Income Tax Appeal No. 663 of 2005 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 663 of 2005 Date of decision: 30.11.2010 The Commissioner of Income Tax Patiala --- Appellant Versus M/s. Rai Agro Industries Ltd. Sangrur --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Ms. Nancy Kaushal, Standing Counsel for the appellant-Revenue. None for the assessee. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated 14.7.2005, passed by the Income Tax Appellate Tribunal Chandigarh Bench ‘B’ Chandigarh (in short “the Tribunal”) in ITA No. 571/CHANDI/2003, relating to the assessment year 1998-99. The following substantial question of law has been claimed for determination by this Court: Income Tax Appeal No. 663 of 2005 2 “Whether on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition made on account of disclosure of the payment of ESI deposited beyond the due date? The facts, in brief, necessary for adjudication, as narrated in the appeal are that the assessee filed return of income declaring loss of Rs. 2,83,85,603/- on 30.11.1998. Assessment under Section 143(3) was completed on 17.11.2000 where an addition of a sum of Rs. 9,33,264/- was made on account of disallowance of the payment of contribution towards Employees’ State Insurance deposited beyond the due date. The Commissioner of Income Tax (Appeals), for short [“CIT(A)”] in the appeal carried by the assessee, vide order dated 28.7.2003, reduced the addition/disallowance to Rs. 2,93,212/- thereby allowing the relief of Rs. 6,40,052/- under Section 43B of the Act. The assessee and the Revenue feeling aggrieved by the order of the CIT(A) preferred separate appeals before the Tribunal. The Tribunal allowed the appeal of the assessee and deleted even the addition of Rs. 2,93,212/-, confirmed by the CIT(A), whereas the appeal of the Revenue was dismissed vide order dated 14.7.2005. The Tribunal, while deleting the addition of Rs. 2,93,212/- held that the omission of second proviso and amendment of first proviso to Section 43B by Finance Act, 2003 whereby payment made by the employer towards contribution to provident fund, Employees’ State Insurance, gratuity, superannuation and other welfare funds would operate retrospectively from 1.4.1988 onwards. Hence, this appeal by the Revenue. Income Tax Appeal No. 663 of 2005 3 We have heard learned counsel for the appellant and have perused the record. The point for determination in this appeal is, whether the amendment made by Finance Act, 2003, effective from 1.4.2004 whereby second proviso to Section 43B stands omitted would govern the earlier cases from 1.4.1988 also. It would be appropriate to delve into brief legislative history and the purpose of enacting the provisions of Section 43B of the Act before embarking on the adjudication of the controversy involved in the present appeal. Section 43B provides for disallowance of unpaid statutory liability. This Section was inserted by the Finance Act, 1983, with effect from 1.4.1984. The purpose of this provision is to discourage those assesses who failed to clear their statutory liability relating to payment of excise duly, employees’ contribution to provident fund etc. within time whereas they laid claim for deductions in respect thereof from their income on the plea that liability to pay these amounts had occurred during the relevant previous year. After the insertion of Section 43B, the assessee was entitled to claim deduction on account of these payments only on actual payments even where the assessee had been following mercantile system of accountancy. The provision at that time comprised of only clauses (a) and (b) and Explanation which was later re-numbered as Explanation 1. The two provisos before the Explanation to the Section were incorporated by Finance Act, 1987 effective from Ist April, 1988. Finance Act, 1988 amended clause (a) with effect from Ist April, 1989. The rigors of clause (a) were lessened by first proviso which permitted the Income Tax Appeal No. 663 of 2005 4 deduction of tax liability wherever it was established that it had been discharged, though not during the previous year, but before the due date for filing of return under Section 139(1) of the Act. However, second proviso which related to liabilities falling under clause (b) had more rigid conditions. The second proviso, which is relevant for decision of this appeal, reads thus: “Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation before clause (va) of sub-section (1) of section 36.” The Finance Act, 2003 effective from 1.4.2004 made an amendment whereby second proviso to Section 43B of the Act was omitted from the statute book. The issue relating to retrospective operation of omission of second proviso to Section 43B of the Act was considered by the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) wherein it was held that it is curative in nature and would apply retrospectively, with effect from, April 1, 1988. The relevant observations of the Supreme Court are as under: “We hold that the Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from April 1, 1988 (when the first proviso came to be inserted). For the above reasons, we find no merit in this batch of civil Income Tax Appeal No. 663 of 2005 5 appeals filed by the Department which are hereby dismissed with no order as to costs.” In view of the above, the Tribunal was right in allowing the claim of the assessee in respect of payments made for ESI contributions and the same could not be disallowed under Section 43B of the Act. The question of law is, thus, answered against the Revenue and in favour of the assessee. In view of the above, there is no merit in the appeal, the same is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) November 30, 2010 JUDGE *rkmalik*