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TMI Blog1982 (8) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... hese years ?" According to the statement of the case, the assessee is a public limited company which maintains its accounts on calendar year basis. Originally assessments for the years 1956-57, 1958-59 and 1959-60 were completed on March 8, 1961, January 31, 1962, and February 14,1962, respectively. In these assessments the ITO, while computing the assessee's income, deducted the amount contributed by it to the provident fund account of its employees. Subsequently, these assessments were reopened by issuing notices under s. 148 on March 23, 1974, on the ground that the assessee had not disclosed the primary facts which were relevant for deciding its claim for deduction of its contributions to the provident fund of its employees. The ITO found that these contributions had been made by the assessee in violation of art. 116 of the articles of association, which provided that the company was not to make any contribution to the provident fund for any year in respect of which the shareholders were paid dividend at a rate lower than one anna per share. For the calendar years 1955, 1957 and 1958, the company did not declare any dividend. The ITO, therefore, felt that the contributions ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to it art. 116 could not override the assessee's obligation under a contract with its employees to make regular contributions to their provident fund. Further, the amendment of art. II 6 of the articles of association, made in the extraordinary general body meeting of the shareholders held on 8th of May, 1959, was to operate retrospectively and the amended provision became effective for the relevant assessment years as well. Any contribution made to the employees' provident fund in consonance with the amended art. 116 of the articles of association could not be disallowed on the ground that they were beyond the scope of art. 116 of the articles of association as they stood prior to its amendment. The AAC held that in the instant case the material and primary facts which the assessee was bound to disclose were: (i) the provisions contained in art. 116 of the articles of association of the company, and (ii) the quantum of dividend declared every year. During the original assessment proceedings, the assessee did not bring the provisions of art. 116 to the notice of the ITO. It could, to this extent, be said that the assessee did not disclose the material facts in the origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to specifically point out the provisions of art. 116 to the ITO could not, therefore, be held to be a non-disclosure of primary facts, which could justify a reopening of its assessments under s. 147(a). The Tribunal further proceeded to record a finding that the original assessment orders for the three years in question showed that they had been made after a detailed scrutiny and it was difficult to believe that all these assessments were completed without referring to the memorandum and articles of association of the assessee-company. The fact that the company had made contributions to its employees' provident fund was clearly shown in the profit and loss account. The claim had been duly examined in the course of original assessment proceedings and the contributions made to the unrecognised provident fund were disallowed in all these years. The fact that the company did not declare any dividend for the years in question was also apparent from the directors' report and the copies of the balance-sheet. The Tribunal, therefore, held that the ITO could not reasonably believe that any income of the assessee had escaped assessment on account of the assessee's failure to disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which lays down that while computing the income under the head " Profits and gains of business or profession ", any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund has, subject to such limit as may be prescribed for the purpose of recognising the provident fund, to be deducted. Accordingly in the instant case the primary facts which the assessee had to disclose to the ITO for claiming deduction under the provisions of s. 36(1)(iv) of the I.T. Act were : (1) that the amount in question was paid by it as an employer by way of contribution to the provident fund set up for its employees; (2) that the said fund was a recognised provident fund ; and (3) that the contribution made by it to such provident fund was within the limits, if any, prescribed for the purposes of recognising the said fund. Our attention has not been invited to any provision in the Incometax Act laying down that contributions made by an assessee, in derogation of its articles of association to a recognised provident fund shall, notwithstanding the provisions of s. 36(1)(iv), be not allowed as deduction. We are accordingly of opinion that it was not obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for reopening the assessee's assessment under s. 147(a) did not exist and the same could not be reopened under that provision. The first question referred to us has, therefore, to be answered in the affirmative and in favour of the assessee. We now proceed to deal with the second question referred to us by the Tribunal on the assumption that the reopening of the assessment of the assessee by the ITO was justified under s. 147(a) of the I.T. Act, 1961, inasmuch as there was some failure on the part of the assessee to fully disclose and place all material facts before the ITO. Main contention of the Department is that in the instant case art. 116 of the articles of association of the company while enabling directors of the assessee-company to establish a provident fund for the benefit of its employees and to make contributions thereto, specifically provided that no such contribution shall be made for any period in respect of which the ordinary shareholders received a dividend at a lower rate than one anna per share per annum. As admittedly no dividend had been declared by the assessee-company in respect of calendar years 1955, 1957 and 1958, it was, in view of the provisions cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company would be precluded from relying on the articles as the basis of his claim and must prove a special contract. " In the case of CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49 (Mad) the question that arose for consideration before the Madras High Court was whether the payment which infringed the provisions of s. 348 of the Companies Act could be allowed as a deduction under s. 10(2) of the Indian I.T. Act, 1922. The learned judges, in this regard, observed thus (p. 58) : "...assuming that the said payment infringed section 348 of the Companies Act, still the company is entitled, in our view, to the deduction under section 10(2)(xv). As pointed out by the Tribunal, in considering the allowability of an expenditure under section 10(2)(xv) one cannot travel outside the provisions of the Income-tax Act and deny the benefit of deduction under the section on the ground that the payment is unauthorised or has been prohibited by some other statute. " Similar view was taken in the case of CIT v. Rajendra Mills Ltd. [1974] 93 ITR 122 (Mad) wherein the question with regard to admissibility of deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922, in respect of remu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is an expenditure laid out wholly and exclusively in connection with the assessee's business (s. 37(1)), but on the basis of s. 36(1)(iv), which provides for making a deduction in respect of the amounts contributed by the assessee to recognised provident funds set up for its employees. In our opinion, there is nothing in the cases cited by learned counsel for the Department which may support his submission that contributions made by the employer-company to recognised provident fund, in derogation of its articles of association are illegal and are to be treated as non est. Learned counsel also invited our attention to the case of Raj Woollen Industries v. CIT[1961]43 ITR 36, wherein the learned judges of the Punjab High Court, relying upon the decision of Chagla C.J. in the case of CIT v. Haji Aziz and Abdul Shakoor Bros. (1955] 28 ITR 266 (Bom), observed that an amount spent by the assessee to carry out the business unlawfully cannot be allowed as a deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The view of the Punjab High Court, stated above does not appear to be in consonance with the decision of the Supreme Court in the case of CIT v. Piara Singh [1980] 124 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se where an amount had been paid by way of penalty for breach of law. In their opinion, expenses or loss incurred in connection with a particular business, though illegally had to be accounted for in computing the figures of profits to be brought to tax and cases where a penalty was levied for committing a breach of law payment of which certainly could not be accounted for under s. 10 of the 1922 Act. It cannot, on the basis of the cases cited, by learned counsel for the Department, be said that an expenditure which otherwise qualifies for deduction in computing the income derived by the assessee under the head " Profits and gains of business or profession " is not to be allowed as deduction merely for the reason that it was incurred by the, assessee in derogation of its articles of association. In our opinion, any contribution made by a company even if it be in derogation of its articles of association, would qualify for deduction in accordance with s. 36(1)(iv) of the I.T. Act, 1961. As the contributions in question had in fact been made, fulfilling all the conditions specified in s. 36(1)(iv) of the I.T. Act, and as these did not, exist any such feature which could impel the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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