Kerala High Court
Aspinwall And Co. Ltd. vs Deputy Commissioner Of Income Tax on 1 August, 2006
Equivalent citations: (2007)207CTR(KER)475
Author: K.S. Radhakrishnan
Bench: K.S. Radhakrishnan, V. Ramkumar
JUDGMENT K.S. Radhakrishnan, J.
1. Aspinwall & Co. Ltd. is the appellant in IT Appeal Nos. 21 and 25 of 1999 and Aspinwall & Co. (Travancore) Ltd. is the appellant in IT Appeal No. 30 of 1999.
2. Questions raised in all these appeals overlap and hence we are disposing of these appeals by a common judgment. Following questions of law arise for consideration in IT Appeal No. 21 of 1999 which relates to the asst. yr. 1991-92:
(a) Whether, on the facts and circumstances of the case was the Tribunal justified in confirming the disallowance of the contribution made by the appellant-assessee to the Executive Staff Provident Fund ?
(b) Whether Section 40A(9) of the IT Act is applicable to the contribution to executive staff provident fund and should not the Tribunal have allowed the deduction claimed under Section 37 on the basis of the decision of this Hon'ble Court in CIT v. Aspinwall & Co. Ltd. (1993) 111 CTR (Ker) 138 : (1993) 204 ITR 255 (Ker) in the appellant's own case ?
(c) Whether on the facts and circumstances of the case was the Tribunal justified in disallowing the amount of Rs. 59,228 being the expenditure incurred by the assessee for giving gifts and presents given to business clients ?
(d) Whether on the facts and circumstances of the case the Tribunal is right in holding that the expenditure incurred for giving presents is an entertainment expenditure for the purpose of Section 37(2) and not an expenditure allowable under Section 37(1) of the IT Act ?
(e) Whether on the facts and circumstances of the case was the Tribunal justified in confirming the disallowance of contribution to the Coir Workers Welfare Fund by applying Section 43B of the IT Act and in holding that it cannot be allowed unless the payment was made within the "due date" as contemplated under the said section ?
(f) Whether on the facts and circumstances of the case was the Tribunal justified in confirming disallowance of expenditure for maintenance of accommodation for visitors in the estate and the expenditure towards rent incurred for hiring out ?
Question (c) relates to disallowance of the expenditure incurred by the assessee for giving gifts and presents to the business clients and question (d) deals with disallowance of expenditure incurred for giving presents as entertainment expenditure for the purpose of Section 37(2) of the IT Act. Abovementioned questions are already covered against the assessee by the decision in CIT v. Alleppey Co. Ltd. . Question (f) is with regard to the disallowance of expenditure for maintenance of accommodation for visitors in the estate and the expenditure towards rent incurred for hiring out the residential accommodation as expenditure for maintenance of guesthouse as contemplated under Section 37(3) of the IT Act. This question is also covered against the assessee in United Catalysts (India) Ltd. v. CIT . In IT Appeal No. 30 of 1999 also questions (c) and (d) are covered against the assessee in view of the decisions cited supra. Questions (a) and (b) arising in IT Appeal No. 30 of 1999 relate to the asst. yr. 1991-92 and the same are questions (a) and (b) in IT Appeal No. 21 of 1999. We are therefore concerned only with questions (a), (b) and (e) in IT Appeal No. 21 of 1999. Rest of the questions in IT Appeal Nos. 21 and 25 of 1999 are identical with the questions raised in IT Appeal No. 30 of 1999 as well which relate to asst. yr. 1990-91.
3. The primary question coming up for consideration in these cases is whether the Tribunal is justified in confirming the disallowance of the contribution made by the appellant-assessee to the executive staff provident fund and also whether Section 40A(9) of the IT Act is applicable to the contribution to executive staff provident fund. This issue earlier came up for consideration before this Court relating to the very same assessee in IT Appeal No. 30 of 1999 in CIT v. Aspinwall & Co. (Travancore) Ltd (Ker). The question referred in that case was whether the assessee was entitled to claim deduction under Section 37(1) of the IT Act in respect of the contribution made to the "unrecognised executive staff provident fund". In that case contention of the Revenue was repelled. It was held that the assessee was entitled to get deduction in respect of contribution to the executive staff provident fund. That decision related to the asst. yr. 1979-80. Later IT Appeal Nos. 21 of 1999 and 25 of 1999 also came up for consideration before this Court. Question raised was whether the assessee was qualified and entitled to deduction under Section 36(1)(iv) of the IT Act for the contribution made to the executive staff provident fund. This Court in CIT v. Aspinwall & Co. Ltd. (1993) 111 CTR (Ker) 138 : (1993) 204 ITR 255 (Ker), following the earlier decision in Aspinwall & Co. (Travancore) Ltd.'s case (supra), answered the reference in favour of the assessee and held that the Tribunal had not committed any error in allowing deduction of Rs. 52,781 paid by the assessee to the executive staff provident fund. Contention was raised by the assessee in all these cases that in view of the decision of this Court referred to above, assessee is entitled to get deduction for the amount paid to the unrecognised provident fund expenditure as provided in Clause (iv) or Clause (v) of Sub-section (1) of Section 36. Contention raised by the assessee was refuted by the Revenue before the Tribunal contending that the decision of this Court in Aspinwall & Co. (Travancoie) Ltd.'s case (supra) would not apply to the assessment years in question in view of the insertion of Sub-section (9) to Section 40A of the Finance Act, 1984 with retrospective effect from 1st April, 1980.
4. We have therefore, to examine whether the insertion of Sub-section (9) to Section 40A is in line with the judgment of this Court on this point. The question that we have to consider is whether the assessee is entitled to get deduction in respect of the contribution made to the unrecognised provident fund in the light of Sub-section (9) of Section 40A. Sub-section (9) of Section 40A is extracted below for easy reference:
(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, AOP, BOI, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under Clause (iv) or Clause (v) of Sub-section (1) of Section 36, or as required by or under any other law for the time being in force.
It is clear, abovementioned provision would indicate that the provisions of Section 40A shall have effect notwithstanding anything to the contrary contained in any other provisions of the Act relating to the computation of income under the head "Profits and gains of business or profession". Section 40A(1) of the Act is extracted for easy reference:
40A. Expenses or payments not deductible in certain circumstances.-(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession'.
It is evident that after the insertion of Sub-section (9) by the Finance Act, 1984, no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards contribution to a provident fund except where such amount is paid for the purposes of and to the extent provided by or under Section 36(1)(iv). Section 36 deals with other deductions which states that 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. Section 36(1)(iv) is extracted below for easy reference:
(iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation 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 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.
5. Section 37(1) is a general provision which says that any expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of-business or profession". In view of the provisions of Section 40A(9) no deduction could be allowed in respect of any sum paid towards contribution to a provident fund by taking recourse to the residuary Section 37(1). In this connection we may refer to the Explanatory Note attached to Section 40A(9), which is extracted below for easy reference:
16.1 Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, AOP, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law.
A reading of the Explanatory Note would show that the intention of the legislature is to deny the deduction in respect of sums paid by the assessee as employer towards contribution to any fund, trust, company, etc. for any purposes within the limits laid down under the provisions to recognised provident fund. We may in this connection refer to the decision of the apex Court in Shree Sajjan Mills Ltd. v. CIT that case apex Court affirmed the decision of the Madhya Pradesh High Court and held that for the gratuity to be deductible, the conditions laid down in Section 40A(7) had to be fulfilled and that deduction could not be allowed on general principles under any other provisions of the Act relating to computation of income under the head "Profits and gains of business or profession". In other words, Section 40A had the effect of notwithstanding anything contained in Sections 30 to 39 of the Act. In view of the above no deduction would be allowed in respect of any contribution towards provident fund. Same principle could be adopted in the matter of Section 40A as well.
6. We have already indicated that Section 36(1)(iv) of the Act provides that any sum paid by the assessee as an employer by way of contribution towards recognised provident fund or an approved superannuation 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. Rules 75, 87 and 88 of the IT Rules deal with limits for contributions, investment of fund moneys and ordinary annual contributions. Section 40A(9) refers to the purposes and to the extent provided by or under Clause (iv) of Sub-section (1) of Section 36 which says any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund is entitled to deduction.
7. We, therefore, hold that no deduction could be allowed under Section 37(1) in respect of contribution to the unrecognised provident fund without regard to the provisions of Section 40A(9) introduced by the Finance Act, 1984. We have already indicated that the decision of this Court was rendered before the introduction of Sub-section (9) of Section 40A. We therefore, answer the questions (a) and (b) in IT Appeal Nos. 21 of 1999 and 30 of 1999 in favour of the Revenue and do not find any error in the findings of the Tribunal.
8. We are now concerned with the question whether the Tribunal was justified in confirming the disallowance of contribution to the Coir Workers Welfare Fund by applying Section 43B of the IT Act. In IT Appeal No. 21 of 1999 assessee is challenging the disallowance of Rs. 69,514 claimed as payment of contribution to the Kerala Coir Workers' Welfare Fund. Assessee's claim of liability to Kerala Coir Workers' Welfare Fund had arisen as per the notification issued by the Government under the Kerala Coir Workers' Welfare Fund and in the capacity as an exporter the assessee was liable to make contribution of Rs. 69,514. Revenue has taken up the stand that no payment was outstanding as on the last date of the accounting year and hence claim was not allowable under Section 43B. Assessee has raised a claim that there is no employer-employee relationship and Clause (b) of Section 43B is not applicable. Assessee also contended that neither Section 43A (sic) nor Section 43B would apply. Assessee's stand is that contribution that has to be paid to the welfare fund is neither tax nor duty and consequently Section 43B would not apply. Assessee therefore, contended that disallowance under Section 43B of Rs. 69,514 claimed as payment of contribution to the Kerala Coir Workers' Welfare Fund should have been allowed.
9. We find that question No. (e) in IT Appeal No. 21 of 1999 has not been properly considered by any of the authorities. In any view, the impact of the Kerala Coir Workers' Welfare Fund Act and the Scheme as such has not been properly appraised by any of the authorities concerned. In such circumstances we feel that it would be appropriate that without answering question (e) the same be remitted to the assessing authority for fresh consideration. We therefore dispose of all the appeals answering questions (a) and (b) in all these appeals in favour of the Revenue and against the assessee. Questions (c), (d) and (f) are answered against the assessee and in favour of the Revenue. Question (e) is not answered since we remit the matter back to the assessing authority for fresh consideration. All these appeals are disposed of as above.