COMMISSIONER OF INCOME TAX vs. ALEMBIC GLASS INDUSTRIES LTD.

ITR/162/1993HC GujaratGJHC24021229199317 June 2005Author: HONOURABLE MR. JUSTICE D.A.MEHTA,HONOURABLE MS. JUSTICE HARSHA DEVANI6 pages
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What were the facts?

The Income Tax Appellate Tribunal (ITAT) referred two questions of law to the Gujarat High Court concerning Assessment Year 1984-85. The assessee, Alembic Glass Industries Ltd., had discharged statutory liabilities like Sales-Tax, ESI, and PF after the previous year's close but before the return filing due date. The Assessing Officer disallowed Rs. 22,50,095/- under Section 43B. Additionally, the assessee had paid Rs. 50,857/- as leave salary to retiring employees, which the Assessing Officer disallowed under Section 40A(5). The assessee succeeded before the CIT(Appeals) and the ITAT on both counts.

What did the High Court hold?

The High Court held that for Question No. 2, concerning the deduction of statutory liabilities paid after the previous year but before the due date of filing the return, the Tribunal was correct. This was based on the Supreme Court's decision in Allied Motors (P) Ltd. v. Commissioner of Income Tax, which established that such payments are allowable deductions. Therefore, Question No. 2 was answered in the affirmative, in favour of the assessee. For Question No. 1, regarding the disallowance of leave salary under Section 40A(5), the Court found that the Tribunal was not justified. The Court reasoned that 'salary' as defined in Explanation 2 to Section 40A(5) includes payments falling under Section 17(1)(va) and Section 17(3)(ii). Leave salary paid to retiring employees falls within this definition. The exemption under Section 10(10AA) is applicable to the employee's total income and cannot be projected to affect the employer's business expenditure computation under Section 40A(5). The Court distinguished the Kodak Ltd. Special Bench decision, stating it did not per se exclude gratuity or all retirement payments from the definition of salary for Section 40A(5) purposes. The Court concluded that the Tribunal's reliance on Kodak Ltd. was unwarranted, and the orders of the CIT(Appeals) and Tribunal were not sustainable. Question No. 1 was answered in the negative, in favour of the revenue. The reference was disposed of accordingly.

What were the issues?

1. Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that the amount of leave salary paid to retiring employees did not constitute 'salary' as defined in Explanation 2 to Section 40A(5) for limiting expenditure under that section? - Assessee's contention: Relied on the Special Bench decision of the ITAT in Kodak Limits, equating leave salary with gratuity, both paid at retirement, and thus not disallowable under Section 40A(5). - Revenue's contention: Argued that 'salary' as defined in Section 17(1) read with Section 17(3) includes leave salary under Section 17(1)(va). The exemption under Section 10(10AA) is for the employee and irrelevant for the employer's disallowance under Section 40A(5). The payment is not listed in the second proviso to Section 40A(5)(a). Relied on Indian Oxygen Ltd. v. CIT. 2. Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that statutory liabilities (Sales-Tax, ESI, PF) paid after the previous year's close but before the Section 139(1) due date were allowable deductions for AY 1984-85, given the proviso to Section 43B was inserted later? - Assessee's contention: Not recorded, but impliedly argued for allowability. - Revenue's contention: Not recorded, but impliedly argued for disallowability.

Which sections of the Income-tax Act were involved?

Section 40A(5),Section 43B,Section 139(1),Section 17(1),Section 17(3),Section 10(10AA),Section 10(10),Section 36(1)(iv),Section 36(1)(v),Section 36(1)(ix),Section 10(5),Section 10(6)(i)

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Cause title — parties, addresses and appearances
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 162 of 1993 For Approval and Signature: THE HON'BLE MR.JUSTICE D.A.MEHTA HON'BLE MS.JUSTICE H.N.DEVANI ============================================================== ============================================================== COMMISSIONER OF INCOME TAX - Petitioner(s) Versus ALEMBIC GLASS INDUSTRIES LTD. - Respondent(s) ============================================================== Appearance : MR MANISH R BHATT for Petitioner No(s).: 1. MRS SWATI SOPARKAR for Respondent No(s).: 1. ============================================================== CORAM :THE HON'BLE MR.JUSTICE D.A.MEHTA HON'BLE MS.JUSTICE H.N.DEVANI Date : 17/06/2005

ORAL JUDGMENT 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 of any order made thereunder ? 5 Whether it is to be circulated to the civil judge ?

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(Per : THE HON'BLE MR.JUSTICE

The order continues below.

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