Income Tax Appellate Tribunal - Ahmedabad
Dy. Cit vs Shree Vallabh Glass Works Ltd. on 27 May, 2002
Equivalent citations: (2002)76TTJ(AHD)652
ORDER
B.M. Kothari, A.M. The revenue has raised the following two grounds in this appeal.
The learned Commissioner (Appeals) has erred in law and on fact in
(i) deleting the addition made under section 40A(3) of Rs. 9,57,774;
(ii) deleting the addition of Rs. 23,33,154 made on account of delayed payment of various funds.
2. The learned Departmental Representative relied upon the reasons mentioned in the assessment order. As regards ground No. (ii), the learned Departmental Representative also placed reliance on the judgment of the Hon'ble Kerala High Court in the case of Kerala State Financial Enterprises Ltd. v. CIT (1997) 225 ITR 999 (Ker).
3. The learned counsel supported the order of the Commissioner (Appeals). As regards ground No. (i) raised by the revenue, the learned counsel submitted that the disallowance under section 40A(3) was made by the assessing officer in respect of payment made to truck drivers towards payment for transportation of goods. The details of such cash payments exceeding Rs. 10,000 were annexed with the tax audit report, copy thereof has been placed at pp. 2 to 7 of the compilation. He drew our attention to Circular No. 220, dated 31-5-1977, to support his contention that such cash payments were made under exceptional and unavoidable circumstances covered by rule 6DD(j). He pointed out that the payments to drivers for transportation charges otherwise than in cash is not practicable as the truck drivers refuse to unload the goods without receiving cash payments. He also pointed out that the Commissioner (Appeals) in assessment year 1985-86 has deleted similar disallowance made under section 40A(3) by placing reliance on the decision of Tribunal Delhi Bench in the case of Nuchem Plastic Ltd. v. Dy. CIT (1992) 44 TTJ (Del) 261 and the decision in the case of Smt. Ninal Lal v. Dy. CIT (2000) 68 TTJ (Del) 52 in which it has been held as under :
"Payment of freight charges in cash could not be disallowed under section 40A(3) as it is a general practice that the transporters do not accept payments otherwise than in cash."
3.1. The learned counsel drew our attention to the following judgments where the amount paid in cash for disbursement among lorry drivers has been held to be covered by exceptions under rule 6DD :
(a) Tirupati Trading Co. v. CIT (2000) 242 ITR 113 (Cal)
(b) Nuchem Plastic Ltd. v. Dy. CIT (supra)
(c) JSR Enterprises v. Asstt. CIT (1994) 49 TTJ (Del) 363 In this case, payments were made to "Karigars" who are small-time operators insisting on cash payments. Affidavits of "Karigars" were filed by the assessee. Disallowance under section 40A(3) was held to be not justified.
(d) Smt. Ninal Lal v. Dy. CIT (supra) In this case also, cash payments made to Karigars pursuant to their insistence for cash payments was held to be covered by exceptional circumstances and disallowance under section 40A(3) was deleted.
(e) Dy. CIT v. Mayur Sales (2000) 68 TTJ (Jp-Trib) 731 In this case, payment made to truck drivers in cash was held to be covered by exceptional circumstances mentioned in rule 6DD(jI) read with Circular dated 31-5-1977.
3.2. The learned counsel submitted that the Commissioner (Appeals) has rightly deleted the disallowance of Rs. 9,57,774 made by the assessing officer under section 40A(3).
3.3. As regards ground No. (ii), the learned counsel submitted that the assessing officer has erred in making an addition of Rs. 23,33,154 in respect of delayed payments of PF, FPF and ESI by invoking the provisions of section 43B read with section 2(24)(x) and section 36(1)(va) of the Income Tax Act, 1961. He contended that the appellant company was declared as a sick industry vide order dated 27-8-1987, passed by the Board for Industrial and Financial Reconstruction (hereinafter referred to as the BIFR). He drew our attention to the following provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the SICA) :
22. Suspension of legal proceedings, contracts, etc.(1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding-up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the appellate authority.
32. Effect of the Act on other laws.(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976), for the time being in force or in the memorandum or articles of association of an industrial company or in any other instrument having effect by virtue of any law other than this Act.
3.4. The learned counsel drew our attention to Circular No. 523, dated 5-10-1988, issued by Central Board of Direct Taxes explaining the effect of the order passed by BIFR in a scheme for the rehabilitation of sick units, in which the Board has, inter alia, advised that if a scheme is sanctioned in pursuance of section 17(3) of the SICA, it will have an overriding effect over the provisions of the Income Tax Act by virtue of section 32 of the SICA, The learned counsel submitted that in view of section 22 of SICA, the delay in payment of PF, FPF and ESI of various employees of the company is not liable for any penalty or prosecution under the PF Act and other relevant laws. Therefore, the due date for payment of PF, FPF and ESI prescribed in PF Act and relevant laws are not applicable in the case of a company covered by BIFR. He also pointed out that in view of financial difficulties faced by the respondent- company, even the payment of salary could not be made in time. The amount of PF, FPF and ESI have duly been made well within the period of 15 days from the date of disbursement of salary. The details of date of disbursement of salary pertaining to the months of April, 1991 to March, 1992 and the details of actual payment of PF and FPF have been given in a chart placed at p. 28 of the paper book to support this contention. The learned counsel submitted that the Commissioner (Appeals) has rightly deleted the said disallowance in view of the fact that the appellant-company has been declared as a sick company by the order passed by BIFR.
3.5. The learned counsel also submitted that most of the payments of PF, FPF and ESI have actually been made during the relevant previous year under consideration. There is no justification for denying the deduction in respect of actual payments of PF, FPF and ESI made during the year under consideration by invoking the provisions of section 43B. He placed reliance on the decisions of Tribunal in the cases of Fluid Air (India) Ltd. v. Dy. CIT (1997) 63 lTD 182 (Mum-Trib) and Madras Radiators & Pressings Ltd. v. Dy. CIT (1996) 59 lTD 515 (Mad-Trib) to support this contention. The learned counsel was, however, fair enough to point out that there are contrary decisions of Hon'ble Calcutta High Court in the case of CIT v. K.L. Thiram & Co. Ltd. (1996) 218 ITR 149 (Cal) and CIT v. Edcons (India) (P) Ltd. (1992) 198 ITR 86 (Cal).
3.6. The learned counsel was also informed that the Hon'ble Andhra Pradesh High Court in the case of Hitech (India) (P) Ltd. v. Union of India & Ors. (1997) 227 ITR 446 (AP) and the Hon'ble Kerala High Court in the case of CIT v. South India Corpn. Ltd. (2000) 242 ITR 114 (Ker) have also taken a contrary view. The learned counsel submitted that the Hon'ble Gauhati High Court in the case of CIT v. Assam Tribune (2002) 253 ITR 93 (Gau) has held that where the contribution towards provident fund, etc. has been paid before the due date for filing of the return by the assessee, the amounts would be deductible. The learned counsel contended that section 43B provides that deduction inter alia, in respect of PF, FPF and ESI by the employer shall be allowed in the year in which such amount is actually paid. The second proviso to section 43B applies only in respect of amount of PF, FPF and ESI remaining outstanding at the end of the year, which will be allowed as deduction in the year under consideration provided such outstanding amount has been paid in next year before the due date prescribed under PF Act and other relevant laws. The proviso to section 43B is enabling proviso and was introduced with a view to reduce rigours of section 43B and it is not meant for providing for a total disallowance of such payments in the year in which the amount is actually paid or because there is a short delay of few days in making payment of such dues. The learned counsel has strongly supported the order of the Commissioner (Appeals).
4. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental Representative. We have also carefully gone through all the judgments cited by the learned representatives of both sides.
5. In order to appreciate the point in issue, it may be necessary to reproduce the relevant provisions of section 43B :
"Certain deductions to be only on actual payment 43B. Notwithstanding anything contained in any other provision of this Act. a deduction otherwise allowable under this Act, in respect of
(a) any such payment by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (ii) or sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution for a state financial corporation or a state industrial investment corporations, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or
(e) any sum payable by the assessee as interest on any term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan, or The following clause (f) shall be inserted after clause (e) of section 43B by the Finance Act, 2001, with effect from 1-2-2002;
(f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :
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.
Explanation (1)For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1-4-1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation. 2For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within the year under the relevant law.
The second proviso was substituted by the Finance Act, 1989, with effect from 1-4-1989, for the following :
"Provided further that no deduction shah, 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."
6. The expression used in old second proviso as it existed prior to 1-4-1989, included the words "paid during the previous year". The words "during the previous year" have been omitted in the subsequent second proviso inserted by the Finance Act, 1989. The significance of the omission of this expression "during the previous year" in second proviso to section 43B will be discussed in later part of this order.
7. The provisions of section 43B were inserted by the Finance Act, 1983. It may, therefore, be relevant to look at the Memorandum explaining the provisions of the Finance Bill, 1983, in order to properly understand the circumstances in which section 43B was inserted and the mischief which was sought to be prevented by such amendment. The relevant clauses 59 and 60 of the said Memorandum as published in (1983) 140 ITR (St) 160 are reproduced below :
"59. Under the Income Tax Act, profits and gains of business and profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting, income and outgo are accounted for on the basis of accrual and not on the basis of actual disbursements or receipts. For the purpose of computation of profits and gains of business and profession, the Income Tax Act defines the word "paid" to mean "actually paid or incurred" according to the method of accounting on the basis of which the profits or gains are computed."
60. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employee's State Insurance Scheme, etc. for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand they dispute the liability and do not discharge the same. For some reasons or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force (irrespective of whether such tax or duty is disputed or not) or any sum payable by the assessee, as an employer by way of contribution to the provident fund, or superannuation fund or gratuity fund or any other fund for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him. "
(Emphasis, here italicised in print, supplied)
8. The extract from the Budget Speech of Hon'ble Finance Minister as published in (1983) 140 ITR (St) 31 is also reproduced below :
"Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, for long period of time. For the purpose of their income-tax assessments, they nonetheless claim the liability as deduction even as they take resort to legal action, thus depriving the government of its dues while enjoying the benefit of non-payment. To curb such practices I propose to provide that irrespective of the method of accounting followed by the taxpayer, a statutory liability will be allowed as a deduction in computing the taxable profits only in the year and to the extent it is actually paid."
9. The Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. v. CIT (1997) 224 ITR 677 (SC) after referring to the aforesaid clauses of Memorandum explaining the provisions in Finance Bill and the Budget Speech of the Hon'ble Finance Minister, has observed as under at page 682 of the said report :
"Section 43B was, therefore, clearly aimed at curbing the activities of those taxpayers, who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident fund, etc. for long period of time but claimed deductions in that regard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year. It was to stop this mischief that section 43B was inserted. It was clearly not realised that the language in which section 43B was worded would cause hardship to those taxpayers who had paid sales-tax within the statutory period prescribed for this payment, although the payment so made by them did not fall in the relevant previous year. This was because the sale-tax collected pertained to the last quarter of the relevant accounting year. It could be paid only in the next quarter which fell in the next accounting year. Therefore, even when the sales- tax had in fact been paid by the assessee within the statutory period prescribed for its payment and prior to the filing of the income-tax return, these assessees were unwittingly prevented from claiming a legitimate deduction in respect of the tax paid by them. This was not intended by section 43B. Hence the first proviso was inserted in section 43B. The amendment which was made by the Finance Act of 1987 in section 43B by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee and which made the provision unworkable or unjust in a specific situation."
(Emphasis, here italicised in print, supplied) The Hon'ble Supreme Court in the aforesaid judgment at page 686 further observed as under :
"The departmental understanding also appears to be that section 43B, the proviso and Explanation 2 have to be read together as expressing the true intention of section 43B. Explanation 2 has been expressly made retrospective. The first proviso, however, cannot be isolated from Explanation 2 and the main body of section 43B. Without the first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of section 43B. The proviso supplies an obvious omission. But for this proviso the ambit of section 43B becomes unduly wide bringing within its scope those payments, which were not intended to be prohibited from the category of permissible deductions.
In the case of Goodyear India Ltd. v. State of Haryana (1991) 188 ITR 402 (SC) this court said that the rule of reasonable construction must be applied while construing a statute. Literal construction should be avoided if it defeats the manifest object and purpose of the Act.
Therefore, in the well known words of Judge Learned Hand, one cannot make a fortress out of the dictionary; and should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. In the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (SC), this court said that one should apply the rule of reasonable interpretation. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be red into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole."
(Emphasis, here eitalicised in print, supplied)
10. The Hon'ble Gujarat High Court examined the object of inserting section 43B in the case of Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240 (Guj). It may be appropriate to reproduce the observations made by the Hon'ble High Court at pages 246 and 247 :
"On a perusal of the language of section 43B, it is clear that it opens with a non obstante clause which means that it controls the operation of other provisions of the Act and irrespective of the other provisions, section 43B will have overriding effect. Keeping this in mind, if we examine the language of the section, it clearly brings out the intention of the legislature that the deduction in respect of any tax or duty under any law would be an allowable deduction in computing the income under section 28 of that previous year in which such sum is actually paid by the assessee. The intention is made more specific by providing that it would be so irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by the assessee. This clearly makes out that even if the mercantile method of accounting is employed and the liability to pay might have accrued which would give the assessee a right to obtain deduction, in view of the specific language of the section, the assessee would not be entitled to get deduction merely on accrual of the liability to pay the tax or duty, but would be so entitled to get deduction only on actual payment of tax or duty. The legislature has also taken care by providing an Explanation that the assessee shall not be entitled to any deduction under section 43B of the Act in respect of such sum in computing the income of the previous year in which such sum is clearly paid by him in case a deduction in respect of any such sum was allowed in the previous year. It is, therefore, clear that the assessee shall not be entitled to get the benefit twice, i.e., at the time when the liability arises, and also at the time when the actual payment is made. In view of the specific language of the section that deduction of the amount as mentioned in clauses (a) and (b) of section 43B would be allowed in the previous year in which such sum is paid, there is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee. "
[Emphasis, here italicised in print, supplied) The aforesaid judgment was delivered by the Hon'ble Gujarat High Court on 31-3-1986. The two provisos under section 43B had not been introduced by that time as those were inserted by the Finance Act, 1987, with effect from 1-4-1998.
11. The Hon'ble Gujarat High Court in a subsequent judgment in the case of CIT v. Chandulal Venichand (1994) 209 ITR 7 (Guj) examined the legislative history of various amendments made in section 43B from time to time. The Hon'ble High Court at p. 12 after reproducing the Memorandum explaining the provisions of Finance Bill, 1983, by which section 43B was introduced, has observed as under :
"From the aforesaid objects and reasons, it is apparent that, even it the assessee is maintaining the mercantile accounting system to curb the practice of non-payment of undisputed tax and to claim deduction, section 43B was introduced so that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force shall be allowed ii. computing the income only of that previous year in which such sum is actually paid by him.
By the Finance Act, 1987, two provisos to section 43B were inserted with effect from 1-4-1988. It is submitted that the first proviso is inserted to mitigate the hardship caused to the taxpayers because the sales-tax for the last quarter cannot be paid during the previous year and under the provisions of section 43B, unnecessarily payment of sales-tax for the last quarter was disallowed.
12. It is true that the aforesaid judgment was delivered by the Hon'ble Gujarat High Court in respect of first proviso to section 43B with reference to the outstanding amount of sales-tax payable pertaining to last quarter but the provident fund of last month also stand on the same footing as that amount also cannot be paid during the previous year, and it can be deposited only in next month of next accounting year before the due' date prescribed under the PF Act, etc. The, second proviso was also, therefore, inserted to mitigate the hardship caused to taxpayers because of the wide amplitude of substantive provisions contained in section 43B. But for the second proviso, the employer's and employees' contribution towards provident fund pertaining to the last month of the accounting year paid before the due date prescribed under the PF Act in next year would have deprived the assessee of his legitimate claim to deduction in respect thereof. The second proviso to section 43B was also introduced to mitigate such unintended hardship likely to be caused by substantive provisions of section 43B. It may be relevant here to mention that the Finance Act, 1989, made certain amendments in the language of section 43B with a view to ensure that the payment in respect of last month of previous year paid before the due date in next year should be allowed as deduction. The use of words "during the previous year" occurring in the second proviso was omitted by the Finance Act, 1989, with a view to mitigate such hardship. The Memorandum explaining the reasons for introducing the said amendment has inter alia, stated as under vide (1989) 176 ITR (St) 123:
"Under the existing provisions of section 43B of the Income Tax Act, it is also provided that any sum payable by the assessee as an employer by way of contribution to the provident fund or superannuation fund, etc. is not allowable as a deduction unless the same is paid "during" the previous year on or before the due date'. The payment in respect of the last month of a previous year shall have to be made by the due date and cannot possibly be made in the previous year itself. It is, therefore, proposed that the words "during the previous year" occurring in the second proviso to section 43B be deleted.
This amendment will take effect from 1-4-1989.
Unlike other payments referred to in section 43B of the Income Tax Act, the deduction regarding employer's contribution, if denied in a year, is not available as a deduction in any subsequent year also. On account of various reasons like postal delay, strikes or long holidays, the payment of employer's contribution to the respective authorities is delayed even though the payment by a cheque or draft is tendered before the due date. To avoid any hardship being caused in such cases, it is proposed to provide that, if any sum payable by an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, if made by a cheque, draft or any other mode, has been tendered by the due date, and the actual payment has been realised within fifteen days of the due date, deduction shall be allowed.
This amendment will take effect from 1-4-1989, and will, accordingly, apply in relation to assessment year 1989-90 and subsequent years."
13. After considering the various amendments made in section 43B, its provisos and Explanations, the Hon'ble Gujarat High Court in the case of CIT v. Chandulal Venichand (supra) summed up the objects and reasons for introducing section 43B and the provisos as under :
"From the aforesaid objects and reasons for introducing section 43B of the Act and the proviso as well as from the aforesaid circular issued by the department. it can be stated that :
(A) The objective behind these provisions is to provide for a tax disincentive by denying deduction in respect of a statutory liability which is not paid within time.
(B) Broadly stated, under the mercantile system of accounting, income and outgoings are accounted for on the basis of accrual and not on the basis of accrual disbursements or receipts.
(ii) Several cases were noticed where taxpayers were not discharging their statutory liability such as in respect of sales-tax, excise duty, etc.
(iii) For the purpose of their income-tax assessments, they were claiming deduction in respect of the liability on the ground that they maintain accounts on the mercantile basis. They claimed deduction even though they were taking resort to legal action and not paying the amount, thus depriving the government of its dues while enjoying the benefit of non-payment.
(iv) To curb this practice, section 43B was introduced and it provides that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force, otherwise allowable as provided in clauses (a), (b), (c) and (d), shall be allowed only in computing the income of that previous year in which such sum is actually paid."
14. The Hon'ble Gujarat High Court examined the main function of the proviso inserted below section 43B at page 25 as under :
"The main function of the proviso is to carve out an exception to the main enactment. It cannot normally be so interpreted as to set at naught the real object of the main enactment. [See A.N.Sehgal v. Raje Ram Shearam AIR 1 991 SC 1406].
The object of section 43B was to refuse deduction to an assessee in respect of a certain statutory liability, which the assessee does not discharge or where there is a dispute about the liability. In the case of certain assessees, practical difficulties were encountered. With a view to getting over them, amendments in section 43B were introduced by the Finance Act, 1987. Under the law as amended, if an assessee has paid sales-tax, additional sales-tax, central sales tax, etc. on or before the due date applicable in his case for furnishing his return of income under section 139(1) of the Act, section 43B has no application. With regard to provident fund, family pension, etc., the assessee shall be entitled to claim deduction if the same was paid on or before the due date as defined in the Explanation below clause (va) of section 36(1) of the Act. The assessee who made payments in the aforesaid terms, were not intended to be brought into the net of disallowance. The object to suppress the mischief of withholding of payment and getting a deduction did not apply to such cases. Therefore, the first proviso to section 43B is retrospective in its operation. Explanation 2 to the said section is subject to the said proviso and the law as amended is applicable for the assessment year 1984-85. The view in this regard expressed by the Patna High Court in Jamshedpur Motor Accessories Stores case (supra) has, therefore, our concurrence. We are in respectful disagreement with the view of the Delhi High Court in Escorts Ltd.'s case (supra). A view similar to ours has been taken by the Calcutta High Court in CIT v. Sri Jagannath Steel Corporation (1991) 191 ITR 676 (Cal)."
At page 27, the Hon'ble Gujarat High Court further observed as under :
"We agree that the language of section 43B is clear and unambiguous. Therefore, for interpreting the said section, no resort can be had to the aims and objects or to the Minister's speech with a view to interpret the provisions of the Act. But here, we are not interpreting section 43B. We are considering whether the proviso, which is inserted with effect from 1-4-1988, and which is in its nature declaratory, remedial and curative, should be held to be having retrospective effect. As stated earlier, the literal interpretation of section 43B, without there being proviso, was likely to cause unintended hardship to genuine taxpayers. It becomes impossible for them to discharge their sales-tax liability for the last quarter within the previous year. It would be too much to hold that the legislature would require the assessee to discharge an impossible function. Hence, to mitigate the hardship, the proviso was inserted. It is also a well recognised rule of construction that a statutory provision must be so construed which avoids absurdity and mischief and that a clarificatory and explanatory provision should normally in the context be interpreted to have retrospective effect."
15. The Hon'ble Gauhati High Court in CIT v. Assam Tribune (supra) applied the interpretation made with regard to the first proviso to section 43B in respect of interpretation of second proviso to section 43B and held as under :
"Where the contribution towards provident fund, etc., has been paid before the filing of the return by the assessee, the amounts would be deductible. "
16. It may also be pertinent to reproduce the headnote of the decision of Tribunal Madras Bench in the case of Madras Radiators & Pressing Ltd. v. Dy. CIT (supra) :
"Contributions received from the employees towards PF or the State Insurance Fund are first treated as income of the assessee in the previous year under section 2(24)(x). Such contributions are to be allowed as deduction under section 36(1)(va) if the same is credited by the assessee to the employees account in the relevant fund on or before the due date prescribed under the relevant Acts.
In regard to determination of the due date for payment of contribution difficulty would not arise if the salary is paid for a particular month on the last day of the same month. But in cases where the salary is paid within 7 days from the end of the month to which it relates, there arises a certain amount of ambiguity with regard to the period of 15 days from the close of each month. Reading together sections 36 and 38 of the EPF Scheme, it could be said that there is certain amount of ambiguity over the expression "15 days from the close of the month". Hence, in the case and ambiguity the benefit should be given to the taxpayer. Consequently, the payments in the instant case, had been made within the due date and, therefore, no part of its could be disallowed.
If the due date is taken to refer to the period of 15 days from the end of the month for which salary is payable to the employees, there was no doubt that in the instant case, there was a delay of only 4 days for two months in respect of PF contribution and a delay of 5 days in respect of ESI contributions. Section 36(1)(va) yields to section 43B as the latter section starts with a non obstante clause. According to section 43B the deduction is to be regarded only on the basis of actual payment in the previous year in which it is so paid. The first proviso to section 43B reduces the rigour of the main section by enabling the assessee to get the benefit of deduction in respect of taxes, duties, etc. even if they were paid after the end of the previous year but before the due date for furnishing of return under section 139(1). According to second proviso to section 43B unless the payment in respect of contribution to PF, etc. have been actually made during the previous year on or before the due date as prescribed under the relevant Acts or the Rules, no deduction should be allowed in respect of the same. Thus, the first proviso in a sense is an enabling provision and the second proviso appears to be a disabling provision. The expression "during the previous year" was omitted from second proviso to section 43B with effect from 1-4-1989, and with this omission so long as the payments were made within the previous year the payments are to be allowed as deduction under the main section. In respect of the contributions recovered on the last day of the previous year or any other subsequent dates under the second proviso deduction has to be allowed if the payment has been made within the due date prescribed under the Act. Thus, the second proviso to section 43B has also been made an enabling provision just as the first proviso by the substitution of the second proviso with effect from 1-4-1989. Further, provisos first and second are meant to helpmate the main section rather than hinder its course. In this view of the matter, even assuming that the due date for the payment of the contribution fell within a period of 15 days from the end of the month for which salaries were payable since, in the instant case, all the payments had been made in the year itself though with a marginal delay of a few days on certain occasions, no part of the contribution received by the assessee from its employees towards PF and ESI could be disallowed.
Reading sections 30 and 32 of the EPF Scheme together, it would be clear that it is the liability of the employer to pay his own contribution and also the contribution of the member of the PF scheme employed by him and the employer is also given the right to recover the amount of member's contribution from the wages bill. Therefore, the provisions of section 43B which has the overriding effect over other sections must prevail over section 36(1)(va).
16.1. Similar view was taken by Tribunal Mumbai Bench in the case of Fluid Air (India) Ltd. v. Dy. CIT (supra).
17. Let us now consider the various judgments which have been relied upon by the learned Departmental Representative during the course of hearing.
Hitech (India) (P) Ltd. v. Union of India & Ors. (supra) This judgment was delivered on 27-12-1996, i.e., prior to the judgment of the Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. v. CIT (supra) which was delivered on 10-3-1997. The Hon'ble Andhra Pradesh High Court has held that section 43B which commences with non obstante clause, mandates that the sum referred to in any of the clauses, will be allowed as deduction in computing the income under section 28 of the previous year, in which such sum is actually paid by the assessee, irrespective of the fact that the said deduction is otherwise allowable in the Act, and irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him. The first, proviso to section 43B relaxes the rigour of the section if the sum referred to in clause (a) or clause (c) or clause (d) is actually paid by the assessee before the due date applicable in his case for furnishing the return of income under section 139(1) in respect of previous year in which the liability to any such sum was incurred and evidence of such payment is furnished by the assessee along with such return. The second proviso imposes a further restriction on the allowability of deduction of any sum referred to in clause (b). It provides that 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, it shall not be allowed as deduction. For this purpose, the definition of "due date" as given in the Explanation to clause (va) of sub-section (1) of section 36 is adopted. Thus, it has been held by the Hon'ble Andhra Pradesh High Court that unless such sum has actually been paid before the due date it shall not be allowed as deduction. Though the general rule embodied in section 43B is one of allowability of deductions based on actual payment, the rule contained in the second proviso is an exception to the said rule.
18. The Hon'ble Kerala High Court in the case of CIT v. South India Corpn Ltd. (supra) has held that the main provision of section 43B of the Act provides that payments made during the currency of the financial year relevant to assessment year qualifies for deduction in certain cases. But in the case of payments relating to PF, etc., shares has been laid on payment within the due date. Therefore, it cannot be said that the payment made beyond the due date also qualifies for deduction, in view of the prescription in the main provision itself. Had that been the legislative intent, there was no necessity to enact the second proviso. There is nothing repugnant between the main provision and the proviso. They operate in different situations. The normal function of the proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. This judgment was delivered on 4-10-1999. The judgment of the Hon'ble Apex Court in the case of Allied Motors (P) Ltd. (supra) delivered on 10-3-1997, was not even cited in the aforesaid judgment.
19. The Hon'ble Calcutta High Court in the case of CIT v. Edcons (India) (P) Ltd. (supra) considered the question relating to deduction inter alia, in respect of outstanding liability of PF of Rs. 2,885 shown in the balance sheet. The Hon'ble High Court held as under :
"The provident fund contribution has to be paid within 15 days from the last day of the month. The assessee cannot, by not making the payment and showing it as a liability, get the benefit of deduction in the case of the provident fund. The principles governing the cases of sales-tax dues will apply to the case of provident fund contribution in respect of the last month of the accounting year, and not for any other month. No deduction will be allowed unless the contribution is paid for the last month of the accounting year within 15 days after the closing of the accounting year. We, therefore, answer the question in this reference by saying that the Tribunal was right in holding that Central Sales Tax, and UP sales-tax, if not statutorily payable in the accounting year, section 43B of the Act will not be applicable but so far as provident fund is concerned, the Income Tax Officer will only consider the payment of contribution, if any, made for the last month of the accounting year within the time prescribed by the statute. No other dues or provident fund will be allowed as deduction. We answer the question accordingly."
19.1. It has been clearly held by the Hon'ble Calcutta High Court in the aforesaid case that the principles governing the cases of outstanding sales-tax liability will apply to the cases of PF contribution in respect of last month of the accounting year and not for any other month. No deduction will be allowed unless contribution is paid for last month of the accounting year within 15 days after the closing of the accounting year. This judgment does not deal with the question relating to actual payment of PF contribution made by the assessee in the relevant previous year under consideration.
20. The Hon'ble Calcutta High Court in the case of CIT v. K.L. Thirani & Co. Ltd. (supra) also considered the question relating to deduction of outstanding sales-tax liability and outstanding ESI provision and PF contribution. The Hon'ble Calcutta High Court held that the Tribunal was correct in holding that the provisions were allowable, if the liabilities were discharged in terms of the provisos below section 43B read with the Explanations. The Hon'ble Calcutta High Court followed its own decision in the case of CIT v. Jagannath Steel Corporation (1991) 191 ITR 676 (Cal). The deductions in respect of outstanding sales-tax, turnover tax and purchase tax, municipal taxes, were allowed by following the judgment in the case of Jagannath Steel Corporation (supra). However, the Hon'ble Calcutta High Court held that the same principles cannot be applied to the provisions for ESI liability and PF contribution governed by clause (b) of section 43B After reproducing the relevant section 43B(b) and second proviso, the Hon'ble Calcutta High Court held as under :
"The proviso says that the provision for the liability for contribution to provident fund, superannuation fund, gratuity fund or any other fund for the welfare of the employees is allowable only if the payment corresponding to the provision is made within the "due date" for such payments in the Explanation below clause (va) of sub-section (1) of section 36. This takes us to that particular provision and the "due date" is defined in the said Explanation as the date by which the assessee is required as an employer to credit an employees' contribution to the employees' account in the relevant fund under any Act, Rules, order or notification issued thereunder or under any standing order, award, contract of service or otherwise. That clause (va) of section 36(1) is as follows :
"(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date."
"(x) any sum received by the assessee from his employees as contributions to 'any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948) or any other fund for the welfare of such employees."
From a combined reading of these provisions, it is clear that the contributions to provident fund or superannuation fund or a fund under the employees' State Insurance Act are allowable only if the payments are made within the due date under the Acts or the Rules or the orders governing such contributions.
In any case, the Tribunal was correct in holding that the provisions are allowable, if the liabilities are discharged in terms of the provisos below section 43 read with the Explanations."
20.1. In the aforesaid case, the amount of provision made for contribution of PF, etc., was held to be allowable if the liabilities are discharged in terms of proviso below section 43B read with the Explanations. The net result of this judgment is that where the assessee had deposited the amount of provision made for PF contribution, ESI, etc. before the due date prescribed under the respective laws, it will be allowed as deduction like sales-tax of last quarter paid in next year before the due date prescribed under section 139(1) is allowable under the first proviso to section 43B.
21. The facts discussed above clearly indicate that contrary view taken by the Hon'ble Andhra Pradesh Court in the case of Hitech India (P) Ltd. (supra) and Hon'ble Kerala High Court in the case of South India Corporation Ltd. (supra) did not have the benefit of considering the judgment of the Hon'ble Apex Court in the case of Allied Motors (P) Ltd. (supra). The Hon'ble Andhra Pradesh High Court and the Hon'ble Kerala High Court also did not examine the legislative history of various amendments made in section 43B from time to time more particularly it did not examine the impact of omission of the words "during the previous year" used in second proviso until its omission with effect from 1-4-1989.
22. The Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. (supra) has clearly held that in view of specific language of section, deduction oil of the amount as mentioned in clauses (a) and (b) of section 43B shall be allowed in the previous year in which the same is paid. There is no scope for any doubt that such sum can be allowed by way of deduction while computing the income in the previous year in which such sum is actually paid by the assessee. Such a clear meaning of section 43B is self-evident from a plain reading of the provisions contained in section 43B. Section 43B opens with a non obstante clause which means that section 43B will have overriding effect over the other provisions contained in Income Tax Act. It clearly lays down that deduction in respect of any tax or duty or in respect of any sum payable by the assessee as an employer by way of contribution to any PF, etc. shall be allowed only in computing the income of that previous year in which such sum is actually paid by him. The intention is made more specific that it would be so irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him. Thus, in a case where the assessee has maintained its accounts on mercantile basis, the deductions in respect of such sums will be allowed only in the year in which such sum is actually paid and not in the year of accrual of liability to pay such amount. The Explanation 1 to section 43B further fortifies the same view. It provides that where deduction in respect of any sum referred to in clause (a) or (b) of section 43B is allowed in computing the income of the previous year relating to assessment year 1983-84 or any earlier assessment year in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the same is actually paid by him. The Explanation inserted with a view to obviate double deductions in respect of same amount also clearly indicate, that if the liability towards PF pertaining to assessment year 1983-84 or any earlier assessment year was not allowed as deduction in the year when such liability was incurred or had accrued, the assessee shall be entitled to get deduction in respect of such sum in the year in which such sum has actually been paid by him in view of clear language of the main provisions of section 43B. The findings given by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. (supra) hold good even after insertion of two provisos to section 43B. The second proviso to section 43B nowhere specifically provides that this would override the main provisions of section 43B which provides that deduction in respect of any tax, duty or any sum payable by the assessee as an employer by way of contribution to any PF, etc. will be allowed in computing the income of that previous year in which such sum is actually paid by him.
23. The Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. (supra) has laid down the manner in which section 43B should be interpreted and how legislative intent should be ascertained for making rational and realistic interpretation and while doing so, the Hon'ble Supreme Court has rejected the literal interpretation made by the Hon'ble Delhi High Court in the case of Sanghi Motors v. Union of India (1991) 187 ITR 703 (Del). The Hon'ble Supreme Court has approved the judgment of the Hon'ble Gujarat High Court in the case of CIT v. Chandulal Venichand (supra) and also the judgment of the Hon'ble, Calcutta High Court in the case of CIT v. Jagannath Steel Corpn. (supra). The Hon'ble Supreme Court has clearly observed that the proviso to section 43B was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee. The Hon'ble Apex Court following its earlier decision in the case of Goodyear India Ltd, v. State of Haryana (1991) 188 ITR 402 (SC) held that rule of reasonable construction must be applied while construing a statute. Literal construction should be avoided if it defeats the manifest object and purpose of the Act. They also referred to their judgment in the case of R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (SC) while applying rule of reasonable interpretation in relation to first proviso to section 43B. It was observed that a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole. The Hon'ble Supreme Court further observed that the Gujarat High Court in Chandulal Venichand (supra) has held that the amendment by way of introducing first proviso to section 43B is curative and explanatory and hence retrospective.
24. The Hon'ble Gujarat High Court reproduced para 24 of the Memorandum explaining the provisions contained in Finance Bill, 1989, at pages 13 and 14 of 209 ITR. In para 24 of the Memorandum, it has been clearly indicated that in the existing provisions of section 43B a deduction for any sum payable by way of tax duty, cess or fees, etc. is allowed on actual payment basis only. The proviso was introduced to remove hardship caused to certain taxpayers who had represented that since the sales-tax for the last quarter cannot be paid within that previous year, the original provisions of section 43B will unnecessarily involve disallowance of the payment for the last quarter. The amendment in the second proviso to section 43B was also made by the Finance Act, 1989. The Memorandum explaining the reasons for making such amendment which is reproduced at page 14 of 209 ITR indicates that under the existing provisions of section 43B which has also provided that any sum payable by the assessee as an employer by way of contribution to PF, etc. is not allowable as deduction unless the same is paid during the previous year, on or before the due date. It was, thereafter, clarified that the payment in respect of last month of a previous year shall have to be made by due date, cannot possibly be made in the previous year itself. It was, therefore, proposed that the words "during the previous year" occurring in second proviso to section 43B should be deleted. Thereafter, the Hon'ble Gujarat High Court has summarised the objects and reasons for introducing section 43B and the provisos from time to time. The object specified in para (A)(iv) by the Gujarat High Court which appear at page 16 of 209 ITR is that section 43B introduced with a view to curb this practice viz., "not discharging their liability but claiming deduction in respect of such liability on the ground that they maintain accounts on mercantile basis" and provides that deduction for any sum payable by the assessee by way of tax or duty under any law, otherwise allowable as provided under clauses (a), (b), (c) and (d), shall be allowed only in computing the income of that previous year in which such sum is actually paid. The Hon'ble Gujarat High Court in para (B) at page 16 of 209 ITR has further observed that the proviso was introduced to remove the hardship caused to tax payers who had represented that because the sales-tax for the last quarter cannot be paid within the previous year and that the provisions of section 43B will unnecessarily involve disallowance of the payment for the last quarter, hence the first proviso was added for the purpose of supplying an obvious omission. The impossibility of payment of PF contribution pertaining to the last month of the accounting year in that very previous year also needed a remedial measure. The words "during the previous year" used in second proviso was omitted by the Finance Act, 1989, with a view to mitigate such hardship relating to disallowance in respect of last month's PF contribution which could not possibly be actually paid in the previous year itself. The second proviso is also, therefore, a provision of remedial nature and was enabling provision for enabling giant of deduction in respect of PF contribution of last month provided such amount is paid before the due date prescribed under the PF Act. The second proviso to section 43B introduced by the Finance Act, 1987 with effect from 1-4-1988, provided 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 Explanation .... On the basis of such language used in second proviso it could perhaps be argued that in respect of PF contribution, etc. covered by section 43B(b) the payment must have been made not only during the previous year but also within the due date prescribed under the relevant Acts. By use of such language in second proviso, law makers realised unintended hardship likely to be caused because of such a provision as it was impossible to make payment of PF contribution of last month of the accounting year in the same previous year. The second proviso was, therefore, amended by the Finance Act, 1989, in which the words "during the previous year" were omitted. This clearly indicates that deduction in respect of payments made during the previous year will be governed by the main provisions of section 43B which provides that deduction in respect of such sums shall be allowed in the year when actual payment is made regardless of the previous year in which the liability for such payment was incurred. Similar meaning emerges from the Explanation 1 to section 43B which also clearly indicates that the PF contribution of assessment year 1983-84 or any earlier year will be allowed as deduction in the year in which it has actually been paid provided no such deduction in respect of such liability was allowed in assessment year 1983-84 or any earlier year when such liability was incurred. The purpose of second proviso to section 43B, like the first proviso is to deal with the payments contemplated in sub-clause (a) of section 43B made after the previous year and not to deny deduction of PF contribution, etc. made during the previous year merely because there was a delay in making payments thereof in the year under consideration. The omission of words "during the previous year" make it abundantly clear that the object of section 43B and second proviso thereto is not to disallow delayed payments made during the previous year but it only provides that the payment of PF liability outstanding at the end of the year will be allowed as deduction if such amounts have been paid before the due date prescribed under the PF Act etc. It is, therefore, clear that very purpose of first proviso and second proviso to section 43B is to deal with the cases where the liability in respect of tax or duty or fees or cess, etc. and PF contribution are discharged after the end of the previous year. These provisos cater to this specific requirement of mitigating hardship likely to be caused because of disallowance such as in respect of sales-tax liability of last quarter or PF contribution of last month which possibly cannot be paid in the same year and it has been held to be allowable as deduction by virtue of these provisos. The first proviso provides that if sales-tax liability is discharged in next year before the due date prescribed under section 139(1), it will be allowed as deduction in the relevant previous year. Likewise the second proviso provides that deduction in respect of last month's PF contribution should be allowed if it has been paid in next year before the due date prescribed under the PF Act, etc. The deduction in respect of PF contribution, etc. as contemplated in section 43B(b) paid during the previous year is clearly allowable in the year when such sum is actually paid by virtue of plain language of the main provision of section 43B. The proviso to section 43B cannot override the main provision so as to deny deduction in respect of such sums actually paid in the relevant previous year. Such a view is clearly supported by the judgment of the Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. (supra) and the judgments of the Hon'ble Gujarat High Court in the cases of Lakhanpal National Ltd. and Chandulal Venichand (supra).
25. The amount of PF contribution, etc. remaining outstanding as on the close of the accounting year paid in next year before the due date prescribed under the PF Act, etc. will also be allowed as deduction in the relevant previous year. The delayed payment of PF contribution made in next year beyond the due date prescribed in PF Act, etc. will be allowed as deduction in the next year when it has actually been paid. The assessing officer is directed to examine the date of actual payment and decide the issue in the light of aforesaid directions.
26. The learned counsel appearing on behalf of the assessee is placed heavy reliance on the provisions of SICA. He contended that the provisions of SICA shall have effect notwithstanding anything inconsistent therewith contained in any other law. He submitted that the provisions of SICA will, therefore, override the provisions of the PF Act as also the provisions of the Income Tax Act. The time-limit of 15 days prescribed for payment of PF contribution and a grace period of five days allowable thereafter as provided in the laws relating to payment of PF will not apply to the case of the assessee as an order under BIFR was already passed on 27-8-1987, declaring the company as sick company. The learned counsel pointed out that the payments of salary and wages itself was delayed on account of liquidity problem faced by the company. The amount of PF contribution has been deposited by the company within 15 days from the date on which salary was paid to workers. The chart to support this contention has been placed at page . 28 of the paper book. The learned counsel submitted that the due date for payment of PF, etc., in the case of a company which has been declared as sick company under BIFR cannot be the date mentioned in Explanation to section 36(1)(va). The due date in the case of sick company stands deferred by virtue of provisions of SICA. In view of these facts also, the order passed by the Commissioner (Appeals) directing the assessing officer to grant deduction in respect of payment of PF, etc., is perfectly valid and justified.
27. We have considered the submissions made by the learned representatives of the parties. The delay in payment of PF, FPF and ESI had occurred on account of bad financial position of the company. Such bad financial position of the company has resulted in declaration of that company as a sick company and an order under BIFR was also passed. Such delay in payment of PF may not result in initiation of proceedings for winding up of industrial company or for execution, distress or like against any of the properties of the industrial company but that will not override the provisions of section 43B as the provisions of section 43B are not in any manner inconsistent or contrary to the provisions of SICA. The main provisions contained in section 43B provides that deduction in respect of any tax, duty, or any sum payable by an employer towards PF, FPF, ESI, etc., will be allowed in the year in which such sum is actually paid. Since we have held that the delayed payment of PF, FPF, ESI, etc., are also eligible for grant of deduction under section 43B in the year in which it has actually been paid, the rights of the sick company will not be jeopardised in any manner as a result of such interpretation of section 43B.
28. In view of the aforesaid facts and discussion, the matter is restored back to the assessing officer for grant of deduction in respect of PF, FPF and ESI, etc., in accordance with the directions given hereinbefore.
29. In the result, the appeal is treated as partly allowed for statistical purpose.