a reasonable interpretation and, hence, be considered as retrospective in operation, particularly to give effect to the Section as a whole.

• In yet another ruling^E2], this Court held that the legislative intent should be gathered from the language used by the legislature. If strict literal construction leads to a result not intended to be sub served by the object of the legislation, then, another plausible construction should be preferred.

• For the aforesaid reasons, the omission of the second proviso should be construed as curative in nature and retrospective in operation from 1 April 1988.

Comments

This SC ruling is a reiteration of the rule of interpretation of statutes that an amendment to the statute, which is remedial or curative in nature, can be construed as retrospective in its effect from the date of introduction of the pre-amended provision of the statute, though the amendment may have been stated by the legislature to be prospective.

This ruling will put an end to the controversy on the deductibility of the social security contributions which were paid belatedly during the period 1 April 1988 to 1 April 2004.

It needs be noted that this ruling is in the context of tax deduction of the employers’ contribution to the social security schemes which is distinct from the tax deduction of the employees’ contribution to such schemes which are governed by other provisions of the ITL.

[1]  224 ITR 677

[2]  J.H. Gotla, 156 ITR 323

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