THE COMMISSIONER OF INCOME TAX - I, KOCHI vs. M/S.MUTHOOT FINANCE PVT.LTD.

The questions of law framed by the Revenue are re-framed by us as follows, the last arising in both the years and the others only in the year 2004-05: (i) Whether the Tribunal was right in holding that the loss arising out of sale of mutual fund units should be allowed as business loss, especially looking at the provision of Section 94(7)? (ii) Whether the Tribunal was right in having deleted the dis-allowance made under Section 14A of the Income-Tax Act and remanding the matter to the Assessing

With respect to the question under Section 94, the issue arose on the assessee purchasing certain units on the record date (the day fixed for declaring dividend) and selling it within or just outside a three month period. Section 94(7) as extracted by the Tribunal, in existence during the subject assessment year, is extracted herein also: Section 94(7): “a) any person buys or acquires any securities or unit within a period of three months prior to the record date; b) such person sells or transfers such securities or unit within a period of three months after such date; c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax”

The Tribunal agreed with the CIT appeals that the purchase being on the record date cannot be said to be within a period of three months prior to the record date. We do not think such an interpretation can be placed on Section 94(7)(a) which would render the provision itself otiose. As rightly submitted by the learned Counsel appearing for the assessee three conditions are to be satisfied insofar as bringing in the rigour of Section 94(7);(i) acquisition should be within three months from the record date, (ii) the sale should be within three months after such date and (iii) the dividend or income on such unit received or receivable by person is exempt.

There were six sets of units of purchase as is seen from the table, from the order of the Tribunal. Admittedly dividend was received on all these units though the purchase was made on the record date. The dividend was also exempt under the provisions of the Act as already found by us. Even a purchase made on the record date has to be construed as one purchased with the intention to receive dividend, which is exempt and hence satisfying the condition as per sub-clause (a) of Section 94(7). The fallacy is insofar as the CIT appeals having contemplated a situation in which the purchase on a record date may not necessarily give rise to payment of dividend to the purchaser. If such a situation arises then the third condition of receipt of exempted income does not arise and the purchaser is saved from the rigor of Section 94. In such circumstance, we are of the opinion that the purchase made by the assessee on the record date also has to be held as sufficient satisfaction of the condition as contemplated in sub-clause (a) of Section 94(7).

The further question is as to whether the sale or transfer of the unit was occasioned within a period of three months after such date. Though the question is one on facts there is also a question on the interpretation to be given to the words employed “within a period of three months after such date”. Whether the three months has to be calculated from the record date or the date after the record date is the issue. We would find that the word used being “after” and not “from” the record date; three months period has to be computed from the date immediately after the record date.

On facts, we see that two securities of KGILT were purchased on the record date coming on 21.09.2003. The computation has to be made from 22.09.2003 and the sale made on 22.12.2003 is removed by one day from the expiry of the three month period. Likewise, the unit purchased of Sundaram Bond Annual Plan on the record date, 07.11.2003 was sold on 09.02.2004. The three month period expires on 7.2.2004, two days before the sale was effected. Hence in these three items the sale was made after the period provided under Section 94(7)(1)(b).

As to the other three purchases made of Sundaram Bond Half Yearly; it was on the record date 26.12.2003. Computing the three months period from 27.12.2013 it expires on 26.03.2004 when the sale was made. The said sale has to be found as having been made within the three months period.

On the issue of 14A deduction, there is no substantial question of law since the Tribunal has made a remand. We also notice that as of now the issue stands covered in favour of the assessee in Commissioner of Income Tax v. Essar Teleholdings Ltd., [(2018) 101 CCH 0021 I SCC((2018) 401 ITR 445 (SC))]. The Hon'ble Supreme Court has found that the machinery provisions having been brought under the Rules only from the assessment year 2007-08; the disallowance under Section 14A could be only from that year. We hence decline to answer the question of law.

The next question is on the Staff Welfare Scheme. On facts, it is submitted by the learned Counsel, that in the subject assessment year the assessee was not covered under the Provident Fund Scheme as framed under the Employees Provident Fundand Miscellaneous Provisions Act, 1952. The assessee/employer hence, as a welfare measure contributed a specific amount to each employee which was credited to a Staff Welfare Fund Account. The facts as recorded by the lower authorities indicate that the said amount was shown in the salary slip of each employee as included in the remuneration but not disbursed. It was retained in a Staff Welfare Fund Account. Interest also accrued with respect to amounts kept in the account which was also claimed as expenditure by the assessee/employer. The account was to be maintained continuously and on the retirement of each employee the amounts so shown in the salary of each month, retained with the employer, was paid to the employee along with interest that accrued from the date of such retention in the Staff Welfare Fund Account.

The Assessing Officer found that there is no separate credit made to the employee's account in the relevant fund or funds so as to enable deduction under Section 36(1)(va). The CIT Appeals found that the expenditure is allowable under Section 14A(9) which did not find favour with the Tribunal. The Tribunal all the same found that accounts will be in the nature of a Sundry Credit and the same could be so allowed as a deduction. We do not agree with the Tribunal on that count since the employer having shown the amount in the salary slip of the employee and retained the same with the employer; it becomes an income includable under Section 2(24)(x). When the amount is included as income of the employee, then retention of the same by the employer, makes it the income of the employer, makes otherwise exempted or permitted deduction under the Act.

The next question hence is as to whether it can be claimed as a deduction under Sub clause (va) of Section 36(1) which is extracted hereunder: S.36(1)(va):any sum revived by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of Section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date”

The provision does not speak of an approved or a statutory fund and the words employed are: “sum credited by the assessee to the employee's account in the relevant fund”. Admittedly, there is a welfare scheme for the employees as spoken of in sub-section (x) of Section 2(14). The amounts though credited in a common account the amounts retained from an individual employee, whose credits are evident from the books of accounts, along with interest accrued on such amounts is eventually payable to that employee. We find from the order of the First Appellate Authority that the amounts retained with the employer and the interest accrued in the name of a particular employee, was taxed in the hands of that employee. Hence though there is a common fund and accrual of interest, the same has to be treated as having been credited separately on the employees account in the relevant fund; the principal and interest accrued, being eventually payable to the employee on his superannuation. We hence find that the deduction under Section 36(1)(va) is permissible.

We find that the assessee had claimed it as expenditure under Section 37 which however, is not permissible. The Tribunal’s finding as to treating it as Sundry Credit also cannot be sustained, but we answer the question of law in favour of the assessee and against the revenue in so far as the deduction being permissible under Section 36(1)(va). We hence partly allow ITA No.231/2012. 15. As to ITA 66/2015 the question raised is again on the Staff Welfare Scheme. The First Appellate Authority and the Tribunal had allowed the same finding that for the earlier year, 2004-05 the same has been allowed.

The learned Counsel for the assessee however, points out that there was a mistake occurred in finding the amounts claimed under Section 37 to be for the staff welfare scheme. The learned Counsel also takes us to the assessment order of 2004-05 produced in ITA 231/2012. Therein a consolidated amount was claimed under administrative, other expenses and the staff welfare scheme, involving two separate amounts; one with respect to expenses on tea and snacks supplied to the employees, educational awards and medical reimbursements, staff training expenses and so on and so forth and the other of amounts credited to the staff welfare scheme. While the contribution to the Staff Welfare Scheme was disallowed under Section 37 the expenses on tea and snacks etc. was allowed as business expenditure under Section 37 for that earlier year.

In the assessment year 2009-10 claim made was only under Section 37, for the administrative and other expenses relating to supply of tea and snacks grant of educational awards, medical reimbursement etc:. The same hence has to be allowed as business expenditure under Section 37 and not as Sundry Credit as has been allowed by the Tribunal on the contribution made to the staff welfare scheme. The contention is, for that year there was no staff welfare scheme and there was a provident fund created for the employees. We hence are of the opinion that the issue is to be remanded to the Assessing Officer for verification as to the expenditure claimed. We