Introduction :
1.1 With a view to prevent assessees from claiming deduction in respect of statutory liabilities, etc. even when they are disputed and not paid to appropriate authority, S. 43B was introduced w.e.f. A.Y. 1984-85. The provision, effectively, provides that deduction in respect of items specified therein will be allowed only on the basis of actual payment. Though originally the provision was introduced to cover statutory liabilities within its ambit, subsequently, the scope thereof is widened from time to time to include within its net bonus and commission payment to employees as well as interest payable to financial institutions, etc. Lastly, to nullify the effect of the judgment of the Apex Court in the case of Bharat Earth Movers Ltd. (245 ITR 428), even the employers’ liability in respect of provision for leave salary has also been brought within its ambit. Unfortunately, at the initial state, the provisions are introduced in the Income-tax Act (the Act) for a specific purpose (many times justifiable) and then, the scope thereof gets widened to unrelated items even if the judiciary explains the correct effects of the provisions originally introduced. S. 43B is a classic example of this nature.
1.2 Large number of litigations were found on the effect of provision of S. 43B and finally, an attempt was made to carry out some rationalisation in the provision by the Finance Act, 1987, which introduced the first ‘proviso’ to S.43B w.e.f. A.Y. 1988-89 (hereinafter referred to as the said ‘proviso’). This is inserted with a view to provide deduction of statutory dues, etc. at the end of the previous year if, they are actually paid by the assessee on or before the ‘due date’ applicable in his case for furnishing the return of income u/s.139(1) (hereinafter referred to as ‘due date’) in respect of previous year in which the liability to pay such dues was incurred with certain further conditions with which we are not concerned in this write-up. Accordingly, with this rationalisation, such amount of outstanding at the year end and paid by the relevant ‘due date’ became eligible for deduction under the said ‘proviso’, which was made effective from 1-4-1988. However, this ‘proviso’, at that time, did not apply to items covered (contribution to P.F., etc.) under clause (b) of S. 43B, under which the conditions for allowing deductions were most stringent. In the context of this ‘proviso’, the Apex Court in the case of Allied Motors (P) Ltd. (224 ITR 677) took the view that though the ‘proviso’ is introduced by the Finance Act, 1987 w.e.f. 1-4-1988, the same will apply retrospectively and the benefit thereof will be available even in respect of the assessment year prior to A.Y. 1988-89. The effect of this judgment was considered in this column in the May, 1997 issue of the Journal.
1.3 Presently, S. 43B covers various items listed in clauses (a) to (f). Till the amendment was made by the Finance Act, 2003 (w.e.f. 1-4-2004), the said ‘proviso’ was applicable to all the clauses of S. 43B except clause (b) of S. 43B. Contribution to employees welfare fund (such as P.F., etc.) was governed by 2nd proviso to S. 43B, under which the payment thereof was required to be made by the due date under the relevant law, rule, etc. in the manner provided in the said 2nd proviso.
1.4 S. 43B(b) covers the employers’ contribution to any Provident Fund (P.F.) or Superannuation Fund or Gratuity Fund or any other fund for the welfare of the employees (hereinafter referred to as contribution to employees welfare fund). As stated in Para 1.3 above, this was earlier not covered by the said ‘proviso’ and accordingly, payment covered by S. 43B (except the contribution to employees welfare funds) were eligible for deduction if the payment in respect thereof is made by the relevant ‘due date’. The Finance Act, 2003 omitted the said 2nd proviso to S. 43B and amended the said first ‘proviso’ w.e.f. 1-4-2004 and made the first ‘proviso’ also applicable to clause (b) dealing with contribution to employees welfare funds (hereinafter this amendment is referred to as Amendment of 2003). Accordingly, all the items covered in S. 43B [i.e., clauses (a) to (f)] are eligible for deduction if amount is paid by the relevant ‘due date’ even if the same is outstanding at end of the relevant year. We are concerned with the effect of this Amendment of 2003 in this write-up.
1.5 The issue was under debate as to whether the amendment of 2003 will apply to the assessment years prior to A.Y. 2004-05 as the amendment was expressly made effective from 1-4-2004. After this amendment, various Benches of the Tribunal started taking a view that the amendment is clarificatory in nature and is applicable retrospectively even to assessment years prior to A.Y. 2004-05. For this, reliance was being placed on the judgment of the Apex Court in the case of Allied Motors (P) Ltd. referred to in Para 1.2 above. Subsequently, the Apex Court in the case of Vinay Cement Ltd. (213 CTR 268) dismissed the SLP filed by the Department against the judgment of the Gauhati High Court in the case of George Williamson (Assam) Ltd. (284 ITR 619) in a case dealing with the assessment year prior to A.Y. 2004-05, by stating that the assessee will be entitled to claim the benefit in S. 43B for that period particularly in view of the fact that he has made the contribution to P.F. before filing of the return. Many of the High Courts also took similar view that the amendment of 2003 is clarificatory in nature and is applicable to assessment years prior to A.Y. 2004-05 [Ref. : 297 ITR 320 (Del.), 313 ITR 144 (Mad.), 313 ITR 161 (Del.), 213 CTR 269 (Kar.) etc.]. However, the Bombay High Court in the case of Pamwi Tissues Limited (313 ITR 137) took a view that the said amendment of 2003 is applicable only from the A.Y. 2004-05. This was followed by the Bombay High Court in other cases also. Therefore, the debate continued and the assessees within the jurisdiction of the Bombay High Court were suffering the disallowance for the prior years in such cases.
1.6 Recently, the Apex Court had occasion to consider the issue referred to in Para 1.5 above in the case of Alom Extrusions Ltd. and the issue is now finally resolved. Though the law is amended from the A.Y. 2004-05, in respect of the prior years, many matters are pending and are under litigation (especially in the State of Maharashtra). Therefore, it is thought fit to consider the same in this column.
CIT v. Pawmi Tissues Limited, 313 ITR 137 (Bom.)
2.1 The issue referred to in Para 1.5 above came up before the Bombay High Court in the above case at the instance of the Revenue in the context of the A.Y. 1990-91. The following question was raised before the Court (Page 138) :
“The substantial question of law which arises in the present appeal is regarding the correct inter-pretation of S. 43B, S. 2(24)(x) read with S. 36(1)(va) and as to the claim of deductions as claimed by the assessee in respect of the PF, EPF and ESIC contributions especially in the facts and circumstances of the case and in law.”
2.2 On behalf of the Revenue, it was contended that insofar as the provident fund dues are concerned, the amendment is made applicable from the A.Y. 2004-05. In the earlier years, the employers’ contribution to P.F. if not paid within the due date under the relevant law was not eligible for deduction. For this, reliance was placed on the judgment of the Bombay High Court in the case of Godavari (Mannar) Sahakari Sakhar Karkhana Ltd. (298 ITR 149).
2.3 On behalf of the assessee, attention was drawn to the judgment of Gauhati High Court in the case of George Williamson (Assam) Limited (supra) to contend that while considering the same issues for the A.Y. 1992-93, the issue was decided in favour of the assessee following the earlier judgments of the same High Court in other cases. It was further pointed out that the Revenue preferred Special Leave Petition (SLP) in the Supreme Court in the case reported as Vinay Cement Limited and the SLP was dismissed. Consequently, the said judgment of the Gauhati High Court in the case of George Williamson (Assam) Limited got approved. Relying on the judgment of the Apex Court in the case of Employees Welfare Association (4 SCC 187), it was pointed out that if the Supreme Court has given reasons for dismissing the SLP, that still attracts Article 14 of the Constitution and consequently, it would be a binding precedent.
2.4 After considering the contentions of both the sides, the High Court decided the issue against the assessee and allowed the appeal filed by the Revenue with the following observations [Page 139] :
“In our opinion, the dismissal of the special leave petition as held in CIT v. Vinay Cement Ltd., (2009) 313 ITR (St.) 1 cannot be said to be the law decided. In State of Orissa v. M. D. Illyas, (2006) 1 SCC 275, the Supreme Court has held that a decision is a precedent on its own facts and that for a judgment to be a precedent it must contain the three basis postulates. A finding of material facts, direct and inferential. An inferential finding of fact is the inference which the Judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the individual effect of the above.”
2.5 In view of the above judgment of the Bombay High Court, the view also prevailed that the said Amendment of 2003 is prospective and applicable only from the A.Y. 2004-05.
CIT v. Alom Extrusions Limited, 2009 TIOL 125 SC IT:
3.1 The issue referred to in Para 1.5 above came up for consideration before the Apex Court in a batch of civil appeals with the lead matter in the case of Alom Extrusion Ltd. For the purpose of deciding the issue, the Court noted the first and the second provisos prior to the amendment of 2003 and the said ‘proviso’ (the first proviso) after such amendment.
3.2 For the purpose of deciding the issue, the Court considered the scheme of the Act and the historical background and the object of introduction of the provisions of S. 43B. The Court also referred to the earlier amendments made in 1988 with introduction of the first and second provisos. The Court also noted further amendment made in 1989 in the second proviso dealing with the items covered in S. 43B(b) (i.e., contribution to employees welfare funds). After considering the same, the Court stated that it becomes clear that prior to the amendment of 2003, the employer was entitled to deduction only if the contribution stands credited on or before the due date given in the Provident Fund Act on account of second proviso to S. 43B. This created further difficulties and as a result of representations made by the industry, the amendment of 2003 was carried out which deleted the second proviso and also made first proviso applicable to contribution to employees welfare funds referred to in S. 43B(b).
3.3 On behalf of the Department, it was, inter alia, contended that even between 1988 and 2004, the Parliament had maintained a clear dichotomy be-tween the tax duty, etc. on one hand and contribution to employees welfare funds on the other. This dichotomy continued up to 1st April, 2004 and hence, the Parliament consciously kept that dichotomy alive up to that date by making the amendment of 2003 effective from 1-4-2004. Accordingly, the amendment of 2003 should be read as amendatory and not as curative.
3.4 Disagreeing with the argument of the Department, the Court stated that there is no merit in the appeals filed by the Department for various reasons such as : originally S. 43B was introduced from 1-4-1984 with certain objectives and the conditions thereof were relaxed in 1988 in the context of tax duty and other items [except for contribution to employees welfare funds covered in S. 43B(b)] to remove the hardships. This relaxation appears to have not been made applicable to contribution to employees welfare funds for the reason that the employers should not sit on the collected contributions and deprive the workmen of the rightful benefits under Social Welfare Legislations by delaying payment of contribution to welfare funds. The Court then further observed as under :
“However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of 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 the Parliament only with effect from 1st April, 2004, would become curative in nature, hence, it would apply retrospectively with effect from 1st April, 1988.”
3.5 The Court then referred to the judgment of the Apex Court in the case of Allied Motors [P] Ltd. (supra) in which the amendment made by the Finance Act, 1987 w.e.f. 1-4-1988 (referred to in Para 1.2 above) was held as retrospective in nature. After considering the said judgment , the Court finally decided the issue in favour of the assessees and held as under :
“Moreover, the judgment in Allied Motors (P) Limited (supra) 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 1st April, 1988 [when the first proviso stood inserted].”
3.6 To support its conclusion, the Court also drew support from another judgment of the Apex Court in the case of J. H. Gotla (156 ITR 323) with the following observations :
“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 31st March (end of 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 u/ s.43-B of the Act for all times. They would lose the benefit of deduction even in the year of ac-count 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 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction u/s.43-B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that the Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003.”
Conclusion :
4.1 In view of the above judgment of the Apex Court, the amendment of 2003 referred to hereinbefore is applicable to assessment years prior to A.Y. 2004-05 also and the judgment of the Bombay High Court in the case of Pawmi Tissues Ltd. (supra) is no longer a good law.
4.2 In many cases, especially within the jurisdiction of the Bombay High Court, the assessees have suffered disallowances and the matters are pending. In such cases, the assessees will be entitled to get the benefits of such deductions.
