Commissioner of Income Tax vs Punjab Financial Corporation Ltd.

Rajesh Bindal, J.—The following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (hereinafter referred to as "the Tribunal") arising out of order 5-2-1983, passed in I.T.A. No. 49 of 1981, in respect of the assessment year 1977-78:

Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in allowing the assessee''s claim regarding interest due on sticky loans ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that deduction u/s 36(1)(viii) of the Income Tax Act, 1961, should be allowed at 40 per cent. of the total income before making deduction u/s 36(1)(viii) itself ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in deleting the disallowance of Rs. 29,402 representing contribution made by the assessee-corporation towards the Provident Funds Act, 1925 ?

As far as questions Nos. 1 and 2 are concerned, much facts are not required to be stated as learned Counsel for the revenue has fairly conceded that the issues are covered against the revenue and in favour of the assessee vide order passed by this Court on 26-8-2004 in W. T. C. No. 33 of 1985 (CIT v. Punjab Financial Corporation Ltd.) wherein the petition filed by the revenue seeking reference of the above referred two questions was dismissed finding the same to be covered against the revenue by the judgments of the hon''ble Supreme Court in UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, and Commissioner of Income Tax Vs. Andhra Pradesh State Financial Corporation and Bihar State Financial Corporation, respectively.

Accordingly, both these questions are answered against the revenue and in favour of the assessee.

As far as question No. 3 is concerned from a perusal of the order of assessment, it is revealed that the assessee had contributed a sum of Rs. 29,402 under the Provident Funds Act, 1925, and claimed deduction in respect thereof. The same was negatived by the assessing officer for the reason that it was not permissible being not a recognised provident fund even if the State of Punjab had included the assessee''s name in annexure/ schedule to the Provident Funds Act, 1925 and the contributions have been made, the same is in violation of Section 36(1)(iv) of the Income Tax Act, 1961 (hereinafter referred to as, "the Act"). He further opined that as the deduction cannot be allowed u/s 36(1)(iv) of the Act, the same is also not admissible u/s 37 of the Act. In further appeal before the Commissioner (Appeals), the assessee succeeded. The order of the Commissioner (Appeals) was upheld by the Tribunal. While doing so both the authorities below had relied upon the order passed by it in the case of Haryana Financial Corporation. The status of that case is not readily available with counsel for the revenue. However, we have examined the case independently and are of the view that the opinion expressed by the Tribunal in the case is in conformity with law even though detailed discussion is not available on record.

Sections 30 to 36 of the Act provides for various deductions which are available while computing the income from business and profession. Section 37 is a general section which provides for deduction of any expenditure not included in any of the Sections 30 to 36 of the Act. The scope of Section 37 of the Act came up for consideration before the Kerala High Court in Commissioner of Income Tax Vs. High Land Produce Co. Ltd., , wherein it was held that the provisions of Section 37 of the Act cannot be given a restricted meaning. Mere fact that the claim does not fall in any of the Sections 30 to 36 will not automatically make the claim unsustainable u/s 37(1) of the Act as well. Section 37 being a general section, is for grant of deduction on certain accounts not enumerated in Sections 30 to 36 of the Act. It was further held as under (page 808):

We cannot give a meaning to the words ''in the nature of so as to stultify a legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true profits and gains of business. Unless there be some statutory provision which in clear terms or by necessary implication negatives against the adoption of such principles and practices, those principles and practices must be given their full play.

The aforesaid judgment in High Land Produce Co. Ltd.''s case was 6 upheld by the hon''ble Supreme Court in Commissioner of Income Tax, Kerala Vs. High Land Produce Co. Ltd., . Issue again came up for consideration before the Gujarat High Court in Khimji Visram and Sons (Gujarat) Private Limited Vs. Commissioner of Income Tax, wherein while referring to the judgment in High Land Produce Co. Ltd.''s case of the Kerala High Court, the proposition was summed up as under:

Considering the aforesaid judgments and the provisions of Sections 30 to 36 and 37, it can be held that:

(a) Section 37 is required to be construed liberally ;

(b) Section 37 is of general nature and it operates in a wide range covering all expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, which expenditure is not capital in nature or personal expenses of the assessee ;

(c) it may take into account not only the day-to-day running expenses of a business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process and assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commencing or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of the business ;

(d) unless there is express or implied prohibition under other provisions of Act, if the expenditure is covered by the provisions of Section 37, then the necessary deduction is required to be given ;

(e) the words "profits and gains" in trade are to be understood in their natural and proper sense, i.e. in a sense in which it is understood by a prudent businessman. Therefore, unless the Legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature or personal expenses it should not be allowed in computing the income from the business, deduction should be granted for the said expenses ;

(f) Sections 30 to 36 deal with specified expenses and for specific purposes. The nature of expenditure in those Sections would be relatable only for the purposes mentioned therein.

Applying the above principles in the present case, it is not disputed that the assessee had contributed the provident fund for its employees under the Provident Funds Act, 1925. Further, it cannot be disputed that the expense was made wholly and exclusively for the purpose of business and was neither capital in nature nor personal expense of the assessee. Section 36(1)(iv) of the Act does not debar specifically deduction on account of contribution made under the Provident Funds Act, 1925. It only talks about grant of deduction in respect of recognized provident fund. Keeping this in view, we do not find that any illegality has been committed by the Tribunal in rejecting the appeal of the revenue sustaining the deletion of disallowance of Rs. 29,402 representing contribution made by the assessee towards provident fund.

Accordingly, question No. 3 is also answered against the revenue and in favour of the assessee.

The reference is disposed of, accordingly.