2015 (10) TMI 253 - HC - Income Tax

Expenditure incurred on payments made to the pensioners - whether is allowable as revenue expenditure notwithstanding the fact that the said amount was not an allowable deduction under section 36(1)(iv) and (v)? - Held that - An analysis of the provisions of section 36(1)(iv) of the Act shows that any sum which is paid by the assessee as an employer to a recognised provident fund or an approved superannuation fund is admissible as deduction thereunder. Under Clause (v) of Section 36(1) of the Act, deduction is allowed in respect of any sum paid by the assessee as an employer as contribution to an approved gratuity fund created by the employer for the exclusive benefit of the employees under an irrevocable trust. Admittedly, in the present case, the contributions were towards the unrecognised pension/superannuation fund and gratuity fund. Thus, the assessee was not entitled to any deduction in respect of the said amounts either under Section 36(1)(iv) or Section 36(1)(v) of the Act. Therefore, the said amount also could not be allowed as deduction under Section 37(1) of the Act as held by the Delhi High Court in Sony India P. Limited s case (2006 (6) TMI 76 - DELHI High Court ). In so far as actual payment made to the pensioners is concerned, the same has been held to be admissible to the assessee on the principle that where an expenditure which is wholly and exclusively expended for the purposes of the business or profession of the assessee is permissible to be deducted from the income under Section 37 of the Act. There was no error in the approach of the Tribunal in allowing the aforesaid expenditure as deduction under Section 37 of the Act. No substantial question of law - Decided against revenue.

Summary

Issues Involved:
1. Whether the Tribunal was justified in holding that the expenditure incurred on payments made to the pensioners is allowable as revenue expenditure.
2. Whether the amount actually disbursed to the pensioners is allowable as revenue expenditure notwithstanding the fact that it was not an allowable deduction under section 36(1)(iv) and (v) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure on Payments Made to Pensioners as Revenue Expenditure:
The primary issue revolves around whether the expenditure incurred on payments made to the pensioners is allowable as revenue expenditure. The original assessment disallowed the deduction claimed by the assessee under Section 36 of the Income Tax Act, 1961, for contributions to an unrecognized pension fund. The Tribunal, however, allowed the expenditure on an actual payment basis for the assessment year 2002-03 and on the basis of total contribution to the unrecognized Pension Fund for the assessment year 2003-04. The Tribunal's decision was challenged by the revenue, arguing that contributions to unrecognized funds are not allowable under Section 36(1)(iv) and (v) of the Act. The High Court upheld the Tribunal's decision, noting that the actual expenditure disbursed to the pensioners was permissible as it was wholly and exclusively expended for the purposes of the business under Section 37 of the Act.

2. Allowability of Actual Disbursement to Pensioners Notwithstanding Non-Allowability Under Section 36(1)(iv) and (v):
The second issue is whether the actual disbursement to the pensioners is allowable as revenue expenditure despite not being an allowable deduction under Section 36(1)(iv) and (v) of the Act. The High Court observed that contributions to unrecognized funds are not deductible under Section 36(1)(iv) and (v). However, it distinguished between contributions to such funds and actual payments made to pensioners. The Court cited precedents, including the Supreme Court's rulings in Shree Sajjan Mills Limited and W.T.Suren and Co. Limited, which supported the deductibility of actual payments made to employees as business expenditure under Section 37. The Court concluded that the Tribunal correctly allowed the actual expenditure disbursed to the pensioners as a deduction under Section 37, as it was wholly and exclusively for the business purposes.

Conclusion:
The High Court dismissed the appeals by the revenue, stating that no substantial question of law arose for consideration. The judgment affirmed that while contributions to unrecognized funds are not deductible under Section 36(1)(iv) and (v), actual payments made to pensioners are allowable as revenue expenditure under Section 37 of the Income Tax Act, 1961, as they are wholly and exclusively expended for business purposes.