Case Law Details
Amendment to Section 43B on deduction of contribution for PF, superannuation fund, gratuity fund etc is retrospective
Whether amendment to Section 43B (Section) of Income Tax Act,1961, 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.
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.
FULL TEXT OF THE JUDGMENT IS AS FOLLOWS :-
SUPREME COURT OF INDIA
Commissioner Of Income-Tax.
Vs.
Alom Extrusions Limited.
Dated 25/11/2009
JUDGMENT
S.H. KAPADIA J.- Civil Appeal No. 7771 of 2009 at S.L.P. (C) No. 23851 of 2007, Civil Appeal No. 7770 of 2009 at S.L.P. (C) No. 17835 of 2008, Civil Appeal No. 7765 of 2009 at S.L.P. (C) No. 28521 of 2008, Civil Appeal No. 7769 of 2009 at S.L.P. (C) No. 6844 of 2008, Civil Appeal No. 7767 of 2009 at S.L.P. (C) No. 9589 of 2008, Civil Appeal No. 7756 of 2009 at S.L.P. (C) No. 9590 of 2008, Civil Appeal No. 7766 of 2009 at S.L.P. (C) No. 9591 of 2008, Civil Appeal No. 7763 of 2009 at S.L.P. (C) No. 14363 of 2008, Civil Appeal No. 7764 of 2009 at S.L.P. (C) No. 17840 of 2008, Civil Appeal No. 7758 of 2009 at S.L.P. (C) No. 20012 of 2009, Civil Appeal No. 7762 of 2009 at S.L.P. (C) No. 1344 of 2009, Civil Appeal No. 7760 of 2009 at S.L.P. (C) No. 3759 of 2009, Civil Appeal No. 7754 of 2009 at S.L.P. (C) No. 21067 of 2009, Civil Appeal No. 7759 of 2009 at S.L.P. (C) No. 25174 of 2009, Civil Appeal No. 7768 of 2009 at S.L.P. (C) No. 30587 of 2008 and Civil Appeal No. 7761 of 2009 at S.L.P. (C) No. 1476 of 2009.
Delay condoned.
Leave granted.
A short question which arises for determination in this batch of civil appeals is whether omission (deletion) of the second proviso to section 43B of the Income-tax Act, 1961, by the Finance Act, 2003, operated with effect from April 1, 2004, or whether it operated retrospectively with effect from April 1, 1988?
Prior to the Finance Act, 2003, the second proviso to section 43B of the Income-tax Act, 1961 (for short, “the Act”) restricted the deduction in respect of any sum payable by an employer by way of contribution to provident fund/superannuation fund or any other fund for the welfare of employees, unless it stood paid within the specified due date. According to the second proviso, the payment made by the employer towards contribution to provident fund or any other welfare fund was allowable as deduction, if paid before the date for filing the return of income and necessary evidence of such payment was enclosed with the return of income. In other words, if contribution stood paid after the date for filing of the return, it stood disallowed. This resulted in great hardship to the employers. They represented to the Government about their hardship and, consequently, pursuant to the report of the Kelkar Committee, the Government introduced the Finance Act, 2003, by which the second proviso stood deleted with effect from April 1, 2004, and certain changes were also made in the first proviso by which uniformity was brought about between payment of fees, taxes, cess, etc., on one hand and contribution made to the employees’ provident fund, etc., on the other.
According to the Department, the omission of the second proviso giving relief to the assessee(s) (employer(s)) operated only with effect from April 1, 2004, whereas, according to the assessee(s)-employer(s), the said Finance Act, 2003, to the extent indicated above, operated with effect from April 1, 1988 (retrospectively).
The lead matter in this batch of civil appeals is CIT Vs. Alom Extrusions Ltd. (civil appeal arising out of S.L.P. (C) No. 23851 of 2007).
Prior to the amendment of section 43B of the Act, vide the Finance Act, 2003, the two provisos to section 43B of the Act read as under:
“Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) or clause (e) or clause (f), which is actually paid by the assessee on or before the due date applicable in his case for furnishing the 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 as aforesaid and the evidence of such payment is furnished by the assessee along with such return:
Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date.”
By the Finance Act, 2003, the second proviso to section 43B of the Act not only got deleted but the said Finance Act, 2003, also amended the first proviso with effect from the assessment year 2004-05. We quote hereinbelow the first proviso to section 43B of the Act, after its amendment by the Finance Act, 2003, which reads as under:
“Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the 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 as aforesaid and the evidence of such payment is furnished by the assessee along with such return.”
To answer the above controversy, we need to understand the scheme of the Income-tax Act, 1961, as it existed prior to April 1, 1984, and as it stood after April 1, 1984.
“Income” has been defined under section 2(24) of the Act to include profits and gains. Under section 2(24) (x), any sum received by the assessee from his employees as contributions to any provident fund/superannuation fund or any fund set up under the Employees’ State Insurance Act, 1948, or any other fund for welfare of such employees constituted income. This is the reason why every assessee(s) (employer(s)) was entitled to deduction even prior to April 1, 1984, on the mercantile system of accounting as a business expenditure by making provision in his books of account in that regard. In other words, if an assessee(s)-employer(s) is maintaining his books on the accrual system of accounting, even after collecting the contribution from his employee(s) and even without remitting the amount to the Regional Provident Fund Commissioner (RPFC), the assessee(s) would be entitled to deduction as business expense by merely making a provision to that effect in his books of account. The same situation arose prior to April 1, 1984, in the context of assessees collecting sales tax and other indirect taxes from their respective customers and claiming deduction only by making provision in their books without actually remitting the amount to the exchequer. To curb this practice, section 43B was inserted with effect from April 1, 1984, by which the mercantile system of accounting with regard to tax, duty and contribution to welfare funds stood discontinued and, under section 43B, it became mandatory for the assessee(s) to account for the aforestated items not on mercantile basis but on cash basis. This situation continued between April 1, 1984, and April 1, 1988, when Parliament amended section 43B and inserted the first proviso to section 43B. By this first proviso, it was, inter alia, laid down, in the context of any sum payable by the assessee(s) by way of tax, duty, cess or fee, that if an assessee(s) pays such tax, duty, cess or fee even after the closing of the accounting year but before the date of filing of the return of income under section 139(1) of the Act, the assessee(s) would be entitled to deduction under section 43B on actual payment basis and such deduction would be admissible for the accounting year. This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds. To this effect, the first proviso stood introduced with effect from April 1, 1988.
Vide the Finance Act, 1988, the second proviso came to be inserted. It reads as follows:
“Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36.”
At this stage, we also quote hereinbelow the Explanation below clause (va) of sub-section (1) of section 36:
“Explanation.-For the purposes of this clause, ‘due date’ means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.”
However, the second proviso stood further amended, vide the Finance Act, 1989, with effect from April 1, 1989, which reads as under:
“Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date.”
On reading the above provisions, it becomes clear that the assessee(s)-employer(s) would be entitled to deduction only if the contribution stands 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, the financial year ended on March 31, which did not coincide with the accounting period of the R.P.F.C. For example, in many cases, the time to make contribution to the R.P.F.C. ended after the d1:le date for filing of returns. Therefore, the industry once again made representation to the Ministry of Finance and taking cognisance of this difficulty, Parliament inserted one more amendment, vide Finance Act, 2003, which, as stated above, came into force with effect from April 1, 2004. In other words, after April 1, 2004, two changes were made, namely, deletion of the second proviso and further amendment in the first proviso, quoted above. By the Finance Act, 2003, the amendment made in the first proviso equated in terms of the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to the Employees’ Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from April 1, 2004. Therefore, the argument of the assessee(s) is that the Finance Act, 2003, was curative in nature, it was not amendatory and, therefore, it applied retrospectively from April 1, 1988, whereas the argument of the Department was that the Finance Act, 2003, was amendatory and it applied prospectively, particularly when Parliament had expressly made the Finance Act, 2003, applicable only with effect from April 1, 2004. It was also argued on behalf of the Department that even between April 1, 1988, and April 1, 2004, Parliament had maintained a clear dichotomy between payment of tax, duty, cess or fee on one hand and payment of contributions to the welfare funds on the other. According to the Department, that dichotomy continued up to April 1, 2004, hence, looking to this aspect, Parliament consciously kept that dichotomy alive up to April 1, 2004, by making the Finance Act, 2003, come into force only with effect from April 1, 2004. Hence, according to the Department, the Finance Act, 2003, should be read as amendatory and not as curative (retrospective) with effect from April 1, 1988.
We find no merit in these civil appeals filed by the Department for the following reasons: firstly, as stated above, section 43B (main section), which stood inserted by the Finance Act, 1983, with effect from April 1, 1984, expressly commences with a non obstante clause, the underlying object being to disallow deductions claimed merely by making a book entry based on the mercantile system of accounting. At the same time, section 43B (main section) made it mandatory for the Department to grant deduction in computing the income under section 28 in the year in which tax, duty, cess, etc., is actually paid. However, Parliament took cognisance of the fact that the accounting year of a company did not always tally with the due dates under the Provident Fund Act, Municipal Corporation Act (octroi) and other tax laws. Therefore, by way of the first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the return under the Income-tax Act (due date), the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds. However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of the 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. Once this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by Parliament only with effect from April 1, 2004, would become curative in nature, hence, it would apply, retrospectively, with effect from April 1, 1988. Secondly, it may be noted that, in the case of Allied Motors P. Ltd. Vs. CIT reported in [1997] 224 ITR 677 (SC), the scheme of section 43B of the Act came to be examined. In that case, the question which arose for determination was, whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales tax law should be disallowed under section 43B of the Act while computing the business income of the previous year? That was a case which related to the assessment year 1984-85. The relevant accounting period ended on June 30, 1983. The Income-tax Officer disallowed the deduction claimed by the assessee which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year. The deduction was disallowed under section 43B which, as stated above, was inserted with effect from April 1, 1984. It is also relevant to note that the first proviso which came into force with effect from April 1, 1988, was not on the statute book when the assessments were made in the case of Allied Motors P. Ltd. [1997] 224 ITR 677. However, the assessee contended that even though the first proviso came to be inserted with effect from April 1, 1988, it was entitled to the benefit of that proviso because it operated retrospectively from April 1, 1984, when section 43B stood inserted. This is how the question of retrospectivity arose in Allied Motors P. Ltd. [1997] 224 ITR 677. This court, in Allied Motors P. Ltd. [1997] 224 ITR 677 held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read as retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this court, in Allied Motors P. Ltd. [1997] 224 ITR 677, held that the first proviso was curative in nature, hence, retrospective in operation with effect from April 1, 1988. It is important to note once again that, by the Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about uniformity in tax, duty, cess and fee on the one hand, vis-a-vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act, 2003, is retrospective in operation. Moreover, the judgment in Allied Motors P. Ltd. is delivered by a Bench of three learned judges, which is binding on us. Accordingly, we hold that the Finance Act, 2003, will operate retrospectively with effect from April 1, 1988 (when the first proviso stood inserted). Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that the Finance Act, 2003, to the above extent, operated prospectively. Take an example-in the present case, the respondents have deposited the contributions with the R.P.F.C. after March, 31 (end of the accounting year) but before filing of the returns under the Income-tax Act and the date of payment falls after the due date 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 section 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 April 1, 2004, and who pays the contribution after April 1, 2004, would get the benefit of deduction under section 43B of the Act. In our view, therefore, the Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from April 1, 1988, when the first proviso was introduced. It is true that Parliament has explicitly stated that the Finance Act, 2003, will operate with effect from April 1, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of the Finance Act, 2003.
Before concluding, we extract hereinbelow the relevant observations of this court in the case of CIT Vs. J.H. Gotla reported in [1985] 156 ITR 323, which reads as under:
“…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 do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.”
For the aforestated reasons, we hold that the Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from April 1, 1988 (when the first proviso came to be inserted). For the above reasons, we find no merit in this batch of civil appeals filed by the Department which are hereby dismissed with no order as to costs.
Civil Appeal No. 7755 of 2009 at S.L.P. (C). No. 20581 of 2008 and Civil Appeal No. 7757 of 2009 at S.L.P. (C). No. 18380 of 2009:
Leave granted.
In view of our judgment in the case of CIT Vs. Alom Extrusions Ltd. (civil appeal arising out of S.L.P. (C). No. 23851 of 2007), we set aside the impugned judgment and order of the Bombay High Court and allow these civil appeals filed by the assessees with no order as to costs.
