2006 (10) TMI 105 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the Tribunal recalling proceedings to consider the applicability of section 40A(9) of the Income-tax Act, 1961.
2. Justification of sustaining the disallowance of Rs. 51,165 after finding section 40A(9) inapplicable.

Issue-wise Detailed Analysis:

1. Legality of the Tribunal Recalling Proceedings:
The Tribunal recalled its earlier order to consider the applicability of section 40A(9) of the Income-tax Act, 1961. The applicant contended that once the Tribunal found section 40A(9) inapplicable, it should not have redecided the controversy on merits. However, the Tribunal clarified in paragraph 13 of its order that recalling the order opened the entire issue for de novo consideration, allowing both sides to present relevant arguments. The Tribunal stated, "The occasion for recalling the order was certainly the omission on the part of the Tribunal to take note of the provisions of sub-section (9) of section 40A to begin with. But once the order on the aforesaid subject, passed earlier, is recalled by the Tribunal, the entire issue becomes open for consideration de novo." The High Court agreed with this approach, noting that the Tribunal could either permit the applicability of section 40A(9) as an additional issue or recall its earlier order in toto and decide afresh. The court found no illegality in the Tribunal's approach and answered the first question in the affirmative, in favor of the Revenue and against the assessee.

2. Justification of Sustaining the Disallowance of Rs. 51,165:
The Tribunal examined the scheme's rules and regulations, which provided a contractual arrangement between the assessee and its employees for contributions towards the marriage of employees' daughters. The Tribunal noted that the employer's obligation to pay arises at the time of the daughter's marriage, not annually. Rule 4 stated, "The company will also pay an amount as its own contribution equal to the contribution of the employee excluding interest at the time of marriage of each daughter." The Tribunal found that the liability to make the payment does not accrue annually but only upon certain contingencies, such as the daughter's marriage or the employee's retirement. The Tribunal concluded, "The liability arises on the happening of certain contingent events, as visualized in rules 4 and 7."

The Tribunal also addressed the interest on employees' contributions, allowing the expenditure of Rs. 27,731 as legitimate business expenditure since the interest liability accrued annually. However, the Tribunal held that section 40A(9) did not apply to the scheme, as the payments were direct disbursements to employees, not contributions to a fund. The Tribunal stated, "To such direct disbursements, the provisions of sub-section (9) of section 40A are not attracted."

The High Court concurred with the Tribunal's findings, stating that the disallowance was based on a correct appreciation of the legal provisions. The court answered the second question in the affirmative, in favor of the Revenue and against the assessee.

Conclusion:
The High Court upheld the Tribunal's decision to recall its earlier order and reconsider the applicability of section 40A(9) and found the disallowance of Rs. 51,165 justified based on the scheme's contingent liability rules. Both questions were answered in favor of the Revenue and against the assessee, with no order as to costs.