2018 (4) TMI 1918 - AT - Income Tax

Disallowance of ESIC u/s 36(1)(va) r.w.s. 2(24)(x) - late payment of employee s contribution towards ESIC - HELD THAT - It is undisputed fact that the assessee has made late payment of employee s contribution towards ESIC on 26th July, 2012. whereas the due date of payment of ESIC as per the relevant act for the purpose of ESIC is 21st April, 2012. The contention of the assessee that the ESI contribution was in the nature of labour expenses for the company since it was contributed by the assessee without any recovery from the labourers has no merit as the assessee has deposited the ESI out of the labour expenses which were payable to the employees. Therefore it is established from these facts that labour expenses which were to be paid to the labours have been deposited as contribution on the behalf of labours in the ESI. In view of the above facts and the detailed findings of the Ld.CIT(A) it is clear that the provisions of section 2(24) (x) r.w.s. 36(1)(va) are attracted to the case of the assessee. See GUJARAT STATE ROAD TRANSPORT CORPORATION 2014 (1) TMI 502 - GUJARAT HIGH COURT - Decided against assessee. Disallowance u/s. 36(1)(iii) - AO not accepted the explanation of the assessee stating that the assessee has not given any specific reason and supporting evidences to substantiate that why the interest was not capitalized towards CWIP and no borrowed funds was utilized towards purchase of various items forming part of the CWIP as on 31st March, 2012 and computed interest @ 12% on the various items forming part of the CWIP and capitalized it u/s. 36(1)(iii) - HELD THAT - As from the proviso to section 36(1)(iii) that any interest paid in respect of capital borrowed for acquisition of an asset, even for the extension of the existing business has to be capitalized till the date on which such asset was first put to use and the same cannot be allowed as deduction. However, for want of information and supporting evidences, the assessing officer capitalized the interest @12% on the various items forming part of CWIP. After considering the above facts and judicial findings, we consider it will be appropriate to restore this issue to the file of the assessing officer for deciding afresh after taking into consideration the exact date of additions to various items forming part of CWIP and after excluding the period when the capital asset actually put to use in the lights of the directions laid down in the above judicial pronouncements. Therefore, as directed, we restore this issue to the file of the assessing officer for deciding afresh after affording adequate opportunities to the assessee. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of ESIC under section 36(1)(va) r.w.s. 2(24)(x) of the Act.
2. Disallowance of interest under section 36(1)(iii) towards Capital Work in Progress (CWIP).

Issue-wise Detailed Analysis:

1. Disallowance of ESIC under section 36(1)(va) r.w.s. 2(24)(x) of the Act:

The assessee appealed against the disallowance of ?1,48,520 towards ESIC, contending that the ESIC contribution was a labor expense for the company, as it was contributed by the assessee without recovery from laborers. The Assessing Officer (AO) disallowed the amount due to late payment, relying on the judgment of Gujarat State Road Transport Corporation (2014) 41 taxman.com 100 (Guj), stating that the payment was made on 26th July 2012, whereas the due date was 21st April 2012.

The CIT(A) upheld the AO’s decision, noting that the ESIC contributions were deposited after the due date specified under the ESIC Act. The appellant's claim that the contributions were made from its own funds and were not recoverable from casual laborers was found unverifiable. The CIT(A) emphasized that the provisions of section 2(24)(x) r.w.s. 36(1)(va) were applicable, as the labor expenses payable to employees were deposited as contributions on their behalf. The Tribunal agreed with the CIT(A) and dismissed the appeal on this ground, affirming that the provisions of section 2(24)(x) r.w.s. 36(1)(va) were rightly applied.

2. Disallowance of interest under section 36(1)(iii) towards Capital Work in Progress (CWIP):

The second issue involved the disallowance of ?10,75,906 under section 36(1)(iii) on account of interest related to CWIP. The AO observed that the closing CWIP was ?1,79,31,767 and noted that the assessee had not capitalized any interest. The AO computed interest at 12% on the CWIP, stating that the assessee failed to provide specific reasons and supporting evidence for not capitalizing the interest.

The CIT(A) upheld the AO’s decision, highlighting that the payments towards CWIP were made from an overdraft balance in the cash credit account, contradicting the assessee's claim of using own funds. The CIT(A) also noted that the provisions of section 36(1)(iii) apply to the extension of existing business, requiring capitalization of interest until the asset is put to use.

The Tribunal reviewed the case, including various judicial pronouncements, and concluded that the interest paid for capital borrowed for asset acquisition must be capitalized until the asset is first put to use. However, due to a lack of specific information and supporting evidence, the Tribunal restored the issue to the AO for a fresh decision. The AO was directed to consider the exact dates of additions to CWIP items and exclude periods when the capital asset was actually put to use, following judicial guidelines.

Conclusion:

The Tribunal dismissed the appeal regarding the ESIC disallowance, affirming the CIT(A)'s decision. For the interest disallowance under section 36(1)(iii), the Tribunal restored the issue to the AO for a fresh decision, directing consideration of specific dates and judicial guidelines. The appeal was partly allowed.