1. This appeal by the revenue is directed against the order of the Commissioner of Tncome-tax (Appeals)-I, Trivandrum dated, 28-4-2005 for the assessment year 2002-03.
2. The first issue which arises for our consideration is whether the CIT(Appeals) is justified in directing the Assessing Officer to allow the entire bad debts written off without limiting the amount of deduction to the amount by which it exceeds the credit balance in the provision for bad and doubtful debts, account as a deduction.
3. We have heard the parties. The assessee bank has claimed the deduction of Rs. 100,17,62,010/- as bad debts written off while computing its total income. It was noticed by the AO that the assessee has further claimed a sum of Rs. 35,47,29,345/- as a deduction Under Section 36(1)(viia) in respect of the provision for bad and doubtful debts which consisted of Rs. 23,77,20,200/- being 10% of the rural advances and Rs. 11,70,09,145/- being 5% of the gross total income relating to non-rural advances. The AO was of the opinion that the assessee was claiming double deduction, one Under Section 36(1)(vii) and the other as Under Section 36(1)(viia). The AO had serious reservation about the claim of the assessee bank in respect of the bad debts written off. The contention of the assessee bank was that there was only debit balance in the account of provision for bad and doubtful debts and hence, the entire claim is required to be allowed. In the opinion of the AO, the method followed by the assessee was not as per the provisions of the Income Tax Act. In the further opinion of the AO, if there is no; credit balance in the provision for bad and doubtful debts made as per Section 36(1)(viia) of the Act, the provision for bad and doubtful debts ceased to exist and debit balance or negative figure in the provision account is not possible. After analyzing the Annexure to the audited statement of accounts, the AO noted that in the case of the assessee bank it is having the debit balance from 1-4-1990 in the provision for bad and doubtful debts. The AO noted that the assessee is simultaneously crediting the provision for bad arid doubtful debts on the credit side of the provision account and at the same time, debiting the entire bad debts which are at a much higher figure than the provision on the debit side of the same provision account without making any adjustment in the provision account as required by the proviso to Section 36(1)(vii) of the Act and as required Under Section 36(2)(v) of the Act. In the opinion of the AO, the proviso to Section 36(1)(vii) and Section 36(2)(v) clearly states that the assessee has to debit bad debts claimed during the year to the provision for bad and doubtful debts arid deduction of bad debts Under Section 36(1)(vii) of the Act is limited to the amount which exceeds the credit balance available in the provision for bad and doubtful debts Under Section 36(1)(viia) of the Act. The AO asked the assessee to furnish the break-up of the bad debts pertaining to the rural branches as well as non-rural branches. The assessee filed the reply contending that the entire write off of bad debts pertains to the non-rural branches and provision for bad and doubtful debts relating to advances made on rural branches. Finally, the AO came to the conclusion that the provision for bad and doubtful debts relating to 10% of the rural advances amounting to Rs. 23,77,27,200/- for the asst, year 2002-03 is to be allowed, but at the same time, the AO was of the opinion that total sum of Rs. 19,51,13,004/- is to be deducted from the total bad debts written off as per proviso to Section 36(1)(vii). In short, the AO made the disallowance in respect of the bad debts written off and provision for bad and doubtful debts at Rs. 19,51,13,004/-.
4. The assessee carried the issue in appeal before the CIT(Appeals).
The CIT(Appeals) following his earlier order in assessee's own case as well as the decision of the Tribunal allowed the entire claim of the assessee. The CIT(Appeals) also relied on the decision of the Jurisdictional High Court in the case of South Indian Bank Ltd. 262 ITR 579 (Ker) and Dhanalakshmi Bank Ltd. 131 Taxman 774(Ker). Now, the revenue has challenged the order of the CIT(Appeals) before us.
5. The learned Chartered Accountant for the assessee bank submitted that this issue is covered in favour of the assessee in assessee's own case for the asst. years 1994-95 and 1995-96 by the decision of this Tribunal in ITA Nos. 465 and 466(Coch)/1998. The ld. CA also relied on the following precedents: 6. The ld. Departmental Representative was fair enough to submit that this issue is covered in favour of the assessee bank by the decision of this Tribunal for the asst. years 1994-95 and 1995-96 as well as by the decision of the Jurisdictional High Court in the case of South Indian Bank Ltd. (supra).
7. This issue had come for the consideration of this Tribunal in assessee's own case for the asst. year 1994-95 and 1995-96 and it is held as under: The same point was considered by this Tribunal in assessee's own case in ITA Nos. 621 and 622(Coch)/1996 dated 30-6-2003 and in ITA Nos. 650 & 651(Coch)/96. The Tribunal accepted the contention of the assessee bank and held that the entire bad debts written off by the assessee bank for the assessment year 1992-93 relating to non rural branches need to be allowed as a deduction. In the light of the above, we accept the contention of the assessee bank and direct the Assessing Officer to give deduction for the entire bad debts of Rs. 15,47,95,645/- written off by the assessee bank as deduction Under Section 36(1)(vii).
We also find that this issue is covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of South Indian Bank Ltd. (supra). Respectfully following the said decision of the Jurisdictional High Court as well as the decision of this Tribunal in assessee's own case, we hold that the CIT(Appeals) has rightly deleted the addition made by the AO in respect of the bad debts written off. We, therefore, confirm the order of the CIT(Appeals) on this issue.
8. The next issue is whether the CIT(Appeals) is justified in deleting the addition made amounting to Rs. 44,33,575/- by making the pro-rata disallowance Under Section l4A of the Act. We have heard the parties.
The briefly stated facts are as under: On verifying the return of income, the AO found that in the computation statement, the assessee has deducted a sum of Rs. 4,94,13,505/- as dividend income, another sum of Rs. 1,67,50,000/- being interest on tax free bonds and a further sum of Rs. 1,14,98,000/- being interest exempt Under Section 10(23G) of the Income Tax Act totalling Rs. 8,86,71,505/-. The AO noted that as per Section 14A, "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income" which does not form part of the total income under this Act". The assessee was asked to furnish details of expenditure incurred in relation to exempted income mentioned above in response to which the assessee filed a detailed reply vide its letter dated 17.03.1005 and has stated that bank has not incurred any expenditure which can be attributed to the collection of tax free income. The assessee has further stated that the allocation of expenditure on an estimated ad hoc and unscientific basis itself proves that the said expenditure does not wholly and exclusively relate to any investment in earning tax free income. According to the assessee, the company had not incurred any special expenditure for earning this tax free incomes of dividend, interest on tax free bonds or interest exempt Under Section 10(13G). In the opinion of the AO, the very fact that similar disallowance were made from assessment year 2000-01 onwards and were upheld by the CIT(A) indicates that the assessee's arguments are without any basis. Further, the assessee was specifically informed about the proposal to estimate expenditure at the rate of 5% of the total tax free income as per the decision of the Bombay High Court in the case of CIT v. Scindia Investment Pvt. Ltd. 190 ITR 118 (Bom), in a case involving computation of deduction under Section S0M of I.T Act in respect of dividend income. The assessee was also informed that the disallowance Under Section l4A will be Rs. 44,33,575/-. However, the assessee in its reply dated 17.03.2005 remained silent about, this proposal to estimate the expenditure at 5% of the total tax free income. Therefore, as proposed, the AO disallowed a sum of Rs. 44,33,575/- Under Section l4A of the Act being the expenditure estimated to have been incurred for earning tax free income.
9. The matter was carried in appeal by the assessee and it found favour. The CIT(Appeals) deleted the said addition relying on the decision of Delhi Bench of ITAT in the case of Maruti Udyog Ltd. 92 ITD 119. Now, the revenue has challenged the order of the CIT(Appeals) on this issue.
10. The ld. CA for the assessee submitted that this issue is covered in favour of the respondent-assessee by the decision in its own case in ITA No. 295(Coch)/2003 order dated 19-9-2006 for the asst. year 2000-01. He further submitted that identical issue had come for consideration of this Tribunal in the case of Dhanalakshmi Bank Ltd. in ITA Nos. 949 and 990(Coch)/2004 order dated 28-7-2006. The ld. DR was fair enough to submit that this issue is covered in favour of the assessee bank by the decision of this Tribunal in assessee's own case as well as by the decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra).
11. An identical issue had come for the consideration of this Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) wherein it was held as under: 10. Now, before the introduction of Section 14A, the Apex Court has dealt with this issue in the case of Rajasthan State Warehousing Corporation 242 ITR 450. In the said case also, the Assessing Officer had made disallowance of the expenditure which was referable to the non-taxable income being exempt Under Section 10(29) of the Act. The Apex Court also referred to the judgment in the case of Indian Bank Ltd. 56 ITR 77(SC), The Apex Court has laid down the following principles: In view of the above discussion, the following principles may be laid down: (i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income; (ii) If income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and. income from one or more items alone Is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii) in computing "profits and gains of business or profession" when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under Section 37 of the Act will depend on: (a) fulfillment of requirements of that provision noted above; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming an integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee.
11. As per the principles laid down by the Apex Court in the case of Rajasthan State Warehousing Corporation (supra), if the business carried on by the assessee constitutes one indivisible business, then the entire expenditure will be a permissible deduction and apportionment of the expenditure is not permissible.
12. After the judgment of the Apex in the case of Rajasthan State Warehousing Corporation (supra), Section 14A was brought on the statute book and as stated hereinabove as explained by the CBDT in its Circular, the principles for disallowance of the expenditure relating to the exempt or non-taxable income were already there, but the said position has been made clear by virtue of introduction of Section 14A. It means that the principles laid down by the Apex Court in the case of Rajasthan State Warehousing Corporation (supra) still hold good law in respect of the introduction of Section 14A governing the disallowance of the expenditure which is incurred for earning tax free income or in other words Income which does not form part of the total income. Moreover, the ratio decidendi of Rajasthan State Warehousing Corporation (supra) could not be nullified even after introduction of Section 14A that if the business of the assessee is indivisible one, then no disallowance can be made on proportionate basis and entire expenditure is allowable.
13. In the case of the assessee bank, it is an admitted position that the assessee is having the indivisible business and considering the nature of the business of the assessee the investment in the tax free bonds or investment in the shares may be in the nature of stock-in-trade. There is no identity in respect of the funds applied for investment in the tax free bonds, or shares and funds which are applied for earning taxable income. The ld. Counsel submitted that the assessee bank is also having the surplus funds and reserves from which the investment is made and that makes the case of the assessee that the funds applied for investment cannot be said to be interest or cost bearing funds alone.
14. The Assessing Officer has adopted the method which is not prescribed as per the provisions of Sub-section (2) of Section 14A. Moreover, we find that unless the method for working out disallowance of the expenditure in case of an indivisible business is prescribed as provided in Sub-section (2) of Section 14A, no disallowance is permissible. We are, therefore, of the opinion that in spite of the introduction of Section 14A, the principles laid down by the Apex Court in the case of Rajasthan State. Warehousing Corporation (supra) still hold good law and as there is no clear identity in respect of the funds applied by the assessee for making the investment for earning the tax free income as well as taxable income and as assessee's business is indivisible one, the method adopted by the A.O for making the disallowance is not a permissible method and A.O was not justified in making the disallowance from the expenditure of Rs. 2,75,77,410/- in respect of the interest attributable to investment on tax free bonds and Rs. 90,60,850/- in respect of the expenditure incurred for earning the dividend income.
We, therefore, set aside the order of the CIT(Appeals) on this issue and direct the A.O to delete the said addition.
In our opinion, the same principles are applicable to the assessee's case. We, therefore, uphold the order of the CIT(Appeals) on this issue.
12. The next issue is regarding deletion of addition in respect of the broken period interest paid on the purchase of securities amounting to Rs. 27,52,58,302/-, It was noticed by the AO that the assessee has paid broken period interest of Rs. 27,52,58,302/- on purchase of securities during the current asst. year. The AO noted that 'the Hon'ble High Court of Kerala has decided this issue in favour of the assessee in the asst. years 1991-92 and 1992-93. However, since the Department is filing SLP against the said decision of the Hon'bie High Court subject to the approval of Committee on Disputes for the asst. year 1991-92, the AO brought to tax the broken period interest of Rs. 27,52,58,302/- as a protective measure.
13. The matter was carried in appeal before the CIT(Appeals) and the CIT(Appeals) following his earlier order in assessee's own case, deleted the addition. Now, the revenue is in appeal before us.
14. We have heard the parties. The ld. CA for the assessee bank submitted that the issue in respect of broken period interest paid on purchase of securities is covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of CIT v.Nedungadi Bank Ltd. 264 ITR 545 (Ker) and CIT v. Citibank NA 264 ITR 18 (Bom). The ld. DR was fair enough to submit that this issue also covered in favour of the assessee by the decision relied on by the assessee's CA.15. An identical issue had come for the consideration before the Hon'bie High Court of Kerala in the case of Nedungadi Bank Ltd. (supra) wherein it was held as under: The last question arising for consideration in some of these appeals is as to whether the Tribunal was justified in allowing the claim for deduction of the interest paid for the broken period for the acquisition of the securities till the date of such acquisition. In fact, the said question is squarely covered by the decision of this court in South India Bank Ltd.'s case [2000] 241 ITR 374. This court in the above decision held that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of the total income of the bank under the head "Profits and gains" of business or profession. In view of the said decision, we are in full agreement with the order of the Tribunal allowing the said claim. Though we have dealt with the issues in relation to Nedungadi Bank's case, the facts of the other appeals also being the same, the decision taken as above will apply to the other appeals also equally. No other question arises for consideration in these appeals. We accordingly dismiss all these appeals. In the circumstances, no order as to costs.
Respectfully following the ratio in the above precedent, we hold that the CIT(Appeals) has rightly deleted the addition in respect of broken period interest made by the AO. We, therefore, confirm the order of the CIT(Appeals) on this issue.
16. The next issue is regarding the addition made by the AO by disallowing the claim of the assessee bank in respect of the contribution to medical benefit scheme amounting to Rs. 50 lakhs and deleted by the CIT(Appeals). The assessee had claimed deduction in respect of sum of Rs. 50 lakhs which was assessee's contribution to Retired Employees Medical Benefit Scheme (hereinafter referred to as "medical scheme"). On the perusal of the tax audit report Under Section 44AB, the AO proposed to make disallowance in respect of the said contribution as the AO was of the opinion that provisions of Section 40A(9) of the Income Tax Act are applicable. The assessee contended that the said expenditure was incurred wholly and exclusively for the purpose of assessee's business and hence it was allowable expenditure Under Section 37 of the Act. The assessee further contended that the provisions of Section 40A(9) of the Act are not applicable as bonafide of the expenditure is not doubted. The AO rejected the contention of the assessee on both the grounds and made the addition of Rs. 50 lakhs while computing the income of the assessee bank.
17. The assessee carried the matter in appeal before the CIT(Appeals).
The CIT(Appeals) was of the opinion that the decision of the ITAT Hyderabad Bench in the case of Rasi Cements Ltd. 42 ITD 233 is squarely applicable to the assessee's case and hence the contribution made by the assessee does not attract the mischief of Section 4.0A(9) of the Act and no disallowance was warranted. The CIT(Appeals) also accepted the alternative contention of the assessee that the said expenditure is allowable Under Section 37 of the Act, The CIT(Appeals) relied on the decision of the Jurisdictional High Court in the case of Travancore Cements Ltd. 161 CTR 124 (Ker).
18. The ld. DR vehemently submitted that the CIT(Appeals) has not at all properly appreciated the facts as well as the principles laid down in the case of Rasi Cements Ltd. v. CIT 275 ITR 579 (AP). He further argued that presuming that the assessee bank ?made the contribution in consequence of honouring the agreement between the associate banks and bank officers' association, it cannot be denied that the same contribution was for floating the funds and there is a specific bar for allowing the deduction Under Section 40A(9) of the Act.
19. Per contra, the ld. CA for the assessee submitted that the Associate Bank Officers Association has raised some demands on the management of the State Bank of India and its subsidiary banks. One of the demands was formulation of medical scheme for the retired officers.
He further submitted that for the settlement of the demands of the Associate Bank Officers Association a meeting of the management of the associate banks and the office bearers of the association was held at Simla on 23-6-1997. In the said meeting, negotiations were held in respect of the different demands of the association and it was reduced into writing. The ld. CA referred to the minutes of the bipartite meeting held on 23-6-1997 copy of which is placed on record. He submitted that as part of - settlement of the demands with the Bank Officers Association, it was agreed in principle for implementation of the scheme and as a part of settlement between the management of the State Bank of India and the Associate Banks Officers Association/Union it was decided to contribute Rs. 50 lakhs received for formulation of the scheme for providing medical relief to the retired employees who were willing to pay a contribution fee. The ld. CA also referred to the scheme which is named as "Retired Employees Medical Benefit Scheme" copy of which is placed on record and submitted that the first object of conceding to the demand of the association was to maintain a healthy industrial relation with the officers.
20. The ld. CA further argued -that the distinction made under the Industrial Disputes Act in respect of the employees as workmen and other than workmen has nothing to do with the smooth working of the assessee bank because ultimately the officers are also the employees of the assessee. Moreover, this scheme is demanded by the present employees of the assessee bank which will be beneficial to them also after their retirement. The ld. CA referred to the different aspects of the scheme and he submitted that it is a bonafide scheme for which State Bank of India and other associate banks made their contribution.
As far as the applicability of Section 40A(9) is concerned, he submitted that the provisions' of the said Section are not applicable to the facts of the assessee's case. The ld. CA relied on the decision of the Jurisdictional High Court in the case of CIT v. Travancore Cochin Chemicals Ltd. (supra) and submitted that the Jurisdictional High Court has discussed the purpose of introduction of Section 40A(9) by giving reference to the Finance Bill, 1984 that it is introduced to avoid the tax evasion in the guise of donation to trust and the flow back of the same amount to the employer again. He further submitted that provisions of Section 40A(9) are to be interpreted in the context for which it is brought on the statute book. He further argued that as the contribution made by the assessee bank is a part of the settlement with the officers' union, it is out of business expediency. The ld. CA further argued that in the case of Rasi Cements Ltd. (supra), there was no agreement between the said assessee's management and the union of the executive officers and on that basis, it was held that it was a unilateral act on the part of the said assessee company to make the payment and hence though the ld. Sr. DR has relied on the decision of the Andhra Pradesh High Court in the case of Rasi Cements Ltd. (supra), the said decision is distinguishable on facts. The ld. CA supported the order of the CIT(A).
21. We have heard the rival submissions of the parties. We have also given thoughtful consideration to the facts pertaining to this issue as per record available before us. For a better understanding of the facts in respect of the contribution made by the assessee bank to the medical scheme, we have directed the assessee bank to file the relevant documents. The ld. CA of the Act has filed the copies of the following documents:---------------------------------------------------------------------Sr. No. Date Particulars---------------------------------------------------------------------1.
15-9-1997 Letter from State Bank of India to the assessee bank informing the minutes of the2.
23-6-1997 Copy of the minutes of the bipartite meeting held between State Bank of India3.
1-11-1999 Copy of Retired Employees Medical Scheme--------------------------------------------------------------------- The controversy before us is in respect of applicability of Section 40A(9) of the Act. As per the facts available before us, the Associate Bank Officers' Association (hereinafter referred to as "union") had raised some demands from the management of State Bank of India and its subsidiary banks and one of the demands was formulation of medical scheme for the retired officers. Negotiations were held between the management and the union at Simla on 23-6-1997 and it was agreed in principle on behalf of the assessee that medical scheme for the retired officers would be formulated as stated hereinabove. The ld. CA has filed a copy of the minutes of the bipartite agreement as well as the copy of the scheme in respect of the retired employees' medical benefit. On the perusal of the said scheme, it is seen that the fund is to be created with the contribution from the bank as well as pensioners and for administration of the funds, a managing committee was formed.
As per the scheme, each member to the scheme and his/her respective spouse are the beneficiaries. It is further provided that the spouse of the member will continue to receive the benefit even after the death of the member. Certain ailments and diseases were specified which would be covered under the scheme and the maximum limit of reimbursement was restricted to Rs. 30,000/-. As per the terms of bipartite agreement between the associate bank management and the union, the assessee paid Rs. 50 lakhs as its contribution towards the formulation of the fund under the scheme.
22. It is necessary to refer to the legislative history of Sub-section (9) of Section 40A of the Act. Sub-section (9) of Section 40A was inserted by the Finance Act, 1984 with effect from 1st April, 1980. The scope and effect of the new provision was explained by the Board in its Circular No. 387 dated 6-7-1984 as under: 16.1 Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction.
Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees, Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc.
16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums 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, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law.
16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, etc., the amendment has been made retrospectively from 1st April, 1980. However, in order to avoid hardship in cases where such trusts, funds, etc., had before, 1st March, 1984, bona fide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee out of the sums contributed by him, such expenditure will be allowed as deduction in computing the taxable profits of the assessee in respect of the relevant accounting year in which such expenditure has been so incurred, as if such expenditure had been incurred by the assessee. The effect of the under-lined words will be that the deduction under this provision would be subject to the other provisions of the Act, as for instance, Section 40A(5), which would operate to the same extent as they would have operated had such expenditure been incurred by the assessee directly: Deduction under this provision will be allowed only if no deduction has been allowed to the assessee in an earlier year in respect of the sum contributed by him to such trust, fund, etc.
16.4 The Finance Act has also provided that, notwithstanding anything contained in any other law for the time being in force or in the instrument creating the trust or fund, the assessee may, at his option, claim that the unexpended amount shall be returned to the assessee and, where such a claim is so made, such unexpended amount shall be returned by the trustee to the assessee as early as possible. The assessee may also claim that any asset being land, building, machinery, plant or furniture acquired or constructed by the. fund, trust, company, association of persons, body of individuals, society or any other-institution out of the sums paid by the assessee be transferred to him and where any such claim is so made such asset shall be transferred to the assessee as early as possible.
23. Sub-section (10) to Section 40A was also introduced at the same time for giving relief, it being in the transitional stage and that was to ensure the bonafide contribution made before the 1st March, 1984.
Sub-section (10) and Sub-section (11) had a limited application to contributions made between 1-4-1979 to 1-3-1984. Section 40A(9) reads as under: 40A(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, or as required by or under any other law for the time being in force.
On a bare reading of the said provision, it is very clear that any sum paid by the assessee as an employer towards setting up or formation of or as contribution to any fund., trust, company, association of persons, body of individuals, etc. except to the extent provided by or under Clauses (iv) and (v) of Section 36(1) or required by or under any other law for the time being in force is not an allowable expenditure.
24. Section 40A(9) had come for consideration before the Hon'ble High Court of Andhra Pradesh in the case of Rasi Cements Ltd. (supra). In the said case, the company which was engaged in the manufacturing of Portland cement had made the necessary contribution to Rasi Cements Employees Welfare Trust and Rasi Cements Executive Welfare Trust amounting to Rs. 150 lakhs. As per the facts of that case, the contribution to Rasi Cements Executive Welfare Trust was as part of the agreement between the management and the union and contribution to Rasi Cements Executive Welfare Trust was not pursuant to any agreement between the said company and its executives. On the facts of the said case, the Hon'ble High Court upheld the decision of the ITAT, Hyderabad; Bench in 45 ITD 233 and held that the Tribunal was correct in law in holding that the contributions made by the assessee company in M/s. Rasi Cements Executive Welfare Trust were not deductible in computing the income of the assessee.
25. In the case before us, formulation of the medical scheme for the retired employees was one of the demands by the Executive Officers' Association and bipartite settlement was reached between the management of the associate bank and the union at Simla, We find force in the argument of the ld. Counsel that the distinction made in the Industrial Disputes Act in respect of the employees as workmen and other than workmen has nothing to do with the smooth working of the assessee bank because ultimately the officers are also the employees of the assessee bank. The demand for the scheme by the present employees of the assessee bank is also beneficial to them after their retirement. It was a contractual obligation between the associate bank's management and the union and it was a bonafide formulation of the funds. In our opinion, whether it is an association or union of the executives or non-executives, both can hamper the smooth working of the assessee bank by resorting to strike or go-slow or other coercive measures if their demands are not settled and this aspect has to be taken into consideration for keeping a healthy relation with its employees as a good businessman.
26. It isinot in dispute that the Circular issued by the CBDT are contempotanea exposition and that can be used as an aid for interpreting the legislative intent for introducing a particular provision or enactment as held by the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO 131 ITR 597(SC). The CBDT has issued the Circular No. 387 dated 6-7-1984 which is reproduced hereinabove. The basic intention of the legislature for insertion of Sub-section (9) to Section 40A is for discouraging the practice of creation of camouflage trust funds, etc. ostensibly for the welfare of the employees and transferring huge sums to such trusts by way of contribution. Some of the trusts are to be created or set up as a discretionary trust with absolute discretion to the trustees, to utilize the trust properties in such manner without any proper scheme or safeguards. Moreover, the investment of the trust corpus was also left to the complete discretion of the trustees and it was seen that many a times, the contributions made by the employer used to flow back in the form of deposit or investment in the shares, etc. and to check said modus operandi on the part of the dishonest assessees using it as an effective device for avoiding the legitimate tax, Sub-section (9) was inserted. At the same time, to avoid hardships in the case where such trust, funds, etc. had been bonafide set up wholly and exclusively J for the welfare of the employees more particularly prior to 1-4-1984, Sub-section (10) was also inserted to Section 40A. In our opinion, the provisions of Section 40A(9) should not make any harm to the expenditure incurred bonafide and the said provision is meant to apply only in respect of the trust funds, society, etc. created by employer or coming under his control so that the employer is in a position to direct the deployment of the funds so contributed by him and not to all such contributions which are otherwise bonafide.
27. As stated hereinabove, the contribution by the assessee bank is not disputed by the AO that it is not bonafide. Moreover, in the case, of Rasi Cements Ltd. (supra), the contribution to Rasi Cements Executive Welfare Trust was not in pursuance of any agreement between that assessee and its executives and hence it was held that on the facts of the said case, the contribution was hit by Sub-section (9) of Section 40A. Moreover, another aspect to be considered here is that if we give careful consideration to the CBDT Circular cited above, the said provision would have application where the funds are under the total control of the assessee employer. In the present case, the fund is not controlled by the assessee bank. In our opinion, the decision relied on by the revenue of Hon'ble AP High Court in the case of Rasi Cements Ltd. (supra) is not helpful. In our further considered opinion, the bonafide contribution made by the assessee as an employer to the fund set up as a part of the settlement between the assessee bank and its executive employee is not hit by Sub-section (9) of Section 40A. We, therefore, uphold the order of the CIT(Appeals) on this issue.