2010 (3) TMI 993 - AT - Income Tax

Delayed payment of employees contribution u/s 43B - assessment made u/s 143(3) - assessee is a company manufacturing cotton yarn and knitted fabrics - AO took the view that the payments made after the due date but before the grace period and the payments made after the grace period but before the due date for filing the return cannot be allowed as a deduction as invoked section 2(24)(x) and added the payments aggregating income of the assessee - CIT(A) sustained the disallowance. HELD THAT - We respectfully following the decision in the case of CIT vs. Vinay Cement Ltd. 2007 (3) TMI 346 - SC ORDER that the employees contribution paid before the due date for filing the return of income is allowable as a deduction. We delete the disallowance was paid after the due date but before the grace period and was paid after the grace period but before the due date for filing the return of income. The first ground is accordingly allowed. Disallowance of the expenses - commission and brokerage - HELD THAT - The assessee is following the mercantile system of accounting. It is also true that the sales as well as the commission and brokerage related to the earlier years. The assessee s claim is founded on the consistent method of accounting followed by it under which the commission is paid to the brokers only in the year in which the corresponding sale proceeds are realized by the assessee, even though the debit notes for the commission payable and the invoices for the sales were all raised in the earlier years. A consistent method has been followed by the assessee and the same has not been disturbed by the AO in all the earlier years. Receipt of the sale proceeds as well as the payment of the brokerage and commission are in the same year. It needs to be clarified that the sales in respect of which the commission has been paid, were taken credit in the Profit and Loss Account in the years in which the invoices were raised, i.e. in the earlier years. It seems to us that the liability to pay commission or brokerage, would arise, having regard to the practice adopted by the assessee and its brokers and agents, only in the year in which the sale proceeds are realized and even on this basis it may be stated that the liability arose only in the year under consideration. This is one way in which the matter can be looked at. In addition, this method has been consistently followed and accepted in all the earlier years. We accordingly delete the disallowance and direct the AO to allow the same as a deduction. Assessee appeal allowed.

Summary

Issues:
1. Disallowance of employees' contribution to Provident Fund.
2. Disallowance of expenses on commission and brokerage.

Issue 1: Disallowance of employees' contribution to Provident Fund:
The appeal concerns the disallowance of Rs.14,02,512 out of the claimed deduction of Rs.15,55,727 for employees' contribution to Provident Fund. The Assessing Officer disallowed the amounts made after the due date but within the grace period and after the grace period but before the due date for filing the return, invoking section 2(24)(x) of the Income Tax Act. The CIT(A) held that employees' contribution is governed by section 36(1)(va) read with section 2(24)(x), not section 43B, and disallowed the deduction. The Tribunal, following previous Mumbai Benches' orders, allowed the deduction, stating that employees' contribution paid before the due date for filing the return is allowable under section 43B, deleting the disallowance.

Issue 2: Disallowance of expenses on commission and brokerage:
The second ground challenges the disallowance of Rs.24,34,266 on commission and brokerage expenses. The Assessing Officer disallowed the amount as prior period expenses, as the commission related to earlier periods. The CIT(A) upheld the disallowance, stating that under the mercantile system of accounting, provision for commission and brokerage should have been made in earlier years when sales occurred. The Tribunal noted the consistent method followed by the assessee, where commission is paid when sale proceeds are realized, and allowed the deduction. It emphasized that the liability to pay commission arises when sale proceeds are realized, following the company's policy, and deleted the disallowance, directing the Assessing Officer to allow it as a deduction.

In conclusion, the Tribunal allowed the appeal of the assessee on both issues, directing the Assessing Officer to allow the deductions.