2009 (11) TMI 27 - SC - Income Tax

Amendment to section 43B - omission deletion of the second proviso to Section 43-B whether retrospective in nature regarding restriction of deduction in respect of any sum payable by an employer by way of contribution to provident fund/superannuation fund or any other fund for the welfare of employees unless it stood paid within the specified due date held that - 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 1st April 2004 would become curative in nature hence it would apply retrospectively with effect from 1st April 1988 Decision in Allied Motors (P) Limited vs. Commissioner of Income Tax 2008 -TMI - 5575 - SUPREME Court followed

Summary

Issues Involved:
1. Retrospective application of the deletion of the second proviso to Section 43-B of the Income Tax Act, 1961.
2. Interpretation of the Finance Act, 2003, and its impact on the first proviso to Section 43-B.
3. Hardship and discrimination caused by prospective application of the Finance Act, 2003.

Issue-wise Detailed Analysis:

1. Retrospective Application of the Deletion of the Second Proviso to Section 43-B:

The core issue in this batch of civil appeals is whether the deletion of the second proviso to Section 43-B of the Income Tax Act, 1961, by the Finance Act, 2003, operated retrospectively from 1st April, 1988, or prospectively from 1st April, 2004. The second proviso restricted the deduction of sums payable by an employer to various employee welfare funds unless paid within the specified due date. The Finance Act, 2003, deleted this proviso and amended the first proviso to bring uniformity between the payment of taxes, duties, cess, etc., and contributions to employee welfare funds.

The Department argued that the deletion operated prospectively from 1st April, 2004, while the assessee contended it should apply retrospectively from 1st April, 1988. The Court held that the Finance Act, 2003, was curative in nature and thus applied retrospectively from 1st April, 1988, when the first proviso was introduced. This decision was supported by the precedent set in Allied Motors (P) Limited vs. Commissioner of Income Tax, where a curative proviso was deemed retrospective to remedy unintended consequences and make the section workable.

2. Interpretation of the Finance Act, 2003, and its Impact on the First Proviso to Section 43-B:

The main section of 43-B, inserted by the Finance Act, 1983, mandated cash basis accounting for tax, duty, and welfare fund contributions, discontinuing the Merchantile System. The first proviso, introduced in 1988, allowed deductions if payments were made before the filing of the return, but this did not apply to welfare fund contributions. The second proviso, added in 1988 and amended in 1989, further restricted deductions for welfare fund contributions unless paid within the due date under the Provident Fund Act.

The Finance Act, 2003, deleted the second proviso and amended the first proviso to equate welfare fund contributions with taxes, duties, and fees, allowing deductions if paid before the return filing date. The Court concluded that this amendment was curative, addressing implementation issues and bringing uniformity, thus applying retrospectively.

3. Hardship and Discrimination Caused by Prospective Application of the Finance Act, 2003:

The Court noted that prospective application of the Finance Act, 2003, would cause hardship and discrimination. Assessees who paid contributions after the accounting year but before filing returns would lose deductions, while those who delayed payments until after 1st April, 2004, would benefit. This would result in invidious discrimination, contrary to the legislative intent of providing relief and uniformity.

The Court emphasized that statutory construction should avoid absurd results and promote equity. Therefore, the Finance Act, 2003, to the extent indicated, was deemed retrospective from 1st April, 1988, ensuring fair and equitable treatment of all assessees.

Conclusion:

The Supreme Court held that the Finance Act, 2003, was curative and applied retrospectively from 1st April, 1988. This interpretation avoided hardship and discrimination, aligning with the legislative intent to provide uniformity and relief to employers regarding deductions for contributions to employee welfare funds. The civil appeals filed by the Department were dismissed, and those by the assessees were allowed, ensuring equitable application of the law.