Decided on February 20,1992



B.M. Kothari, Accountant Member - (1.) THE assessee-firm derives income from manufacture and sale of castings for electric motors, pumps, hot plates etc. A return of income declaring an income of Rs. 15,46,290 was submitted on 27th July, 1984.
(2.) The only point of dispute in this appeal relates to disallowance of interests paid to Arvind Metal Industries Ltd. Welfare Trust of Rs. 26,386 and Arvind Metal Industries Staff Welfare Trust of Rs. 27,377, totalling Rs. 53,763. The brief facts relating to aforesaid disallowance are that the appellant had settled an amount of Rs. 1000 on 20th March, 1983 for the benefit of its labourers and staff members. During the accounting year ended on 31st March, 1983 i.e., relating to assessment year, 1983-84, the appellant had contributed a sum of Rs. 2 lakhs each to both the aforesaid trusts on 20lh March, 1983. The amount was handed over to both the trusts and the trustees of these two trusts decided to earn interest on the said amount of Rs. 2 lakhs. Both the trusts accordingly deposited the said amount of Rs. 2 lakhs with the appellant on interest. The appellant in turn paid interest to both the trusts which was claimed as deduction in the Profit & Loss account. 2.1 Section 40A(9) was inserted by the Finance Act, 1984 with retrospective effect from 1-4-1980 which provided that 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 etc. for the purpose of labour welfare or staff welfare etc. unless such payment is covered by Section 36( l)(iv) or (v) or is otherwise required to be made by any law. Sub-section (10) grants deduction to the employer in respect of any revenue expenditure bona fide incurred before the first day of March, 1984 by such fund or trust for the welfare of the employees. Sub-section (11) further entitles the assessee (employer) to recover from such fund or trust any amount which was paid to such welfare fund or trust meant for employees before 1st March, 1984, which remained unspent with those fund or trust created for the welfare of the employees. The assessing authority came to the conclusion that in view of the aforesaid retrospective amendment the contributions made by the assessee flowed back to the assessee in the form of deposits. The entries have been reversed in the subsequent years and thus the amount of original contribution have come back to the assessee. The claim for grant of deduction in respect of interest aggregating to Rs. 53,665 to both these trusts cannot, therefore, be allowed. The said disallowance was confirmed by the CIT (A) on the ground that the said amounts had been returned to the appellant and, therefore, the income arising out of the said amounts also belongs to the assessee. The learned counsel for the assessee submitted that the appellant had contributed a sum of Rs. 4 lakhs to the aforesaid two trusts in the preceding year. The amount was handed over to those trusts. The said trusts made a deposit of Rs. 2 lakhs each with the assessee on which interest was not only credited in their respective accounts periodically but was also paid to those trusts and tax was also deducted at source thereon. The said income has been charged to tax in the respective assessments of those two trusts. The mere fact that by virtue of a retrospective amendment made by the Finance Act, 1984, the assessee became entitled to recover the unspent amount from those trusts would not lead to the conclusion that during the intervening period the funds did not in fact belong to those trusts. What the assessee recovered back was only the unspent amount out of the principal amount of donation/contribution made in their favour and not the amount of interest credited and paid to them for the year under consideration. There is no provision in the law which regards the income derived by these two trusts as income of the assessee and there is also no provision which entitles the assessee to recover back the amount of interest allowed to the said trusts for the intervening period. He, therefore, urged that the deduction in respect of interest claimed by the assessee should be allowed.
(3.) THE learned Sr. D.R. contended that the object of introducing the provisions of Section 40A(9) & (11) with retrospective effect has been explained in the CBDT Circular No. 387, dated 6th July, 1984 published in [1985] 152ITR 1 (St.). At page 10 the object and import of introducing these provisions with retrospective effect has been explained which clearly proves that such a retrospective amendment was made with a view to discourage creation of such trust's funds and societies with a view to claim deduction in respect of any such sums paid by the employer by way of contribution or donation to such funds and trusts except as permissible within the limits laid down under the other relevant provisions of the Income-tax Act. With a view to avoid litigation such amendment was specifically made retrospective w.e.f. 1st April, 1980. THE effect of such retrospective amendment in substance is that the assessee would be regarded as the owner of the amount of such contribution/donation made in the previous year commencing from assessment year 1980-81. Since the assessee itself is regarded as owner of the said funds with retrospective effect, the deduction in respect of interest thereon has rightly been denied by the departmental authorities. He thus supported the order of the CIT (A).;

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