Allowability of unfunded actuarial liability for pension in respect of employees payable till death
Brooke Bond India Ltd. Vs. JCIT & Anr. (Calcutta High Court) – Tribunal was justified in law in not allowing the sum of Rs.1,43,35,000/- which represents the liability on account of pension on the basis of the resolution of the Board payable to the employee till their death. Whether, the liability on account of pension on the basis of the provisions made should be allowed for the period till the death of the employees or all liabilities should be limited for the period of accounting year relevant to this assessment year.
IN THE HIGH COURT AT CALCUTTA
ITA 139 of 1999
Brooke Bond India Ltd.
Joint Commissioner of Income Tax & Anr.
For the Appellant: Dr. D. Pal, Mrs. Sutapa Roychowdhury, Mr. Somak Basu.
For the Respondent: Mr. M. P. Agarwal.
Heard on: 17.01.2011.
Judgment on: 1st March, 2011.
Coram: The Hon’ble Mr. Justice Bhaskar Bhattacharya And The Hon’ble Mr. Justice Sambuddha Chakrabarti
J U D G M E N T
Bhaskar Bhattacharya, J.:
This appeal under Section 260A of the Income Tax Act, 1961 is at the instance of an assessee and is directed against an order dated 25th March, 1999, passed by the Income Tax Appellate Tribunal, ‘D’ Bench, Calcutta, in ITA No.312 (cal) of 1995, relating to Assessment Year 1989-1990.
This appeal was admitted on the following substantial questions of law formulated by the Division Bench.
i) “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not allowing the sum of Rs.1,43,35,000/- which represents the liability on account of pension on the basis of the resolution of the Board payable to the employee till their death?”
ii) “Whether, on the facts and in the circumstances of the case, the liability on account of pension on the basis of the provisions made should be allowed for the period till the death of the employees or all liabilities should be limited for the period of accounting year relevant to this assessment year?”
The following facts are not in dispute:
a) The assessee claimed deduction of Rs.1,43,35,000/- on account of unfunded actuarial liability for pension in respect of certain categories of employees. There is no dispute that the assessee maintained its account on mercantile basis. It is also admitted that out of the aforesaid amount claimed as actuarial liability of pension under the aforesaid Head, the amount actually paid was to the extent of Rs.23,04,228/- only and the same was included under the Head as Staff Welfare Expenses.
b) The Assessing Authority disallowed the aforesaid claim of deduction by passing the following order:
“The assessee has debited a sum of Rs.15,50,000 in respect of Death Pension which is included under the head “Staff Welfare Expenses”. It has been held by the CIT, WB-II in his order under Section 263 of the Income Tax Act for Asstt. Years 1981-82 to 1983- 84 that the amount of death pension is not admissible. On the same ground the claim made by the assessee in this year is also being disallowed.”
c) On appeal, the Commissioner of Income Tax (Appeal) observed that on the basis of the resolution of the Board of Directors of the assessee-company certain payments on account of pension were to be made on actuarial basis the assessee worked out the liability to be Rs.1,43,35,000/-, however, the actual liability for that year amounted to Rs.23,04,228/- only which was paid. Thus the aforesaid claim was refused.
d) Before the learned Tribunal below it was contended on behalf of the assessee that consequent upon the decision of the company to grant pension to the executives of the company, to the persons who, retired prior to introduction of the pension scheme, and were not in receipt of any pension, the liability had arisen and crystalised during the year under the reference and since the company was following the mercantile system of accounting, and as the liability in respect of such pension arose and crystallized during the said year, the company was entitled to claim deduction of such pension liability determined on actuarial basis in the relevant previous year in which such liability arose.
e) The learned Tribunal below, however, overruled the aforesaid claim of the assessee and dismissed the appeal.
Being dissatisfied, the assessee has come up with the present appeal. Dr. Pal, the learned senior counsel appearing on behalf of the assessee, has strenuously contended before us that his client having maintained its account on mercantile basis, is entitled to the deduction of the entire amount which accrued during the year as liability for the purpose of the said pension notwithstanding the fact that his client had actually paid a lesser amount. In support of such contention, Dr. Pal has relied upon the following decisions:
2. Commissioner of Income-Tax, West Bengal-II vs. National Insurance Co. of India, reported in 127 ITR 54 (Cal);
3. Calcutta Co. Ltd. vs. Commissioner of Income-Tax, West Bengal reported in (1959) 37 ITR 1 (SC).
4. Commissioner of Income tax vs. Bharat Petroleum Corporation Ltd reported in (2001) 116 Taxman 775(Bom).
5. Keshav Mills Ltd. vs. Commissioner of Income tax reported in (1953) 23 ITR 230 (SC).
6. E. D. Seassoon & Company Ltd and others vs. Commissioner of Income tax reported in (1954) 26 ITR 27 (SC).
7. Metal Box Company of India Ltd vs. Their workmen reported in (1969) 73 ITR 53 (SC).
8. CIT vs. Turner Morrison & Co. Ltd. reported in (1978) 114 ITR 629 (CAL).
Mr. Agarwal, the learned advocate appearing on behalf of the Revenue, has, however, opposed the aforesaid contention of Dr. Pal and has contended that in view of the provisions contained in sub-section (9) of Section 40A of the Income-tax Act, 1961 inserted by the Finance Act, 1984 with retrospective effect from April1, 1980, only such deduction should be allowed which exists for the purpose and to the extent provided by or under Clause (iv) or Clause (v) of subsection (1) of Section 36 of the Act or as required by or under any other law for the time being in force. According to Mr. Agarwal, a perusal of the Clauses (iv) and (v) of Section 36(1) referred to in sub-section (9) of Section 40A of the Act would show that the deductions that are to be allowed to an employer are contributions towards a recognized provident fund or an approved superannuation fund or by way of contribution towards approved gratuity fund created by the employer for the exclusive benefit of his employee under an irrevocable trust.
Mr. Agarwal contends that in the case before us, the pension scheme created by the resolution of the Board of Directors is not an approved superannuation fund and as such, the same is not entitled to deduction. In support of such contention, Mr. Agarwal relies upon a Division Bench decision of the Andhra Pradesh High Court in the case of Raasi Cement Ltd. vs. Commissioner of Income-tax (No.1), reported in 275 ITR page 579. In reply to the aforesaid submission, Dr. Pal contended that Section 40A (9) of the Act applies only to the cases covered by Section 36(1) (iv) or (v), but the scheme in question not having fallen within those provisions, his client is entitled to the benefit of the residuary Section 37 of the Act. Therefore, the question that boils down in the present case is whether an employer maintaining account on the basis of mercantile system is entitled to deduction on actuarial basis for discharging any liability on account of unapproved pension scheme.
In order to appreciate the aforesaid question, it would be profitable to refer to the provisions contained in Sections 36 and 40A of the Act which are quoted below:
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—
(iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund;
(v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;
40-A. Expenses or payment not deductible in certain circumstances.—(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.
(9) No deduction shall be allowed in respect of any sum paid by 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 (1) of Section 36 or, as required by or under any other law for the time being in force.
(Emphasis supplied by us).
On a conjoint reading of those two sections of the Act, we find substance in the contention of Mr. Agarwal, the learned counsel appearing on behalf of the Revenue, that the amount of liability alleged to have accrued to the employer towards an unapproved scheme of superannuation fund for the payment to the employees would not be entitled to any deduction and even if it comes with the purview of Section 36, it is further required to comply with the requirement of Section 40A (9) of the Act and as such, we find that the learned Tribunal below rightly turned down the claim of deduction of the appellant.
We are unable to accept the contention of Dr. Pal, the learned Senior Advocate appearing on behalf of the appellant, that a pensionary liability created by a resolution of the Board of Directors of the assessee to be paid to the executives and other employees who had already retired amounts to “expenditure” of the company so as to get the benefit of deduction under the Act even if such liability is of the nature contemplated under Section 36 but not in conformity with the same.
In order to get the benefit of deduction of expenditure, the assessee must bring his case strictly within the purview of either of the provisions of Sections 30 to 36 of the Act or at least within the residuary Section 37 of the Act.
In our opinion, in order to get the benefit of deductible expenditures by creating a liability through a mere resolution of the board of directors which does not fall under any of the Sections 30 to 36 of the Act, such liability must not be of the nature described in Sections 30 to 36 of the Act and at the same time, should not be of the nature of capital expenditure or personal expenses of the assessee as provided in Section 37 of the Act which is quoted below:
“37. General.—(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
1[Explanation.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.]
(2) [* * *]
(2-B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.”
(Emphasis supplied by us).
In the case before us, first, the liability created by the resolution is although not covered by the instances indicated in Section 36, yet, is definitely of the nature of the liabilities mentioned therein and therefore, being of the same nature, it must conform to those provisions in order to get benefit of such deduction. The object of the legislature is to give benefit of deduction of expenditure to those items and to the extent prescribed in Sections 30 to 36 and not to give such deduction to any item, although of those natures but not coming within those sections. In other words, expenditures of the natures mentioned in Sections 30 to 36 of the Act must conform to those provisions in order to get benefit; otherwise, such benefit would be refused. Since it is impossible to conceive of all types of business expenditure, the legislature in its wisdom created a residuary provisions thereby providing the scope of deduction only to those other expenditure which are not of the nature provided in Sections 30 to 36 and at the same time, the same must not also be of the nature of personal expenses or capital expenditure. It is preposterous to suggest that an expenditure of the nature provided in any of the provisions of Sections 30 to 36 of the Act, although not covered by those provisions, would be allowed under the residuary Section. In that event, the purpose of putting various restrictions in Sections 30 to 36 of the Act would become ineffective and an assessee can easily bypass those restrictions by claiming benefit of the residuary Section.
We, therefore, hold that expenditure in the nature of those mentioned in Sections 30 to 36 but actually not coming within their purview or in excess thereof, cannot get the benefit of Section 37 of the Act.
Secondly, a resolution taken by the board of directors can be modified or reversed by a subsequent resolution and for that reason the legislature put various restrictions provided in Section 36 of the Act to be complied with in order to get the benefit of the deduction for expenditure of that nature. By taking aid of an “avoidable” promise, an assessee cannot claim the benefit of the expenditure in the nature of those provided in Section 36 of the Act and that too, without complying with the requirement of Section 40 A(9) of the Act.
If we accept the contention of Dr. Pal that expenditure made in the nature of but not exactly the one provided in Section 36 should come under the purview of Section 37 of the Act, the effect would be disastrous. Any company, following mercantile method of accounting, by taking a fake resolution to pay pension without any intention to pay, would, for years, not actually pay the amount, or may make payment of a paltry percentage of amount of the shown liability and may even, subsequently, recall or vary such resolution, but in the process, would enjoy the benefit of deduction. Thus, we find no substance in the contention of Dr. Pal.
Moreover, even after compliance of the provisions of Section 36 of the Act, an assessee is not entitled to such claim without further complying with the provisions of Section 40A (9) of the Act. Therefore, it is absurd to suggest that a deduction permissible under Section 36 of the Act is required to further comply with the provisions of Section 40A (9), whereas a deduction not coming even under the limited range of Section 36 would not be required to comply with the provisions of Section 40A (9) of the Act by making payment.
We now propose to deal with the decisions cited by Dr. Pal.
In the case of Bharat Earth Movers vs. Commissioner of Income-tax (supra), the question before the Supreme Court was whether for the relevant Assessment Year 1978-79, the provision for meeting the liability of leave encashment by the employees was liable to deduction. The Supreme Court answered the question in affirmative as the liability was not a contingent one. In the case before us we are concerned with the question whether a deduction not falling under the approved superannuation scheme as provided in Section 36 of the Act and at the same time is also reversible by a subsequent resolution is eligible for deduction on actuarial basis. The Supreme Court had in that decision no occasion to deal with the effect of Section 40A (9) of the Act or of Section 37 of the Act. Therefore, the said decision has no application to the facts of the present case.
In the case of Commissioner of Income-tax, West Bengal-II vs. National Insurance Co. of India (supra), the question was whether for the relevant Assessment Year 1971-72, the provisions of pension represented an accrued liability and was an admissible deduction in computing the profit of the assessee company.
Such question was answered in the affirmative. In answering such question, the Division Bench took note of the fact that on an earlier reference the said Bench held that the provision made was not excessive and unreal and the provision made was a permissible deduction in computing the true profit of the assessee-company and, therefore, the Tribunal was justified in holding that the provision for gratuity was allowable in its entirety as a revenue deduction. In our view, in said decision, the question raised before us was never decided and thus, the said decision can be of no assistance to Dr. Pal.
In the case of Calcutta Co. Ltd. vs. Commissioner of Income-tax, West Bengal (supra), the appellant bought lands and sold them in plots fit for building purposes undertaking to develop them. When the plot was sold, the purchaser paid only a portion of the purchased land and undertook to pay the balance on installments. The appellant in its turn undertook to carry out the developments within six months but the time was not the essence of the contract. In the relevant accounting year, the appellant actually received in cash only as sum of Rs.29,392/- towards the sale price, but in accordance with the mercantile system of accounting adopted by it credited to in its accounts the sum of Rs.43,692/- representing the full sale price. At the same time, it debited an estimated amount of Rs.24,809/- as expenditure for the development it had undertaken to carry out although no part of that amount was actually spent. The department disallowed the expenditure. The Supreme Court allowed such deduction observing that having accepted the receipt of Rs.43,692/- in their totality even though a sum of Rs.29,392/- only was received by the appellant in cash, thus making the appellant liable for the amount of Rs.14,300/- which was not received by it during the year, it was hardly open to the Revenue to urge that the sum of Rs.24,809/- should not have been allowed as permissible deduction before arriving at the profit or gain of the appellant which were liable to tax. We fail to appreciate how the said decision can have any application in case of deduction claimed as liability towards the payment of “unapproved” superannuation scheme which is a bar created by the Statute.
In the case of Commissioner of Income-tax vs. Bharat Petroleum Corporation Ltd (supra), the question was whether the department was right in disallowing the claim of the assessee for deduction of Rs.2,60,283/- being staff sports and welfare expenses under Section 40A (9) of the Act. The Division Bench of the Bombay High Court answered the question in the negative with the following observations:
“Bharat Petroleum Corporation is a Central Government Undertaking. It has incorporated a club, essentially to carry on staff welfare activities. Under clause 28, Bharat Petroleum Corporation Ltd. had a right to issue directives to the Club which were binding on the Club. At times, the members of the Club who were the employees of Bharat Petroleum Corporation, took part in tournaments held outside the club premises like Times Shield in cricket. On such occasions, the assessee corporation used to reimburse expenses incurred by the Club. This is a finding of fact recorded by the Tribunal. In the circumstances, section 40 A (9) is not applicable. No substantial question of law arises. Hence, our answer to the aforesaid question no. 2 is in the negative, i.e. in favor of the assessee against the department.”
In the said decision, the Division Bench of the Bombay High Court had no occasion to deal with the question as to whether the assessee was entitled to the benefit of Section 37 of the Act in a case where the expenses is in the nature of one mentioned in Section 36 but is not an approved one and at the same time, the deduction of expenses was claimed on the basis of a liability created by a resolution of the board of directors of the company which is capable of being reversed by a subsequent resolution. Therefore, the said decision does not help Dr. Pal’s client in anyway.
In the case of Keshav Mills Ltd. vs. Commissioner of Income-tax (supra), the Supreme Court was dealing with the general principle of the mercantile system of accounting in respect of an enforceable legal liability incurred by an assessee and such principle is well-settled. But if expenditure is not permissible as a deductable one under the Act, the assessee cannot be benefited by maintaining the account through such system.
For the selfsame reason, the decision of the Supreme Court in the case of E. D. Seassoon & Company Ltd and others vs. Commissioner of Income-tax reported in (1954) 26 ITR 27 (SC) which deals with the mercantile and cash system of accounting is inconsequential for the purpose of dealing with the question involved before us.
In the case of Metal Box Company of India Ltd vs. Their workmen (supra), the Supreme Court held that the contingent liabilities discounted and valued as out of necessity could be taken into account as trading expenses if these were capable of being valued. It was further held that an estimated liability under a gratuity scheme, even if it was a contingent liability, if properly ascertainable and if its present value stood fairly discounted, was deductible from the gross profits while preparing the profit and loss account. In view of this decision it became permissible for an assessee to provide, in his profit and loss account, for the estimated liability under a gratuity scheme by ascertaining its present value on accrued basis and claiming it as an ascertained liability to be deducted in the computation of profit and gains of the previous year either under Section 28 or under Section 37 of the Act. However, as pointed out by the Supreme Court in the recent case of Rotork Control India Private Limited vs. Commissioner of Income-tax reported in (2009) 13 SCC 283 at page 296, the above principle would not apply after the insertion of Section 40-A(7) with effect from April 1, 1973. At paragraph 42 of the judgment, it has been pointed out that the principles of commercial accounting, mentioned above, which formed the basis of the judgment in Metal Box Co. of India (supra), were affirmed by the judgment of the Supreme Court in Shree Sajjan Mills vs. CIT reported in (1985) 4 SCC 590 up to April 1, 1973. We, therefore, find that the decision of Metal Box (supra), is of no assistance to the appellants before us and the aforesaid observations of the Supreme Court in the subsequent decision in the case of Rotork Control India Private Limited (supra), go against the contention of Dr. Pal.
In the case of CIT vs. Turner Morrison & Co. Ltd. reported in (1978) 114 ITR 629 (CAL), the contribution of assessee to a provident fund in Pakistan where it carried on its business and where such contribution was recognized but not in India was found to be deductable under Section 37(1) of the Act for computation of foreign income. It appears that the Division Bench did not give any detailed reason in arriving at such conclusion but simply relied upon the decision of the Supreme Court in the case of CIT vs. Mysore Spinning and Manufacturing Company Ltd. reported in AIR 1970 SC 1785.
In the case of Mysore Spinning and Manufacturing Company Ltd. (supra), on coming into force of the Provident Funds Act, the assessee- company transferred some amount to the Commissioner. This amount represented assessee’s contribution to the Private Provident Funds of the assessee. The assessee claimed deduction on account of transfer of this amount in the relevant assessment year. The Income-tax Officer disallowed this claim on the ground that the amount in question was allowable to be treated as ‘capital expenditure’ under the provisions of Section 58K of the Act. An appeal was taken to the Appellate Assistant Commissioner but it failed. The assessee appealed the Appellate Tribunal. The Tribunal held that there was a transfer of the fund to Trustees which came within the scope of Section 58K of the Act and, therefore, the amount was not deductible nor could the deductions be allowed under Section 10 (1) or Section 10(2)(xv) of the 1922 Act. The assessee sought reference and the following two questions were referred:
(1) Whether the provisions of Section 58K of the Income-tax Act apply to the transfer of the sum of Rupees 3,01,772-1-7 to the Regional Provident Fund Commissioner.
(2) If the answer to the above question is in the negative, whether the sum of Rs.3,01,882-1-7 is allowable as deduction in arriving at the commercial profits under Section 10(1) or is an allowable deduction under Section 10(2)(xv) of the Income-tax Act in the computation of the asses sable ‘business’ profits. The High Court, however, proceeded to consider the matter even on the assumption that the transfer of the fund contemplated by Section 58K (1) would also include involuntary transfer. According to the High Court, the position that emerged on a consideration of the material provisions of the Provident Funds Act and the Scheme framed there under was as follows:
For the administration of the statutory Provident Fund which came into existence and stood constituted on the framing of the Scheme a Board of trustees called the Central Board of Trustees was constituted. On the framing of the Scheme and the constitution of the statutory Provident Fund the employer in the industries to which the Provident Funds Act applied were required to transfer the accumulated balances of the Provident Fund, if any, which had been maintained by them. Similarly, trustees of the private Provident Fund constituted by an employer were also required to transfer the accumulated balances to the statutory Provident Fund. Such employers were further required to make their own annual contributions according to the prescribed limit to that fund. The Board of trustees and the Officers administering the fund were required to open a Provident Fund account and in that account a separate account was maintained of each member showing the balance to his credit containing the contributions of the employer. The High Court was of the view that a trust in its true sense had not been constituted by the Provident Funds Act or the Scheme and that the transfer was not to the trustees but to the fund. The first question was answered in the negative and in favor of the assessee. The answer to the second question was given in the affirmative. It held that the deduction claimed was allowable under Section 10(2)(xv) and that the provisions of Section 10(4)(c) did not operate as a bar to the claim made by the assessee for deduction of the amount in question.
On an appeal by Revenue, the Supreme Court held that Section 58k would not be applicable and as regards the second question, the Apex Court made the following observations:
“Hardly any argument was addressed on the decision of the High Court on the second question. The expenditure was incurred in the relevant accounting year. It was something which had gone irretrievably. The amount in question had been spent and paid out in the relevant year of accounting, and was therefore allowable as expenditure incurred exclusively for the purpose of the business. It is not suggested that it was incurred for any other purpose. The conditions of Section 10 (2) (xv) had been fully satisfied in the present case.”
Therefore, neither the Division Bench of this Court in the case of Turner and Morrison (supra) nor the Supreme Court in the case of Mysore Spinning and Manufacturing Company Ltd. (supra), had decided the point now sought to be raised before us by Dr. Pal. A decision, it is well known, is an authority for what it decides but what necessarily follows from such decision is not to be taken as a precedent. We are, therefore, unable to rely upon the said decision as a precedent on the question involved before us.
We, thus, find that the decisions cited by Dr. Pal are of no assistance to his client.
We, consequently, answer the first question in the affirmative and the second one in the negative and dismiss the appeal by upholding the order of the Tribunal below for the reasons assigned by us.
In the facts and circumstances, there will be, however, no order as to costs.