PCIT vs. State Bank Of India (Bombay High Court)

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/by
Mr.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 the
judgment of the Income Tax Appellate Tribunal (“Tribunal”
for short).
2. Following questions are presented for our
consideration :-
“i. Whether on the facts of the case and in
law, ITAT was right in directing the A.O. to
carry out verification and allow the claim of
interest credited to “Interest Suspense
Account” taxed in earlier years now written off
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during the year if found correct without clearly
holding as to whether the interest is taxable
in the year of credit of the suspense account
or in the year of recovery?
ii. Whether on the facts and in the
circumstances of the case and in law, the
tribunal was justified in allowing deduction of
expenditure of Rs.50 lakhs incurred by the
assessee towards contribution to retired
employees benefit scheme ignoring the
provision of section 40A(9) of the Act which
provide for deduction only for payment to
approved/recognized funds as referred to
section 36(1)(iv) & (v) of the Income Tax Act,
1961?”
iii. Whether on facts and in the
circumstances of the case, the Tribunal was
right in law in allowing a loss of Rs.16,84,481/-
on account of loss on revaluation of
permanent category investments, even though
the same is a notional loss and inadmissible in
law?
iv. Whether on the facts and in the
circumstances of the case and in law, ITAT was
right in deleting the disallowance without
appreciating the fact that the disallowance
determined by the Ld. CIT(A) on the basis of
the decision of ITAT in the assessee’s own
case in earlier years and giving scientific
method of disallowance of the interest
expenses in respect of share purchase during
the year?”
3. Question No.i arises out of the judgment of the
Income Tax Appellate Tribunal in remanding the issue
before the Assessing Officer for proper verification of
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facts. The record would suggest that the assessee, in
view of its success before the Tribunal on the issue of
disallowance of interest credited to Interest Suspense
Account, had not pressed the ground of appeal in the
earlier year, however, clarifying that if at all such
decision of the Tribunal is reversed by the High Court
the assessee would be at liberty to revise the claim. This
offer of the assessee was accepted by the Tribunal. On
the same ground in the present year the Tribunal followed
the formula of the earlier year and for such limited
purpose placed the matter before the Assessing Officer.
We do not find any error. No question of law therefore
arises.
4. Question No.ii relates to the revenue’s objection to
the assessee’s claim of deduction of expenditure of
Rs.50 lakhs towards contribution to a fund created for
the health care of the retired employees. The revenue
argues that such fund not being one recognized under
Section 36(1)(iv) or (v), claim of expenditure was hit by
the provisions of Section 40A(9) of the Income Tax Act,
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1961 (“the Act” for short).
5. The Tribunal while accepting such claim of the
assessee observed that the assessee had made such
contribution to the medical benefit scheme specially
envisaged for the retired employees of the bank.
Sub-section (9) of Section 40A of the Act, in the opinion
of the Tribunal was inserted to discourage the practice of
creation of bogus funds and not to hit genuine
expenditure for welfare of the employees. The Tribunal
also noted that the Assessing Officer had not doubted
the bonafides of the assessee in creation of fund and
that such fund was not controlled by the assessee-bank.
The Tribunal proceeded on the basis that the Assessing
Officer and the CIT (Appeals) had not doubted the
bonafides in creation of the Trust or that the expenditure
was not incurred wholly must exclusively for the
employees. The Tribunal thus allowed the assessee’s
appeal on this ground and deleted the disallowance.
6. Sub-section (9) was inserted to Section 40A of the
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Act by Finance Act, 1984 with the retrospective effect
from 1st April, 1985 and reads as under:-
“(9) No deduction shall be allowed in respect
of any sum paid by the assessee as an
employer towards the setting up or formation
of, or as contribution to, any fund, trust,
company, association of persons, body of
individuals, society registered under the
Societies Registration Act, 1860 (21 of 1860),
or other institution for any purpose, except
where such sum is so paid, for the purposes
and to the extent provided by or under clause
(iv) (or clause (iva) or clause (v) of subsection
(1) of section 36, or as required by or
under any other law for the time being in
force.”
7. In plain terms, sub-section (9) of section 40A
disallows deduction of any sum paid by an assessee as
an employer towards setting up of or formation of or
contribution to any fund, trust, company etc. except
where such sum is paid for the purposes and to the
extent provided under clauses (iv) or (iva) or (v) of subsection
(1) of Section 36 or as required by or under any
other law for the time being in force. It is undoubted that
the instance of the assessee does not fall in any of the
above mentioned clauses of sub-section (1) of Section 36.
However, the question remains whether the purpose of
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inserting sub-section (9) of section 40A of the Act was to
discourage genuine expenditure by an employer for the
welfare activities of the employees. This issue has been
examined by this Court on multiple occasions. Before
taking note of such decisions, we may notice that the
explanatory notes on the provisions contained in the
Finance Act, 1984, in the context of insertion of subsection
(9) to Section 40A of the Act records as under:-
“(ix) Imposition of restrictions on contributions
by employers to non-statutory funds.
16.1 Sums contributed by an employer to a
recognised provident fund, an approved
superannuation fund and an approved gratuity
fund are deducted in computing his taxable
profits. Expenditure actually incurred on the
welfare of employees is also allowed as
deduction. Instances have come to notice
where certain employers have created
irrevocable trusts, obstensibly for the welfare
of employees, and transferred to such trusts
substantial amounts by way of contribution.
Some of these trusts have been set up as
discretionary trusts with absolute discretion to
the trustees to utilize the trust property in
such manner as they may think fit for the
benefit of the employees without any scheme
or safeguards for the proper disbursement of
these funds. Investment of trust funds has also
been left to the complete discretion of the
trustees. Such trusts are, therefore, intended
to be used as a vehicle for tax avoidance by
claiming deduction in respect of such
contributions, which may even flow back to the
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employer in the form of deposits or investment
in shares, etc.
16.2 With a view to discouraging creation of
such trusts, funds, companies, association of
persons, societies, etc. the Finance Act has
provided that no deduction shall be allowed
in the computation of taxable profits in respect
of any sums paid by the assessee as an
employer towards the setting up or formation
of or as contribution to any fund, trust,
company, association of persons, body of
individuals, or society or any other institution
for any purpose, except where such sum is
paid or contributed (within the limits laid
down under the relevant provisions) to a
recognized provident fund or an approved
gratuity fund or an approved superannuation
fund or for the purposes of and to the extent
required by or under any other law.
16.3 With a view to avoiding litigation
regarding the allowability of claims for
deduction in respect of contributions made in
recent years to such trusts, etc., the
amendment has been made retrospectively
from 1st April, 1980. However, in order to
avoid hardship in cases where such trusts,
funds, etc. had before , 1st March 1984,
bonafide incurred expenditure (not being in
the nature of capital expenditure) wholly and
exclusively for the welfare of the employees of
the assessee out of the sums contributed by
him, such expenditure will be allowed as
deduction in computing the taxable profits of
the assessee in respect of the relevant
accounting year in which such expenditure
has been so incurred, as if such expenditure
had been incurred by the assessee. The effect
of the under-lined words will be that the
deduction under this provision would be
subject to the other provisions of the Act, as
for instance, section 40A(5), which would
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operate to the same extent as they would
have operated had such expenditure been
incurred by the assessee directly. Deduction
under this provision will be allowed only if no
deduction has been allowed to the assessee in
an earlier year in respect of the sum
contributed 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 expenditure
by the employers towards contribution to funds, trust,
association of persons etc. which was wholly
discretionary and did not impose any restriction or
condition for expanding such funds which had possibility
of misdirecting or misuse of such funds after the
employer claimed benefit of deduction thereof. In plain
terms, this provision was not meant to hit genuine
expenditure by an employer for the welfare and the
benefit of the employees.
9. In case of Commissioner of Income Tax Vs.
Bharat Petroleum Corporation Limited1, Division
Bench of this Court considered a similar issue when the
1 (2001) Vol.252 ITR 43
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assessee had claim deduction of contribution towards
staff sports and welfare expenses. The revenue opposed
the claim on the ground that the same was hit by section
40A(9) of the Act. The High Court allowed the assessee’s
appeal making following observations :-
“For the aforestated assessment year 1985-
86, the Assessing Officer disallowed
Rs.2,60,283 under section 40A(9) paid by the
assessee for staff welfare activities. The
assessee claimed that the entire amount was
for staff welfare activity. That, the said amount
was a grant for staff welfare activity and that
the entire amount was for the benefit of the
employees and, therefore, the assessee
claimed deduction as business expenditure
under section 28. However, the Department
rejected the assessee’s claim on the ground
that a club known as Trombay Club was
incorporated by the assessee for social,
cultural and recreational activities of its
members who were required to pay
subscription fees. Hence, the Assessing Officer
as also the Commissioner of Income-tax
(Appeals) came to the conclusion that the
said amount constituted contribution to the
club and, therefore, under section 40A(9), the
claim for deduction was disallowed. Being
aggrieved, the assessee went in appeal to the
Tribunal which took the view that the
aforestated amount represented
reimbursement of expenses incurred by a
society and, therefore, it did not constitute
contribution under section 40A(9). Being
aggrieved by the decision of the Tribunal, the
Department has come in appeal.
Findings on question No. 2:
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Bharat Petroleum Corporation is a Central
Government undertaking. It has incorporated
a club, essentially to carry on staff welfare
activities. Under clause 28, Bharat Petroleum
Corporation Limited had a right to issue
directives to the club which were binding on
the club. At times, the members of the club,
who were the employees of Bharat Petroleum
Corporation, took part in tournaments held
outside the club premises like Times shield in
cricket. On such occasions, the assessee-
Corporation used to reimburse expenses
incurred by the club. This is the finding of fact
recorded by the Tribunal. In the
circumstances, section 40A(9) is not
applicable. No substantial question of law
arises. Hence, our answer to the aforestated
question No.2 is in the negative, i.e. in favour
of the assessee and against the Department.”
10. In case of Commissioner of Income-tax-LTU Vs.
Indian Petrochemicals Corporation Limited1, Division
Bench of Bombay High Court considered the case where
the assessee-employer had contributed to various clubs
meant for staff and family members and claimed such
expenditure as deduction. Once again the revenue had
resisted in the expenditure by citing section 40A(9) of the
Act. This Court confirmed the view of the Tribunal and
dismissed the revenue’s appeal, in which the Tribunal had
1 (2019) 261 Taxman 251(Bombay)
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allowed the expenditure claimed by the assessee.
11. Once again in case of The Principal
Commissioner of Income-Tax-14 Vs. Indian Oil
Corporation reported in Income Tax Appeal No.
1765 of 2016, revenue had raised such an issue when
the assessee had spent certain amounts in either setting
up or providing grant-in-aid made to Kendriya Vidyalaya
Schools where the students of the assessee-Indian Oil
Corporation would receive education. This Court
referred to a judgment of Kerala High Court in case of P.
Balakrishnan, Commissioner of Income-Tax Vs.
Travancore Cochin Chemicals Ltd.1 and of the
decision of this Court in case of Bharat Petroleum
Corporation Limited (supra) held that the Tribunal
had correctly allowed the assessee’s claim of
expenditure. In view of this discussion, this question is
not entertained.
12. With respect to question No.c, it is an agreed
1 243 ITR 284
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position that such an issue in case of this very assessee
had traveled the High Court in Income Tax Appeal No.254
of 2014. In respect of this question, the Court observed
as under:-
“(i) It is agreed position between parties that
the issue raised herein stands concluded
against revenue and in favour of the
respondent assessee by the order of this
Court in CIT vs. Union Bank of India (Income
Tax Appeal 1977 of 2013) rendered on 8th
February, 2016.
(ii) In the above view question (d) does not
give rise to any substantial question of law.
Thus not entertained.”
13. In view of such discussion, this question is not
entertained.
14. The sole surviving question (iv) arises out of the
revenue’s contention that the claim of the assessee under
Section 80M of the Act should be on the net of the income
and not gross. This issue is squarely covered in favour
of the assessee by virtue of decision of this Court in case
of Commissioner of Income-tax-6 Vs. Modern Terry
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Towers Ltd.1. This Court held that the principles
applicable for computing deduction under Section 80HHC
of the Act cannot be imported into Section 80M of the
Act. The Court observed as under :-
“The provisions of section 80HHC are entirely
different from those of sections 80M and 80AA.
There is no basis for importing the provisions
of section 80HHC with section 80M. The same
does not lead to a satisfactory computation of
the net dividend under section 80M.”
15. In the result, Income Tax Appeal is dismissed.
(S.J.KATHAWALLA, J.) (AKIL KURESHI, J.)
….
1 (2014) 43 taxmann.com 466 (Bombay)
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