CIT, FARIDABAD V. M/S HYPER NETWORK

ITA/874/2008

AI Insights

The case revolves around the deductibility of Provident Fund contributions made by M/s Hyper Network, a firm engaged in providing security services, during the assessment year 2003-04. The Income Tax Department challenged the Tribunal's decision which allowed the deductions for contributions made within the grace period. The Tribunal had earlier ruled in favor of the assessee, referencing a decision by the Madras High Court and the provisions of the Income Tax Act that permit deductions for such contributions if paid before the due date of filing the income tax return. The High Court upheld the Tribunal's decision, emphasizing the retrospective nature of the amendments made by the Finance Act, 2003, which deleted the second proviso to Section 43B, thereby aligning the treatment of tax, duty, and welfare fund contributions uniformly.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 720567 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 01-08-2013
• Assessment Year: misc
• Other Referred Cases: CIT v. Salem Cooperative Spinning Mills, Nachem Limited v. Income Tax Appellate Tribunal, Delhi Bench, Alom Extrusions Ltd's case, Allied Motors (P) Limited vs. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Employees' Provident Fund Scheme, 1952
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: TEJINDER JOSHI
• Keywords: Deduction; Employees Contribution; Employer's contribution; Grace period; Provident fund
• Section: 143(3); 43B; 260A; 36(1)(va)

Judgement Text

"ITA No.874 of 2008 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.874 of 2008 Date of decision:1.8.2013 Commissioner of Income Tax, Faridabad Appellant Versus M/s Hyper Network, DCF 35-36, Sector 16-A, Faridabad Respondent CORAM: HON'BLE MR.JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE MEHINDER SINGH SULLAR Present: Mr. Tejinder Joshi, Advocate for the appellant. None for the respondent. Ajay Kumar Mittal,J. 1. The revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 25.4.2008, Annexure A.3 passed by the Income Tax Appellate Tribunal, Delhi Bench 'C' New Delhi (in short, “the Tribunal”) in ITA No.462/DEL of 2007 for the assessment year 2003- 04, claiming following substantial questions of law:- “A. Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the actual date of payment is within the grace period permissible under the Employees' Provident Fund Scheme, 1952 especially when the Income Tax Act, 1961 does not talk about the grace period for making payments GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 2 in relevant funds and it talks only about the 'due date' by which the assessee is required to make the payments in relevant funds? B. Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that if the payment has been made within the grace period, or even under Section 43B read with Section 36(1) (va), the assessee is entitled to deduction in respect of payment towards contribution to Provident Fund?” 2. Briefly, the facts necessary for adjudication of the controversy involved, as narrated in the appeal, may be noticed. The assessee firm is engaged in the business of providing security services, guards/watchmen etc. It filed its return on 1.12.2003 declaring income of ` 1,45,425/-. The assessment was completed under Section 143(3) of the Act at an income of ` 13,48,420/- on 28.2.2006, Annexure A.1. Aggrieved by the order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 27.11.2006, Annexure A.2, the CIT(A) allowed the appeal giving relief of ` 11,90,679/- to the assessee. It was held that in view of the decision of the Hon'ble Madras High Court in the case of CIT v. Salem Cooperative Spinning Mills, (2002) 258 ITR 360, payment of Provident Fund contribution within grace period was deductible. It was also held that if the payment was made before the due date of furnishing of return of income, the same was allowable. Not satisfied with the order, the revenue filed appeal before the Tribunal against deleting addition of ` 5,46,743/- in respect of employees' contribution to Provident Fund and ` 6,43,936/- on account of employer's GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 3 contribution to Provident Fund made by the Assessing Officer under Section 43B read with Sections 2(24) (x) and 36(1) (va) of the Act. Vide order dated 25.4.2008, Annexure A.3, the Tribunal dismissed the appeal of the revenue. It was held that since the payment had been made within the grace period even under Section 43B read with Section 36(1)(va) of the Act, the assessee was entitled to deduction in respect of payment towards Employees' contribution and employer's contribution to Provident Fund. Aggrieved thereby, the revenue has filed the instant appeal. 3. We have heard learned counsel for the parties and perused the record. 4. The issue involved herein is whether the statutory payment in respect of Provident Fund of the employees which was paid by the assessee before the filing of the return was allowable deduction within the meaning of Section 43B of the Act. 5. The matter is no longer res integra. This Court while dealing with identical issue in ITA No.116 of 2008 (Nachem Limited v. Income Tax Appellate Tribunal, Delhi Bench and others, decided on 13.8.2012, recorded that deletion of Second Proviso to Section 43B of the Act by Finance Act, 2003 was curative in nature and was to operate from 1.4.1988. It was also noticed that an assessee was entitled to deduction in respect of contributions made to ESI and Provident Fund before the filing of the income tax return. It was observed as under:- “7. The Hon'ble Supreme Court in Alom Extrusions Ltd's case (supra) while delving into the similar issue had GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 4 noticed as under:- 'We find no merit in these civil appeals filed by the Department for the following reasons: firstly, as stated above, Section 43-B (main section), which stood inserted by Finance Act, 1983, with effect from 1st April, 1984, expressly commences with a non- obstante clause, the underlying object being to disallow deductions claimed merely by making a Book entry based on Merchantile System of Accounting. At the same time, Section 43-B [main section] made it mandatory for the Department to grant deduction in computing the income under Section 28 in the year in which tax, duty, cess, etc., is actually paid. However, Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under the Provident Fund Act, Municipal Corporation Act [octroi] and other Tax laws. Therefore, by way of first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the Return under the Income Tax Act [due date], the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under Social Welfare legislations by delaying payment of contributions to the welfare funds. However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of Finance Act, 2003, GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 5 deleting the second proviso and bringing about uniformity in the first proviso by equating tax, duty, cess and fee with contributions to welfare funds. Once this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by the Parliament only with effect from 1st April, 2004, would become curative in nature,hence, it would apply retrospectively with effect from 1st April, 1988. Secondly, it may be noted that, in the case of Allied Motors (P) Limited vs. Commissioner of Income Tax, reported in [1997] 224 I.T.R.677, the Scheme of Section 43-B of the Act came to be examined. In that case, the question which arose for determination was, whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant Sales Tax law should be disallowed under Section 43-B of the Act while computing the business income of the previous year? That was a case which related to Assessment Year 1984-1985. The relevant accounting period ended on June 30, 1983. The Income Tax Officer disallowed the deduction claimed by the assessee which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year. The deduction was disallowed under Section 43-B which, as stated above, was inserted with effect from 1st April, 1984. It is also relevant to note that the first proviso which came into force with effect from 1st April, 1988 was not on the statute book when the assessments were made in the case of Allied Motors (P) Limited (supra). However, the assessee contended that even though the first proviso came to be inserted with effect from 1st April, 1988, it was entitled to the GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 6 benefit of that proviso because it operated retrospectively from 1st April, 1984, when Section 43-B stood inserted. This is how the question of retrospectivity arose in Allied Motors (P) Limited (supra). This Court, in Allied Motors (P) Limited (supra) held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this Court, in Allied Motors (P) Limited (supra), held that the first proviso was curative in nature, hence, retrospective in operation with effect from 1st April, 1988. It is important to note once again that, by Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about uniformity in tax, duty, cess and fee on the one hand vis-a-vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act, 2003, is retrospective in operation. Moreover, the judgment in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that Finance Act, 2003, will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted]. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee (s) if the contention of the Department is to be accepted that Finance Act, 2003, to the above extent, operated prospectively. Take an example - in the GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 7 present case, the respondents have deposited the contributions with the R.P.F.C. after 31st March [end of accounting year] but before filing of the Returns under the Income Tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under Section 43-B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right upto 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction under Section 43-B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003.' 8. The Hon'ble Supreme Court held that the amendment by Finance Act,2003, whereby second proviso to Section 43B was deleted, to be curative in nature and was operative from 1.4.1988 (when first proviso came to be inserted). Once that was so, the appellant was entitled to deduction on account of contributions made to ESI and PF fund before the filing of the income tax return. The Tribunal was, thus, in error in deciding the issue against the assessee.” GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.874 of 2008 8 6. In view of the above, the questions are answered against the revenue and in favour of the assessee. The appeal stands dismissed. (Ajay Kumar Mittal) Judge August 01, 2013 (Mehinder Singh Sullar) 'gs' Judge GURBAX SINGH 2014.09.22 14:00 I attest to the accuracy and integrity of this document High Court Chandigarh "