Ita v. M/S Haryana Financial Corporation

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No. 370 of 2014Date of decision: 10.8.2015 The Commissioner of Income Tax, Panchkula .....- Appel M/s Haryana Financial Corporation ....mesponden CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTALHON’ BLE MR. JUSTICE RAMENDRA JAIN 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?3. Whether the judgment should be reported 1n the Digest? Present: Mr.Tejinder K.Joshi, Advocate for the appellant. Ms. Radhika Suri, Sr. Advocate with Ms.Rinku Dahiya, Advocatefor the respondent. Ajay Kumar Mittal,J, 1]This order shall dispose of ITA Nos.51 of 2015, 370 and 399 of2()]as learned counsel for the parties are agreed that the issue involved inall these appeals is identical. However, the facts are being extracted fromITA No.370 of 2014. ).ITA No.370 of 2014 has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short, “the Act”) against theorder dated 27.3.2014, Annexure A.III passed by the Income Tax AppellateTribunal, Chandigarh Bench 'B', Chandigarh (in short, “the Tribunal’) inITA No.785/Chd/2011 for the assessment year 2002-03, claiming following substantial questions of law:- “'1) Whether on facts and in the circumstances of the case, thTribunal was justified in holding that the expenditure incurredon payments made to the pensioners is allowable in the handsof the assessee as revenue despite the facts that the Tribunal inits order held that the expenditure 1s allowable on actualpayment basis for assessment year 2002-03 and in theassessment year 2003-04 on the basis of total contribution tothe unrecognized Pension Fund, therefore, the decision ofHon'ble ITAT is self contradictory?Tribunal was justified in holding that the expenditure incurredon payments made to the pensioners is allowable in the handsof the assessee as revenue despite the facts that the Tribunal inits order held that the expenditure 1s allowable on actualpayment basis for assessment year 2002-03 and in theassessment year 2003-04 on the basis of total contribution tothe unrecognized Pension Fund, therefore, the decision ofHon'ble ITAT is self contradictory? 11) Whether on facts and in the circumstances of the case, theTribunal was justified in holding that the amount actuallydisbursed to the pensioners 1s allowable as revenue expenditurenotwithstanding the fact that the said amount was not aniallowable deduction under section 36(1)(av) and (v) of theIncome Tax Act, 1961?” 3 A few facts relevant for the decision of the controversy involved as narrated in ITA No.370 of 2014 may be noticed. Original assessment inthis case was completed vide order dated 13.12.2004 under Section 143(3)of the Act assessing the total loss of the assessee at =a7,85,04,010/-including brought forward loss ofv1,90,72,362/-. During the assessmentproceedings, the Assessing Officer noted that the assessee had claimeddeduction on account of contribution to unrecognized pension fundamounting to -22,89,137/- for the assessment year 2002-03 andL56,33,188/- for the assessment year 2003-04. The deduction claimed by theassessee was disallowed under Section 36 of the Act by the AssessingOfficer. The Commissioner of Income Tax (Appeals) [CIT(A)| upheld theorder passed by the Assessing Officer. The assessee filed appeal before the as narrated in ITA No.370 of 2014 may be noticed. Original assessment inthis case was completed vide order dated 13.12.2004 under Section 143(3)of the Act assessing the total loss of the assessee at =a7,85,04,010/-including brought forward loss ofv1,90,72,362/-. During the assessmentproceedings, the Assessing Officer noted that the assessee had claimeddeduction on account of contribution to unrecognized pension fundamounting to -22,89,137/- for the assessment year 2002-03 andL56,33,188/- for the assessment year 2003-04. The deduction claimed by theassessee was disallowed under Section 36 of the Act by the AssessingOfficer. The Commissioner of Income Tax (Appeals) [CIT(A)| upheld theorder passed by the Assessing Officer. The assessee filed appeal before the Assessing Officer with the observation that since the matter had not beenexamined in its true perspective with regard to subsequent development ofthe pension scheme being scrapped and amounts having been transferred tothe PF scheme, the issue was required to be examined afresh. In the secondround also, the Assessing officer disallowed the deduction claimed by theassessee on account of contribution to unrecognized pension fund andpassed assessment order dated 30.12.2009, Annexure A.1. It was held thatthe case of the assessee was covered by judgment of the Delhi High Court inthe case of.Sony India P. Limited vs. Commissioner ofIncome Tax(2006)285 ITR 213 (Del.). The assessee filed appeal before the CIT(A). The CIT(A) held that contribution to unrecognized pension funds was not allowablein view of provisions of Section 36(1)(iv) and (v) of the Act and dismissedthe appeal vide order dated 16.5.2011, Annexure A.IJ. The assessee filedappeal before the Tribunal. The Tribunal vide order dated 27.3.2014,Annexure A.III held that the expenditure incurred on payment basis in thehands of the assessee was revenue expenditure amounting to |22,89,137/-which was actually disbursed to the pensioners in assessment year 2002-03out of total contribution to the pension fund of41.22 crores. Similarly, forthe assessment year 2003-04, the total contribution to the pension fund wasLv32,07,989/- and the payment by the assessee to the pensioners was|=56,33,188/-. The Tribunal restricted the expenditure toa32,07,889/- on thebasis of the contribution to the pension fund. Hence the instant appeals bythe revenue. 4AWe have heard learned counsel for the parties. 5.Learned counsel for the revenue submitted that the Provident ITA No.370 of 2014 Fund and the gratuity fund were unrecognized and therefore, no expenditurecould be allowed as deduction under Section 36(1)(1v) and (v) of the Act. Itwas urged that what was not allowed directly could not have beenindirectly allowed even under section 37(1) of the Act. Learned counselrelied upon judgment of the Delhi High Court 1n Sony India P. Limited"Scase (supra). 6.|On the other hand, learned counsel for the assessee did notdispute that in the light of contribution to unrecognized provident fund,superannuation fund and gratuity fund, certain deductions were notadmissible under Section 36(iv) and (v) of the Act. It was contended that theTribunal has only allowed actual expenditure disbursed to the pensioners forthe assessment year 2002-03 whereas it was restricted to the amountcontributed towards the pension fund as it was less than the actualdisbursement for the assessment year 2003-04 which was legallypermissible, |.After hearing learned counsel for the parties, we find substancein the submissions of learned counsel for the assessee. [t would beexpedient to reproduce Sections 36(1)(iv) and (v) of the Act which 1s infollowing terms:- (36 (1) The deductions provided for in the following clausesshall be allowed in respect of the matters dealt with therein,In computing the income referred to 1n section 28- 22222222222222xX|(iv)any sum paid by the assessee as an employer by way ofcontribution towards a recognised provident fund or anapproved superannuation fund, subject to such limits as maybe prescribed for the purpose of recognising the provident |.After hearing learned counsel for the parties, we find substancein the submissions of learned counsel for the assessee. [t would beexpedient to reproduce Sections 36(1)(iv) and (v) of the Act which 1s infollowing terms:- (36 (1) The deductions provided for in the following clausesshall be allowed in respect of the matters dealt with therein,In computing the income referred to 1n section 28- 22222222222222xX|(iv)any sum paid by the assessee as an employer by way ofcontribution towards a recognised provident fund or anapproved superannuation fund, subject to such limits as maybe prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case maybe; and subject to such conditions as the Board may think fitto specify in cases where the contributions are not in thenature of annual contributions of fixed amounts or annualcontributions fixed on some definite basis by reference to theincome chargeable under the head" Salaries" or to thecontributions or to the number of members of the fund;(v) any sum paid by the assessee as an employer by way ofcontribution towards an approved gratuity fund created byhim for the exclusive benefit of his employees under anirrevocable trust’’ An analysis of the provisions of section 36(1)(iv) of the Act shows that anysum which 1s paid by the assessee as an employer to a recognised providentfund or an approved superannuation fund is admissible as deductionthereunder. Under Clause (v) of Section 36(1) of the Act, deduction isallowed in respect of any sum paid by the assessee as an employer ascontribution to an approved gratuity fund created by the employer for theexclusive benefit of the employees under an irrevocable trust.S.Admittedly, in the present case, the contributions were towardsthe unrecognised pension/superannuation fund and gratuity fund. Thus, theassessee was not entitled to any deduction in respect of the said amountseither under Section 36(1)(iv) or Section 36(1)(v) of the Act. Therefore, thesaid amount also could not be allowed as deduction under Section 37(1) ofthe Act as held by the Delhi High Court in.Sony India PF. Limited'sCasd(supra). Q |Now another issue that arises for consideration relates to thededuction on account of actual payment made to the pensioners totalling= ITA No.370 of 2014 for the assessment year 2003-04 against actual payment of <a56,33,188/-under Section 37(1) of the Act. In so far as actual payment made to thepensioners 1s concerned, the same has been held to be admissible to theassessee on the principle that where an expenditure which 1s wholly andexclusively expended for the purposes of the business or profession of theassessee 1S permissible to be deducted from the income under Section 37 ofthe Act. There was no error in the approach of the Tribunal in allowing theaforesaid expenditure as deduction under Section 37 of the Act. 10. |The Supreme Court in Shree Sajjan Mills Limtited vsCommissioner ofIncome lax, MP Bhopal and another,AIR 1986 SC 484held as under:- ITA No.370 of 2014 for the assessment year 2003-04 against actual payment of <a56,33,188/-under Section 37(1) of the Act. In so far as actual payment made to thepensioners 1s concerned, the same has been held to be admissible to theassessee on the principle that where an expenditure which 1s wholly andexclusively expended for the purposes of the business or profession of theassessee 1S permissible to be deducted from the income under Section 37 ofthe Act. There was no error in the approach of the Tribunal in allowing theaforesaid expenditure as deduction under Section 37 of the Act. 10. |The Supreme Court in Shree Sajjan Mills Limtited vsCommissioner ofIncome lax, MP Bhopal and another,AIR 1986 SC 484held as under:- "24. The right to receive the payment accrued to the employeeson their retirement or termination of their services and thehability to pay gratuity became the accrued hability of theassessee when the employees retired or their services, wereterminated. Until then the right to receive gratuity is acontingent right and the liability to pay gratuity continues to bea contingent ability qua the employer. An employer might paygratuity when the employee retires or his service 1s terminatedand claim the payment made as an expenditure incurred for thepurpose of business under|section 37. He might, 1f he followedthe mercantile system, provide for the payment of gratuitywhich became payable during the previous year and claim it asan expenditure on the accrued basis undersection 37ot the saidAct. Since the amount of gratuity payable in any given yearwould be a variable amount depending upon the number ofemployees who would be entitled to receive the payment duringthe year, the amount being a large one in one year and a smallone 1n another year, the employer often finds it desirable and/orconvenient to set apart for future use a sum every year to meet the contingent liability as a provision for gratuity or a fund forgratuity. He might create an approved gratuity fund for theexclusive benefit of his employees under an irrevocable trustand make contributions to such fund every year. Contingenthabilities do not constitute expenditure and can not be thesubject matter of deduction even under the mercantile system ofaccounting. Expenditure which was deductible for income taxpurposes is towards a liability actually existing at the time butsetting apart money which might become expenditure on thehappening of an event is not expenditure. (See in thisconnection the observations of this Court 1nIndian molassesCo. (P) Ltd., v. Commissioner of Income-tax, West Bengal:%37 I.T.R. 66 at pages 76 & 80. A distinction 1s often madebetween an actual liability in praesenti and a liability de futuro,which for the time being is only contingent. The former 1sdeductible but not the latter.” ll. Similarly inW.T.Suren and Co. Limited vs. Commissioner ofIncome Tax, (1998) 230 ITR 643 (SC), it was held thus:- “XXXXXXXx Gratuity 1s, thus, payable on the termination ofemployment of the employee on any account except dismissaland calculated on the basis of number of years of service and atthe rate prescribed in the scheme. In the present case, theamount of gratuity which was paid to Rallis India Ltd. onbehalf of the employees was not on account of transfer of thedistribution unit to the assessee but on account of stopping ofthat business and the employees working in that unit becomingsurplus resulting in termination of their services. Otherbusiness of the assessee, as held by the Tribunal, continued.Payment of gratuity amount to Rallis India Ltd. was not madeby the assessee of its own but at the instance and on behalf ofthe employees whose services though terminated in theassessee company were taken over by Rallis India Ltd. with thepromise of continuity of service in Rallis India Ltd. As far as the assessee 1S concerned, 1t was bound to make payment ofgratuity to the employees whose services were terminated and,in fact, as noticed above, the employees who did not join RallisIndia Ltd. were directly paid gratuity. Assessee was obliged topay gratuity to those employees who had joined Rallis IndiaLtd. Instead of those employees getting the gratuity amountdirectly, got that amount in trust in a separate account for theexclusive use of the transferred employees and payable to themafter their services 1n Rallis India Ltd. terminated including thegratuity due on account of service rendered in Rallis India Ltd.as per the scheme relating to gratuity of that company. Paymentof amount of gratuity to Rallis India Ltd. was made as per thescheme of the assessee and it was not an ex-gratia or someisolated payment. It was never disputed and, in fact, noquestion raised if the service of the employees of the assesseewere not terminated and that being the position, the obligationof the assessee to make payment of gratuity to its employeeswas an obligation in praesenti. Payment of gratuity amount toRallis India was with the consent of the employees transferredthere. We are, thus, of the view that payment of gratuityawarded by the assessee to Rallis India Ltd. in thecircumstances of the case was an expenditure wholly laid orexpended for the purpose of the business of the assessee andwas allowable deduction. It cannot certainly be said that it wasan expenditure incurred much ahead of time as the service ofthe employees with the assessee were terminated. Tribunal alsofound that the assessee was a going concern and only one of itsdepartment was closed. The assessee had not wound up all ofits affairs. Only a part of its business was closed and transferredto Rallis India Ltd. In these circumstances, in our view,Tribunal was right in holding that the payment of gratuityamount was not on account of closing the business of theassessee but for the purpose of business of the assessee and,thus, entitled to deduction under clause (xv) of sub-section (2) of|Section 10of 1922 Act corresponding toSection 37(1)ot the1961 Act. We, therefore, hold that the assessee, the appellantherein, 1s entitled to the payment of gratuity amount of Rs.4,08,622/- made to Rallis India Ltd. as an allowable deduction. 12.InCommissioner of Income Tax, bombay City II ys.Herbertsons P.Limtited(1980) 124 ITR 613 (Bombay), it wasobserved:- “XXXXXXXx It appears to be some benefit provided to anemployee who was expecting such benefit. It was certainly forhis long and faithful services to the company. But that wouldnot by itself disentitle the payment being allowed as adeduction in the year under consideration. There was an earlierinstance of such pension benefit being provided to anotheremployee, and the other employees who were 1n the regularservice of the company in 1957 would be thenceforwardcovered by the gratuity scheme adopted in that year. It wouldappear that the facts are not at all similar to the facts consideredby the Supreme Court in Gordon Woodroffe LeatherManufacturing Co.'scase [1962] 44 ITR 551(SC) and nocompelling circumstance has been brought to our notice whichwould induce us to differ from the approach or conclusion ofthe Tribunal. 13.|In view of the above, no substantial question of law arises forconsideration in these appeals and the same are hereby dismissed. (Ajay Kumar Mittal)vudge August 10, 2015 (Ramendra Jain)Judge ‘gs!