Calcutta High Court
Shalimar Chemical Works Private Ltd. vs Commissioner Of Income-Tax on 12 March, 1987
Equivalent citations: [1987]167ITR13(CAL)
JUDGMENT Dipak Kumar Sen, J.
1. The facts found or admitted in this reference are, inter alia, that under the Employees' State Insurance Act as originally promulgated, only the employees who worked in the factory of an employer came under the purview of the said Act. By Act No. 44 of 1966, the definition of an "employee" under Section 2(9) of the Employees' State Insurance Act was substituted and other categories of employees, viz., persons employed for wages on any work connected with the administration of the factory or establishment or any part of the department or branch thereof or with the purchase of raw materials for, or the distribution or sale of the products of, the factory or establishment were brought within the purview of the said Act.
2. The employers did not accept the extended definition of "employee" in the substituted section and challenged the validity of the amending legislation in different High Courts. Subsequently, the High Courts of Calcutta and Delhi rejected the contentions of the employers and held that all categories of employees mentioned in the substituted Section 2(9) of the Employees' State Insurance Act would be employees within the meaning of the said Act. The High Court at Madras and the Employees' Insurance Court, Bombay, took a different view and the Employees' State Insurance authorities preferred appeals from the said decisions. M/s. Shalimar Chemical Works (P) Ltd., Calcutta, the assessee, is a limited company carrying on business of manufacturing of chemicals. The assessee came within the mischief of the substituted Section 2(9) of the Employees' State Insurance Act and became liable to contribute for such insurance to the Employees' State Insurance Corporation on and from January 28, 1968. The assessee, however, did not make any contribution as required under the substituted section nor did it initiate any proceedings challenging the substituted Section 2(9) in any court. The assessee, however, kept watching the proceedings taken by other employers as aforesaid.
3. After the decisions of several High Courts on the controversy as aforesaid, the Employees' State Insurance authorities issued a letter to the assessee dated January 9, 1974, informing the latter of the decisions of the courts. It was stated that if the assessee failed to make deduction of the employees' contribution from the wages of the employees and make payment to the Corporation, the assessee would be liable to pay such contribution from its own funds as under the provisions of the Employees' State Insurance Act, the assessee would not be entitled to deduct the employees' contributions from their wages for subsequent periods.
4. The assessee initially objected to the demand for payment of contribution under the substituted section but after a further demand from the authorities dated February 20, 1974, agreed to pay the contribution as demanded.
5. The assessee was assessed to income-tax for the assessment year 1975-76, the corresponding accounting year ending on June 30, 1974. In its return, the assessee claimed deduction of Rs. 45,191 as expenditure incurred on account of contribution to the Employees' State Insurance Corporation for the period from January 28, 1968, to June 30, 1973.
6. The Income-tax Officer rejected the claim of the assessee for deduction of the said amount as the same was not a liability for the year under consideration.
7. An appeal was preferred by the assessee from the order of the Income-tax Officer to the Appellate Assistant Commissioner. The said appeal was rejected on the ground that as the assessee followed the mercantile system of accounting, the liability accruing under a statute was allowable as a deduction in the year when the liability accrued. It was noted that the liability accrued under the statute itself as amended and the assessee did not make any provision for such liability in the earlier years. The Appellate Assistant Commissioner applied the principles laid down by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. C1T [1971] 82 ITR 363.
8. Being aggrieved, the assessee preferred an appeal from the order of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal. It was contended on behalf of the assessee before the Tribunal that the liability to pay contribution for insurance crystallised on the issue of demand of the Employees' State Insurance authorities by its letter dated January 9,-1974. It was contended on behalf of the Revenue that the liability accrued under the statute during the earlier period and as the assessee was following the mercantile system of accounting, it could not claim any deduction of the liability for the earlier years in the assessment year in question.
9. The Tribunal found that the letter of January 9, 1974, from the Employees' State Insurance authority was in the nature of a demand for payment of contribution by the assessee and that such demand was made after an inspector of the Employees' State Insurance Corporation inspected the establishment of the assessee. But the Tribunal, following, inter alia, the decision of the Supreme Court in Kedarnath Jute Manufacturing Co, Ltd. [1971] 82 ITR 363, held that the assessee was not entitled to claim the deduction of the said amount in the relevant assessment years as the liability to pay contribution arose for a period earlier to the assessment year involved. The Tribunal held that the liability to pay contribution had accrued under the State Employees' Insurance Act and did not depend upon the quantum to be determined or any demand from the authorities concerned.
10. On an application of the assessee under Section 256(1) of the Income-tax Act, 1961, the following question has been referred by the Tribunal as a question of law arising out of the order of the Tribunal for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the claim of Rs. 45,191 being the employers' special contribution to the Employees' State Insurance Corporation is allowable as a deduction for the assessment year 1975-76 ? "
11. At the hearing of this reference, learned advocate for the assessee submitted that the general principles laid down by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. [1971] 82 ITR 363 were, no doubt, binding but the said general principles were not inflexible and in the special facts and circumstances, an exception could be made. He submitted that the facts before the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd, [1971] 82 ITR 363 were, inter alia, that the assessee in that case who was assessed to sales tax initiated proceedings for a reduction or cancellation of the assessment. During the pendency of the income-tax assessment of the assessee, its liability to sales tax was quantified and a demand for a specific sum was raised. The assessee had not made any provision for the said sales tax demand in its original return and filed a revised return claiming such deduction. It was held that the assessee in that case was entitled to do so and it was held that liability for payment of tax arose independent of the assessment thereof and such liability to pay the tax could be claimed by way of deduction though the same could not be enforced till it was quantified by assessment.
12. Learned advocate for the assessee cited the following decisions in support of his contentions :
(a) Allahabad Woollen Mills (P) Ltd. v. CIT [1967] 64 ITR 548 (All). In this case, the assessee started implementing a provident fund scheme for its employees under the Employees' Provident Funds Act, 1952, on the basis that the said Provident Funds Act applied to the assessee from November, 1958. Subsequently, in 1960, the assessee was informed by the Regional Provident Fund Commissioner that on inspection of the records of the assessee, it had been found that the assessee had become liable to contribute to the Employees' Provident Fund on and from April, 1956, as the number of persons employed by the assessee exceeded 50 on and from that time. The assessee contributed towards provident fund for the period from April, 1956, to November, 1958, and claimed deduction in respect of the same in the assessment year 1961-62. On these facts, it was held by the Allahabad High Court that as there was a dispute as to from which period the assessee was liable to contribute to the provident fund, the assessee was under no liability to make a deposit for the said period till the dispute was determined by the competent authority. The dispute having been determined in 1960 during the relevant year of account, the liability to pay such contribution was irrevocably incurred and the payment was debited in the said year. The assessee was held to be entitled to the deduction claimed.
(b) CIT v. Orient Supply Syndicate . The assessee in this case, following the mercantile system of accounting, claimed deduction under the head "Provident Fund Contribution" which related to years earlier to the relevant accounting year. It was found as a fact that though the assessee was under a statutory liability to contribute to the employees' provident fund under the Employees' Provident Funds Act, the same was never enforced in the earlier years and only in the year involved, the Regional Provident Fund Commissioner for the first time called upon the assessee to make a statutory contribution for the earlier periods and the entire amount of contribution was paid by the assessee in the relevant assessment year. It was recorded in a letter dated June 19, 1962, from the Regional Provident Fund Commissioner to the assessee that the demand in respect of earlier years was pending a decision.
13. On these facts, it was held by a Division Bench of this court that a part of the statutory liability became real and enforceable in the year involved though it was referable to earlier years. Though under the mercantile system of accounting the liability arose in the earlier years, in reality it arose in the subsequent year involved when the position was clarified and the assessee was called upon to discharge the liability. It was held that from the commercial point of view, the assessee on the facts was entitled to claim the deduction in the year in question.
(c) Addl. CIT v. Rallan Chand Kapoor [1984] 149 ITR 1 (Delhi). The assessee in this case was a partner in a firm. On the dissolution of the firm, the assessee took over the assets and liabilities of the firm and carried on the business of the firm. From 1953 to 1956, the firm had incurred liability for sales tax. The assessee thereafter had also incurred liability to pay sales tax for the period up to the assessment year 1958-59. There was a dispute as to whether the tax was payable or not in Bombay where the assessee was carrying on business. The dispute was ultimately resolved and the sales tax authorities determined the liability of both the firm and the assessee on account of sales tax and issued a demand notice in 1964. In the relevant assessment year, the assessee made a provision in his accounts for payment of the said sales tax as assessed and claimed deduction in the computation of his business profits. On these facts, a Division Bench of the Delhi High Court affirmed the decision of the Tribunal and held that it was not possible for the assessee to claim a deduction for the earlier years. If the demand had been raised immediately after the relevant earlier years, it would have been open to the assessee to file a revised return and to claim a deduction. The assessee could provide for the liability only when the demand was raised. The Delhi High Court considered the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. [1971] 82 ITR 363 and held that the principles laid down in the said decision were limited to cases where the demand had been raised by the sales tax authorities before the income-tax assessment had been actually completed. The liability which was settled before the income-tax assessment was completed could be appropriated to the relevant year but if the demand was raised long afterwards, it could not be appropriated to the earlier year and had to be claimed at a later date or not at all.
14. Learned advocate for the Revenue contended to the contrary. He submitted that the law on the controversy was settled by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. [1971] 82 ITR 363 and the principles laid down therein were applicable in the facts and circumstances of this case. He submitted that different High Courts had, in similar facts and circumstances, applied the decision in Kedarnath Jute Manufacturing Co. Ltd. In support of his contention, learned advocate for the Revenue drew our attention to the following decisions:
(a) Sheveroy Estates Ltd. v. Government of Tamil Nadu [1981] 132 ITR 214 (Mad). The matters in issue and the facts and circumstances in this case are different from those in the case before us. This decision is of little assistance in the instant case and need not be considered further.
(b) C1T v. Travancore Timbers and Products . In this case, the assessee claimed deduction of a provision made towards payment of gratuity in respect of years earlier to the assessment year involved on the ground that the assessee had provided for payment of gratuity for the earlier years in terms of a claim which was accepted by the assessee in the relevant assessment year. The contention of the assessee was accepted by the Tribunal. On a reference, it was held by a Division Bench of the Kerala High Court following Kedarnath Jute Manufacturing Co. Ltd. , that as the assessee followed the mercantile system of accounting, the assessee was not entitled to claim deduction for any liability which arose in an earlier year under a statute. The contention of the assessee that it had been exempted by the Government from payment of gratuity was also rejected as it was found that such exemption had only been granted for the later years and the assessee remained liable to pay gratuity for the earlier years.
(c) CIT v. St. George Motors . In this case, the Kerala Motor Vehicles (Taxation of Passengers and Goods) Act, 1963, was impugned before the High Court and the Supreme Court. Ultimately, the Supreme Court upheld the validity of the Act. The Government of Kerala agreed to receive payment of the arrears of tax under the Act from the taxpayers in instalments. The assessee in that case paid during the accounting period instalments of arrears of tax which had fallen due in earlier years and claimed deduction of the same. It was held by a Division Bench of the Kerala High Court following a Full Bench decision of the same High Court in CIT v. K.A. Karim and Sons reported in [1982] 133 ITR 515 and Kedarnath Jute Manufacturing Co. Ltd. , that the liability for payment of tax under the Kerala Act accrued under the statute itself and the agreement by which the Government permitted the assessee to discharge its liability in instalments did not affect in any way the accrual of the liability which related only to the discharge of the liability. Payment of the arrears of tax in respect of earlier years, it was held, was not a permissible deduction.
15. From the facts found, it appears that though the Employees' State Insurance Act was extended to cover categories of employees who were working outside the factory under the said Act No. 44 of 1966, the Employees' State Insurance authorities did not take steps to enforce the extended provisions of the Act inasmuch as the same was challenged by a number of employers in different High Courts as also in other forums. The assessee admittedly did not initiate any proceeding on its own but maintained a watch on the proceedings which were pending. The Employees' State Insurance authorities also kept the demand in abeyance possibly as the matter was sub judice. It was only after the High Courts of Calcutta and Delhi upheld the validity of the extended provision of the Employees' State Insurance Act that the Employees' State Insurance authorities revived their demand under the amended provision and called upon the assessee to comply with the demand.
16. In the aforesaid facts and circumstances of the case, it appears to us that the principle laid down by this court in Orient Supply Syndicate [1982] 134 ITR 12, becomes applicable. The statutory liability no doubt was created by Act No. 44 of 1966 but in the facts, the said liability became real and enforceable in the relevant subsequent year though the demand was referable to the earlier years. The position was clarified by the High Courts upholding the validity of the extension of the statute after which the assessee was called upon to discharge its liability. From a commercial point of view, the assessee, in our view, was at that stage entitled to treat the demand of the Employees' State Insurance authorities as final and enforceable and contend that the liability accrued on the said demand at that stage. A similar view has been taken by the Delhi High Court in Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi). In the facts before the Delhi High Court, it was held that though the assessee had incurred the liability for sales tax, a dispute was pending as to the payability of such tax and only after the dispute was ultimately resolved, the liability of the assessee to pay the sales tax was finally determined. It was not possible for the assessee to submit a revised return in respect of the earlier years and the assessee could claim a deduction of the said liability in the later years or not at all.
17. We have, noted the decisions cited on behalf of the Revenue where a contrary view has been taken and the principle laid down by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. [1971] 82 ITR 363, has been applied strictly.
18. The earlier decision of the Division Bench of this court is binding on us. In any event, we are not inclined to take a different view and refer the matter to a larger Bench.
19. For the reasons as aforesaid, we answer the question referred in the affirmative and in favour of the assessee.
20. Learned advocate for the Revenue, orally applied for a certificate for leave to appeal to the Supreme Court against this judgment. Inasmuch as it appears that a different view has been taken by other High Courts as to the strict applicability of the principles laid down by the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. [1971] 82 ITR 363, it appears to us this is a fit case for appeal to the Supreme Court.
21. Let a certificate issue as prayed for. Let the order for the issue of the certificate be drawn up separately.
22. There will be no order as to costs.
Shyamal Kumar Sen, J.
23. I agree.