SPEARHEAD DIGITAL STUDIO P.LTD. vs. COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA No.755 of 2008

Reserved on: December 04, 2009 Pronounced on: December 23, 2009

Spearhead Digital Studio P. Ltd.

Commissioner of Income Tax

CORAM :-

THE HON'BLE MR. JUSTICE A.K. SIKRI THE HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

- 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? - 2. To be referred to the Reporter or not? - 3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

For orders, see ITA No. 1063/2008.

(SIDDHARTH MRIDUL)

December 23, 2009. nsk

19-24

IN THE HIGH COURT OF DELHI AT NEW DELHI


ITA No. 1063 of 2006

ITA No.755 of 2008

ITA No. 204 of 2009

ITA No. 1214/2008 with ITA No. 1246/2008

ITA No. 50/2009

ITA No. 78/2009

% Reserved on: December 04, 2009

Pronounced on: December 23, 2009

Commissioner of Income Tax ... Appellant

through: Ms. Prem Lata Bansal with

Mr. Paras Chaudhry, Advocates

AIMIL Limited ... Respondent

through: Dr. Rakesh Gupta with

Ms. Poonam Ahuja, Advocates

Nirmala Swami ... Appellant

through: Mr. Satyen Sethi with

Mr. Johnson Bara, Advocates

Commissioner of Income Tax, Delhi - VIII ... Respondent

through: Ms. Rashmi Chopra, Advocate

Spearhead Digital Studio P. Ltd. . . . . Appellant

through: Mr. Prakash Kumar, Advocate

Commissioner of Income Tax, Delhi-V

Mr. N.P. Sahni, Advocate

M/s. Net 4 India Ltd.

Dr. Rakesh Gupta with

Ms. Poonam Ahuja, Advocates

Commissioner of Income Tax-II

Modipon Ltd.

Commissioner of Income Tax-II

. . . Appellant

Modipon Ltd.

M/s. Ekta Agro Industries Ltd.

. . . Appellant

NEMO

Income Tax Officer, Ward 11(1)

through -

ugh - N


CORAM:-

THE HON'BLE MR. JUSTICE A.K. SIKRI THE HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

- 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? - 2. To be referred to the Reporter or not? - 3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

- 1. Though the assessees are different in these appeals, the aforesaid question is common in all these cases, which falls for consideration in almost identical factual backdrop. In fact, it is a matter of pure interpretation of the provisions of the Income Tax Act, 1961 (for short, the 'Act'), particularly Section 36(1)(va) of the Act. However, in order to understand the implication, it would be necessary to take note of facts of one appeal. We, accordingly, are stating the facts as they appear in ITA No. 1063/2008. - 2. The case relates to the assessment year 2002-03. The respondent assessee had filed its return on 30.10.2002 declaring income at Rs.7,95,430/-. During the assessment proceedings, the Assessing Officer (AO) found that the assessee had deposited employers' contribution as well as employees' contribution towards provident fund and ESI after the due date, as prescribed under the relevant Act/Rules. Accordingly, he made addition of Rs.42,58,574/- being employees' contribution under Section 36(1)(va) of the Act and Rs.30,68,583/- being employers' contribution under Section 438 of

the Act. Felt aggrieved by this assessment order the assessee

"Whether the ITAT was correct in law in deleting the addition relating to employees' contribution towards Provident Fund and ESI made by the Assessing Officer under Section 36(1)(va) of the Income Tax Act, 1961?"

- Section 36 of the Act deals with certain deductions which shall be 5. allowed in respect of matters dealt with therein, in computing the income referred to in Section 28 of the Act. Different types of deductions are provided therein in various clauses of Section 36. Clause (iv) of sub-section (1) deals with deductions on account of contribution towards a recognized provident fund or an approved superannuation fund made by the assessee as an employer, subject to certain limits and also subject to certain conditions as the CBDT may think fit to specify. Clause (v) of sub-section (1) of Section 36 enables the assessee to seek deduction in respect of sum paid by it as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. Then comes clause (va) which deals about employees' contribution in the provident fund and ESI and reads as under:- - "(va) any sum received 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

Explanation — For the purposes of this clause, "due d means the date by which the assessee is required as employer to credit an employee's contribution to employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract or service or otherwise;"

- 6. It would also be appropriate to take note of Section 43B of the Act primarily for the reason that in Vinay Cement (supra) it was this provision which came up for discussion before the Supreme Court and also keeping in view the contention of learned counsel for the Revenue that this judgment would be of no avail to the assessee while discussing the matter under Section 36(1)(va) of the Act. Section 43B stipulates that certain deductions are to be given only on actual payment. Clause (b) thereof talks about contribution by the assessee as employer to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees. Since we are concerned only with clause (b), we reproduce the same for clearer understanding:- - "43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of -

XX XX XX

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, (or),

xx xx xx

shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him only in computing the income referred to in section 28 of that

Provided that nothing contained in this section shall appl relation to any sum which is actually paid by the assessee o before the due date applicable in his case for furnishing me return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return."

"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realized within fifteen days from the due date."

- 8. As per the first proviso, if the payment is actually made on or before the due date applicable in his case for filing the return, it would be admissible as deduction. Thus, the 'due date' is the date on which return is to be filed. The case of the Revenue is that for employees' contribution, the 2^nd proviso was specifically incorporated and in the present case, as we are concerned with non-deposit of the employees' contribution towards provident fund as well as ESI contribution by the employer, only 2^nd proviso be looked into. - 9. What is sought to be argued is that distinction is to be made while treating the case related to employers' contribution on the one hand and employees' contribution on the other hand. It was submitted

salaries/wages, that is trust money in the hands of the asse this reason, rigors of law are provided by treating it as income when the assessee receives the employees' contribution and enabling the assessee to claim deduction only on actual payment by due date specified under the provisions.

- 10. Ms. Prem Lata Bansal, learned counsel for the Revenue, thus, argued that the second proviso to Section 43B, as it stood at the relevant time, clearly mentioned that deduction in respect of any sum referred to in clause (b) shall not be allowed unless such sum has actually been paid in cash or by issuance of cheque or draft or by any other mode on or before the due date, as defined in the explanation below clause (va) of sub-section (1) of Section 36. Thus, the assessee would earn the entitlement only if the actual payment is made before the due date specified in explanation below clause (va) of sub-section (1) of Section 36 of the Act. As per the said explanation, 'due 'date' means the date by which the assessee is required, as an employer, to credit the employees' contribution to the employees account in the relevant fund under any Act, rules, order or notification issued thereunder or under any standing order award contract of service or otherwise. - Before we delve into this discussion, we may take note of some more 11. provisions of the Act Sction 2(24) of the Act enumerates different components of income. If inter alians

to any provident fund or superannuation fund or any fun under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees. It is clear from the above that as soon as employees contribution towards provident fund or ESI is received by the assessee by way of deduction or otherwise from the salary/wages of the employees, it will be treated as 'income' at the hands of the assessee. It clearly follows therefrom that if the assessee does not deposit this contribution with provident fund/ESI authorities, it will be taxed as income at the However, on making deposit with the hands of the assessee. concerned authorities, the assessee becomes entitled to deduction under the provisions of Section 36(1) (va) of the Act. Section 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from income insofar as employees' It is in this backdrop we have to contribution is concerned. determine as to at what point of time this payment is to be actually made.

ITAT on this aspect :-

AO has categorically stated that what the amount due was \$\frac{1}{2}\$ which month in respect of EPF, Family Pension, PF inspec charges and ESI deposits and what were the due dates for these deposits and on which date these deposits were made. The dates of deposits are mentioned between 23rd May 2001 to 23rd April 2002. The latest payment is made on 23rd April 2002 and assessee being limited company had filed its return on 20th October, 2002 which is a date not beyond the due date of filing of the return. Thus, it is clear beyond doubt that all the payments which have been disallowed were made much earlier to the due date of filing of the return. The disallowance is not made by the AO on the ground that there is no proof of making such payment but disallowance is made only on the ground that these payments have been made beyond the due dates of making these payments under the respective statute. Thus, it was not an issue that the payments were not made by the assessee on the dates which have been stated to be the dates of deposits in the assessment order. If such is a factual aspect then according to latest position of law clarified by Hon'ble Supreme Court in the case of CIT Vs Vinay Cement Ltd. that no disallowance could be made if the payments are made before the due date of filing the return of income. This issue came before Hon'ble Supreme Court in the case of CIT Vs. Vinay Cement Ltd. which was a special leave petition filed by the department against the High Court Order of 26th June, 2006 in ITA No. 2/05 and ITA No. 56/03 and ITA No. 80/03 of the High Court of Guwahati, Assam and it is order dated 7th March, 2007. A copy of the said order is placed on record. The observations of their Lordships on the issue are as under:

"In the present case we are concerned with the law as it stood prior to the amendment of Sec. 43B. In the circumstances the assessee was entitled to claim the benefit in Sec. 43B for that period particularly in view of the fact that he has contributed to provident fund before filing of the return.

The special leave petition is dismissed."

- When we keep that proposition in mind and also to 14. consideration various judgments where Vinay Cement (supra) is applied and followed, it will not be possible to accept the contention of the Revenue. - In CIT v. Dharmendra Sharma, 297 ITR 320, this Court specifically 15. dealt with this issue and relying upon the aforesaid judgment of the Guwahati High Court, as affirmed by the Supreme Court in Vinay Cement (supra), the appeal of the Revenue was dismissed. More detailed discussion is contained in another judgment of this Court in CIT v. P.M. Electronics Ltd. (ITA No. 475/2007 decided on 3.11.2008). Specific questions of law which were proposed by the Revenue in that case were as under :- - Whether amounts paid on account of PF/ESI after due date are allowable in view of Section 43B, read with Section 36(1)(va) of the Act? - Whether the deletion of the 2^nd proviso to Section 43B by way of amendment by the Finance Act, 2003 is retrospective in nature?" - These questions were answered by the Division Bench in the 16. following manner:- - "7. Having heard the learned counsel for the Revenue, as well as, the assessee, we are of the view that the view taken by the Tribunal deserves to be sustained as it is no longer res integra in view of the decision of the Supreme Court in the case of CIT v Vinay Cement Ltd: 213 ITR 268 which has been followed by a Division Bench of this Court in the case of CIT v. Dharmendra Sharma: 297 ITR 320. - 8. Despite the aforesaid judgments, the learned counsel for the Tribunal has contended that in view of the judgment of the Division Bench of the Madras High Court in the case of CIT v.

CIT v. Nexus Computer (P) Ltd by a judgment dated 18. passed in Tax Case (A) No. 1192/2008 discussed the impared both the dismissal of the special leave petition in the case of George Williamson (Assam) Ltd (supra) and Vinay Cement (supra) as well as a contrary view of the Division Bench of its own Court in Synergy Financial Exchange (supra). The Division Bench of the Madras High Court has explained the effect of the dismissal of a special leave petition by a speaking order by relying upon the judgment of the Supreme Court in the case of Kunhayammed and Others v. State of Kerala and another: 119 STC 505 at page 526 in Paragraph 40 and noted the following observations:-

"It the order refusing leave to appeal is a speaking order, ie., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country, But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties."

7.4

It also becomes clear that deletion of the 2^nd proviso is as retrospective in nature and would not apply at all. The case is to

be governed with the application of the 1st proviso.

- 17. We may only add that if the employees' contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore. the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in Vinay Cement (supra). - 18. We, thus, answer the question in favour of the assessee and against the Revenue. As a consequence, the appeals filed by the assessees stand allowed and those filed by the Revenue are dismissed.

No costs.

(SIDDHARTH MRIDUL)