2017 (8) TMI 1427 - AT - Income Tax

Disallowance u/s. 36(1)(va) qua the employee s contribution to the employee welfare funds, being the provident fund and state insurance funds - Held that - Each of the contributions constituting the impugned sum in the present case is deposited beyond the due date defined in Explanation below s. 36(1)(va) and, thus, not deductible there-under. On the contrary, s. 36(1)(va) also providing the condition of payment, and one which is more stringent than that by s. 43B, a fact of which the Legislature could not but be aware of, is one more reason for regarding the employee s contribution as separate and distinct from the employee s contribution and, accordingly, not covered by s. 43B. We have already shown a difference in the nature of the two sums as well as the clear manner of the different descriptions adopted by law to identify them. There is no mandate in law for disregarding the same; rather, stands explained per different decisions, several of which stand cited supra. We decide accordingly. Disallowance u/s. 14A - Held that - The assessee having earned tax exempt dividend income at . 54,501/-. The AO observed an average investment of ₹ 32.27 lacs in shares and units, besides inflow and outflow of funds, so that expenditure on its management would have been incurred, i.e., besides a proportionate interest expenditure, incurred at a total ₹ 1.72 lacs. As no explanation for not effecting any suo motu disallowance u/s. 14A was forthcoming from the assessee, he, applying r. 8D, disallowed ₹ 26,112/-, including ₹ 9,976/- u/r. 8D(2)(ii) qua indirect interest expenditure, and the balance qua indirect, administrative expenditure. The same stands confirmed in first appeal on the same basis. No improvement in its case having been made before us, we confirm the same. We decide accordingly.

Summary

Issues Involved:
1. Disallowance under Section 36(1)(va) regarding employee's contribution to employee welfare funds.
2. Disallowance under Section 14A regarding tax-exempt dividend income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 36(1)(va) regarding employee's contribution to employee welfare funds:

The first issue pertains to the disallowance of the employee's contribution to provident and state insurance funds under Section 36(1)(va) of the Income Tax Act, 1961. The Revenue disallowed ?12,99,016/- and ?1,98,697/- based on the decisions in CIT v. Gujarat State Road Transport Corporation and CIT v. Merchem Ltd., asserting that the deduction is governed by Section 36(1)(va) and not by Section 43B. The assessee's appeal was dismissed by the Commissioner of Income Tax (Appeals), leading to the present second appeal.

The assessee relied on CIT v. Nexus Computers (P.) Ltd., while the Revenue relied on CIT v. Madras Radiators & Pressings Ltd. The Tribunal examined the provisions of Section 2(24)(x), Section 36(1)(va), and Section 43B. The Tribunal noted that the employee's contribution is deemed as the employer's income under Section 2(24)(x) and is deductible only if credited to the employee's account by the due date as per Section 36(1)(va). Section 43B, which provides for deductions on actual payment, does not apply to employee contributions but only to employer contributions.

The Tribunal emphasized that Section 43B is a disabling provision that regulates the deduction of sums specified therein by linking them to actual payment. The employee's contribution, distinct from the employer's contribution, is deductible only under Section 36(1)(va) and not Section 43B. The Tribunal cited various judicial precedents, including the decisions of the Kerala High Court in Merchem Ltd. and the Gujarat High Court in Gujarat State Road Transport Corporation, which clarified that Sections 36(1)(va) and 43B operate in different fields.

The Tribunal also referred to the decision in Madras Radiators & Pressings Ltd., which held that Section 36(1)(va) does not yield to Section 43B. The Tribunal concluded that the employee's contribution is not deductible if not credited by the due date specified in Section 36(1)(va), irrespective of the provisions of Section 43B.

2. Disallowance under Section 14A regarding tax-exempt dividend income:

The second issue involves the disallowance under Section 14A of the Act, related to the assessee's tax-exempt dividend income of ?54,501/-. The Assessing Officer (AO) observed that the assessee had an average investment of ?32.27 lakhs in shares and units, indicating that expenditure on its management would have been incurred. Consequently, the AO applied Rule 8D and disallowed ?26,112/-, including ?9,976/- for indirect interest expenditure and the balance for indirect administrative expenditure.

The Commissioner of Income Tax (Appeals) confirmed the disallowance on the same basis, and the assessee did not provide any improvement in its case before the Tribunal. Therefore, the Tribunal confirmed the disallowance under Section 14A.

Conclusion:

In conclusion, the Tribunal dismissed the assessee's appeal, upholding the disallowances under Section 36(1)(va) for employee's contribution to employee welfare funds and under Section 14A for tax-exempt dividend income. The order was pronounced on August 31, 2017, at Chennai.