Disallowed Deduction: Assessee's Payment to Pension Fund Rejected

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Case Name:

Commissioner of Income Tax vs. State Bank of Travancore (High Court of Kerala)

ITA. No. 73 of 2014

Date: 21st July 2015

Key Takeaways

- Section 40A(9) (of Income Tax Act, 1961) Restriction: The court emphasized that Section 40A(9) (of Income Tax Act, 1961) restricts deductions for contributions to funds unless specifically allowed by other sections like Section 36 (of Income Tax Act, 1961).

- Non-Applicability of Past Judgments: The court noted that earlier judgments, such as the one in T. Stanes & Company Limited, were not applicable due to changes in the law.

- Legal Clarity: The decision reinforces the importance of adhering to statutory provisions when claiming deductions.

Issue

Can the assessee claim a deduction for contributions made to a pension fund under Section 40A(9) (of Income Tax Act, 1961)?

Facts

The assessee, during the assessment year 2006-2007, contributed Rs. 1.5 crores to a medical benefit scheme for retired employees. The Assessing Officer disallowed this deduction, but the Commissioner of Income Tax allowed it. The Revenue appealed, leading to this case.

Arguments

- Revenue's Argument: The Revenue argued that under Section 40A(9) (of Income Tax Act, 1961), the deduction was not permissible as it was not explicitly allowed by the Act.

- Assessee's Argument: The assessee relied on Section 37 (of Income Tax Act, 1961) and past judgments, arguing that the expenditure was for business purposes and should be deductible.

Key Legal Precedents

- Section 40A(9) (of Income Tax Act, 1961): This section, introduced by the Finance Act, 1984, restricts deductions for contributions to funds unless allowed by other sections like Section 36 (of Income Tax Act, 1961).

- T. Stanes & Company Limited: The court clarified that this past judgment was not relevant due to changes in the law post-1984.

Judgement

The court ruled in favor of the Revenue, stating that the deduction was not permissible under Section 40A(9) (of Income Tax Act, 1961). The court emphasized that the statutory provisions clearly disallow such deductions unless explicitly permitted.

FAQs

Q1: Why was the deduction disallowed?

A1: The deduction was disallowed because Section 40A(9) (of Income Tax Act, 1961) restricts deductions for contributions to funds unless specifically allowed by other sections.

Q2: What is the significance of Section 40A(9) (of Income Tax Act, 1961)?

A2: Section 40A(9) (of Income Tax Act, 1961) was introduced to prevent deductions for contributions to funds unless they are explicitly permitted by the Act, ensuring that only certain types of contributions are deductible.

Q3: How does this case affect future deductions?

A3: This case reinforces the need for strict adherence to statutory provisions when claiming deductions, particularly under Section 40A(9) (of Income Tax Act, 1961).

1. This appeal filed by the Revenue is directed against the order passed

in ITA 381/13 on the file of the Income Tax Appellate Tribunal, Cochin

Bench. On facts it is seen that during the assessment year 2006-2007, the

assessee had contributed Rs.1.5 crores to medical benefit scheme for the

benefit of its retired employees. This amount was disallowed by the

Assessing Officer. However, the Commissioner of Income Tax set aside the

order of the Assessing Officer and allowed deduction. Revenue preferred

an appeal before the Tribunal which was dismissed by the impugned order.

It is accordingly that this appeal is filed and the question of law framed is whether on the facts and circumstances of the case and also in the light of Section 40A(9) (of Income Tax Act, 1961), the assessee is entitled to claim

deduction of the contribution made by it.

2. We heard the counsel for the appellant and the learned counsel appearing for the respondent.

3. While the Standing Counsel for the Revenue contended that in the light of Section 40A(9) (of Income Tax Act, 1961) the Tribunal could not have allowed deduction under Section 37 (of Income Tax Act, 1961), the learned counsel for the assessee relied not only on Section 37 (of Income Tax Act, 1961) but also on the judgment of the Madras High Court in Commissioner of Income Tax, Madras II v. T. Stanes & Company Ltd. [105 ITR 251].

4. We have considered the submissions made. Section 37 (of Income Tax Act, 1961) provides that any expenditure (not being expenditure of the nature described in Section 30 (of Income Tax Act, 1961) to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. It was in the context of this provision that the Madras High Court rendered its judgment in T.Stanes & Company Limited (supra). However, Section 40A (of Income Tax Act, 1961) provide for 'expenses or payments not deductible in certain circumstances', to the extent it is relevant reads thus:

“(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'profits and gains

of business or profession'.

(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 (v) of sub-section (1) of section 36 (of Income Tax Act, 1961), or as required by or under any other law for the time being in force.]

5. Section 40A (of Income Tax Act, 1961) which starts with the non obstante clause. Prior to

its amendment by Finance Act 2011, as per sub section (9) introduced

by Finance Act, 1984 with effect from 1.4.1980, deduction of only

payments for the purposes and the extent provided was permitted.

Assessee does not have a case that the contribution made by it to the

pension fund is payment which is permitted under Section 36 (of Income Tax Act, 1961). If that be

so, in view of Section 40A(9) (of Income Tax Act, 1961), the payment made by the assessee could

not have been allowed to be deducted and its disallowance by the

Assessing Officer, is perfectly in line with the statutory provisions. We

may also add that since sub section 9 (of Income Tax Act, 1961) was added to Section 40A (of Income Tax Act, 1961) by

Finance Act, 1984, the judgment of the Madras High Court in T.Stanes&

Company Limited (supra) rendered in the context of assessment years

1959-1960 to 1964-1965 has no relevance in so far as the case of the

assessee is concerned.

In such circumstances, answering the question of law in favour of the Revenue, this appeal is allowed.

Sd/-

ANTONY DOMINIC

JUDGE

Sd/-

SHAJI P. CHALY

JUDGE