Itxa/718/2017 Of Pr. Commissioner Of Income-Tax-2 v. M/S. State Bank Of India Accounts And Compliance Dept

Priya Soparkar 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.718 OF 2017 Pr.Commissioner of Income-Tax-2 … Appellant V/s. M/s State Bank of India … Respondent --- Mr.Suresh Kumar for Appellant.Mr.P.Pardiwala, Senior Advocate with Mr.N.Joshi i/byMr.Atul Karsandas Jasani for the Respondent. CORAM : AKIL KURESHI AND S.J.KATHAWALLA, JJ. DATE : JUNE 18, 2019. P.C.:- 1.This appeal is filed by the revenue to challenge thejudgment of the Income Tax Appellate Tribunal (“Tribunal”for short). 2.Following questions are presented consideration :- for our “i.Whether on the facts of the case and inlaw, ITAT was right in directing the A.O. tocarry out verification and allow the claim ofinterest credited to “Interest SuspenseAccount” taxed in earlier years now written off during the year if found correct without clearlyholding as to whether the interest is taxablein the year of credit of the suspense accountor in the year of recovery? ii.Whether on the facts and in thecircumstances of the case and in law, thetribunal was justified in allowing deduction ofexpenditure of Rs.50 lakhs incurred by theassessee towards contribution to retiredemployees benefit scheme ignoring theprovision of section 40A(9) of the Act whichprovide for deduction only for payment toapproved/recognized funds as referred tosection 36(1)(iv) & (v) of the Income Tax Act,1961?” iii.Whether on facts and in thecircumstances of the case, the Tribunal wasright in law in allowing a loss of Rs.16,84,481/-on account of loss on revaluation ofpermanent category investments, even thoughthe same is a notional loss and inadmissible inlaw? iv.Whether on the facts and in thecircumstances of the case and in law, ITAT wasright in deleting the disallowance withoutappreciating the fact that the disallowancedetermined by the Ld. CIT(A) on the basis ofthe decision of ITAT in the assessee’s owncase in earlier years and giving scientificmethod of disallowance of the interestexpenses in respect of share purchase duringthe year?” 3.Question No.i arises out of the judgment of theIncome Tax Appellate Tribunal in remanding the issuebefore the Assessing Officer for proper verification of Priya Soparkar 317 itxa 718-17-o facts. The record would suggest that the assessee, inview of its success before the Tribunal on the issue ofdisallowance of interest credited to Interest SuspenseAccount, had not pressed the ground of appeal in theearlier year, however, clarifying that if at all suchdecision of the Tribunal is reversed by the High Courtthe assessee would be at liberty to revise the claim. Thisoffer of the assessee was accepted by the Tribunal. Onthe same ground in the present year the Tribunal followedthe formula of the earlier year and for such limitedpurpose placed the matter before the Assessing Officer.We do not find any error. No question of law thereforearises. 4.Question No.ii relates to the revenue’s objection tothe assessee’s claim of deduction of expenditure ofRs.50 lakhs towards contribution to a fund created forthe health care of the retired employees. The revenueargues that such fund not being one recognized underSection 36(1)(iv) or (v), claim of expenditure was hit bythe provisions of Section 40A(9) of the Income Tax Act, 1961 (“the Act” for short). 4.Question No.ii relates to the revenue’s objection tothe assessee’s claim of deduction of expenditure ofRs.50 lakhs towards contribution to a fund created forthe health care of the retired employees. The revenueargues that such fund not being one recognized underSection 36(1)(iv) or (v), claim of expenditure was hit bythe provisions of Section 40A(9) of the Income Tax Act, 1961 (“the Act” for short). 5.The Tribunal while accepting such claim of theassessee observed that the assessee had made suchcontribution to the medical benefit scheme speciallyenvisaged for the retired employees of the bank.Sub-section (9) of Section 40A of the Act, in the opinionof the Tribunal was inserted to discourage the practice ofcreation of bogus funds and not to hit genuineexpenditure for welfare of the employees. The Tribunalalso noted that the Assessing Officer had not doubtedthe bonafides of the assessee in creation of fund andthat such fund was not controlled by the assessee-bank.The Tribunal proceeded on the basis that the AssessingOfficer and the CIT (Appeals) had not doubted thebonafides in creation of the Trust or that the expenditurewas not incurred wholly must exclusively for theemployees. The Tribunal thus allowed the assessee’sappeal on this ground and deleted the disallowance. Priya Soparkar Act by Finance Act, 1984 with the retrospective effect from 1[st] April, 1985 and reads as under:- “(9) No deduction shall be allowed in respect of any sum paid by the assessee as anemployer towards the setting up or formationof, or as contribution to, any fund, trust,company, association of persons, body ofindividuals, society registered under theSocieties Registration Act, 1860 (21 of 1860),or other institution for any purpose, exceptwhere such sum is so paid, for the purposesand to the extent provided by or under clause(iv) (or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by orunder any other law for the time being inforce.” 7.In plain terms, sub-section (9) of section 40Adisallows deduction of any sum paid by an assessee asan employer towards setting up of or formation of orcontribution to any fund, trust, company etc. exceptwhere such sum is paid for the purposes and to theextent provided under clauses (iv) or (iva) or (v) of sub-section (1) of Section 36 or as required by or under anyother law for the time being in force. It is undoubted thatthe instance of the assessee does not fall in any of theabove mentioned clauses of sub-section (1) of Section 36.However, the question remains whether the purpose of Priya Soparkar inserting sub-section (9) of section 40A of the Act was todiscourage genuine expenditure by an employer for thewelfare activities of the employees. This issue has beenexamined by this Court on multiple occasions. Beforetaking note of such decisions, we may notice that theexplanatory notes on the provisions contained in theFinance Act, 1984, in the context of insertion of sub-section (9) to Section 40A of the Act records as under:- “(ix) Imposition of restrictions on contributionsby employers to non-statutory funds. Priya Soparkar inserting sub-section (9) of section 40A of the Act was todiscourage genuine expenditure by an employer for thewelfare activities of the employees. This issue has beenexamined by this Court on multiple occasions. Beforetaking note of such decisions, we may notice that theexplanatory notes on the provisions contained in theFinance Act, 1984, in the context of insertion of sub-section (9) to Section 40A of the Act records as under:- “(ix) Imposition of restrictions on contributionsby employers to non-statutory funds. 16.1 Sums contributed by an employer to arecognised provident fund, an approvedsuperannuation fund and an approved gratuityfund are deducted in computing his taxableprofits. Expenditure actually incurred on thewelfare of employees is also allowed asdeduction. Instances have come to noticewhere certain employers have createdirrevocable trusts, obstensibly for the welfareof employees, and transferred to such trustssubstantial amounts by way of contribution.Some of these trusts have been set up asdiscretionary trusts with absolute discretion tothe trustees to utilize the trust property insuch manner as they may think fit for thebenefit of the employees without any schemeor safeguards for the proper disbursement ofthese funds. Investment of trust funds has alsobeen left to the complete discretion of thetrustees. Such trusts are, therefore, intendedto be used as a vehicle for tax avoidance byclaiming deduction in respect of suchcontributions, which may even flow back to the employer in the form of deposits or investmentin shares, etc. 16.2 With a view to discouraging creation ofsuch trusts, funds, companies, association ofpersons, societies, etc. the Finance Act hasprovided that no deduction shall be allowedin the computation of taxable profits in respectof any sums paid by the assessee as anemployer towards the setting up or formationof or as contribution to any fund, trust,company, association of persons, body ofindividuals, or society or any other institutionfor any purpose, except where such sum ispaid or contributed (within the limits laiddown under the relevant provisions) to arecognized provident fund or an approvedgratuity fund or an approved superannuationfund or for the purposes of and to the extentrequired by or under any other law. 16.3 With a view to avoiding litigationregarding the allowability of claims fordeduction in respect of contributions made inrecent years to such trusts, etc., theamendment has been made retrospectivelyfrom 1[st] April, 1980. However, in order toavoid hardship in cases where such trusts,funds, etc. had before , 1[st] March 1984,bonafide incurred expenditure (not being inthe nature of capital expenditure) wholly andexclusively for the welfare of the employees ofthe assessee out of the sums contributed byhim, such expenditure will be allowed asdeduction in computing the taxable profits ofthe assessee in respect of the relevantaccounting year in which such expenditurehas been so incurred, as if such expenditurehad been incurred by the assessee. The effectof the under-lined words will be that thededuction under this provision would besubject to the other provisions of the Act, asfor instance, section 40A(5), which would operate to the same extent as they wouldhave operated had such expenditure beenincurred by the assessee directly. Deductionunder this provision will be allowed only if nodeduction has been allowed to the assessee inan earlier year in respect of the sumcontributed by him to such trust, fund, etc.” 8.The very purpose of insertion of sub-section (9) of operate to the same extent as they wouldhave operated had such expenditure beenincurred by the assessee directly. Deductionunder this provision will be allowed only if nodeduction has been allowed to the assessee inan earlier year in respect of the sumcontributed by him to such trust, fund, etc.” 8.The very purpose of insertion of sub-section (9) of section 40A thus was to restrict the claim of expenditureby the employers towards contribution to funds, trust,association of persons etc. which was whollydiscretionary and did not impose any restriction orcondition for expanding such funds which had possibilityof misdirecting or misuse of such funds after theemployer claimed benefit of deduction thereof. In plainterms, this provision was not meant to hit genuineexpenditure by an employer for the welfare and thebenefit of the employees. 9.In case of Commissioner of Income Tax Vs.Bharat Petroleum Corporation Limited[1], DivisionBench of this Court considered a similar issue when the 1(2001) Vol.252 ITR 43 9 assessee had claim deduction of contribution towardsstaff sports and welfare expenses. The revenue opposedthe claim on the ground that the same was hit by section40A(9) of the Act. The High Court allowed the assessee’sappeal making following observations :- “For the aforestated assessment year 1985-86, the Assessing Officer disallowedRs.2,60,283 under section 40A(9) paid by theassessee for staff welfare activities. Theassessee claimed that the entire amount wasfor staff welfare activity. That, the said amountwas a grant for staff welfare activity and thatthe entire amount was for the benefit of theemployees and, therefore, the assesseeclaimed deduction as business expenditureunder section 28. However, the Departmentrejected the assessee’s claim on the groundthat a club known as Trombay Club wasincorporated by the assessee for social,cultural and recreational activities of itsmembers who were required to paysubscription fees. Hence, the Assessing Officeras also the Commissioner of Income-tax(Appeals) came to the conclusion that thesaid amount constituted contribution to theclub and, therefore, under section 40A(9), theclaim for deduction was disallowed. Beingaggrieved, the assessee went in appeal to theTribunal which took the view that theaforestatedamountrepresentedreimbursement of expenses incurred by asociety and, therefore, it did not constitutecontribution under section 40A(9). Beingaggrieved by the decision of the Tribunal, theDepartment has come in appeal. Findings on question No. 2: Priya Soparkar Bharat Petroleum Corporation is a CentralGovernment undertaking. It has incorporateda club, essentially to carry on staff welfareactivities. Under clause 28, Bharat PetroleumCorporation Limited had a right to issuedirectives to the club which were binding onthe club. At times, the members of the club,who were the employees of Bharat PetroleumCorporation, took part in tournaments heldoutside the club premises like Times shield incricket. On such occasions, the assessee-Corporation used to reimburse expensesincurred by the club. This is the finding of factrecordedbytheTribunal.Inthecircumstances, section 40A(9) is notapplicable. No substantial question of lawarises. Hence, our answer to the aforestatedquestion No.2 is in the negative, i.e. in favourof the assessee and against the Department.” 10.In case of Commissioner of Income-tax-LTU Vs.Indian Petrochemicals Corporation Limited[1], DivisionBench of Bombay High Court considered the case wherethe assessee-employer had contributed to various clubsmeant for staff and family members and claimed suchexpenditure as deduction. Once again the revenue hadresisted in the expenditure by citing section 40A(9) of theAct. This Court confirmed the view of the Tribunal anddismissed the revenue’s appeal, in which the Tribunal had 10.In case of Commissioner of Income-tax-LTU Vs.Indian Petrochemicals Corporation Limited[1], DivisionBench of Bombay High Court considered the case wherethe assessee-employer had contributed to various clubsmeant for staff and family members and claimed suchexpenditure as deduction. Once again the revenue hadresisted in the expenditure by citing section 40A(9) of theAct. This Court confirmed the view of the Tribunal anddismissed the revenue’s appeal, in which the Tribunal had allowed the expenditure claimed by the assessee. 11.Once again in case ofThe PrincipalCommissioner of Income-Tax-14 Vs. Indian OilCorporation reported in Income Tax Appeal No.1765 of 2016, revenue had raised such an issue whenthe assessee had spent certain amounts in either settingup or providing grant-in-aid made to Kendriya VidyalayaSchools where the students of the assessee-Indian OilCorporation would receive education. This Courtreferred to a judgment of Kerala High Court in case of P.Balakrishnan, Commissioner of Income-Tax Vs.Travancore Cochin Chemicals Ltd.[1] and of thedecision of this Court in case of Bharat PetroleumCorporation Limited(supra) held that the Tribunalhad correctly allowed the assessee’s claim ofexpenditure. In view of this discussion, this question isnot entertained. 12. With respect to question No.c, it is an agreed Priya Soparkar position that such an issue in case of this very assesseehad traveled the High Court in Income Tax Appeal No.254of 2014. In respect of this question, the Court observedas under:- “(i)It is agreed position between parties thatthe issue raised herein stands concludedagainst revenue and in favour of therespondent assessee by the order of thisCourt in CIT vs. Union Bank of India (IncomeTax Appeal 1977 of 2013) rendered on 8[th]February, 2016. (ii)In the above view question (d) does notgive rise to any substantial question of law.Thus not entertained.” 13.In view of such discussion, this question is notentertained. 14.The sole surviving question (iv) arises out of therevenue’s contention that the claim of the assessee underSection 80M of the Act should be on the net of the incomeand not gross. This issue is squarely covered in favourof the assessee by virtue of decision of this Court in caseof Commissioner of Income-tax-6 Vs. Modern Terry 13 17 itxa 718-17-o Towers Ltd.[1]. This Court held that the principlesapplicable for computing deduction under Section 80HHCof the Act cannot be imported into Section 80M of theAct. The Court observed as under :- “The provisions of section 80HHC are entirelydifferent from those of sections 80M and 80AA.There is no basis for importing the provisionsof section 80HHC with section 80M. The samedoes not lead to a satisfactory computation ofthe net dividend under section 80M.” 15.In the result, Income Tax Appeal is dismissed. (S.J.KATHAWALLA, J.) (AKIL KURESHI, J.)….