Retrospective amendment: S. 43B VIEWS EXPRESSED BY AUTHOR FIND APPROVAL OF SUPREME COURT.

[C.A. DEV KUMAR KOTHARI]

 

Earlier Article:

Earlier article  under head "Effect of amendments to section 43B with effect from April 1, 2004 on contribution to provident funds and other funds" by the author was published in [2005] 143 TAXMAN 82 (ART).  In that article after considering entire history of section 43B, various rules of interpretation, and focusing on the issue of allowability of deduction of contributions to provident fund/gratuity fund/superannuation fund etc. by invoking section 43B and its provisos the author pointed out that, in the light of the recent amendment, whereby the two provisos have been merged into a single proviso with effect from April 1, 2004, and that single proviso has to be treated as retrospective as per a judgment of the Supreme Court, the amendment provisions would cover claims for periods prior to April 1, 2003. In other words, the author opined that the amendment should be considered clarificatory, curative and thus retrospective. With some examples the author had pointed out that unless the amendment is applied as clarificatory and retrospective, there will be incongruity and inconsistency. The author had also suggested remedial measures to be taken, wherever necessary. The author had also suggested that the Board may issue a suitable clarificatory circular in this regard. However, instead of adopting right approach, the revenue authorities indulged into litigation. The Supreme court has now ruled that the amendment was clarificatory.

SECTION 43B A BRIEF REVIEW

1. Section 43B which came into force with effect from April 1, 1984, deduction of various sums referred to in section 43B is to be allowed only in the year of actual payment irrespective of the year of accrual as per method of accounting. In due course, the first proviso was inserted to relax this requirement and to permit deduction of any sum not actually paid within the previous year but paid after the previous year, but before the due date for filing of the return under section 139 of the Act. To avail this relaxation, the assesses have to make a claim and file evidence of such payment along with the return. Therefore, author had opined that it can be said that it is optional to take the benefit of the proviso or to claim deduction in the year of actual payment , the proviso is a privilege which the assessees may or may not avail.

The amendment vide the FA. 2004 had the effect of deleting the second proviso to the section and the other was a consequential amendment to the first proviso to cover contributions to employees welfare funds like provident fund, gratuity fund, employees state insurance fund and other welfare funds under the main section 43B. Originally also, contributions to such funds (P.F., etc.) were also covered by the first proviso itself. The proviso was inserted with effect from April 1, 1988, however, as it was considered to be curative, clarificatory and to remove difficulties and to make provision of section 43B workable, it was held to be applicable with retrospective effect from April 1, 1984 by a bench of three judges of  the Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677/91 Taxman 205 (SC).

The author had thus opined that, contributions to such employees welfare funds (P.F, etc.) were also allowed if the sum was paid before the due date under section 139(1) up to the assessment year 1987-88. Therefore, it can be said without any doubt, that originally the intention was to allow such deductions in the year of actual payment or as per proviso, if paid within due date under section 139(1) and claimed by the assessee. No further condition was applicable as to actual payment within 'due date', as per relevant law or scheme governing such funds.

Extension of first proviso - additional conditions prescribed for welfare funds:

An extension to the first proviso was inserted with effect from April 1, 1988 to add further requirement for actual payment within the due date as defined in the Explanation below section 36(1)(va) in respect of contributions to employees' welfare funds like P.F., F.P., ESI, etc. This extension was also amended again with effect from April 1, 1989 adding further conditions to permit deduction of contributions to such funds. Although this extension is generally considered as an independent second proviso, however, it starts with words 'provided further', and there is no condition prescribed in it to claim deduction by filing of evidence of payment with the return, and such condition flows from the first proviso. Therefore, this is merely an extension of the first proviso and not an independent proviso.

This extension or the second proviso was interpreted as a separate provision laying down additional condition of actual payment within relevant due date for grant of deduction of expenses by way of contributions to various employee welfare funds like Provident Fund, Family Pension Fund, Gratuity Fund, Superannuation Fund, Employees State Insurance Fund, etc. The High Courts of Calcutta, Andhra Pradesh, Madras and Karnataka have taken the view that contributions to such funds shall be allowed if and only if the actual payment was made in accordance with and within the stipulated time or extended time (revised due date) under relevant rules, schemes or law. In case of delayed payment (beyond due date), deduction shall not be allowed.

The Gauhati High Court had, however, held that actual payments can be allowed in the year of actual payment.

AMENDED PROVISO

5. Now as per amended section 43B read, with the proviso to it, all sums covered by section 43B including contributions to such funds can be claimed under the first proviso. Therefore, even belated actual payments shall also be allowed in the year of actual payment. It is, therefore, clear that intention is to allow deductions of relevant sums only in the year of actual payment or if assessees so claim by making actual payment within due date for filing of the return of income under section 139(1), and furnish the evidence of payment.

The first proviso itself was held to be applicable for all times when section 43B came into force, i.e., with retrospective effect from April 1, 1984. Therefore, it can be said that the amended proviso as it stands now (without extension or second proviso) is also applicable with retrospective effect from April 1, 1984. Therefore, deductions can be allowed in the year of actual payment or if paid before due date under section 139(1), if so claimed by the assessee.

ALREADY DELAYED PAYMENTS MADE AFTER MARCH 31, 2003

If any such sum of contributions to employees' welfare funds, payment of which has already been delayed, is made on or after April 1, 2003 the same shall be allowable in the year of actual payment. Therefore, today if some one pays old liability of P.F. for, say, last ten years, it will be allowable as per main section 43B.

However, if these were paid, say, before April 1, 2003, they were not allowed in view of extension to the proviso because they were not actually paid within due date under respective law or rules.

CONSIDERING AMENDMENT WOULD RESULT IN STRANGE RESULTS

 If the amendment is considered prospective then the following statements show something strange and incongruous :

A. Old position - Delayed payment made between April 1, 1983 to March 31, 1987 was allowable in the year of actual payment.

B. Latest position - Delayed payment of old liability made on or after April 1, 2003 is allowable in the year of actual payment in view of amendment with effect from April 1, 2004.

C. Delayed payment made between April 1, 1987 to March 31, 2003 is not allowable as per extension to the proviso.

To say that between April 1, 1987 to March 31, 2003, there was different intention appears to be strange. There appears no reason to have different intention only in the middle period.

CONTROL OF PROVISO OVER MAIN SECTION 43B

As observed above, it is well settled that proviso came into being to remove difficulties and it was clarificatory. In fact, proviso is in the nature of option and privilege. Suppose Mr. 'X' has made payment of liability for period up to March, 2001 in the month of April, 2001, he can claim it in computation of previous year ended March 31, 2001 but he does not claim it in previous year ended March 31, 2001 by filing evidence of payment. He can claim it in the year of actual payment, i.e., previous year ended March 31, 2002 (assessment year 2002-03).

In view of this example, it is clear that the proviso never controlled the main section 43B. It only relaxed the rigours of section 43B which stipulates, that deduction can be claimed only in the year of actual payment. Proviso only carved out an exception to main section 43B. The conditions laid down in the proviso/second proviso (or extension to the proviso) were applicable only when the claim was made as per the proviso and not under main section 43B.

In respect of other items (other than P.F., etc.), deduction as per main section was always available without any other condition except 'actual payment'. Therefore, for P.F., etc., also, same rule may be applied to allow actual payment without any further condition even during the middle period, i.e., from April 1, 1988 to March 31, 2003.

RETROSPECTIVE EFFECT OF AMENDMENT

It appears that recent amendment relating to P.F., etc., has been brought to clarify legislative intention and to also to remove hardship to the business and industry caused due to views taken by the Courts about second proviso/extension to the proviso. Furthermore, as discussed above, it may be wrong and inconsistent to say that different intentions of not allowing delayed payments even in year of actual payment, prevailed in respect of delayed payments made during the middle period (April 1, 1987 to March 31, 2003).

Keeping in mind the judgment of the Supreme Court holding first proviso to be retrospective and subsequent amendment, it can be said that actual payments are allowable even for P.F., etc., in the year of actual payment irrespective of whether payment was made within due date as per P.F. scheme or not.

OMISSION MEANS IT NEVER EXISTED

 It can also be said that omission of the second proviso/extension to first proviso means as if it never existed. In pending proceedings, section 43B may be applied as if there is no second proviso (extension to first proviso). The matter for P.F., etc. can now be covered by the first proviso for all periods.

On principles relating to deletion or omissions of any provisions, we may fruitfully rely on principles laid down in Kolhapur Canesugar Works Ltd. v. Union of India AIR 2000 SC 811 which has been referred in Union of India v. Abdul Zarkhan [2003] 260 ITR 358/127 Taxman 179 (MP) at page 360. Applying the law laid down therein, it can be said that the second proviso/(extension to first proviso) to section 43B has been omitted and in lieu thereof, the first proviso has been made applicable. Therefore, the pending proceedings shall not be governed by the old second proviso/extension to first proviso but by the new provisions, that is, amended proviso to section 43B.

Recent judgment of the Supreme Court:

 In CIT V. Alom Extrusions Ltd vide judgment dated 25.11.2009 honorable Supreme Court has held that the amendment of S. 43B vide the FA. 2003, is clarificatory, curative and hence retrospective. The contentions as raised by author in earlier articles of S. 43B have been approved, with some examples to similar effect as given in illustrations by the author. The Supreme Court also considered the history of S. 43B and various amendments and came to conclusion that the deletion of second proviso and covering PF etc. in main section and first proviso is clarificatory and curative and therefore applicable from the date when the first proviso came into force that is since inception of S. 43B.

Question before the Supreme Court:

"whether omission [deletion] of the second proviso to section 43B of the Income-tax Act, 1961, by the Finance Act, 2003, operated with effect from 1st April 2004, or whether it operated retrospectively with effect from 1st April, 1988?

The second proviso read as follows:

             "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 in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realized within fifteen days from the due date."

The Finance Act, 2003:

 The second proviso to Section 43-B was deleted and first proviso was also amended with effect from Assessment Year 2004-2005. Thus the Supreme Court quoted the first proviso to Section 43-B of the Act after its amendment by Finance Act, 2003, which reads as under:

"Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under subsection (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the

Assessee with the return.

Scheme of the  Act:

The court consider that to answer the above controversy, we need to understand the Scheme of the Income Tax Act, 1961, as it existed prior to 1"' April, 1984, and as it stood after 1st April, 1984.

"Income" has been defined under Section 2(24) of the Act to include profits and gains. Under Section 2(24) (x), any sum received by the assessee from his employees as contributions to provident fund/superannuation fund or any fund set up under Employees' State Insurance Act, 1948, or any other fund for welfare of such employees constituted income. This is the reason why every assessee(s) [employer(s)] was entitled to deduction even prior to 1st  April, 1984, on Merchantile System of Accounting as a business expenditure by making provision in his Books of Accounts in that regard. In other words, if an assessee (s) -employer(s) is maintaining his books on Accrual System of Accounting, even after collecting the contribution from his employee (s) and even without remitting the amount to the Regional Provident Fund Commissioner [R.P.F.C], the assessee(s) would be entitled to deduction as business expense by merely making a provision to that effect in his Books of Accounts. The same situation arose prior to 1 April, 1984, in the context of assessees collecting sales tax and other indirect taxes from their respective customers and claiming deduction only by making provision in their Books without actually remitting the amount to the exchequer. To curb this practice, Section 43-B was inserted with effect from 1st April, 1984, by which the Merchantile System of Accounting with regard to tax, duty and contribution to welfare funds stood discontinued and, under Section 43-B, it became mandatory for the assessee (s) to account for the afore-stated items not on Merchantile basis but on cash basis. This situation continued between 1 April, 1984, and 1 April, 1988, when the Parliament amended Section 43-B and inserted first proviso to Section 43-B. By this first proviso, it was, inter alia, laid down, in the context of any sum, payable by the assessee(s) by way of tax, duty, cess or fee, that if an assessee(s) pays such tax, duty, cess or fee even after the closing of the accounting year but before the date of filing of the Return of income under Section 139(1) of the Act, the assessee(s) would be entitled to deduction under Section 43-B on actual payment basis and such deduction would be admissible for the accounting year. This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds. To this effect, first proviso stood introduced with effect from 1st  April, 1988. Vide Finance Act, 1988, the second proviso came to be inserted. It reads as follows:

"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."

At this stage, we also quote herein below the Explanation below clause (va) of sub-section (1) of section 36.

"Explanation.— For the purposes of this clause, "due date' means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise."

However, the second proviso stood further amended vide Finance Act, 1989, with effect from 1st April, 1989, which reads as under:

"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 in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made other wise than in cash, the sum has been realised within fifteen days from the due date."

On reading the above provisions, it becomes clear that the assessee (s) -employer (s) would be entitled to deduction only if the contribution stands credited on or before the due date given in the Provident Fund Act, However, the second proviso once again created further difficulties. In many of the Companies, financial year ended on 31st March, which did not coincide with the accounting period of R.P.F.C. For example, in many cases, the time to make contribution to R.P.F.C. ended after due date for filing of Returns. Therefore, industory once industry once again made representation to the Ministry of Finance and, taking cognizance of this difficulty, the Parliament inserted one more amendment vide Finance Act, 2003, which, as stated above, came into force with effect from 1st April, 2004. In other words, after 1st April, 2004, two changes were made, namely, deletion of the second proviso and further amendment in the first proviso, quoted above. By the Finance Act, 2003, the amendment made in the first proviso equated in terms of the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to Employees' Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from 1st April, 2004. Therefore, the argument of the assessee(s) is that the Finance Act, was curative in nature, it was not amendatory and, therefore, it applied retrospectively from 1st April, 1988, whereas the argument- of the Department was that Finance Act, 2003, was amendatory and it applied prospectively, particularly when the Parliament had expressly made the Finance Act, 2003, applicable only with effect- from 1st April, 2004. It was also argued on behalf of the Department that even between 1^st April, 1988, and 1st April, Parliament had maintained a clear dichotomy between payment of tax, duty, cess or fee on one hand and payment of contributions to the welfare funds on the other. According to the Department, that dichotomy continued upto lat April, 2004, hence, looking to this aspect, the Parliament consciously kept that dichotomy alive upto 1st April, 2004, by making Finance- Act, 2003, come into force only with effect from 1st April, 2004. Hence, according to the Department, Finance Act, 2003 should be read as amendatory and not as curative [retrospective] with effect from 1st April, 1988.

Ruling of the Supreme Court:

Supreme Court held that "We find no merit in these civil appeals filed by the Department for the following reasons: firstly, as stated above. Section 43-B [main section], which stood inserted by Finance Act, 1983, with effect from 1st April, 1984, expressly commences with a non-obstante clause, the underlying object being to disallow deductions claimed merely by making a Book entry based on Merchantile System of Accounting. At the same time, Section 43-B [main section] made it mandatory for the Department to grant deduction in computing the income under Section 28 in the year in which tax, duty, cess, etc., is actually paid. However, Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under the Provident Fund Act, Municipal Corporation Act [octroi] and other Tax laws. Therefore, by way of first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the Return under the Income Tax Act [due date], the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of benefits under Social Welfare legislations by delaying payment of contributions to the welfare funds. However, as stated above, 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. Secondly, it may be noted that, in the case of Allied Motors (P) Limited vs. Commissioner of Income Tax, reported in [1997] 224 I.T.R.677, the Scheme of Section 43-B of the Act came to be examined. In that case, the question which arose for determination was, whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant Sales Tax law should be disallowed under Section 43-B of the Act while computing the business income of the previous year? That was a case which related to Assessment Year 1984-1985. The relevant accounting period ended on June 30, 1983. The Income Tax Officer disallowed the deduction claimed by the assessee which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year. The deduction was disallowed under Section 43-B which, as stated above, was inserted with effect from 1st April, 1984. It is also relevant to note that the first proviso which came into force with effect from 1st April, 1988 was not on the statute book when the assessments were made in the case of Allied Motors (P) Limited (supra). However, the assessee contended that even though the first proviso came to be inserted with effect from 1st April, 1988, it was entitled to the benefit of that proviso because it operated retrospectively from l" April, 1984, when Section 43-B stood inserted. This is how the question of retrospectively arose in Allied Motors (P) Limited (supra). This Court, in Allied Motors (P) Limited (supra) held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this Court, in Allied Motors (P) Limited (supra), held that the first proviso was curative in nature, hence, retrospective in operation with effect from 1st April, 1988. It is important to note once again that, by Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about an uniformity in tax, duty, cess and fee on the one hand vis-a-vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act, 2003, is retrospective in operation. Moreover, the judgement in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned judges which is binding on us. Accordingly, we hold that Finance Act, 2003, will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted]. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that Finance Act, 2003, to the above extent, operated prospectively. Take an example - in the present case, the respondents have deposited the contributions with the R.P.F.C. after 31st March [end of accounting year it before filing of the Returns under the Income Tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under Section 43-B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right upto 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction under Section 43-B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore; operate from 1st   April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate with effect from 13th April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance' Act, 2003.

Before concluding, we extract hereinbelow the relevant observations of this Court in the case of Commissioner of Income Tax, Bangalore vs. J.H. Gotla, reported in [1985] 156 I.T.R. 323, which reads as under:

*We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is pissioie apart from strict literal construct ion, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in justice, then such construction should be preferred to the literal construction."

For the afore-stated reasons, we hold that Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from 1st April, 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.

Authors view on the recent judgment of the Supreme Court:

The Supreme Court in case of Alom Extrusion (supra.) has held that the amendment vide the FA 2003 are retrospective and applicable from 01.04.1988. However, since earlier the Supreme Court in case of Allied Motors (Supra.) has held that the first proviso to S. 43B is applicable since inception of section 43B that is w.e.f. 01.04.1984, it can be said that the first proviso will apply to PF etc. also w.e.f. 01.04.1984 and not 01.04.1988. For this purpose we have to read the present judgment of the Supreme Court with the judgment in case of Allied Motors.

Classic case of litigation:

Section 43B is a classic case of litigation. How much benefit the revenue has derived or how much social purpose it has served is not known. The implication of S. 43B is simply deferring a deduction. Usually delay in statutory payments occurs due to losses and /or capital inadequacy. This is because, there are other legislations which govern payment of such sums. In fact by applying section 43B in many cases assessee can get benefit of prolonged duration of allowability of loss for set off. Suppose a deduction is allowed in a year of loss, and the loss itself lapses due to limitation so the deduction also becomes useless. Now suppose a deduction is not allowed due to S. 43B, the loss is reduced and carry forwarded loss is also reduced and does not lapse or lower amount is lapsed. When the  assessee earns income, or his capital restructuring takes place, he pays past statutory dues ( which were not allowed) and get deduction against current income. So the assessee is benefited due to deferment of the allowance or deduction of statutory dues.