REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7771 OF 2009 (Arising out of S.L.P. (C) No.23851 of 2007)

Commissioner of Income Tax                 ...Appellant(s)

Versus

M/s. Alom Extrusions Limited     ...Respondent(s)

With Civil Appeal No.7770/2009 @ S.L.P. (C) No.17835/2008,  Civil  Appeal  No.7765/2009  @  S.L.P.  (C)  No.28521/2008,  Civil Appeal No.7769/2009 @ S.L.P. (C) No.6844/2008, Civil  Appeal  No.7767/2009  @  S.L.P.  (C)  No.9589/2008,  Civil  Appeal  No.7756/2009  @  S.L.P.  (C)  No.9590/2008,  Civil  Appeal  No.7766/2009  @  S.L.P.  (C)  No.9591/2008,  Civil  Appeal  No.7763/2009  @  S.L.P.  (C)  No.14363/2008,  Civil  Appeal  No.7764/2009  @  S.L.P.  (C)  No.17840/2008,  Civil  Appeal  No.7758/2009  @  S.L.P.  (C)  No.20012/2009,  Civil  Appeal  No.7762/2009  @  S.L.P.  (C)  No.1344/2009,  Civil  Appeal  No.7755/2009  @  S.L.P.  (C)  No.20581/2008,  Civil  Appeal  No.7757/2009  @  S.L.P.  (C)  No.18380/2009,  Civil  Appeal  No.7760/2009  @  S.L.P.  (C)  No.3759/2009,  Civil  Appeal  No.7754/2009  @  S.L.P.  (C)  No.21067/2009,  Civil  Appeal  No.7759/2009  @  S.L.P.  (C)  No.25174/2009,  Civil  Appeal No.7768/2009 @ S.L.P. (C) No.30587/2008 and Civil  Appeal No.7761/2009 @ S.L.P. (C) No.1476/2009.

J U D G M E N T

S.H. KAPADIA,J.

Civil  Appeal  No.7771/2009  @  S.L.P.  (C)  No.23851/2007,  Civil  Appeal  No.7770/2009  @  S.L.P.  (C)  No.17835/2008,  Civil  Appeal  No.7765/2009  @  S.L.P.  (C)  No.28521/2008,  Civil Appeal No.7769/2009 @ S.L.P. (C) No.6844/2008, Civil  Appeal  No.7767/2009  @  S.L.P.  (C)  No.9589/2008,  Civil  Appeal  No.7756/2009   @  S.L.P.  (C) No.9590/2008,  Civil

...2/-

- 2 -  

Appeal  No.7766/2009  @  S.L.P.  (C)  No.9591/2008,  Civil  Appeal  No.7763/2009  @  S.L.P.  (C)  No.14363/2008,  Civil  Appeal  No.7764/2009  @  S.L.P.  (C)  No.17840/2008,  Civil  Appeal  No.7758/2009  @  S.L.P.  (C)  No.20012/2009,  Civil  Appeal  No.7762/2009  @  S.L.P.  (C)  No.1344/2009,  Civil  Appeal  No.7760/2009  @  S.L.P.  (C)  No.3759/2009,  Civil  Appeal  No.7754/2009  @  S.L.P.  (C)  No.21067/2009,  Civil  Appeal  No.7759/2009  @  S.L.P.  (C)  No.25174/2009,  Civil  Appeal No.7768/2009 @ S.L.P. (C) No.30587/2008 and Civil  Appeal No.7761/2009 @ S.L.P. (C) No.1476/2009.

Delay condoned.

Leave granted.

A short question which arises for determination in  

this  batch  of  civil  appeals  is:  whether  omission  

[deletion] of the second proviso to Section 43-B of the  

Income Tax Act, 1961, by the Finance Act, 2003, operated  

with effect from 1st April, 2004, or whether it operated  

retrospectively with effect from 1st April, 1988?

Prior to Finance Act, 2003, the second proviso to  

Section 43-B of the Income Tax Act, 1961 [for short, “the  

Act”]  restricted  the  deduction  in  respect  of  any  sum  

payable by an employer by way of contribution to provident  

fund/superannuation fund or any other fund for the welfare  

of employees, unless it stood paid within the specified  

due date.  According to the second proviso, the payment  

made  by  the  employer  towards  contribution  to  provident  

fund or any other welfare fund was allowable as deduction,  

if paid before the date for filing the Return of income  

and necessary evidence of such payment was enclosed with  

the Return of income.  In other words, if contribution  

stood paid after the date for filing of the Return, it  

stood  disallowed.  This resulted in great hardship to the

...3/-

- 3 -  

employers.  They represented to the Government about their  

hardship and, consequently, pursuant to the Report of the  

Kelkar Committee, the Government introduced Finance Act,  

2003,  by  which  the  second  proviso  stood  deleted  with  

effect from 1st April, 2004, and certain changes were also  

made in the first proviso by which uniformity was brought  

about between payment of fees, taxes, cess, etc., on one  

hand and contribution made to Employees' Provident Fund,  

etc., on the other.

According to the Department, the omission of the  

second  proviso  giving  relief  to  the  assessee(s)  

[employer(s)]  operated  only  with  effect  from  1st April,  

2004, whereas, according to the assessee(s)-employer(s),  

the said Finance Act, 2003, to the extent indicated above,  

operated  with  effect  from  1st April,  1988  

[retrospectively].

The lead matter in this batch of civil appeals is  

Commissioner  of  Income  Tax vs.  M/s.  Alom  Extrusions  

Limited [civil appeal arising out of S.L.P. (C) No.23851  

of 2007].   

Prior to the amendment of Section 43-B of the Act,  

vide Finance Act, 2003, the two provisos to Section 43-B  

of the Act read as under:

“Provided  that  nothing  contained  in  this  section  shall  apply  in  relation  to  any  sum  referred  to  in  clause  (a)  or  clause  (c)  or  clause (d) or clause (e) or clause (f), which  is actually paid by the assessee on or before  the  due  date  applicable  in  his  case  for  furnishing  the  return  of  income  under  sub- section (1) of section 139 in respect of the  previous year in which the liability to pay  such  sum  was  incurred  as  aforesaid  and  the  evidence of such payment is furnished by the  assessee along with such return.

...4/-

- 4 -  

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 in cash or by issue of a  cheque or draft or by any other mode on or  before  the  due  date  as  defined  in  the  Explanation below  clause  (va)  of  sub-section  (1) of section 36, and where such payment has  been made otherwise than in cash, the sum has  been realized within fifteen days from the due  date.”

By Finance Act, 2003, the second proviso to Section  

43-B of the Act not only got deleted but the said Finance  

Act, 2003, also amended the first proviso with effect from  

Assessment Year 2004-2005.  We quote hereinbelow the first  

proviso to Section 43-B of the Act after its amendment by  

Finance Act, 2003, which reads as under:

“Provided  that  nothing  contained  in  this  section shall apply in relation to any sum  which is actually paid by the assessee on or  before the due date applicable in his case for  furnishing  the  return  of  income  under  sub- section (1) of section 139 in respect of the  previous year in which the liability to pay  such sum was incurred as aforesaid and the  evidence of such payment is furnished by the  assessee along with such return.”

To  answer  the  above  controversy,  we  need  to  

understand the Scheme of the Income Tax Act, 1961, as it  

existed prior to 1st April, 1984, and as it stood after 1st  

April, 1984.

“Income” has been defined under Section 2(24) of  

the  Act  to  include  profits  and  gains.   Under  Section  

2(24)(x), any sum  received by the  assessee from his  

employees

...5/-

- 5 -  

as contributions to provident fund/superannuation fund or  

any  fund  set  up  under  Employees'  State  Insurance  Act,  

1948,  or  any  other  fund  for  welfare  of  such  employees  

constituted  income.   This  is  the  reason  why  every  

assessee(s) [employer(s)] was entitled to deduction even  

prior  to  1st April,  1984,  on  Merchantile  System  of  

Accounting as a business expenditure by making provision  

in his Books of Accounts in that regard.  In other words,  

if an assessee(s)-employer(s) is maintaining his books on  

Accrual System of Accounting, even after collecting the  

contribution  from  his  employee(s)  and  even  without  

remitting  the  amount  to  the  Regional  Provident  Fund  

Commissioner [R.P.F.C.], the assessee(s) would be entitled  

to  deduction  as  business  expense  by  merely  making  a  

provision to that effect in his Books of Accounts.  The  

same  situation  arose  prior  to  1st April,  1984,  in  the  

context  of  assessees  collecting  sales  tax  and  other  

indirect  taxes  from  their  respective  customers  and  

claiming deduction only by making provision in their Books  

without actually remitting the amount to the exchequer.  

To  curb  this  practice,  Section  43-B  was  inserted  with  

effect  from  1st April,  1984,  by  which  the  Merchantile  

System  of  Accounting  with  regard  to  tax,  duty  and  

contribution  to  welfare  funds  stood  discontinued  and,  

under  Section  43-B,  it  became  mandatory  for  the  

assessee(s) to account for the afore-stated items not on  

Merchantile  basis  but  on  cash  basis.   This  situation  

continued between 1st April, 1984, and 1st April, 1988, when  

the  Parliament  amended  Section  43-B  and  inserted  first  

proviso to  Section 43-B.   By this first proviso, it was,

...6/-

- 6 -  

inter alia, laid down, in the context of any sum payable  

by the assessee(s) by way of tax, duty, cess or fee, that  

if an assessee(s) pays such tax, duty, cess or fee even  

after the closing of the accounting year but before the  

date  of  filing  of  the  Return  of  income  under  Section  

139(1) of the Act, the assessee(s) would be entitled to  

deduction under Section 43-B on actual payment basis and  

such  deduction  would  be  admissible  for  the  accounting  

year.   This  proviso,  however,  did  not  apply  to  the  

contribution made by the assessee(s) to the labour welfare  

funds.   To this effect, first proviso stood introduced  

with effect from 1st April, 1988.   

Vide Finance Act, 1988, the second proviso came to  

be inserted.  It reads as follows:

“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 below  clause (va) of sub-section (1) of section 36.”

At  this  stage,  we  also  quote  hereinbelow  the  

Explanation below  clause  (va)  of  sub-section  (1)  of  

Section 36:

“Explanation.--  For  the  purposes  of  this  clause, `due date' means the date by which  the assessee is required as an employer to  credit  an  employee's  contribution  to  the  employee's account in the relevant fund under  any Act, rule, order or notification issued  thereunder  or  under  any  standing  order,  award, contract of service or otherwise.”

...7/-

- 7 -  

However, the second proviso stood further amended  

vide Finance Act, 1989, with effect from 1st April, 1989,  

which reads as under:

“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 in cash or by issue of a cheque or draft  or by any other mode on or before the due  date  as  defined  in  the  Explanation below  clause (va) of sub-section (1) of section 36,  and  where  such  payment  has  been  made  otherwise  than  in  cash,  the  sum  has  been  realised  within  fifteen  days  from  the  due  date.”

On reading the above provisions, it becomes clear  

that  the  assessee(s)-employer(s)  would  be  entitled  to  

deduction only if the contribution stands credited on or  

before  the  due  date  given  in  the  Provident  Fund  Act.  

However,  the  second  proviso  once  again  created  further  

difficulties.  In many of the Companies, financial year  

ended  on  31st March,  which  did  not  coincide  with  the  

accounting period of R.P.F.C.  For example, in many cases,  

the time to make contribution to R.P.F.C. ended after due  

date for filing of Returns.  Therefore, the industry once  

again made representation to the Ministry of Finance and,  

taking  cognizance  of  this  difficulty,  the  Parliament  

inserted one more amendment vide Finance Act, 2003, which,  

as  stated  above,  came  into  force  with  effect  from  1st  

April, 2004.  In other words, after 1st April, 2004, two  

changes  were  made,  namely,   deletion   of  the  second  

proviso and further amendment in the first proviso, quoted  

above.   By the Finance Act,  2003,  the amendment made in

..8/-

- 8 -  

the  first  proviso  equated  in  terms  of  the  benefit  of  

deduction of tax, duty, cess and fee on the one hand with  

contributions to Employees' Provident Fund, superannuation  

fund and other welfare funds on the other.  However, the  

Finance  Act,  2003,  bringing  about  this  uniformity  came  

into force with effect from 1st April, 2004.  Therefore,  

the argument of the assessee(s) is that the Finance Act,  

2003, was curative in nature, it was not amendatory and,  

therefore, it applied retrospectively from 1st April, 1988,  

whereas the argument of the Department was that Finance  

Act, 2003, was amendatory and it applied prospectively,  

particularly when the Parliament had expressly made the  

Finance Act, 2003, applicable only with effect from 1st  

April,  2004.   It  was  also  argued  on  behalf  of  the  

Department that even between 1st April, 1988, and 1st April,  

2004, Parliament had maintained a clear dichotomy between  

payment of tax, duty, cess or fee on one hand and payment  

of  contributions  to  the  welfare  funds  on  the  other.  

According to the Department, that dichotomy continued upto  

1st April,  2004,  hence,  looking  to  this  aspect,  the  

Parliament consciously kept that dichotomy alive upto 1st  

April, 2004, by making Finance Act, 2003, come into force  

only with effect from 1st April, 2004.  Hence, according to  

the  Department,  Finance  Act,  2003  should  be  read  as  

amendatory and not as curative [retrospective] with effect  

from 1st April, 1988.

We find no merit in these civil appeals filed by  

the  Department  for  the  following  reasons:  firstly,  as  

stated  above,  Section  43-B  [main  section],  which  stood  

inserted  by Finance Act, 1983, with effect from 1st April,

...9/-

- 9 -  

1984, expressly commences with a non-obstante clause, the  

underlying  object  being  to  disallow  deductions  claimed  

merely by making a Book entry based on Merchantile System  

of  Accounting.   At  the  same  time,  Section  43-B  [main  

section]  made it  mandatory for  the Department  to grant  

deduction in computing the income under Section 28 in the  

year in which tax, duty, cess, etc., is actually paid.  

However,  Parliament  took  cognizance  of  the  fact  that  

accounting year of a company did not always tally with the  

due  dates  under  the  Provident  Fund  Act,  Municipal  

Corporation Act [octroi] and other Tax laws.  Therefore,  

by  way  of  first  proviso,  an  incentive/relaxation  was  

sought to be given in respect of tax, duty, cess or fee by  

explicitly stating that if such tax, duty, cess or fee is  

paid before the date of filing of the Return under the  

Income Tax Act [due date], the assessee(s) then would be  

entitled to deduction.  However, this relaxation/incentive  

was restricted only to tax, duty, cess and fee.  It did  

not apply to contributions to labour welfare funds.  The  

reason appears to be that the employer(s) should not sit  

on the collected contributions and deprive the workmen of  

the rightful benefits under Social Welfare legislations by  

delaying payment of contributions to the welfare funds.  

However, as stated above, the second proviso resulted in  

implementation  problems,  which  have  been  mentioned  

hereinabove,  and  which  resulted  in  the  enactment  of  

Finance  Act,  2003,  deleting  the  second  proviso  and  

bringing about uniformity in the first proviso by equating  

tax,  duty,  cess  and  fee  with  contributions  to  welfare  

funds.  Once this uniformity is brought about in the first

...10/-

- 10 -  

proviso, then, in our view, the Finance Act, 2003, which  

is made applicable by the Parliament only with effect from  

1st April, 2004, would become curative in nature, hence, it  

would  apply  retrospectively  with  effect  from  1st April,  

1988.  Secondly, it may be noted that, in the case of  

Allied Motors (P) Limited vs. Commissioner of Income Tax,  

reported in [1997] 224 I.T.R.677, the Scheme of Section  

43-B of the Act came to be examined.  In that case, the  

question which arose for determination was, whether sales  

tax collected by the assessee and paid after the end of  

the  relevant previous  year but  within the  time allowed  

under  the  relevant  Sales  Tax  law  should  be  disallowed  

under Section 43-B of the Act while computing the business  

income  of  the  previous  year?   That  was  a  case  which  

related  to  Assessment  Year  1984-1985.   The  relevant  

accounting period ended on June 30, 1983.  The Income Tax  

Officer disallowed the deduction claimed by the assessee  

which  was  on  account  of  sales  tax  collected  by  the  

assessee for the last quarter of the relevant accounting  

year.   The  deduction was  disallowed under  Section 43-B  

which, as stated above, was inserted with effect from 1st  

April, 1984.  It is also relevant to note that the first  

proviso which came into force with effect from 1st April,  

1988 was not on the statute book when the assessments were  

made  in the  case of  Allied  Motors (P)  Limited (supra).  

However, the assessee contended that even though the first  

proviso came to be inserted with effect from 1st April,  

1988,  it  was  entitled  to  the  benefit  of  that  proviso  

because it  operated retrospectively from 1st April, 1984,  

when  Section 43-B  stood  inserted.    This  is  how  the

...11/-

- 11 -  

question  of  retrospectivity  arose  in  Allied  Motors  (P)  

Limited (supra).  This Court, in Allied Motors (P) Limited  

(supra) held that when a proviso is inserted to remedy  

unintended consequences and to make the section workable,  

a  proviso  which  supplies  an  obvious  omission  in  the  

section and which proviso is required to be read into the  

section to give the section a reasonable interpretation,  

it could be read retrospective in operation, particularly  

to give effect to the section as a whole.  Accordingly,  

this  Court, in  Allied Motors  (P) Limited (supra), held  

that  the  first  proviso  was  curative  in  nature,  hence,  

retrospective  in  operation  with  effect  from  1st April,  

1988.  It is important to note once again that, by Finance  

Act, 2003, not only the second proviso is deleted but even  

the  first  proviso  is  sought  to  be  amended  by  bringing  

about an uniformity in tax, duty, cess and fee on the one  

hand  vis-a-vis  contributions  to  welfare  funds  of  

employee(s) on the other.  This is one more reason why we  

hold  that  the  Finance  Act,  2003,  is  retrospective  in  

operation.  Moreover, the judgement in  Allied Motors (P)  

Limited (supra) is delivered by a Bench of three learned  

Judges, which is binding on us.  Accordingly, we hold that  

Finance  Act,  2003,  will  operate  retrospectively  with  

effect from 1st April, 1988 [when the first proviso stood  

inserted].  Lastly, we may point out the hardship and the  

invidious  discrimination  which  would  be  caused  to  the  

assessee(s) if the contention of the Department is to be  

accepted  that  Finance  Act,  2003,  to  the  above  extent,  

operated prospectively.   Take an example – in the present  

case,  the  respondents  have  deposited  the  contributions  

with the R.P.F.C. after 31st March [end of accounting year]

...12/-

- 12 -  

but before filing of the Returns under the Income Tax Act  

and the date of payment falls after the due date under the  

Employees'  Provident  Fund  Act,  they  will  be  denied  

deduction for all times.  In view of the  second proviso,  

which stood on the statute book at the relevant time, each  

of  such assessee(s)  would not  be entitled  to deduction  

under Section 43-B of the Act for all times.  They would  

lose the benefit of deduction even in the year of account  

in which they pay the contributions to the welfare funds,  

whereas a defaulter, who fails to pay the contribution to  

the welfare fund right upto 1st April, 2004, and who pays  

the  contribution  after  1st April,  2004,  would  get  the  

benefit of deduction under Section 43-B of the Act.  In  

our  view,  therefore,  Finance  Act,  2003,  to  the  extent  

indicated  above,  should  be  read  as  retrospective.   It  

would, therefore, operate from 1st April, 1988, when the  

first  proviso  was  introduced.   It  is  true  that  the  

Parliament has explicitly stated that Finance Act, 2003,  

will operate with effect from 1st April, 2004.  However,  

the  matter  before  us  involves  the  principle  of  

construction  to be  placed on  the provisions  of Finance  

Act, 2003.

Before  concluding,  we  extract  hereinbelow  the  

relevant  observations  of  this  Court  in  the  case  of  

Commissioner  of  Income  Tax,  Bangalore vs.  J.H.  Gotla,  

reported in [1985] 156 I.T.R. 323, which reads as under:

“We should find out the intention from the  language  used  by  the  Legislature  and  if  strict  literal  construction  leads  to  an  absurd result, i.e., a result not intended to  be subserved by the object of the legislation  found in the manner indicated before, then if

...13/-

- 13 -  

another construction is possible apart from  strict  literal  construction,  then  that  construction  should  be  preferred  to  the  strict literal construction.  Though equity  and  taxation  are  often  strangers,  attempts  should  be  made  that  these  do  not  remain  always so and if a construction results in  equity rather than in injustice, then such  construction  should  be  preferred  to  the  literal construction.”

For the afore-stated reasons, we hold that Finance  

Act, 2003, to the extent indicated above, is curative in  

nature, hence, it is retrospective and it would operate  

with effect  from 1st April, 1988  [when the first proviso  

came to be inserted].  For the above reasons, we find no  

merit  in  this  batch  of  civil  appeals  filed  by  the  

Department which are hereby dismissed with no order as to  

costs.

Civil Appeal No.7755/2009 @ S.L.P. (C) No.20581/2008 and  Civil Appeal No.7757/2009 @ S.L.P. (C) No.18380/2009:

Leave granted.

In  view  of  our  judgement  in  the  case  of  

Commissioner  of  Income  Tax vs.  M/s.  Alom  Extrusions  

Limited [civil appeal arising out of S.L.P. (C) No.23851  

of 2007], we set aside the impugned judgement and order of  

the Bombay High Court and allow these civil appeals filed  

by the assessees with no order as to costs.

......................J.            [S.H. KAPADIA]

......................J.            [H.L. DATTU]

New Delhi, November 25, 2009.