2004 (12) TMI 55 - HC - Income Tax

1. Whether Tribunal was correct in law in holding that the contributions made by the applicant in M/s. Raasi Cement Executives Welfare Trust was not deductible in computing the income of the applicant? 2. Whether Tribunal was correct in law in holding that the Executive Welfare Trust was hit by the provisions of section 40A(9)? - Admittedly, the payments in question do not fall either under clause (iv) or clause (v) of sub-section (1) of section 36 - It also appears that the main grievance of the assessee, as can be seen from the order of the Income-tax Officer was that the provision of section 40A(9) having been brought in with retrospective effect was unconstitutional. There is no decision of the court, at least, no such decision has been brought to our notice, holding the said provision to be unconstitutional Thus, both questions are answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

Summary

Issues:
1. Deductibility of contributions made to welfare trust in computing income.
2. Applicability of section 40A(9) of the Income-tax Act to the Executive Welfare Trust.

Analysis:
The case involved an appeal arising from the Income-tax Appellate Tribunal's order concerning the assessment year 1984-85. The two questions referred for consideration were related to the deductibility of contributions made by the assessee to the Raasi Cement Executives Welfare Trust and the applicability of section 40A(9) of the Income-tax Act. The assessee, a cement manufacturing company, claimed a deduction for contributions made to the welfare trust. The Income-tax Officer disallowed the claim, citing it as a capital contribution under section 40A(9) of the Act. The first appellate authority upheld the disallowance, but the ITAT allowed the deduction for contributions to the Employees' Welfare Trust while rejecting the claim for the Executives Welfare Trust.

The provision in question, section 40A(9) of the Act, disallows deductions for sums paid by an employer towards setting up or contributing to any fund, trust, or institution unless specified conditions are met. The provision was inserted with retrospective effect from April 1, 1980. It restricts deductions to those provided under specific clauses of section 36(1) or as required by any other applicable law. The contributions in this case did not align with the permissible deductions under section 36(1) of the Act.

The court noted that there was no legal requirement compelling the assessee to make such contributions. The deductions allowed under section 36(1) include contributions to recognized provident funds, superannuation funds, or approved gratuity funds for the exclusive benefit of employees under an irrevocable trust. Since the contributions did not fall within these categories, they were not eligible for deduction under the Act.

The assessee contended that the retrospective application of section 40A(9) was unconstitutional, but the court found no prior decision declaring the provision unconstitutional. Consequently, the court ruled in favor of the Revenue on both issues, affirming the disallowance of deductions for contributions to the Executive Welfare Trust and upholding the applicability of section 40A(9) to the case.

In conclusion, the court answered both questions in favor of the Revenue, emphasizing the limitations imposed by section 40A(9) on deductions for contributions to funds, trusts, or institutions unless meeting specific criteria outlined in the Act.