Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Hyderabad Asbestos Cement Products ... on 22 April, 1988
Equivalent citations: [1988]172ITR762(AP)
JUDGMENT Y.V. Anjaneyulu, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), in connection with the income-tax assessment year 1976-77. The reference is made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax. The question referred for the consideration of this court is set out in para. 4 of the statement of the case and may be extracted below for ready reference :
"whether, on the facts and in the circumstances of the case, the Appellate Tribunal is rights in law in allowing the assessee's appeal holding that the assessee is entitled to the entire amount of Rs. 2,59,451 being the initial contribution made to an approved superannuation fund as a deduction as against Rs. 41,512 allowed by the Income-tax Officer ?"
2. The assessee is a public company. For the income-tax assessment year 1976-77, its previous year ended on December 31, 1975. In the previous year ended on December 31, 1975. In the previous year relevant to this assessment, it appears, the assessee contributed a sum of Rs. 2,59,451 by way of initial contribution to an approved superannuation fund. In the return filed, however, the assessee claimed deduction of only Rs. 41,512 arrived at on the basis of Notification No. SO 3433 dated October 21, 1965, of the Central Board of Direct Taxes. The Income-tax Officer accepted the claim for deduction of the sum of Rs. 41,512 and completed the assessment. At that stage, the assessee seems to have realised that it has committed an error in asking for deduction of only Rs. 41,512 against the total contribution of Rs. 2,59,451. It appears, the assessee was advised that the notification above referred to of the Central Board of Direct Taxes has no application in the facts and circumstances of the case, and, consequently, the assessee would be entitled to claim deduction of the entire sum of Rs. 2,59,451.
3. The assessee filed an appeal before the Commissioner of Income-tax (Appeals) against the assessment made by the Income-tax Officer. One of the contentions urged in the appeal was against the allowance of only Rs. 41,512 out of Rs. 2,59,451 being the initial contribution made by the assessee towards the approved superannuation fund. The commissioner of Income-tax (Appeals) permitted the assessee to raise the ground for the first time in the appeal, dealt with the matter but rejected the assessee's contention. Thereafter, the assessee carried the matter in second appeal to the Tribunal and reiterated its claim for deduction of the full amount. The Tribunal in its order dated December 12, 1983, accepted the assessee's claim on the short ground that the decision of the Bombay Bench of the Tribunal in ITA Nos. 822 and 1010/Bombay/1978-79 dated September 25, 1980, covered the matter in dispute . Accordingly, the Tribunal directed the allowance of the entire amount by way of deduction under section 36(1)(iv) of the Act. Unfortunately, we do not get the relevant facts from the Tribunal's order. The reference by the Tribunal to the decision of the Bombay Bench of the Tribunal dated September 25, 1980, does not also shed any light in the matter. A copy of that decision is part of the record and we find that the Tribunal in that case allowed the claim on the following ground :
"our task in this matter has become easier because the identical point has come up before the Tribunal for the assessment year 1972-73. As per the findings in para. 7 of the order, the entire initial contribution to be allowed as a deduction itself. This means the assessee's appeal on this point will be accepted, while the Department's ground would stand rejected."
4. We are, therefore, back to square one to find out what the reasons of the Tribunal are. Unfortunately, the order of the Tribunal for the assessment year 1972-73 is not part of the record.
5. We have, on more than one occasion, referred to the difficulty experienced in High Court by this kind of order passed by the Tribunal. Even if the matter is covered by an earlier decision, it is always proper to refer to all relevant facts and law and record the decision of the Tribunal. In passing, the Tribunal may observe that the decision arrived at in the matter under appeals supported by a decision of another Bench of the Tribunal and give a reference to it if necessary. When the matter reaches this court, all that this court has to do is to look into the order of the Tribunal containing the relevant facts and the legal propositions and will not have to grope in the dark for finding out the facts and the reasons for the Tribunal arriving at a particular decision. We hope we will not have any occasion in the future to comment on the inadequacy of the Tribunal's orders rendering it very difficult for this court to answer the questions referred. While standing counsel for the Department does not have a copy of the Bombay Bench order relied upon, Sri M. J. Swamy, learned counsel for the assessee has fortunately supplied a copy of the order on which reliance had been placed by the Tribunal. We have gone through that order.
6. Section 36(1)(iv) of the Act deals with the deductions on account of contribution to a recognised provident fund or a an approved super-annuation fund. The provision is in the following terms :
"S. 36. (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 super-annuation 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 contribution 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."
7. We may now refer to the Fourth Schedule. Part A of the Sehedule deals with recognised provident funds. Part B of of the Schedule deals with approved superannuation funds. Conditions relating to the grant of approval and the procedure therefor are set out in these two Parts. Rule 11 of Part B provides that in addition to any power conferred by Part B, the Board may make rules, inter alia, limiting the ordinary annual contribution and any other contributions to an approved superannuation fund by an employer. Rules 87 and 88 of the Income-tax Rules, 1962, are prescribed in pursuance of section 36(1)(iv) of the Act. For convenient reference, these rules are reproduced below :
"87. Ordinary annual contribution. - The ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed twenty-five per cent. of his salary for each year as reduced by the employer's contribution, if any, to any provident fund (whether recognised or not) in respect of the same employee for that year. 88. Initial contributions. - Subject to any condition which the Board may think fit to specify under clause (iv) of sub-section (1) of section 36, the amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed twenty-five per cent. of the employee's salary for each year of his past service with the employer as reduced by the employer's contribution, if any, to any provident fund (whether recognised or not) in respect of that employee for each such year."
8. It will be seen from rule 88 that it is subject to any condition which the Board may think fit to specify under section 36(1)(iv) of the Act. We have already referred earlier to the power conferred by rule 11 of Part B of the Fourth Schedule on the Board to make rules limiting the ordinary annual contribution and any other contributions to an approved superannuation fund by an employer. It exercise of this power, the Board issued Notification No. SO 3433 dated October 21, 1965. This Notification is extracted below :
"CONTRIBUTION TO APPROVED SUPERANNUATION FUND - CONDITIONS SPECIFIED UNDER CLAUSE (iv) OF SUB-SECTION (1) FOR THE PURPOSES OF DEDUCTION OF CERTAIN CONTRIBUTIONS :
In exercise of the powers conferred by clause (iv) of sub-section (1) of section 36, the Central Board of Direct Taxes hereby specifies the following conditions for the deduction of contributions, not being 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 namely :
1. The total amount of contribution that shall be taken into account for the purposes of this notification shall not exceed twenty-five per cent. of the employee's salary for each year of his past service with the employer as reduced by the employer's contribution, if any, to any provident fund (whether recognised or not) in respect of that employee for each such year.
2. Subject to condition 1, eighty per cent. of the amount actually paid by the employer by way of contribution during any previous year shall be the deductible allowance.
3. One-fifth of such deductible allowance shall be allowed in the assessment year relating to the previous year in which the amount was actually paid and the balance of the deductible allowance shall be allowed in equal instalments for each of the four immediately succeeding assessment years.
9. The conditions specified in this notification, therefore, govern rule 88.
10. We have earlier referred to all the relevant provisions of law governing the deduction of contributions made to an approved superannuation fund. The contention of the Department is quite simple. It says that the sum paid by the assessee is an "initial contribution" to the superannuation fund as opposed to the "annual contribution". The initial contribution is allowable under section 36(1)(iv) subject to the limitations prescribed in rule 88, in its turn, refers to the conditions which the Board may specify. Those conditions, according to the Revenue, are specified in the Notification No. SO 3433 dated October 21, 1965. Now, the combined effect of section 36(1)(iv), rule 88 and the Notification No. SO 3433 dated October 21, 1965, is that eighty per cent. of the initial contribution made by the assessee will be allowable in five equal annual instalments. The sum of Rs. 41,512 represents 1/5th of eighty per cent. of Rs. 2,59,451. The Revenue claims that the assessee itself had correctly claimed the deduction in the return filed, although it made a somersault later on. It is submitted that the initial understanding of the assessee is correct and the assessee can claim deduction of a sum not more than Rs. 41,512 as reckoned in the above manner. The assessee resists the above claim of the Revenue. It admits that it was due to a misunderstanding of the real effect of the Notification No. SO 3433 dated October 21, 1965, that deduction of only Rs. 41,512 was claimed. The assessee later on realised its mistake and set out its claim for deduction of the full amount in the first appeal filed before the Commissioner (Appeals). According to the assessee, the limitations and conditions contemplated to be prescribed under section 36(1)(iv) refer to the limitations and conditions for the establishment of superannuation funds and the approval thereof by the departmental authorities. It is claimed that once the superannuation fund is approved, section 36(1)(iv) does not contemplate prescribing any limitations for the allowance. The entire amount of contribution will have to be allowed. It is urged that the superannuation fund to which contribution has been made in the previous year was established several years ago by the assessee. The "initial contribution" made during the year is not a contribution made at the time establishing the superannuation fund and consequently neither rule 88 nor the notification No. SO 3433 dated October 21, 1965, has the effect of restricting the contribution made for the purpose of deduction under section 36(1)(iv) of the Act.
11. It is further contended that the Notification No. SO 3433 dated October 21, 1965, issued by the Central Board of Direct Taxes is in excess of the power conferred by section 36(1)(iv) of the Act and should be disregarded for that reason. It is urged that section 36(1)(iv) confered power on the Board only to lay down "conditions". The "conditions" refereed to in the second limb of clause (iv) have nexus with the first limb of the clause which deals with the allowance of the sum paid by an employer by way of contribution subject to the limits as may be specified for the purpose of approving funds. The question of the Board issuing a notification specifying further limits is not contemplated by the seconds limb. It is submitted that the second limb of clause (iv) contemplates any conditions which the Board may specify for the purpose of allowing the contributions within the limits already prescribed in rule 88. It is urged that rule 11 of Part B of the Fourth Schedule conferred power on the Board only to make rules limiting the ordinary annual contribution and any other contributions to an approved superannuation fund by an employer. The limits are specified in rule 88 and the Board is not empowered to lay down further limits by notification. Referring to rule 88, it is pointed out that it is subject to "any condition" which the Board may think fit to specify under the clause (iv) of sub-section (1) of section 36. The limits enunciated in rule 88 are effective subject only to any conditions which the Board may think fit to specify. The Notification No. SO 3433 dated October 21, 1965, issued by the Board is not in the Direction of specifying any conditions. It goes beyond and provides that only 80 per cent. of the total contribution shall be allowed and that too, in five annual instalments commencing from the year in which the initial contribution is actually paid. It is contended that by the notification, the Board did not purport to make any conditions but went to the extent of cutting short the eligible deduction only to 80 per cent. and providing that even that 80 per cent. would be allowed in fives successive assessments. These provisions, it is urged, cannot be considered to be conditions for the allowance of initial contribution within the meaning of section 36(1)(iv) of the Act and the notification is, therefore, in excess of the power conferred on the Central Board of Direct Taxes by section 36(1)(iv) and must be disregarded for that reason.
12. We shall deal first with the submission of Mr. M. J. Swamy that the limits referred to in the first limb of section 36(1)(iv) do not affect a superannuation fund already approved but would relate only to a superannuation fund seeking approval initially. Having regard to the clear language in section 36(1)(iv), we are unable to accept this submission of learned counsel. As already pointed out, section 36 of the Act deals with deductions in computing the income referred to in section 28. Clause (iv) of section 36(1) refers to the deductions on account of contribution to a recognised provident fund or an approved superannuation fund. The first limb of clause (iv) states that any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an superannuation fund, shall be allowed subject to such limit as may be prescribed for the purpose of recognising a provident fund or an approved superannuation fund, as the case may be. The intention is quite clear. Certain limits for contribution are prescribed for the purpose of recognising a provident fund or approving a superannuation fund, as the case may be . It should be borne in mind that contributions made to a recognised provident fund or an approved superannuation fund alone qualify for deduction under section 36(1)(iv). Contributions made to unrecognised funds do not qualify for deduction under clause (iv). Whatever limits of contributions are prescribed for the purpose of recognising a provident fund or an approved superannuation fund, they continue to govern even after the fund is established. In order to retain recognition, it is imperative that the limits prescribed at the time of recognition should be followed even subsequent to recognition or approval. That seems to be the clear intention of the provision. While learned counsel is quite right in pointing out that the limits spoken of refer to limits prescribed at the time of initial recognition, it is not possible to hold that the limits prescribed for the purpose of recognition cease to apply subsequent to recognition or approval. Thus, the first limb of clause (iv) authorises the deduction of the employer's contribution to a superannuation fund subject to whatever limits prescribed at the time of approval of the superannuation fund. We cannot accede to the proposition that the limits cease to be operative once approval is granted to the superannuation fund and whatever sum is paid by way of contribution to the fund would then be allowable. Such an interpretation is possible on the clear language employed in the first limb and, what is more important, it serves no purpose to to refer to the limits prescribed at the time of initial recognition or approval if the intention of the Legislature is that the entire sum contributed should be allowed by way of deduction. We are, therefore, of the opinion that during the continuance of approval of the superannuation fund, the limits prescribed at the time of initial approval would continue to govern and the deduction can only be confined to those limits.
13. A perusal of rule 87 and 88 would also fortify the above view, Rule 87 specifies the limit for annual contributions. Annual contributions are those which relate to the accounting year relevant to the assessment year under consideration. Rules 88 deals with initial contributions as opposed to annual contribution. It may be pointed out that an employee does not become automatically eligible to become a member of the superannuation fund. The provision is that he becomes so eligible after he puts in five years of service. Once he becomes a member of the superannuation fund, there is an obligation on the employer to contribute not only from the year in which he earned eligibility but also for the period prior to his becoming a member. Therefore, in the previous year in which an employee earns eligibility, the employer has to make two payments. The first payments is the annual contribution to the superannuation fund relating to the year in which the employee became a member. The second payment is the contribution made for the past five years when the employee was not a member. The second payment is known as "initial contributions". Rule 88, therefore, specifies the limits within which initial contributions to the superannuation fund should be allowed. The limit prescribed is that the contributions shall not exceed 25% of the employee's salary for each year of his past service with the employer as reduced by the employer's contribution, if any, to any provident fund or superannuation fund in respect of that employee for each such year. Now, if rule 88 merely provided this limit, there can be little doubt that the entire amount of initial contribution, subject to the limits specified therein, would be allowed as a deduction in the year in which the initial contribution was liable to be made. But rule 88 starts with the prefix that the limits specified there are subject to any condition which the Board may think fit to specify under section 36(1)(iv). Thus, a scrutiny of rule 87 as well as rule 88 would indicate that these provisions are applicable for allowance of contributions made by the employer from year to year and the deduction on account of annual contribution as well as initial contribution is restricted to the limits specified in the two rules. We are, therefore, fortified in our view that the first limb of section 36(1)(iv) as well as rule 87 and rule 88 refer not only to the limit prescribed for the recognition and approval of the provident fund and superannuation fund, as the case may be but also relate to the contributions thereafter made, whether such contributions are annual contributions on initial contributions. We would, therefore, reject Mr. M. J. Swamy's contention in this regard.
14. Taking up the second contention, the power to specify conditions is traceable to the second limb of clause (iv) of sub-section (1) of section 36. The second limb provided that the deduction on account of contribution is also subject to such conditions as the Board may think fit to specify. Thus the only power conferred on the Board is to specify any conditions. It is necessary to bear in mind that power is conferred on the Board as the rule-making authority to specify the limits within which the contributions should be made by the first limb of section 36(1)(iv). Having already conferred this power on the Board, it is not possible to hold that the second limb confers once again the same power to specify further limits. While the limits are specified by the Board in exercise of the power conferred by the first limb, by exercising the power conferred by the second limb only, any conditions subject to which allowance may be made can be specified. It is not possible to hold that power is once conferred to prescribe limits of contribution and power is again conferred to lay down further limits beyond what is already prescribed. This position is quite clear by referring to rule 11 of Part B of the Fourth Schedule which provides that in addition to any power conferred by Part B, the Board may make rules, inter alia, limiting the ordinary annual contribution and any other provident fund and approved superannuation fund by an employer. It is clear that the rule 11 of Part B of the Fourth Schedule reiterates the power conferred on the Board to lay down limits as already envisaged by the first limb of section 36(1)(iv) As far as we see, rule 11 of Part B of the Fourth Schedule has nothing to do with the Board's power to specify conditions governing the allowance of contributions to the superannuation fund.
15. In exercise of the power conferred by the first limb of clause (iv) of sub-section (1) of section 36 and also rule 11 of Part B of the Fourth Schedule, the Board has framed rules specifying the limits for the annual contributions as well as initial contributions. These are rules 87 and 88 of the Income-tax Rules. The matter would have ended there if the second limb of section 36(1)(iv) did not confer power on the Board to specify such conditions as the Board may think fit for the purpose of allowing contributions to the provident fund or superannuation fund. In exercise of the power conferred by the second limb of section 36(1)(iv), Notification No. S.O. 3433 dated October 21, 1965, was issued and that is clear from the heading of the notification on itself. The heading is "Contributions to approved superannuation fund - conditions specified under clause (iv) of sub-section (1) for the purpose of deduction of certain contributions". The preamble to the notification also says that the notification is issued in exercise of the powers conferred by clause (iv) of sub-section (1) of section 36. It would be wrong to think that this notification has anything to do with rule 11 of Part B of the Fourth Schedule to the Act as is contended by learned standing counsel for the Revenue. All that we have to examine is whether the contents of this notification dated October 21, 1965, fall within the power conferred on the Board to specify conditions governing the allowances for contributions to the provident fund/superannuation fund.
16. A scrutiny of the notification dated October 21, 1965, would show that condition No. 1 is merely a repetition of rule 88. There could be no objection in so far as condition No. 1 is concerned, because it is provided already in rule 88 and is merely repetitive in character so far as the notification is concerned. Condition No. 2 states that 80 per cent. of the amount actually paid by the employer by way of contribution during any two previous years shall be the deductible allowance. Had it not been for this condition, there could be little dispute that the entire amount of contribution would qualify for deduction. Is it, therefore, permissible for the Central Board of Direct Taxes to state that what would otherwise be allowable as a deduction would not be allowed by framing a condition ? We clearly of the view that it is not open to the Board to stipulate a condition that what is otherwise legally allowable under section 36(1)(iv) and rule 88 would not be allowed. Condition No. 2, disentitling the employer to claim deduction of 20 per cent. of the initial contribution, overstepped the power given to the Board by the second limb of clause (iv).
17. The third condition states that 1/5th of the 80% shall be allowed in the assessment year relating to the previous year in which the amount was actually paid and the balance of the deductible allowance shall be allowed in equal instalments for each of the four immediately succeeding assessment years. It is clear from this condition that after disqualifying for the purpose of deducting 20%, he balanced of 80% is divided into five equal instalments and one such instalment shall be allowed as deduction in each year commencing from the year in which the contribution was paid. This condition overstepped the power conferred on the Board in two directions. Firstly, 1/5th of the deductible allowance is directed to be allowed in the year in which the initial contribution was actually paid. This condition is contrary to the provisions of law. An employer maintaining accounts on the mercantile system is under no obligation to make the actual payment. An employer can show that he has incurred liability to pay the initial contribution in the previous year by reason of eligibility earned by the employee to become a member of the superannuation fund. As the liability is incurred in the previous year, it constitutes a deduction for that year . Whether or not it is actually paid. It is not open to the Board to specify a condition that unless it is actually paid, it shall not be allowed as a deduction. The Board has no power to specify a condition contrary to the provisions of law. The second direction in which the board specifies is the division of deductible allowance into five annual instalment. There could be little doubt that had it not been for this division, the entire amount would have to be allowed as a deduction in the year in which the liability is incurred. It cannot be said that the division of deductible allowance into five annual instalments and the directions to allow 1/5th of such deductible allowance in each of five successive assessments is a condition envisaged by the second limb of section 36(1)(iv). The rule-making authority cannot frame rules or issue notifications contrary to the provisions of the Act. The power conferred on the Board to specify conditions cannot confer power on the Board to specify by way of conditions further limits running counter to the provisions of the Act and the rules. The conditions to be specified by the Board must relate to the limits already prescribed in rule 88 and cannot travel outside. In our opinion, the power to specify conditions conferred on the Board by the second limb of section36(1)(iv) merely touches upon any routine conditions which the Board may stipulate for observance by the employer and cannot justify imposition of drastic cuts and divisions in the matter of allowing contributions to recognised provident funds and approved superannuation funds by employers. We are, therefore, satisfied that conditions Nos. 2 and 3 of the notification No. S.O. 3433 dated October 21, 1965, are in excess of the power conferred on the Board by the second limb of section 36(1)(iv).
18. The question that arises for consideration then is whether in a reference proceeding it is open to us to strike down conditions Nos. 2 and 3 of the notification dated October 21, 1965, as being ultra vires section 36(1)(iv) of the Act. Learned counsel for the assessee invited our attention to the decision of the Supreme Court in CIT v. S. Chenniappa Mudaliar . Relying on this decision, learned counsel represented that if the notification should be held to be inconsistent in any manner, it should give way to the statutory provision contained in section 36(1)(iv) of the Act and, therefore, it is not strictly necessary for this court to strike down conditions Nos. 2 and 3 of the notification in question. It is submitted that the reference can be answered by ignoring conditions Nos. 2 and 3 and applying the provisions contained in section 36(1)(iv) of the Act. Shri Krishna Koundinya, learned junior standing counsel for the Revenue, drew our attention to cases where the view taken was that in a reference proceeding, it is not open to the court to consider the vires of a provision. In all these cases, the courts were dealing with the constitutional validity of the provisions as opposed to the validity of subordinate legislation with reference to the provisions of the Act itself. Learned standing counsel does fairly admit that the Supreme Court decision referred to above does provide that even in a reference proceeding, if the subordinate legislation is held to be in excess of the power conferred, it could be ignored and the matter decided keeping in mind the provisions of the Act which are paramount.
19. We think that in the facts and circumstances of this case, we must involve the doctrine of "reading down" and apply the principle enunciated by the Supreme Court in the above referred case. We may refer to the following observations of the supreme Court (p. 48) :
"It is true that the Tribunal's powers in dealing with appeal are of the widest amplitude and have, in some cases, been held similar to, and identical with, the powers of an appellate court under the Civil Procedure Code. Assuming that for the aforesaid reasons the Appellate Tribunal is competent to set aside an order dismissing an appeal for default in exercise of its inherent power, there are serious difficulties in upholding the validity of rule 24. It clearly comes into conflict with sub-section (4) of section 33 and in the event of repugnacy between the substantive provisions of the Act and a rule, it is the rule which must give way to the provisions of the Act. We would accordingly affirm the decision of the Special Bench of the High Court and hold that the answer to the question which was referred was rightly given in the affirmative."
20. In view of our finding that conditions Nos. 2 and 3 of Notifications No. S.O. 3433 dated October 21, 1965, travel beyond power conferred by section 36(1)(iv) of the Act, we must hold that these conditions being repugnant must give way to the substantive provisions of the Act contained in section 36(1)(iv) of the Act. In that view of the matter, we disregard conditions Nos. 2 and 3 of the Notification dated October 21, 1965, and hold that in accordance with section 36(1)(iv) of the Act and rule 88 of the Income-tax Rules, the assessee is entitled to claim deduction of the entire sum of Rs. 2,59,451 contributed to the approved superannuation fund during the previous year relevant to the assessment year. In that view of the matter, we answer the question referred in the affirmative, although for different reasons, that is to say, in favour of the assessee and against the Revenue. There shall be no order as to cost.