THE ACIT CIR 6(3), MUMBAI V. M/S. GLAXO SMITHKLINE PHARMACEUTICLS LTD. ( FORMERLY KNOWN AS M/S. BURROUGHS WELLCOME (I) LTD), MUMBAI

ITA 6444/MUM/2007

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8631 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 11-01-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 22-10-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bad and doubtful debts
• Section: 143(3); 37(1); 28

Judgement Text

I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 1 IN THE INCOME TAX APPELLATE TRIBUNAL, G BENCH, MUMBAI. [ CORAM: PRAMOD KUMAR, AM AND V.DURGA RAO, JM ] I.T.A NO.6444/ MUM/2007 ASSESSMENT YEAR: 2004-05 ASST. COMMISSIONER OF INCOME TAX, CIR.6(3) .. AP PELLANT MUMBAI. VS GLAXO SMITHKLINE PHARMACEUTICALS ,. RESPONDEN T 252, DR. A.B. ROAD, WORLI, MUMBAI-030. PA NO.AAACB 0465 D C.O.NO.16/MUM/2008 (ARISING OUT OF ITA NO.6444/M/2007) GLAXO SMITHKLINE PHARMACEUTICALS ,. APPELLANT 252, DR. A.B. ROAD, WORLI, MUMBAI-030. PA NO.AAACB 0465 VS. ASST. COMMISSIONER OF INCOME TAX, CIR.6(3) .. RE SPONDENT MUMBAI. APPEARANCES: P.J. PARDIWALA, FOR THE ASSESSEE PAVAN VED, FOR THE REVENUE I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 2 O R D E R PER PRAMOD KUMAR: ITA NO.6444/MUM/2007 : 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CAL LED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 18 TH JULY,2007, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT,. 1961 FOR THE ASSESSMENT YEAR 2004-05. 2. IN GROUND NOS. 1 AND 2, WHICH ARE INTERCONNECTED, THE AO HAS RAISED THE FOLLOWING GRIEVANCES: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD CIT (A) HAS ERRED IN LAW IN DELETING THE DISALLOWANCE OF ` .4.76 CRORES MADE BY THE AO U/S.36910(VII) OF THE INCOME TAX ACT, BEING THE A MOUNT PAID TO APPROVED SUPERANNUATION FUND EXCEEDING 27% SALARY OF AN EMPLOYEE IN VIOLATION OF RULE 87 OF INCOME TAX RULES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, L D CIT (A) HAS ERRED IN LAW IN HOLDING THAT THE AMOUNT DISALLOWED U /S.3691)(VII) IS ALLOWABLE U/S.37 JOF THE INCOME TAX ACT EVEN THOUGH SECTION 37(1) SPECIFICALLY PROVIDES THAT SECTION 37(1) IS NOT APPLICA BLE TO AN EXPENDITURE BEING EXPENDITURE OF THE NATURE DESCRIBE D IN SECTION 30 TO 36 OF THE INCOME TAX ACT. 3. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURIN G THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT T HE ASSESSEE HAS CLAIMED DEDUCTION OF ` .4,05,06,000 BEING PAYMENT TO SUPERANNUATION SCHEME F OR THE CURRENT MEMBERS. THE ASSESSING OFFICER NOTED THAT IN TERMS OF TH E PROVISIONS OF SECTION 36(1)(VII) OF THE INCOME TAX ACT , 1961, DEDUCTION ON ACCOUNT OF CONTRIBUTION TO APPROVED SUPERANNUATION FUND WAS SUBJECT TO SUCH LIMIT AS MAY BE PRESCRIBED UNDER THE INCOME TAX RULES. HE FURTHER NOTED THAT R ULE 87 AND RULE 88 OF THE INCOME TAX RULES RESTRICT THE DEDUCTION TO 27% OF SA LARY OF THE EMPLOYEE., AS REDUCED BY EMPLOYERS CONTRIBUTION TO THE PROVIDENT FUND. IT WAS IN THIS BACKDROP THAT THE ASSESSEE WAS REQUIRED TO SHOW CAUSE AS TO WHY AMOU NT PAID BY THE ASSESSEE TO SUPERANNUATION FUND, TO THE EXTENT IT IS IN EXCESS O F 27% OF SALARY OF THE EMPLOYEE, NOT BE DISALLOWED. I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 3 4. IT WAS EXPLAINED BY THE ASSESSEE THAT SUPERANNUATION F UND OF THE ASSESSEE, WHICH IS DULY APPROVED BY THE COMMISSIONER, IS A DEFIN ED BENEFIT SCHEME AND THE COMPANY MAKES ORDINARY ANNUAL CONTRIBUTION EQUAL TO 27% OF SALARY, LESS THE AMOUNT OF ITS CONTRIBUTION TO PROVIDENT FUND. HOWE VER, AS A CONSEQUENCE OF FALLING INTEREST RATES, THE LIFE INSURANCE CORPORATION OF IND IA HAS REVISED ANNUITY RATES OF PENSION TO BE PROVIDED BY THEM TO THE RETIRING MEMBE RS RESULTING IN LARGER PAY OUT FROM THE FUND. IT WAS ALSO SUBMITTED THAT UPON AN ACT UARIAL VALUATION OBTAINED BY THE COMPANY, IT WAS NOTICED THAT THERE IS A DEFICIT O F ` .476.06 LAKHS. IT WAS AN ORDER TO MEET THIS FUND DEFICIT OF ` .476.06 LAKHS THAT THE ASSESSEE HAD TO MAKE PAYMENT TO THE SUPERANNUATION TRUST. IT WAS CONTENDED THAT THE PA YMENT SO MADE IS ELIGIBLE FOR DEDUCTION. 5. NONE OF THESE SUBMISSIONS, HOWEVER, IMPRESSED THE ASSESSI NG OFFICER. HE WAS OF THE VIEW THAT THE PAYMENT, TO THE EXTENT IT I S IN EXCESS OF 27% OF THE SALARY OF THE EMPLOYEE, IS NOT AN ALLOWABLE DEDUCTION. HE, AC CORDINGLY, DISALLOWED ` . 4,76,06,000. AGGRIEVED, ASSESSEE CARRIED THE MATTER I N APPEAL BEFORE US. LEARNED CIT (A) ALLOWED THE APPEAL OF THE ASSESSEE ON THIS ISSUE, AND OBSERVED AS FOLLOWS: I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE AR AND I FIND THAT IN THE CASE OF CIT VS. PREMIER COTTON SPG. MILLS LTD., EX CESS GRATUITY CONTRIBUTION WAS ALLOWED U/S.37, WHEREAS U/S.36(1)(V), THE SAME WAS NOT ALLOWABLE. IN THE CASE OF CIT V. RAYALSEEMA PASSEN GER AND GOODS TRANSPORT LTD, IT WAS AGAIN HELD THAT GRATUITY IN EXC ESS OF THE PRESCRIBED LIMIT U/S.36 ARE ALLOWABLE U/S.37. IN THE SIMILAR JUDGEMENT THE MADRAS HIGH COURT IN THE CASE OF TRIPLICANE PERMA NENT FUND LTD V. CIT, IT WAS HELD THAT GRATUITY IN EXCESS OF 8 AND 1/3 RD %, IS ALLOWABLE U/S.37. RELYING ON THE ABOVE DECISIONS, I DIRECT THE AO TO ALLOW THE EXCESS CONTRIBUTION PAID TO SUPERANNUATION FUND BY TH E APPELLANT. THIS GROUND OF APPEAL IS ALLOWED. 6. AGGRIEVED BY THE STAND SO TAKEN BY THE CIT (A), TH E ASSESSING OFFICER IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 4 8. WE FIND THAT SECTION 36(1)( IV ), WHICH DEALS WITH THE DEDUCTIONS ON ACCOUNT OF CONTRIBUTION TO A RECOGNISED PROVIDENT FUND OR AN AP PROVED SUPERANNUATION FUND, PROVIDES AS FOLLOWS : '36. OTHER DEDUCTIONS. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLA USES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 ( I ) TO ( III ) ** ** ** ( IV ) ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER BY WAY OF C ONTRIBUTION TOWARDS A RECOGNISED PROVIDENT FUND OR AN APPROVED SUP ERANNUATION FUND, SUBJECT TO SUCH LIMITS AS MAY BE PRESCRIBED FOR THE PURP OSE 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 T O SPECIFY IN CASES WHERE THE CONTRIBUTIONS ARE NOT IN THE NATURE OF ANNUAL CO NTRIBUTIONS OF FIXED AMOUNTS OR ANNUAL CONTRIBUTIONS FIXED ON SOME DEFINITE BASIS BY REFERENCE TO THE INCOME CHARGEABLE UNDER THE HEAD 'SALARIES' OR TO THE CONTR IBUTIONS OR TO THE NUMBER OF MEMBERS OF THE FUND ;' 9. WE MAY NOW REFER TO THE FOURTH SCHEDULE. PART B OF THE SCHEDULE DEALS WITH THE APPROVED SUPERANNUATION FUNDS. CONDITIONS RELATING TO THE GRANT OF APPROVAL AND THE PROCEDURE THEREFOR ARE SET OUT IN THESE, TWO PARTS. RULE 11 OF PART B PROVIDES, THAT IN ADDITION TO ANY POWER CONFERRED BY PART B, THE CBDT MAY MAKE RULES, INTER ALIA, LIMITING THE ORDINARY ANNUAL CONTRIBUTION AND ANY O THER CONTRIBUTIONS TO AN APPROVED SUPERANNUATION FUND BY AN EMPLOYER. RULES 87 AND 88 OF THE INCOME-TAX RULES, 1962 ('THE RULES'), ARE PRESC RIBED IN PURSUANCE OF SECTION 36(1)( IV ). FOR CONVENIENT REFERENCE THESE RULES ARE REPRODUCE D BELOW : '87. ORDINARY ANNUAL CONTRIBUTIONS.THE ORDINARY ANNUAL CONTRIBUTION BY THE EMPLOYER TO A FUND IN RESPECT OF ANY PARTICULAR EMPL OYEE SHALL NOT EXCEED TWENTY-FIVE PER CENT OF HIS SALARY FOR EACH YEAR AS RE DUCED BY THE EMPLOYER'S CONTRIBUTION, IF ANY, TO ANY PROVIDENT FUND (WHETHE R RECOGNISED OR NOT) IN RESPECT OF THE SAME EMPLOYEE FOR THAT YEAR. 88. INITIAL CONTRIBUTIONS. SUBJECT TO ANY CONDITION WHICH THE BOARD MAY THINK FIT TO SPECIFY UNDER CLAUSE ( IV ) OF SUB-SECTION (1) OF SECTION 36, THE AMOUNT TO BE ALLOWED AS A DEDUCTION ON ACCOUNT OF AN INITIAL CONT RIBUTION WHICH AN EMPLOYER MAY MAKE IN RESPECT OF THE PAST SERVICES OF AN EMPLOYE E ADMITTED TO THE BENEFITS OF A FUND SHALL NOT EXCEED TWENTY-FIVE PER CENT OF T HE EMPLOYEE'S SALARY FOR EACH YEAR OF HIS PAST SERVICE WITH THE EMPLOYER AS REDUCED B Y THE EMPLOYER'S CONTRIBUTION, IF ANY, TO ANY PROVIDENT FUND (WHETHE R RECOGNISED OR NOT) IN RESPECT OF THAT EMPLOYEE FOR EACH SUCH YEAR.' I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 5 10. WHAT FOLLOWS IS THAT, IN TERMS OF THE ABOVE PROVISI ONS, A CONTRIBUTION TO APPROVED SUPERANNUATION FUND IS DEDUCTIBLE IN PRINCIP LE AS LONG AS THE QUANTUM OF THE SAID CONTRIBUTION DOES NOT EXCEED THE PRESCRIBED L IMITS. THE LIMITS ARE, HOWEVER, PRESCRIBED ONLY FOR THE INITIAL CONTRIBUTION AND ORD INARY ANNUAL CONTRIBUTION TO THE FUND. AS A COROLLARY TO THESE LIMITS HAVING BEEN PRE SCRIBED, AMOUNTS PAID IN EXCESS OF SUCH LIMITS, TOWARDS INITIAL CONTRIBUTION AND FOR O RDINARY ANNUAL CONTRIBUTION, ARE NOT ALLOWED AS DEDUCTION. THAT IS THE ONLY LIMITATIO N FOR QUANTUM OF DEDUCTION UNDER SECTION 36(1)(IV). HOWEVER, IT IS NOT IN DISPUTE THAT THE AMOUNTS PAID IN EXCESS OF THE 27% OF SALARIES OF THE EMPLOYEES, ARE NE ITHER TOWARDS THE ORDINARY ANNUAL CONTRIBUTION NOR TOWARDS THE INITIAL CONTRIBU TION. THIS PAYMENT HAS BEEN NECESSITATED DUE TO SHORTFALL DISCOVERED IN THE COURSE O F ACTUARIAL VALUATION OF THE FUND, AND IS IN THE NATURE OF A ONE TIME EXCEPTIONAL PAYMENT TO ENSURE THAT THE SUPERANNUATION FUND IS ABLE TO DISCHARGE ITS OBLIGATION . ITS NEITHER AN ANNUAL CONTRIBUTION, NOR AN ORDINARY CONTRIBUTION. LIMITAT IONS PLACED UNDER RULE 87 RELEVANT FOR ORDINARY ANNUAL CONTRIBUTION, AS HAVE BEEN INVOKED IN THIS CASE, CANNOT BE PRESSED INTO SERVICE IN SUCH A CASE. IN OUR CONSIDERE D VIEW, THE DISALLOWANCE UNDER SECTION 36(1)(IV) READ WITH RULE 87 DONOT COME INTO PLAY IN THE CASE OF A PAYMENT TO MAKE GOOD THE SHORTFALL, ON THE BASIS OF A CTUARIAL VALUATION, IN THE SUPERANNUATION FUND. IN THIS VIEW OF THE MATTER, THE VERY FOUNDATION OF THE IMPUGNED DISALLOWANCE DID NOT HAVE LEGALLY SUSTAINABLE BASIS; THE AMOUNT WAS DEDUCTIBLE, IN PRINCIPLE, UNDER SECTION 36(1)(IV) AN D THE RESTRICTION ON DEDUCTIBILITY, AS SET OUT IN THE SAID SECTION AS ALSO IN RULE 87, DID NO T APPLY IN THIS CASE. THE CONCLUSIONS ARRIVED AT BY THE CIT(A), THOUGH FOR THE REASONS OTHER THAN THE REASONS ADOPTED BY THE CIT(A), ARE CORRECT AND DONOT CALL F OR ANY INTERFERENCE. 11. GROUND NOS. 1 AND 2 ARE THUS DISMISSED. 13. IN GROUND NO. 3, THE ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD CIT (A) ERRED IN DELETING THE ADDITION OF ` .3.20 CRORES MADE BY THE AO DISALLOWING THE CLAIM OF BAD DEBT. IN SUPPORT OF THIS GROUND, RELIA NCE IS PLACED UPON MADRAS HIGH COURTS DECISION IN THE CASE OF INDIA SURGI CAL(153 TAXMA N 491) AND GUJARAT HIGH COURTS DECISION IN THE CASE O F DHALL ENTERPRISES(207 CTR 729). I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 6 14. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUE IS NOW COVERED, IN FAVOUR OF THE ASSESSEE, BY HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF TRF LTD V. CIT (323 ITR 397). IN THIS VIEW OF THE MATTER, THE CONC LUSIONS ARRIVED AT BY THE CIT(A), ON THIS ISSUE AS WELL, DO NOT CALL FOR ANY INTERFERENCE . 14. GROUND NO. 3 IS ALSO DISMISSED. 16. IN THE RESULT, APPEAL IS DISMISSED. C.O.NO.16/MUM/2008: 17. THE CROSS OBJECTION FILED BY THE ASSESSEE IS IN SUPPORT OF CIT(A)S ORDER IN REGARD TO DELETION OF BAD DEBTS. SINCE WE HAVE UPHE LD THE ACTION OF THE CIT (A) ON THIS ISSUE IN REVENUES APPEAL, THE CROSS OBJECTION FILED BY THE ASSESSEE IS RENDERED INFRUCTUOUS. ACCORDINGLY, THE SAME IS DISMISSED. 18. IN THE RESULT, THE APPEAL OF THE REVENUE AND CRO SS OBJECTION FILED BY THE ASSESSEE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY, 2011 SD/- (V. DURGA RAO) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 28 TH JANUARY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-VI, MUMBAI 4. COMMISSIONER OF INCOME TAX, CITY-6 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH B, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 7 I.T.A NO.6444/ MUM/2007 C.O.NO.16/MUM/2008 GLAXO SMITHKLINE PHARMACEUTICALS 8