2018 (5) TMI 1273 - HC - Income Tax

Contributions towards Provident Fund made beyond the due date specified in section 36(1)(va) - whether no disallowance u/s. 43B can be made if the same is made before due date of filing of return? - Held that - Since the question, whether such disallowance should be sustained or not depends on this crucial fact, we would place the matter before the Assessing Officer for giving effect to this order after ascertaining such fact. We make it clear that such disallowance would be made only if the same pertains to the employees contribution to the said funds and not otherwise. While doing so, the Assessing Officer will also examine whether the delayed payment was within the grace period, as discussed in Commissioner of Income Tax v. Amoli Organics (P) Ltd. 2013 (11) TMI 971 - GUJARAT HIGH COURT . This question thus stands disposed of. Deduction u/s 80IA - entitled to deduction on Weighted Average while allocating the advertisement expenses for the purpose of calculation of deduction - Held that - The news papers remained the same. The news, the articles, the advertisements, the quality of paper and the printing quality were the same. The cost of the news paper also remained the same. Merely because greater number of news papers printed at Nilgiri unit were diverted for circulation in Ahmedabad would not, in our opinion, make any material difference insofar as income allocation is concerned. When we find that the formula devised by the CIT(A) and approved by the Tribunal lacks scientific basis, the same must be discarded. The question is of its substitution. As noted, the assessee had not maintained separate accounts for its two units of Ahmedabad one being eligible for deduction under section 80-I, the other not so eligible. Both printing units printed and published news papers which were marked as Ahmedabad edition. Such news papers were circulated in and around the city of Ahmedabad including North Gujarat. The news papers, in all respects, were identical. The quality of paper used, the printing material and the cost of each such news paper sold in Ahmedabad as well as outside Ahmedabad were the same. Under the circumstances, the most fair and equitable means of dividing the income between the two units would be in the proportion of their internal publication and circulation of Ahmedabad edition. That is what the Assessing Officer has done. We restore the formula. In the result, the question is answered in favour of the Revenue subject to the observations made in the judgement

Summary

Issues Involved:
1. Entitlement to deduction on Weighted Average while allocating advertisement expenses for the purpose of calculation of deduction under section 80-I of the Income Tax Act, 1961.
2. Disallowance under section 43B of the Income Tax Act for contributions to Provident Fund made beyond the due date specified in section 36(1)(va).

Issue-wise Detailed Analysis:

1. Deduction on Weighted Average Allocation of Advertisement Expenses:
- Background: The respondent-assessee, a publication house, claimed deduction under section 80-I for its Nilgiri printing unit. The Assessing Officer (AO) scrutinized the allocation of advertisement income between the Nilgiri unit (eligible for deduction) and the Khanpur unit (non-eligible). The AO allocated 80% of the total advertisement income to the Ahmedabad edition and further divided this income between the Nilgiri and Khanpur units based on their respective publication volumes.
- CIT(A) Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] devised a new formula for allocating advertisement revenue, considering the weighted average of the percentage of newspapers printed and circulated from the Nilgiri unit versus the percentage of newspapers sold in Ahmedabad and printed at Nilgiri.
- Tribunal Decision: The Tribunal upheld the CIT(A)'s formula, recognizing the higher importance of city circulation in revenue generation.
- High Court Analysis: The High Court found that the CIT(A)'s formula lacked scientific basis and was based on unverified facts. The court emphasized that the news papers printed at both units were identical in content and quality. The court concluded that the most equitable method for income allocation would be based on the proportion of publication and circulation of the Ahmedabad edition between the two units, as originally done by the AO.
- Conclusion: The High Court restored the AO's method of allocation, rejecting the CIT(A)'s formula. The question was answered in favor of the Revenue, directing the AO to recompute the income accordingly.

2. Disallowance under Section 43B for Late Provident Fund Contributions:
- Background: The AO disallowed certain expenditures related to contributions towards Provident Fund and ESIC, made beyond the due date specified in section 36(1)(va).
- CIT(A) and Tribunal Decision: Both CIT(A) and the Tribunal deleted the disallowance, noting the delay was minimal and holding that disallowance was not justified if payments were made before the due date of filing the return.
- High Court Analysis: The High Court noted that the nature of the contributions (employer's or employees') was crucial for determining the disallowance. Employer's contributions, if paid late but before the return filing due date, would not attract disallowance. However, employees' contributions paid beyond the due date specified in section 36(1)(va) would disqualify the assessee from claiming deductions.
- Conclusion: The High Court remanded the matter to the AO to ascertain the nature of the contributions and determine the applicability of disallowance, emphasizing that disallowance would only apply to employees' contributions made beyond the due date.

Final Disposition:
All tax appeals were disposed of with directions to the AO to recompute the assessee's income from eligible and non-eligible units in accordance with the High Court's judgment. The High Court's decision favored the Revenue on both issues, subject to the specific observations and instructions provided in the judgment.