1988 (3) TMI 144 - AT - Income Tax

Summary

Issues:
1. Deduction claimed by the assessee for contribution to an employees' welfare trust disallowed due to retrospective amendment.
2. Interpretation of provisions under sec. 40A(10) regarding deduction of trust expenditure.
3. Disallowance of expenses incurred by the trust for providing benefits to the company's directors and employees under sec. 40A(5)/40(c).

Detailed Analysis:
1. The judgment pertains to an appeal by a company manufacturing potentiometers and switches regarding the disallowance of a deduction claimed for contribution made to an employees' welfare trust. The Income-tax Act was retrospectively amended by the Finance Act, 1984, introducing sub-sec. (9) in sec. 40A, leading to the disallowance of the claimed amount by the IAC (Asst.). However, sec. 40A(10) allows for deduction of expenditure laid out for employee welfare before March 1, 1984. The IAC (Asst.) allowed a deduction for the trust's expenditure on providing television sets to certain employees, which was contested by the assessee leading to the present appeal.

2. The contention in the appeal was whether sec. 40A(10) creates a legal fiction extending to expenses incurred by the trust or only pertains to expenses by the employer. The assessee argued that the legal fiction should not be extended beyond its legitimate field, while the Departmental Representative relied on lower authorities' orders. The tribunal analyzed the provisions and held that the trust's expenditure, treated as laid out by the assessee under sec. 40A(10), triggers the applicability of sec. 40A(5)/40(c) for disallowance, as legal fictions must be carried to their logical conclusion as per established legal principles.

3. The tribunal concluded that the lower authorities were justified in considering the trust's expenditure on providing benefits to the company's directors and employees for calculating the disallowable amount under sec. 40A(5)/40(c). It emphasized that once the legal fiction under sec. 40A(10) deems the trust's expenditure as laid out by the assessee, all consequences and restrictions related to such expenditure must apply. Therefore, the order of the CIT (Appeals) upholding the disallowance of the trust's expenses was affirmed, and the assessee's appeal was dismissed.