Finance Act, 2003, which deleted second proviso to section 4

SUMMARY OF CASE LAW

S. 43B (b) provides that any sum payable by way of contribution to a provident fund etc shall be allowed as a deduction only in the year of payment. The second proviso to s. 43B provided that the sums referred to in s. 43B (b) would not be allowed as a deduction unless the sum had been paid on or before the due date. The said second proviso was omitted by the Finance Act, 2003 w.e.f. 1.4.2004. Simultaneously, the benefit of the first proviso, which provides that even sums paid beyond the previous year but before the due date of filing the return shall be allowed as a deduction, was extended to s. 43B (b). The question arose whether the deletion of the said second proviso and amendment of the first proviso was retrospective or prospective. HELD upholding the claim of the assessee that thedeletion had retrospective effect:

(i) The deletion of the second proviso to s. 43B, and the amendment to the first proviso, by the Finance Act, 2003 was to overcome implementation problems. Consequently, the amendments, though made applicable by Parliament only with effect from 1.4.2004, were curative in nature and would apply retrospectively w.e.f. 1.4.1988.

(ii) In Allied Motors 224 ITR 677 it was held that even though the first proviso to s. 43B was inserted w.e.f 1.4.1988, it operated retrospectively from 1.4.1984.It was held that when a proviso is inserted to remedy unintended consequences and to make the section workable it could be read retrospective in operation. This principle applies to the deletion of the second proviso as well.

(iii) if the contention of the Department that the deletion of the second proviso is prospective is accepted, there will be hardship and invidious discrimination because assessee who have paid the contributions after the due date will be denied deduction for all times while a defaulter who pays the contribution after 1st April, 2004 would get the benefit of deduction under s. 43-B.

(iv) Though Parliament has explicitly stated that the amendment will operate w.e.f. 1.4.2004, as a principle of construction the intention should be determined from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be sub-served by the object of the legislation, then if another construction should be preferred.

Note:- Pamvi Tissues 313 ITR 137 (Bom) is impliedly overruled while Nexus Computer 313 ITR 144 (Mad) & P.M. Electronics 313 ITR 161 (Delhi) are impliedly approved. See also: Saurashtra Kutch 305 ITR 227 (SC): A view contrary to the judgement of jurisdictional Court or of the Supreme Court is a “mistake apparent from the record” irrespective of when the decision was rendered and a rectification application can be filed.

CASE LAW DETAILS
Decided by: SUPREME COURT OF INDIA, In The case of: CIT v. Alom Extrusions Ltd. , Appeal No.: Civil Appeal No. 7771 of 2009, Decided on: November 25, 2009

RELEVANT PARAGRAPH

A short question which arises for determination in this batch of civil appeals is: whether omission [deletion] of the second proviso to section 43-B of the Income-tax Act, 1961, by the Finance Act, 2003, operated with effect from 1st April 2004, or whether it operated retrospectively with effect from 1st April, 1988?

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 thedue 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 realized within fifteen days from thedue date.”

By Finance Act, 2003, the second proviso to Section 43-B of the Act not only got deleted but the said Finance Act, 2003, also amended the first proviso with effect from Assessment Year 2004-2005. We quote hereinbelow the first .proviso to Section 43-B of the Act after its amendment by Finance Act, 2003, which reads as under:

“Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before thedue date applicable in his case for furnishing the return of income under subsection (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 ?r*~”?5^ alon” with svch rptinrn.”

To answer the above controversy, we need to understand the Scheme of the Income Tax Act, 1961, as it existed prior to 1″‘ April, 1984, and as it stood after 1* April, 1984.

“Income” has been defined under Section 2(24) of the Act to include profits and gains. Under Section 2(24) (x), any sum received by the assessee from his employees as contributions to provident fund/superannuation fund or any fund set up under Employees’ State Insurance Act, 1948, or any other fund for welfare of such employees constituted income. This is the reason why every assessee(s) [employer(s)] was entitled todeduction even prior to l mt April, 1984, on Merchant ile System of Accounting as a business expenditure by making provision in his Books of Accounts in that regard. In other words, if an assessee (s) -employer(s) is maintaining his books on Accrual System of Accounting, even after collecting thecontribution from his employee (s) and even without remitting the amount to the Regional Provident Fund Commissioner [R.P.F.C], the assessee(s) would be entitled todeduction as business expense by merely making a provision to that effect in his Books of Accounts . The same situation arose prior to 1* April, 1984, in the context of assessees collecting sales tax and other indirect taxes from their respective customers and claimingdeduction only by making provision in their Books without actually remitting the amount to the exchequer. To curb this practice, Section 4 3-B was inserted with effect from 1* April, 1984, by which the Merchantile System of Accounting with regard to tax, duty andcontribution to welfare funds stood discontinued and, under Section 4 3-B, it became mandatory for the assessee (s) to account for the afore-stated items not on Merchantile basis but on cash basis. This situation continued between 1* April, 1984, and 1* April, 1988, when the Parliament amended Section 4 3-B and inserted first proviso to Section 43-B. By this first proviso, it was, inter alia, laid down, in the context of any silt, payable by the assessee(s) by way of tax, duty, cess or fee, that if an assessee(s) pays such tax, duty, cess or fee even after the closing of the accountingyear but before the date of filing of the Return of income under Section 139(1) of the Act, the assessee(s) would be entitled to deduction under Section 43-B on actual payment basis and such deduction would be admissible for the accounting year. This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds. To this effect, first proviso stood introduced with effect from l rt April, 1988. Vide Finance Act, 1988, the second proviso came to be inserted. It reads as follows:

“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 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.”

At this stage, we also quote hereinbelow the Explanation below clause (va) of sub-section (1) of section 36.

“Explanation.— For the purposes of this clause, “due date’ means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.”

However, the second proviso stood further amended vide Finance Act, 1989, with effect from 1st April, 1989, which reads as under:

“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 thedue date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made other wise than in cash, the sum has been realised within fifteen days from thedue date.”

On reading the above provisions, it becomes clear that the assessee (s) -employer (s) would be entitled to deduction only if the contribution stands credited on or before the due date given in the Provident Fund Act, However, the second proviso once again created further difficulties. In many of the Companies, financial year ended on 31st March, which did not coincide with the accounting period of R.P.F.C. For example, in many cases, the time to make contribution to R.P.F.C. ended after due date for filing of Returns. Therefore, industory once industry once again made representation to the Ministry of Finance and, taking cognizance of this difficulty, the Parliament inserted one more amendment vide Finance Act, 2003, which, as stated above, came into force with effect from 1st April, 2004. In other words, after 1st April, 2004, two changes were made, namely, deletion of the second proviso and further amendment in the first proviso, quoted above. By the Finance Act, 2003, the amendment made in the first proviso equated in terms of the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to Employees’ Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from 1* April, 2004. Therefore, the argument of the assessee(s) is that the Finance Act, was curative in nature, it was not amendatory and, therefore, it applied retrospectively from 1st April, 1988, whereas the argument- of the Department was that Finance Act, 2003, was amendatory and it applied prospectively, particularly when the Parliament had expressly made the Finance Act, 2003, applicable only with effect- from 1″ April, 2004. It was also argued on behalf of the Department that even between 1rApril, 1988, and lst April, Parliament had maintained a clear dichotomy between payment of tax, duty, cess or fee on one hand and payment of contributions to the welfare funds on the other. According to the Department, that dichotomy continued upto lat April, 2004, hence, looking to this aspect, the Parliament consciously kept that dichotomy alive upto 1st April, 2004, by making Finance- Act, 2003, come into force only with effect from 1st April, 2004. Hence, according to the Department, Finance Act, 2003 should be read as amendatory and not as curative [retrospective] with effect from 1* April, 1988.

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  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, 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 1* April, 2004, would become curative in nature, hence, it would apply retrospectively with effect from 1″ 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 lrt April, 1988 was not on the statute book when the assessments were made #in the case of Allied Motors IP) 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 benefit of that proviso because it operated retrospectively from l” April, 1984, when Section 43-B stood inserted. This is how the question of retrospectively arose in Allied Motors fP) 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 (V) Limited (supraJ, 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 an 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 judgement in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned ?T“^7»s which is binding on us. Accordingly, we hold that Finance Act, 2003, will operate retrospectively with effect from 1* 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 present case, the respondents have deposited the contributions with the R.P.F.C. after 31rt March [end of accounting year it 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 lrt April, 2004, and who pays the contribution after l-t 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 lrt 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 l3t April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance' Act, 2003.

Before concluding, we extract hereinbelow the relevant observations of this Court in the case of Commissioner of Income Tax, Bangalore vs. J.H. Gotla, reported in [1985] 156 I.T.R. 323, which reads as under:

*We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is pissioie apart from strict literal construct ion, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in in justice, then such construction should be preferred to the literal construction.”

For the afore-stated reasons, we hold that Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from 1st April, 1988 [when the first proviso came to be inserted]. For the above reasons, we find no merit in this batch of civil appeals filed by the Department which are hereby dismissed with no order as to costs.