JUDGMENT R.K. Agrawal, J.
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following questions of law under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as "the Act", for opinion to this court:
1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in recalling the proceedings to consider the applicability of Section 40A(9) of the Income-tax Act, 1961?
2. Whether after finding the provisions of Section 40A(9) do not apply to the facts of the present case, the Appellate Tribunal was legally justified in sustaining the disallowance at Rs. 51,165?
2. The present reference relates to the assessment year 1980-81.
3. Briefly stated the facts giving rise to the present reference are as follows:
4. The applicant is a public limited company and is regularly assessed to income-tax, by the concerned Assessing Officer at Kanpur. In the assessment year 1980-81 based on the accounting year ended December 31, 1979, amongst other, it claimed deduction of Rs. 78,896 on account of contribution made by it towards daughter's marriage benefit scheme. Such a deduction was claimed as an admissible expense being in the nature of staff welfare expenses. The Assessing Officer observed that the payment cannot be treated as obligatory and also cannot be treated expenses towards staff welfare necessary for business. Further, he held that the contribution was not under any irrevocable trust divesting the company of control and authority over such funds. Further the expenditure is neither obligatory under the Factories Act nor customary to the trade in which company is engaged. As such the expenditure was not treated as business expenditure and the same was disallowed.
5. Against the order passed by the Assessing Officer the matter was taken in first appeal and it was, inter alia, submitted before the appellate authority that the assessee-company made a matching contribution and such amount was utilised for marriage of employees' daughters. It was also pointed out that since the entire funds remained with the company and were used in the business the amount of interest paid by the company should be allowed as an admissible deduction. However, for the reasons given in paragraphs 23 and 24 of the order only an amount of Rs. 8,330 on account of interest was allowed and the disallowance in respect of the balance amount of Rs. 70,566 was upheld.
6. Against the order of the Commissioner of Income-tax (Appeals) the assessee-company further took the matter in appeal before the Tribunal. This issue was considered by the Appellate Tribunal in paragraph 7 of the order and for the reasons contained therein the assessee's claim in respect of the amount of Rs. 78,896 was fully accepted and thus the disallowance of the same was fully deleted.
7. On the petition under Section 254(2) dated September 11, 1989, moved by the Revenue, the matter was heard and as per order dated March 22, 1990, passed by the Appellate Tribunal the earlier order relating to this particular aspect in ground No. 1(5) of the appeal was recalled.
8. On such recall the matter again came for hearing and for the reasons given in paragraphs 13 and 14 of the order the disallowance to the extent of Rs. 42,835 has been sustained.
9. We have heard Sri R. Section Agrawal, learned Counsel appearing for the applicant, and Sri A.N. Mahajan, learned standing counsel appearing for the Revenue.
10. Before adverting to the various pleas raised by learned Counsel for the parties, it would be appropriate to put on record that this Court on April 4, 2005, on the request of learned Counsel for the parties the reference was directed to be listed after one month in order to enable them to file a copy of the Tribunal's order whereby it had recalled its earlier order. About one and a half years have passed and the order of the Tribunal has not been filed by either of the parties. We are, therefore, left with no other option but to proceed to decide the case on the basis of the documents enclosed with the statement of the case.
11. We find that vide order dated March 22, 1990, the Appellate Tribunal had recalled its entire order by which the Tribunal had earlier decided the appeal. In the absence of the order dated March 22, 1990, having been brought on record, for which sufficient time had already been granted, we proceed to decide the matter on the premises that the Tribunal had recalled its order in toto.
12. Sri R. Section Agrawal, learned Counsel for the applicant, submitted that the Tribunal had recalled its earlier order in respect of the applicability of the provisions of Sub-section (9) of Section 40A of the Act and once it is found that the same was not attracted it was not open to the Tribunal to proceed to redecide the controversy on the merits. The submission is misconceived.
13. The Tribunal in paragraph 13 of its order has dealt with this plea in the following words:
13. The preliminary objection of the assessee in these proceedings, viz. that we would not travel beyond the provisions of Sub-section (9) of Section 40A is not acceptable to us. The occasion for recalling the order was certainly the omission on the part of the Tribunal to take note of the provisions of Sub-section (9) of Section 40A to begin with. But once the order on the aforesaid subject, passed earlier, is recalled by the Tribunal, the entire issue becomes open for consideration de novo, and it is open for both the sides to urge before the Tribunal the relevant arguments which they may consider appropriate. There is nothing in the language of the recall order putting any fetters in this regard.
14. As we have already mentioned hereinbefore that the order dated March 22, 1990, passed by the Tribunal has not been brought on record by either of the parties, if the Tribunal has recalled its earlier order in toto it goes without saying that the Tribunal could have proceeded to decide all issues on the merits for which the decision had been taken in its earlier order. We may mention here that it appears from the record that before the Tribunal only one issue regarding allowability of contribution made by the applicant towards employees' daughters' marriage expenditure and interest accruing thereon was involved. From a perusal of the relevant portion of the Tribunal's order reproduced above, we are of the considered opinion that it was in the wisdom of the Tribunal to either permit on the basis of the applicability of Section 40A(9) of the Act as an additional issue while maintaining the earlier order and substituting it by a fresh order or by recalling its earlier order in toto and deciding the appeal afresh considering all material and its effect. The Tribunal having been adopted the latter one, we do not find any illegality in the approach adopted by the Tribunal.
15. We, therefore, answer the first question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee.
16. So far as the second question is concerned, we find that the Tribunal in paragraphs Nos. 9-12 had dealt with the issue. Paragraphs Nos. 9-12 of the Tribunal's order are reproduced below:
We have given a careful consideration to the facts of the case and the rival submissions. The rules and regulation governing the scheme have been placed on record by the assessee. The various forms that have been to be filled in by a clerk in order to become a member of the scheme have also been filed. From a perusal thereof, it is clear that the scheme does provide a contractual arrangement between the assessee and its employees who opted for the scheme. In terms of this contract the employees have to contribute every month at specified rates. On such contribution of the employees which are credited to the respective accounts interest at 10 per cent, is credited at the end of each year on the basis of the balances to the credit of the employees at the beginning of the year (see Rules 5 and 6). Rule 4 provides for the contribution of the employer company. It reads as below:
The company will also pay an amount as its own contribution equal to the contribution of the employee excluding interest at the time of marriage of each daughter irrespective of period of membership of the scheme, provided the marriage takes place during his employment with the company.
It will be apparent from the above that the obligation to pay the amount as its own contribution to an employee arises on the asses-see-company at the time of marriage of each daughter ; it does not arise at the end of each accounting period. Clause 7(a) is also relevant and may be quoted here as below:
7(a) A clerk, who resigns or is discharged or removed or retired from service, will cease to be a member of the scheme with effect from the date of ceasing of his employment. In the case of a clerk, who resigns or is discharged or removed from services, only his contribution together with to date interest thereon will be refunded to him.
However, in the case of a clerk who is retired on reaching the age of superannuation, the clerk's own contribution together with to date interest thereon shall be paid to him with the management's contribution at the following rates:
The above rule visualises situations where no payment becomes due to an employee under Rule 4 referred to above and the services of the clerk are coming to an end with the assessee either as a result of his being discharged or removed from the service or on his superannuation or retirement. In case of his being discharged or removed from his service or his resigning no contribution of the employer is payable to the clerk. In case of his retirement in the normal course the amounts payable to the employee on account of employer's contribution are in a graded manner. If his membership of the scheme has been of less than 5 years nothing is paid to him by way of employer's contribution. If his membership is in between 5 years to 10 years only 50 per cent, of the employer's contribution is payable to him. In case of membership period in between 10 years to 15 years, the employer's contributions is paid to him at 75 per cent, of the employee's contribution. Only to those employees whose membership of the scheme is of more than 15 years duration 100 per cent, contribution of the employer is paid. From the above, it is clear that the right of an employee to claim the contributions of the employer as a matter of right enforceable in a court of law does not arise from year to year, it arises only on certain contingencies, taking place.
10. In the setting of the above provisions, we have to see whether the liability to make the payment accrues and arises on the assessee during each accounting period. Our answer to this has to be in the negative in view of Rules 4 and 7(a) of the scheme quoted above. Therefore, it would not be correct to accept the assessee's claim on the footing that the liability to give contribution is annual as made out by the assessee. For the purpose of its accounts, the assessee-company might be keeping the accounts of the employees in a manner which shows a matching contribution of the employer to that of the employee every year, but, as regards the accrual of the liability to make the payment to the employees is concerned, no liability for employer's contribution, in fact, arises on an annual basis in terms of the above scheme. It arises on the happening of certain contingencies as noted above. The mode of treatment in accounts cannot change the nature of the liability of the assessee. The liability arises on the happening of certain contingent events, as visualised in Rules 4 and 7. In fact, there may be certain situations, where such liabilities may never arise, e.g., when the daughter may die before marriage or the employee resigns or his services are terminated, or if he retires in the normal course, and his membership of the scheme is of less than 5 years' duration. In other contingencies, the employees may be eligible at the time of superannuation, for 50 per cent, or 75 per cent, of the employer's matching contribution. To say in the face of the above rules, that the liability to make the payments to the scheme by the employer accrues and arises annually would be against the facts. The learned Commissioner of Income-tax (Appeals) was, therefore, in our opinion, correct in holding that no liability, in fact, accrued and arose against the company to contribute to the employee's account under the scheme except where actual marriage took place and payments were made to the extent of Rs. 8,330. The order of the learned Commissioner of Income-tax (Appeals) has, therefore, to be upheld.
11. There is, however, merit in the assessee's contention that so far as the payment of interest on the employee's contribution is concerned, it is a liability, which has accrued and arisen this year and which should be allowed, for the funds of the employees have already been received by the assessee under the scheme and interest at 10 per cent, thereon is payable by the assessee, annually, and in no situation can this payment be denied by the assessee to the employees. Therefore, the expenditure of Rs. 27,731 on account of interest payable on the employees' contribution has to be allowed to the assessee as a legitimate business expenditure.
12. So far as the provisions of Sub-section (9) of Section 40A are concerned, we are unable to accept the assessee's contention that there is no fund trust, etc., in existence to which the assessee might be contributing in terms of Sub-section (9) of Section 40A. The scheme itself provides for the creation of a separate fund consisting of the employees contribution plus interest thereon and the employer's contribution in certain situations. Such a fund is held under trust by the assessee-company in terms of the agreement reached between the assessee and the employees in terms of the aforesaid scheme. We have, however held that in the peculiar facts of this case, the liability to make annual contributions does not arise on the company, liability to make payments arises only in the event a certain contingencies. When those contingencies arise, the payments are made, not by way of contribution to the fund but by way of individual disbursements to the employee directly. To such direct disbursements, the provisions of Sub-section (9) of Section 40A are not attracted. Therefore, there is merit in the assessee's contention that a closer examination of the applicability of Sub-section (9) of Section 40A to the facts in this case would show that these provisions do not apply to the scheme under consideration.
17. From a perusal of the order of the Tribunal, we are of the opinion that the Tribunal has come to the conclusion that the contribution towards the marriage of the employee's daughter, which was not to be held during the previous year relevant to the assessment year in question could not have been allowed. Further, the liability existing which the applicant claimed, was also not allowable, is based on correct appreciation of the legal provisions. We, accordingly, answer the second question of law referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee.
18. However, there shall be no order as to costs.