DEPUTY COMMISSIONER OF INCOME TAX , CHENNAI vs. M/S. CHEMPLAST SANMAR LIMITED, CHENNAI

Sub-section 7(a) of Section 40A reads thus:~

Clause (a) of Section 40A(7) states that no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to their employees on their retirement or on termination. Clause (b) carves out an exception to the stipulation under clause (a), to the extent of a contribution made towards an approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the previous year.

We are concerned with two special provisions as both Sections 43B and 40A commence with non obstante clauses. In such situations, one may make useful reference to a series of judgments of the Supreme Court dealing with preference to be accorded in the case of an interpretation involving two special provisions.

Three Judges of the Supreme Court in Sarwan Singh and anr v KasturiLal [AIR 1997 SC 265] stated that, where both the enactments in question contain a non obstante clause and ‘when two or more laws operate in the same field and each contains a non obtante clause stating that its provisions will override those of any other law, stimulating and incisive problems of interpretation arise since statutory interpretation has no conventional protocol case of such conflict has to be decided in reference to the object and purpose of the laws under consideration’.

In R.S.Ragunath v State of Karnataka and Ors [AIR 1992 SC 81], the Supreme Court noted its earlier observations in the case of Justiniane Augusto De Piedade Barreto v Antonio Vincente Da Fortseca and ors [AIR 1979 SC 984] to the effect that a law which is essentially general in nature may contain special provisions on certain matters and in respect of these matters it would be classified as a special law. Therefore unless the special law is abrogated by express repeal or by making provisions which arc wholly inconsistent with it, the special law cannot be held to have been abrogated by mere implication.

In Ashoka Marketing Limited and anr v Punjab National Bank and others, [AIR 1991 SC 855], a Constitution Bench of the Supreme Court also considered two special enactments, the Public Premises Act and the Rent Control Act and which would override the other. They concluded as follows:~ One such principle of statutory interpretation which is applied is contained in the latin maxim: leges posteriors priores conterarias abrogant, (later laws abrogate earlier contrary laws). This principle is subject to the exception embodied in the maxim: generalia 7 -: specialibus non derogant, (a general provision does not derogate from a special one). This means that where the literal meaning of the general enactment covers a situation for which specific provision is made by another enactment contained in an earlier Act, it is presumed that the situation was intended to continue to be dealt with by the specific provision rather than the later general one (Benion: Statutory Interpretation p. 433-34).

The Rule that a general provision should yield to specific provision springs from the common understanding that when two directions are given one encompassing a large number of matters in general and another to only some, the latter directions should prevail as being more specific in nature. Section 40A has been inserted by the Finance Act, 1968 with effect from 01.04.1968 whereas Section 43B has been inserted later vide Finance Act, 1983 with effect from 01.04.1984.

One of the parameters to determine priority of one legislation / provision over the other, is as to which was the later provision and the general understanding is that the later would prevail. However, in the present case, the provisions of Section 40(A)(7), particularly clause (b) are specific to a claim of deduction based on a provision for payment towards an approved gratuity fund.

This is a stipulation which does not feature in the other provision i.e., Section 43B which is general its application and, relates to a ‘gratuity fund’ in clause (b) thereof in general terms. Seen in that context, the two provisions could be reconciled easily as, in our considered view, there is no real conflict inter se.

Had Section 43B also made reference to an approved gratuity fund, a conflict might have arisen. In the present circumstances, where Section 40(A)(7)(b) refers specifically to an approved gratuity fund and Section 43B, in generic terms, to a gratuity fund, we see no conflict in applying the provision of Section 40(A)(7)(b) in preference to Section 43B in the case of an approved gratuity fund.

The decisions in Commonwealth Trust (I) Limited (Kerala High Court) and Bechtel India Private Limited (Delhi High Court), support the legal position canvassed by the assessee on all fours. In Commonwealth Trust (supra), the Court answered this issue in favour

In Betchal India (supra) the Court was concerned with the computation under Section 115JB of the Act, being Minimum Alternate Tax. On the issue of allowability of the claim for gratuity, the Court accepts the assessee’s stand noting thus: “6. Further, we are in agreement with the Tribunal that s.40A(7)(b) of the Act will have an overriding effect over s.43B of the Act. In the first place s.40A(1) is an unequivocal non obstante clause and since s. 40A(7)(b) specifically permits a deduction of a sum constituting the provision towards an approved gratuity fund, the said provision will take precedence over a comparatively general provision like s.43B. Secondly, s.40A(7)(a) which disallows deduction of any provision of gratuity to employees on their retirement is itself made subject to s.40A(7)(b) which allows such deduction as long as it is made towards an approved gratuity fund. There is no dispute that in the instant case the provision made is towards contribution to an approved gratuity fund. Therefore the claim by the assessee for deduction on this score was clearly justified. We are accordingly of the opinion that no substantial question of law arises in this regard as well.”

We find support for our conclusion at paragraph 20 supra, in the observations of the Delhi Court above to the effect that a specific provision such as Section 40A(7)(b) will take precedence over ‘a comparatively general provision like Section 43B’.

In fact, the issue has been more or less answered by the Supreme Court in the case of Shasun Chemicals (supra), where the interplay between Sections 43B and Section 40A(9) is noted. The provisions of Section 43B mandate that certain deductions would be allowed only on actual payments.

Section 40A(9) states that no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards setting up, or its contribution to any fund/trust/company/AoP/ DOI/Society/Institution, except were the sum is paid in accordance with the relevant provisions

The analogy drawn by the assessee is qua the observation of the Supreme Court in the context of Section 40A(9) by that assessee, pointing out that that provision, Section 40A(9), has been held to override the provisions of Section 43B by operation of the non-obstante clause in Section 40A(1). So too in the present case, we agree that the provisions of Section 40A(7) would override Section 43B if the assessee in question satisfies the stipulations under clauses (a) and (b) thereof.

It thus remains for us to see whether the contributions made by the assessee are to an approved gratuity fund or otherwise, as that would be critical to determine eligibility in terms of Section 40A(7)(b).

In light of the above binding of Hon’ble Jurisdictional High Court, this ground No.3 filed by the Revenue stands dismissed.

Ground No.3 challenges the correctness of the direction of CIT(A) to delete the addition made on account of contribution to benevolent fund of Rs.14,565/-.

The AO, of the opinion that during the previous year relevant to the assessment year under consideration, the assessee made contribution of Rs.14,565/- to the benevolent fund for the benefit of employees. The AO, of the opinion that said contribution is hit by the provisions of section 40A(9) of the Act and accordingly, disallowed the same. It is contended that the contribution was made to the benevolent fund for the welfare of employees in terms 10 -: of agreement entered into with Workers Union and further contended that this issue was decided in favour of the assessee company by the Tribunal in assessee’s own case for assessment year 2008-09 to 2014-15 in to 2963/Chny/2017, order dated 04.12.2019. Since the CIT(A) followed the Tribunal’s decision in assessee’s case for earlier years, we do not find any illegality in the decision of the CIT(A) allowing the contribution of benevolent fund of Rs.14,565/-. Accordingly, we do not find any merit in this ground of Revenue. Therefore, the Ground No.3 stands dismissed.

The next Ground No.4 challenges the decision of CIT(A) deleting the addition made u/s.14A r.w.rule 8D of Rs.4,25,40,030/-.

During the previous year relevant to the assessment year under consideration, the assessee company earned exempt income of Rs.11,21,18,637/- by way of share of profit from the partnership firm. It was contended that the share of profit from the partnership is exempt under the provisions of section 10(2A) of the Act. It was further contended that the assessee company had not incurred any expenditure to earn said exempt income, since the investments made were out of own funds and not from the borrowed funds and 11 -: therefore, provisions of section 14A cannot be invoked. Rejecting the above contentions, the AO made addition of 1% of average monthly value of investment yielding exempt income under clause (ii) of 8D(2) of the Rules. However, on appeal before CIT(A), the CIT(A) deleted the addition accepting the contention of the assessee that no expenditure was incurred to earn exempt income.

Being aggrieved, Revenue is in appeal before us in this ground of appeal. We have carefully perused the assessment order. The respondent assessee company contended before the AO that no expenditure was incurred to earn the exempt income. The AO without recording satisfaction as to how the contention of the respondent assessee company is incorrect, had proceeded with making disallowance u/s.14A r.w.Rule 8D(ii). Now, it is settled position of law that the AO cannot apply the provisions of rule 8D(ii) unless and until the AO had first recorded a satisfaction as mandated by the provisions of section 14A(2) of the Act and Rule 8D(1) as held by the Hon’ble Delhi High Court in the cases of CIT vs. Taikisha Engineering India Ltd, [2015] 54 taxmann.com 109, H.T. Media Ltd., vs. CIT, [2017] 85 taxmann.com 113 and the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd, [2015] 56 taxmann.com 391. In light of 12 -: above well settled position of law, we find no illoegality in the findings of the CIT(A). Accordingly, this ground of appeal stands dismissed.

The next Ground No.5 challenges the decision of the CIT(A) deleting the CSR expenses of Rs.1,29,64,000/- relying on the decision of Hon’ble Madras High Court in the case of CIT vs. Madras Refineries Ltd., 266 ITR 170. We find that the ratio of the decision of Hon’ble Madras High Court in the case of Madras Refineries Ltd., supra cannot be applied blindly without discussing about the applicability of Explanation (2) to Section 37(1) of the Act inserted by Finance Act-2, 2014 w.e.f.01.04.2015. Since there was no discussion in the impugned order by the CIT(A) whether the expenses in question is governed by the provisions of section 135 of Companies Act, 2013 or the expenditure was incurred out of business expediency, we are of the view the matter requires to be remanded to the file of the AO for verification of the claim on the above lines. Accordingly, the findings of the CIT(A) are reversed and this ground of appeal is set aside to the AO. Hence, Ground No.5 is partly-allowed for statistical purposes.

In the result, the appeal filed by the Revenue is partly-allowed for statistical purposes.