IN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nORDINARY ORIGINAL CIVIL JURISDICTION
\nINCOME TAX APPEAL NO.718 OF 2017
\nPr.Commissioner of Income-Tax-2 \u2026 Appellant
\nV\/s.
\nM\/s State Bank of India \u2026 Respondent
\n—
\nMr.Suresh Kumar for Appellant.
\nMr.P.Pardiwala, Senior Advocate with Mr.N.Joshi i\/by
\nMr.Atul Karsandas Jasani for the Respondent.
\nCORAM : AKIL KURESHI AND
\nS.J.KATHAWALLA, JJ.
\nDATE : JUNE 18, 2019.
\nP.C.:-
\n1. This appeal is filed by the revenue to challenge the
\njudgment of the Income Tax Appellate Tribunal (\u201cTribunal\u201d
\nfor short).
\n2. Following questions are presented for our
\nconsideration :-
\n\u201ci. Whether on the facts of the case and in
\nlaw, ITAT was right in directing the A.O. to
\ncarry out verification and allow the claim of
\ninterest credited to \u201cInterest Suspense
\nAccount\u201d taxed in earlier years now written off
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\nduring the year if found correct without clearly
\nholding as to whether the interest is taxable
\nin the year of credit of the suspense account
\nor in the year of recovery?
\nii. Whether on the facts and in the
\ncircumstances of the case and in law, the
\ntribunal was justified in allowing deduction of
\nexpenditure of Rs.50 lakhs incurred by the
\nassessee towards contribution to retired
\nemployees benefit scheme ignoring the
\nprovision of section 40A(9) of the Act which
\nprovide for deduction only for payment to
\napproved\/recognized funds as referred to
\nsection 36(1)(iv) & (v) of the Income Tax Act,
\n1961?\u201d
\niii. Whether on facts and in the
\ncircumstances of the case, the Tribunal was
\nright in law in allowing a loss of Rs.16,84,481\/-
\non account of loss on revaluation of
\npermanent category investments, even though
\nthe same is a notional loss and inadmissible in
\nlaw?
\niv. Whether on the facts and in the
\ncircumstances of the case and in law, ITAT was
\nright in deleting the disallowance without
\nappreciating the fact that the disallowance
\ndetermined by the Ld. CIT(A) on the basis of
\nthe decision of ITAT in the assessee\u2019s own
\ncase in earlier years and giving scientific
\nmethod of disallowance of the interest
\nexpenses in respect of share purchase during
\nthe year?\u201d
\n3. Question No.i arises out of the judgment of the
\nIncome Tax Appellate Tribunal in remanding the issue
\nbefore the Assessing Officer for proper verification of
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\nfacts. The record would suggest that the assessee, in
\nview of its success before the Tribunal on the issue of
\ndisallowance of interest credited to Interest Suspense
\nAccount, had not pressed the ground of appeal in the
\nearlier year, however, clarifying that if at all such
\ndecision of the Tribunal is reversed by the High Court
\nthe assessee would be at liberty to revise the claim. This
\noffer of the assessee was accepted by the Tribunal. On
\nthe same ground in the present year the Tribunal followed
\nthe formula of the earlier year and for such limited
\npurpose placed the matter before the Assessing Officer.
\nWe do not find any error. No question of law therefore
\narises.
\n4. Question No.ii relates to the revenue\u2019s objection to
\nthe assessee\u2019s claim of deduction of expenditure of
\nRs.50 lakhs towards contribution to a fund created for
\nthe health care of the retired employees. The revenue
\nargues that such fund not being one recognized under
\nSection 36(1)(iv) or (v), claim of expenditure was hit by
\nthe provisions of Section 40A(9) of the Income Tax Act,
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\n1961 (\u201cthe Act\u201d for short).
\n5. The Tribunal while accepting such claim of the
\nassessee observed that the assessee had made such
\ncontribution to the medical benefit scheme specially
\nenvisaged for the retired employees of the bank.
\nSub-section (9) of Section 40A of the Act, in the opinion
\nof the Tribunal was inserted to discourage the practice of
\ncreation of bogus funds and not to hit genuine
\nexpenditure for welfare of the employees. The Tribunal
\nalso noted that the Assessing Officer had not doubted
\nthe bonafides of the assessee in creation of fund and
\nthat such fund was not controlled by the assessee-bank.
\nThe Tribunal proceeded on the basis that the Assessing
\nOfficer and the CIT (Appeals) had not doubted the
\nbonafides in creation of the Trust or that the expenditure
\nwas not incurred wholly must exclusively for the
\nemployees. The Tribunal thus allowed the assessee\u2019s
\nappeal on this ground and deleted the disallowance.
\n6. Sub-section (9) was inserted to Section 40A of the
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\nAct by Finance Act, 1984 with the retrospective effect
\nfrom 1st April, 1985 and reads as under:-
\n\u201c(9) No deduction shall be allowed in respect
\nof any sum paid by the assessee as an
\nemployer towards the setting up or formation
\nof, or as contribution to, any fund, trust,
\ncompany, association of persons, body of
\nindividuals, society registered under the
\nSocieties Registration Act, 1860 (21 of 1860),
\nor other institution for any purpose, except
\nwhere such sum is so paid, for the purposes
\nand to the extent provided by or under clause
\n(iv) (or clause (iva) or clause (v) of subsection
\n(1) of section 36, or as required by or
\nunder any other law for the time being in
\nforce.\u201d
\n7. In plain terms, sub-section (9) of section 40A
\ndisallows deduction of any sum paid by an assessee as
\nan employer towards setting up of or formation of or
\ncontribution to any fund, trust, company etc. except
\nwhere such sum is paid for the purposes and to the
\nextent provided under clauses (iv) or (iva) or (v) of subsection
\n(1) of Section 36 or as required by or under any
\nother law for the time being in force. It is undoubted that
\nthe instance of the assessee does not fall in any of the
\nabove mentioned clauses of sub-section (1) of Section 36.
\nHowever, the question remains whether the purpose of
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\ninserting sub-section (9) of section 40A of the Act was to
\ndiscourage genuine expenditure by an employer for the
\nwelfare activities of the employees. This issue has been
\nexamined by this Court on multiple occasions. Before
\ntaking note of such decisions, we may notice that the
\nexplanatory notes on the provisions contained in the
\nFinance Act, 1984, in the context of insertion of subsection
\n(9) to Section 40A of the Act records as under:-
\n\u201c(ix) Imposition of restrictions on contributions
\nby employers to non-statutory funds.
\n16.1 Sums contributed by an employer to a
\nrecognised provident fund, an approved
\nsuperannuation fund and an approved gratuity
\nfund are deducted in computing his taxable
\nprofits. Expenditure actually incurred on the
\nwelfare of employees is also allowed as
\ndeduction. Instances have come to notice
\nwhere certain employers have created
\nirrevocable trusts, obstensibly for the welfare
\nof employees, and transferred to such trusts
\nsubstantial amounts by way of contribution.
\nSome of these trusts have been set up as
\ndiscretionary trusts with absolute discretion to
\nthe trustees to utilize the trust property in
\nsuch manner as they may think fit for the
\nbenefit of the employees without any scheme
\nor safeguards for the proper disbursement of
\nthese funds. Investment of trust funds has also
\nbeen left to the complete discretion of the
\ntrustees. Such trusts are, therefore, intended
\nto be used as a vehicle for tax avoidance by
\nclaiming deduction in respect of such
\ncontributions, which may even flow back to the
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\nemployer in the form of deposits or investment
\nin shares, etc.
\n16.2 With a view to discouraging creation of
\nsuch trusts, funds, companies, association of
\npersons, societies, etc. the Finance Act has
\nprovided that no deduction shall be allowed
\nin the computation of taxable profits in respect
\nof any sums paid by the assessee as an
\nemployer towards the setting up or formation
\nof or as contribution to any fund, trust,
\ncompany, association of persons, body of
\nindividuals, or society or any other institution
\nfor any purpose, except where such sum is
\npaid or contributed (within the limits laid
\ndown under the relevant provisions) to a
\nrecognized provident fund or an approved
\ngratuity fund or an approved superannuation
\nfund or for the purposes of and to the extent
\nrequired by or under any other law.
\n16.3 With a view to avoiding litigation
\nregarding the allowability of claims for
\ndeduction in respect of contributions made in
\nrecent years to such trusts, etc., the
\namendment has been made retrospectively
\nfrom 1st April, 1980. However, in order to
\navoid hardship in cases where such trusts,
\nfunds, etc. had before , 1st March 1984,
\nbonafide incurred expenditure (not being in
\nthe nature of capital expenditure) wholly and
\nexclusively for the welfare of the employees of
\nthe assessee out of the sums contributed by
\nhim, such expenditure will be allowed as
\ndeduction in computing the taxable profits of
\nthe assessee in respect of the relevant
\naccounting year in which such expenditure
\nhas been so incurred, as if such expenditure
\nhad been incurred by the assessee. The effect
\nof the under-lined words will be that the
\ndeduction under this provision would be
\nsubject to the other provisions of the Act, as
\nfor instance, section 40A(5), which would
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\noperate to the same extent as they would
\nhave operated had such expenditure been
\nincurred by the assessee directly. Deduction
\nunder this provision will be allowed only if no
\ndeduction has been allowed to the assessee in
\nan earlier year in respect of the sum
\ncontributed by him to such trust, fund, etc.\u201d
\n8. The very purpose of insertion of sub-section (9) of
\nsection 40A thus was to restrict the claim of expenditure
\nby the employers towards contribution to funds, trust,
\nassociation of persons etc. which was wholly
\ndiscretionary and did not impose any restriction or
\ncondition for expanding such funds which had possibility
\nof misdirecting or misuse of such funds after the
\nemployer claimed benefit of deduction thereof. In plain
\nterms, this provision was not meant to hit genuine
\nexpenditure by an employer for the welfare and the
\nbenefit of the employees.
\n9. In case of Commissioner of Income Tax Vs.
\nBharat Petroleum Corporation Limited1, Division
\nBench of this Court considered a similar issue when the
\n1 (2001) Vol.252 ITR 43
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\nassessee had claim deduction of contribution towards
\nstaff sports and welfare expenses. The revenue opposed
\nthe claim on the ground that the same was hit by section
\n40A(9) of the Act. The High Court allowed the assessee\u2019s
\nappeal making following observations :-
\n\u201cFor the aforestated assessment year 1985-
\n86, the Assessing Officer disallowed
\nRs.2,60,283 under section 40A(9) paid by the
\nassessee for staff welfare activities. The
\nassessee claimed that the entire amount was
\nfor staff welfare activity. That, the said amount
\nwas a grant for staff welfare activity and that
\nthe entire amount was for the benefit of the
\nemployees and, therefore, the assessee
\nclaimed deduction as business expenditure
\nunder section 28. However, the Department
\nrejected the assessee\u2019s claim on the ground
\nthat a club known as Trombay Club was
\nincorporated by the assessee for social,
\ncultural and recreational activities of its
\nmembers who were required to pay
\nsubscription fees. Hence, the Assessing Officer
\nas also the Commissioner of Income-tax
\n(Appeals) came to the conclusion that the
\nsaid amount constituted contribution to the
\nclub and, therefore, under section 40A(9), the
\nclaim for deduction was disallowed. Being
\naggrieved, the assessee went in appeal to the
\nTribunal which took the view that the
\naforestated amount represented
\nreimbursement of expenses incurred by a
\nsociety and, therefore, it did not constitute
\ncontribution under section 40A(9). Being
\naggrieved by the decision of the Tribunal, the
\nDepartment has come in appeal.
\nFindings on question No. 2:
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\nBharat Petroleum Corporation is a Central
\nGovernment undertaking. It has incorporated
\na club, essentially to carry on staff welfare
\nactivities. Under clause 28, Bharat Petroleum
\nCorporation Limited had a right to issue
\ndirectives to the club which were binding on
\nthe club. At times, the members of the club,
\nwho were the employees of Bharat Petroleum
\nCorporation, took part in tournaments held
\noutside the club premises like Times shield in
\ncricket. On such occasions, the assessee-
\nCorporation used to reimburse expenses
\nincurred by the club. This is the finding of fact
\nrecorded by the Tribunal. In the
\ncircumstances, section 40A(9) is not
\napplicable. No substantial question of law
\narises. Hence, our answer to the aforestated
\nquestion No.2 is in the negative, i.e. in favour
\nof the assessee and against the Department.\u201d
\n10. In case of Commissioner of Income-tax-LTU Vs.
\nIndian Petrochemicals Corporation Limited1, Division
\nBench of Bombay High Court considered the case where
\nthe assessee-employer had contributed to various clubs
\nmeant for staff and family members and claimed such
\nexpenditure as deduction. Once again the revenue had
\nresisted in the expenditure by citing section 40A(9) of the
\nAct. This Court confirmed the view of the Tribunal and
\ndismissed the revenue\u2019s appeal, in which the Tribunal had
\n1 (2019) 261 Taxman 251(Bombay)
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\nallowed the expenditure claimed by the assessee.
\n11. Once again in case of The Principal
\nCommissioner of Income-Tax-14 Vs. Indian Oil
\nCorporation reported in Income Tax Appeal No.
\n1765 of 2016, revenue had raised such an issue when
\nthe assessee had spent certain amounts in either setting
\nup or providing grant-in-aid made to Kendriya Vidyalaya
\nSchools where the students of the assessee-Indian Oil
\nCorporation would receive education. This Court
\nreferred to a judgment of Kerala High Court in case of P.
\nBalakrishnan, Commissioner of Income-Tax Vs.
\nTravancore Cochin Chemicals Ltd.1 and of the
\ndecision of this Court in case of Bharat Petroleum
\nCorporation Limited (supra) held that the Tribunal
\nhad correctly allowed the assessee\u2019s claim of
\nexpenditure. In view of this discussion, this question is
\nnot entertained.
\n12. With respect to question No.c, it is an agreed
\n1 243 ITR 284
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\nPriya Soparkar 12 17 itxa 718-17-o
\nposition that such an issue in case of this very assessee
\nhad traveled the High Court in Income Tax Appeal No.254
\nof 2014. In respect of this question, the Court observed
\nas under:-
\n\u201c(i) It is agreed position between parties that
\nthe issue raised herein stands concluded
\nagainst revenue and in favour of the
\nrespondent assessee by the order of this
\nCourt in CIT vs. Union Bank of India (Income
\nTax Appeal 1977 of 2013) rendered on 8th
\nFebruary, 2016.
\n(ii) In the above view question (d) does not
\ngive rise to any substantial question of law.
\nThus not entertained.\u201d
\n13. In view of such discussion, this question is not
\nentertained.
\n14. The sole surviving question (iv) arises out of the
\nrevenue\u2019s contention that the claim of the assessee under
\nSection 80M of the Act should be on the net of the income
\nand not gross. This issue is squarely covered in favour
\nof the assessee by virtue of decision of this Court in case
\nof Commissioner of Income-tax-6 Vs. Modern Terry
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\nTowers Ltd.1. This Court held that the principles
\napplicable for computing deduction under Section 80HHC
\nof the Act cannot be imported into Section 80M of the
\nAct. The Court observed as under :-
\n\u201cThe provisions of section 80HHC are entirely
\ndifferent from those of sections 80M and 80AA.
\nThere is no basis for importing the provisions
\nof section 80HHC with section 80M. The same
\ndoes not lead to a satisfactory computation of
\nthe net dividend under section 80M.\u201d
\n15. In the result, Income Tax Appeal is dismissed.
\n(S.J.KATHAWALLA, J.) (AKIL KURESHI, J.)
\n\u2026.
\n1 (2014) 43 taxmann.com 466 (Bombay)
\n::: Uploaded on – 24\/06\/2019 ::: Downloaded on – 24\/06\/2019 15:39:58 :::<\/p>\n","protected":false},"excerpt":{"rendered":"
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<\/p>\n