1. Issue for Consideration :
1.1 S.43B of the Income-Tax Act provides that certain expenditures, which would otherwise have been allowable as deductions in computing the total income under the Income-tax Act, shall be allowed as deduction only in the year of actual payment of such items by the assessee notwithstanding the method of accounting followed by the assessee. These expenditures are listed in clauses (a) to (f) of the said Section Clause (b) of the said Section refers to the sums payable by an employer by way of contribution to any Provident Fund, Superannuation Fund, Gratuity Fund, or any other fund for the welfare of employees (‘welfare dues’). Accordingly, the deduction of welfare dues is allowed only where payment of such expenditure is actually made.
1.2 Till assessment year 2003-04, the second proviso to S.43B provided that no deduction of welfare dues covered by the said clause (b) would be allowed unless such sum had actually been paid on or before the due date as defined in the Explanation to S.36(1)(va), i.e., the due date for payment of such welfare dues under the relevant applicable law. From assessment year 2004-05, the second proviso to S.43B has been omitted, and welfare dues covered by clause (b) were brought into the purview of the first proviso, which provides that the disallowance would not operate if the sums are paid on or before the due date of filing of the Income-tax return of the year in which the liability to pay such sum was incurred, and proof of such payment was furnished along with the return.
1.3 A dispute has arisen as to whether this amendment was applicable to all pending matters, and therefore applied retrospectively, or whether it applied prospectively from assessment year 2004-05 onwards. While the Bombay High Court has held that the amendment would apply prospectively, the Delhi and Madras High Courts have taken the view that the amendment applied retrospectively.
2. Godaveri (Mannar) Sahakari Sakhar Karkhana’s case :
2.1 The issue came up before the Bombay High Court in the case of CIT vs. Godaveri (Mannar) Sahakari Sakhar Karkhana Ltd. 298 ITR 149.
2.2 In this case, pertaining to assessment years 1991-92 and 1994-95, the assessee had made payments of provident fund dues before the due date of filing of its return of income, but beyond the due date stipulated under the Provident Fund Act. The amounts had been disallowed by the Assessing Officer, but the assessee’s appeal against such disallowance had been allowed by the Commissioner (Appeals). The Tribunal had also upheld the order of the Commissioner (Appeals).
2.3 Before the Bombay High Court, it was argued on behalf of the Revenue that the deletion of the second proviso to S.43B with effect from 1st April 2004 only meant that the relaxation in S.43B, insofar as employer’s contribution was concerned, would be governed by the first proviso to S.43B from 1st April 2004 only.
2.4 On behalf of the assessee, it was submitted that the amendment was curative and was resorted to for the purpose of removing the hardship caused by the second proviso. A similar amendment had been made in relation to clause (a) relating to tax, duty, cess and fees earlier, and in relation to such amendment, the Supreme Court, in the case of Allied Motors (P) Ltd. vs. CIT 224 ITR 677, had held the amendment to be curative and retrospective. It was argued that the proviso which was inserted to remedy the unintended consequences and to make the provision workable, the proviso which supplied an obvious omission in the Section and was required to be read into the Section to give the Section a reasonable interpretation, was required to be treated as retrospective in operation, so that a reasonable interpretation could be given to the Section as a whole.
2.5 The Bombay High Court went through the history of S.43B and the amendments carried out to it from time to time. It analysed the decision of the Supreme Court in Allied Motors case. It noted that when the two provisos to S.43 B were added, payments under clause (b) and payments under other clauses of S.43B were treated as two different classes. The Finance Act, 1989 substituted the second proviso, noting certain hardships that were being occasioned by the operation of that proviso. The Bombay High Court noted that, in its wisdom, the Parliament chose not to delete the second proviso but substituted it, and therefore intended that S.43B(b) should be treated as a class by itself distinct from the other sub-Sections. The second proviso was omitted based on the recommendations of the Kelkar Committee Report, which responded to representation by trade and industry that the delayed payment of statutory liability related to labour should be accorded the same treatment as the delayed payment of taxes and interest.
2.6 The Bombay High Court noted the decision of the Madras High Court in CIT vs. Synergy Financial Exchange Ltd., 288 ITR 366, where the Madras High Court held that the amendment was not retrospective, on the basis that fiscal legislation imposing liability is generally governed by normal presumption that it is not retrospective and that in interpreting the statute, the Courts, in the first instance, have to consider the plain written language of the statute. If on so reading, it is not possible to give effect to the intent of the Parliament, then the Courts resort to purposeful interpretation to give effect to that intent. The Bombay High Court also (inadvertently) noted the decision of the Assam High Court in George Williamson (Assam) Ltd. vs. CIT, 284 ITR 619 as rejecting the contention that the amendment should be read as retrospective, though the Assam High Court in that case upheld the contention of the assessee for allowing deduction for the payments on or before the due date of filing of the return of income.
2.7 The Bombay High Court noted that the amendment was made applicable from the assessment year 2004-05. It observed that in interpreting statutory provisions, the Court also considered the mischief rule, namely, what was the state of law before the act or the amendment, and what was the mischief that the Act or the amendment sought to avoid. From the normal aids to construction, the Court observed that the only mischief that the amendment if at all sought to obviate was the need to eliminate the procedural complexities, reduce paperwork, simplify tax administration and to enhance efficiency and also integrate such tax proposals as the system could at present absorb, and acceptance of the representations made by trade and industry that they should not be denied the benefit of deductions on account of delayed payment of taxes and interest.
2.8 According to the Bombay High Court, the law as it stood earlier was that in relation to the employer’s contribution to provident fund, if it was not paid within the due date, was not eligible for deduction. According to the High Court, this position had been remedied, and the remedial measure had been made applicable from assessment year 2004-05. The Bombay High Court therefore took the view that it could not be said that the amendment was retrospective.
2.9 Subsequent to this decision of the Bombay High Court, the decision of the Assam High Court in George Williamson’s case went up to the Supreme Court in a special leave petition as CIT vs. Vinay Cement Ltd. 213 CTR 268. In a short five-line order, the Supreme Court noted that they were concerned with the law as it stood prior to the amendment of Section 43 B, that in the circumstances the assessee was entitled to claim the benefit under Section 43 B for that period, particularly in view of the fact that he had contributed to Provident Fund before filing of the return, and dismissed the special leave petition.
2.10 Subsequent to this decision of the Supreme Court, the matter again came up before the Bombay High Court in the case of CIT vs. Pamwi Tissues Ltd. 215 CTR 150, relating to assessment year 1990-91. In this case, when the attention of the Bombay High Court was drawn to the dismissal of the special leave petition by the Supreme Court in Vinay Cement’s case, it observed that the dismissal of the special leave petition by the Supreme Court cannot be said to be the law decided. According to the Bombay High Court, for a judgment to be a precedent, it must contain the three basic postulates — a finding of material facts, direct and inferential, statements of the principles of law applicable to the legal problems disclosed by the facts, and judgment based on the individual effect of the above. The Bombay High Court therefore followed its earlier decision in the case of Godaveri (Mannar) Sahakari Sakhar Karkhana, holding that Provident Fund payment made after the due date under the PF Act but before the due date of filing of the return of income, were not allowable.
3. Nexus Computer’s case :
3.1 The issue again recently came up before the Madras High Court in the case of CIT vs. Nexus Computer (P) Ltd., 177 Taxman 202.
3.2 In this case pertaining to assessment year 2000-01, the attention of the Madras High Court was drawn by the Revenue to its earlier decision in the case of Synergy Financial Exchange (Supra), wherein it had held that the amendment was not retrospective, and by the assessee, to the decision of the Assam High Court in George Williamson’s case and the dismissal of the special leave petition by the Supreme Court in Vinay Cement’s case.
3.3 The Madras High Court in that case (Nexus Computers)noted that the order of the Supreme Court in Vinay Cement’s case was a speaking order, which gave reasons for rejecting the special leave petition, and that the reasoning given in the dismissal of the special leave petition in that case would be binding on it as the law declared by the Apex Court under article 141 of the Constitution. Therefore, the Madras High Court held that the Provident Fund payments would be allowable under Section 43 B.
3.4 The issue also came up before the Delhi High Court in the case of CIT vs. Dharmendra Sharma, 297 ITR 320, in relation to assessment year 2001-02, and in CIT vs. P.M. Electronics Ltd., 177 Taxman 1. The Delhi High Court took note of the decisions of the Madras High Court in Synergy Financial Exchange, the Bombay High Court in Pamwi Tissues, the Supreme Court in dismissing the special leave petition in Vinay Cement’s case, and the Madras High Court in Nexus Computer’s case. The Delhi High Court also observed that judicial discipline required it to follow the view of the Supreme Court in Vinay Cement’s case, and hold the amendment to be retrospective. The Delhi High Court therefore disagreed with the approach adopted by the Bombay High Court in Pamwi Tissues case.
4. Observations :
4.1 The issue of whether the amendment is retrospective in operation or not can be for the time being concluded on examination of the true effect of the Supreme Court order in Vinay Cement’s case, delivered while dismissing the special leave petition. As observed by the Bombay High Court, the question is whether it was a dismissal on merits, laying down a binding precedent. If the decision of the Supreme Court is held to have been delivered on merits, it would be the law of the land and be binding on the Courts; if not, the Courts would be empowered to examine the issue independently.
4.2 As observed by the Supreme Court in the case of Kunhayammed vs. State of Kerala, 119 STC 505 :
“If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of article 141 of the Constitution. Secondly, other than a declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceeding subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties.”
4.3 Reading the order of the Supreme Court in Vinay Cement’s case certainly gives the impression that though the order is short, the Supreme Court has applied its mind to the issue at stake while dismissing the petition, and dismissed it on merits, and not merely on technical grounds or as not maintainable. The order therefore seems to set a binding precedent, which all High Courts ought to have followed.
4.4 Further, it is no doubt true that the operation of the proviso gave rise to absurd situations where large amounts were disallowed on account of trivial delays of a few days, even when there was reasonable cause for making delayed payments of labour welfare dues. It does seem rather harsh to take the view that such disallowance was always intended by the Legislature.
4.5 The better view of the matter is therefore the view of the Delhi and Madras High Courts that the omission of the second proviso to S.43B is retrospective in operation, and applied to all pending matters as on the date of the amendment.