Punjab & Haryana : The Income-tax Appellate Tribunal was right in law in deleting the addition made on account of disallowance of the payment of ESI deposited beyond the due date

High Court Of Punjab And Haryana

CIT vs. Rai Agro Industries Ltd.

Assessment Year : 1998-99

Section : 43B

Adarsh Kumar Goel And Ajay Kumar Mittal, JJ.

IT Appeal No. 663 Of 2005

November  30, 2010


Ajay Kumar Mittal, J. – This appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated July 14, 2005, passed by the Income-tax Appellate Tribunal Chandigarh Bench “B” Chandigarh (in short “the Tribunal”) in I.T.A. No. 571/Chandi/2003, relating to the assessment year 1998-99.

2. The following substantial question of law has been claimed for determination by this court :

“Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deleting the addition made on account of disallowance of the payment of ESI deposited beyond the due date ?”

3. The facts, in brief, necessary for adjudication, as narrated in the appeal are that the assessee filed return of income declaring loss of Rs. 2,83,85,603 on November 30, 1998. The assessment under section 143(3) was completed on November 17, 2000, where an addition of a sum of Rs. 9,33,264 was made on account of disallowance of the payment of contribution towards Employees’ State Insurance deposited beyond the due date. The Commissioner of Income-tax (Appeals), for short (“CIT(A)”) in the appeal carried by the assessee, vide order dated July 28, 2003, reduced the addition/disallowance to Rs. 2,93,212 thereby allowing relief of Rs. 6,40,052 under section 43B of the Act. The assessee and the Revenue feeling aggrieved by the order of the Commissioner of Income-tax (Appeals) preferred separate appeals before the Tribunal. The Tribunal allowed the appeal of the assessee and deleted even the addition of Rs. 2,93,212, confirmed by the Commissioner of Income-tax (Appeals), whereas the appeal of the Revenue was dismissed vide order dated July 14, 2005. The Tribunal, while deleting the addition of Rs. 2,93,212 held that the omission of the second proviso and the amendment of the first proviso to section 43B by the Finance Act, 2003 whereby payment made by the employer towards contribution to provident fund, employees’ State insurance, gratuity, superannuation and other welfare funds would operate retrospectively from April 1, 1988 onwards. Hence, this appeal by the Revenue.

4. We have heard learned counsel for the appellant and have perused the record.

5. The point for determination in this appeal is, whether the amendment made by the Finance Act, 2003, effective from April 1, 2004 whereby the second proviso to section 43B stands omitted would govern the earlier cases from April 1, 1988 also.

6. It would be appropriate to delve into the brief legislative history and the purpose of enacting the provisions of section 43B of the Act before embarking on the adjudication of the controversy involved in the present appeal.

7. Section 43B provides for disallowance of unpaid statutory liability. This section was inserted by the Finance Act, 1983, with effect from April 1, 1984. The purpose of this provision is to discourage those assessees who failed to clear their statutory liability relating to payment of excise duty, employees’ contribution to provident fund, etc., within time whereas they laid claim for deductions in respect thereof from their income on the plea that liability to pay these amounts had accrued during the relevant previous year. After the insertion of section 43B, the assessee was entitled to claim deduction on account of these payments only on actual payments even where the assessee had been following the mercantile system of accountancy. The provision at that time comprised of only clauses (a) and (b) and Explanation which was later renumbered as Explanation 1. The two provisos before the Explanation to the section were incorporated by the Finance Act, 1987 effective from 1st April, 1988. The Finance Act, 1988 amended clause (a) with effect from 1st April, 1989. The rigours of clause (a) were lessened by the first proviso which permitted the deduction of tax liability wherever it was established that it had been discharged, though not during the previous year, but before the due date for filing of return under section 139(1) of the Act. However, the second proviso which related to liabilities falling under clause (b) had more rigid conditions. The second proviso, which is relevant for decision of this appeal, reads thus :

“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.”

8. The Finance Act, 2003 effective from April 1, 2004, made an amendment whereby the second proviso to section 43B of the Act was omitted from the statute book.

9. The issue relating to retrospective operation of the omission of the second proviso to section 43B of the Act was considered by the Supreme Court in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 / 185 Taxman 416 wherein it was held that it is curative in nature and would apply retrospectively, with effect from April 1, 1988. The relevant observations of the Supreme Court are as under (page 316) :

“. . . we hold that the Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from April 1, 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.”

10. In view of the above, the Tribunal was right in allowing the claim of the assessee in respect of payments made for ESI contributions and the same could not be disallowed under section 43B of the Act. The question of law is, thus, answered against the Revenue and in favour of the assessee.

11. In view of the above, there is no merit in the appeal, the same is dismissed.

[Citation : 334 ITR 122]

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