2019 (1) TMI 1332 - AT - Income Tax

Disallowance of Contribution to Environmental Relief Fund u/s 43B - case of the assessee is that the amounts collected towards ERF were specifically identified in the policy schedule issued by it - Held that - Here the assessee has collected the contribution to the ERF from the owner (insured) then he is only acting as a custodian of the said fund and the said amount cannot be regarded as income of the assessee. In case the amount is not the receipt of the assessee, not routed through Profit and Loss Account, then there is no question of applicability of provisions of section 43B. The absence of a mechanism of making contribution to ERF; though under the Act, the assessee has collected the amount from the owner (insured), but in the absence of the fund being created, the assessee was handicapped in transferring the amount so collected to the fund. The manner of remittance was prescribed in December 2008 and the assessee has paid the accumulated balance on 2.9.2009. In the absence of the creation of fund, the assessee had no means of depositing the said amount and the assessee in such circumstances cannot be held responsible for non-depositing the contribution to ERF. As already held in the above paras that the assessee was only the collector of funds of the amount which was to be deposited on behalf of the owner (insured), when the mechanism was provided for such deposit. Thus allowing the claim of the assessee, we hold that the fund collected by the assessee was neither fee, tax or cess and, hence, do not come within the ambit of section 43B of the Act. Determination of income of the insurance companies as prescribed under rule 5 of Schedule 1 of the Act - The Profit and Loss Account disclosed by the assessee i.e. its annual accounts are sacrosanct. The said rule provides that the income to be determined is subject to clause 8 i.e. if any expenditure is debited to the Profit and Loss Account, then the same can be added back. As pointed out in the paras above, the assessee had not debited the aforesaid amount to the Profit and Loss Account, but shown as Current Liabilities and consequently, the same cannot be added back to the profits of the business for the year of Insurance Business. Accordingly, the disallowance made by the Assessing Officer is hereby deleted. - decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Contribution to Environmental Relief Fund under Section 43B of the Income-tax Act, 1961.

Detailed Analysis:

Disallowance of Contribution to Environmental Relief Fund under Section 43B of the Act:
The primary issue in this appeal is the disallowance of ?70,31,561/- towards the Environmental Relief Fund (ERF) under Section 43B of the Income-tax Act, 1961.

Facts and Background:
The appeal is in the second round of proceedings before the Tribunal. Initially, the assessee had disallowed the sum suo motu but later filed a revised computation claiming it as deductible. The Assessing Officer (AO) did not entertain the relief, citing the Supreme Court's decision in Goetze (India) Limited, as the assessee had not furnished a revised return. The matter was set aside by the Tribunal to the AO, who again disallowed the amount under Section 43B. The CIT(A) upheld this disallowance, treating the amount as 'cess' and not excluding it from the ambit of Section 43B.

Arguments by the Assessee:
The assessee argued that it was merely a collecting agency for the Government of India, and the amount collected was not routed through the Profit and Loss Account, thus Section 43B was not applicable. The assessee cited various legal precedents, including the Supreme Court's decision in Siddheshwar Sahakari Sakhar Karkhana Limited, to support the claim that the amount collected for ERF was not its income but a liability to be remitted to the government.

Arguments by the Revenue:
The Revenue contended that the assessee had collected the fund and earned interest on it, and since it was a statutory liability, it had to be deposited before filing the income tax return. The Revenue emphasized that the assessee could claim the deduction under Section 43B only on the date of payment and relied on several judicial decisions to support their stance.

Tribunal's Findings:
The Tribunal noted that the assessee was a joint venture engaged in general insurance business and had collected the ERF amount from policyholders as per the Public Liability Fund Act, 1999. The Tribunal observed that the amount collected was not the assessee's income but a liability to be remitted to the government, acting as a conduit for the fund. The Tribunal referred to the principle of "diversion of income by overriding title" and the Supreme Court's decisions in Siddheshwar Sahakari Sakhar Karkhana Limited and New Horizon Sugar Mills (P) Ltd., which supported the assessee's claim.

Absence of Mechanism for Contribution:
The Tribunal highlighted that the government had not prescribed the manner of remittance until December 2008, which handicapped the assessee from depositing the collected amount. The assessee paid the accumulated balance in January 2009 once the mechanism was prescribed.

Nature of the Fund:
The Tribunal rejected the CIT(A)'s classification of the ERF as 'cess', citing the Supreme Court's definition in M/s Guruswamy & Co. Etc., which clarified that 'cess' generally refers to a tax for specific administrative expenses. The Tribunal concluded that the ERF was neither a fee, tax, nor cess and thus not covered under Section 43B.

Special Manner of Determination of Income:
The Tribunal noted that the assessee had not debited the ERF amount to the Profit and Loss Account but shown it as Current Liabilities. Hence, under Rule 5 of Schedule 1 of the Act, the amount could not be added back to the profits of the insurance business.

Conclusion:
The Tribunal allowed the appeal, deleting the disallowance of ?70,31,561/- made by the AO, and held that the ERF collected by the assessee was not its income and thus not subject to Section 43B of the Act.

Order Pronounced:
The appeal of the assessee was allowed on January 21, 2019.