2018 (8) TMI 851 - AT - Income Tax

Disallowance of deduction u/s 36(1)(va) - Provident Fund and Employees State Insurance (FP & ESI) contribution - failure to deposit before the due date of return - Held that - where assessee did not deposit employees contribution to employees account in relevant fund before due date prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B. - Additions confirmed - Decided against the assessee. Disallowance of alleged legal expense u/s 37(1) - nature of payment of compounding feed - Held that - the impugned expenditure incurred by the assessee is more in the nature of compensatory and necessitated by commercial expediency. In the normal incidences of business, certain damages are to be paid by an assessee and the expenses so incurred is an allowable deduction in the ordinary course of the business. The letter of Inspector of Legal Metrology, Nagpur dated 11.7.2012 states that the assessee to make payment of ₹ 20,000/- to avoid any future litigation. The assessee has settled the issue by paying the sum as compensation/damages for the interest of its business, which according to us, cannot be treated as incurred for infraction of any law and therefore to be disallowed. - Expenses allowed - Decided in favor of assessee.

Summary

Issues:
1. Disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance.
2. Disallowance of legal expenses paid.

Analysis:
1. The first issue pertains to the disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance. The Assessing Officer (AO) noticed that the assessee did not deposit the amount received from employees towards PF and ESIC on time. The AO proposed disallowance, and after the assessee's reply was not accepted, the disallowance was made and added to the income. The CIT(A) reduced the disallowance, but the Tribunal upheld the disallowance. The Tribunal clarified that the due date for depositing the sum deducted from employees' salary with the relevant fund is as per the relevant Act, not as per the Income Tax Act. Citing relevant case law, the Tribunal dismissed the assessee's claim for deduction under section 36(1)(va).

2. The second issue concerns the disallowance of legal expenses paid. The AO considered a payment of ?26,000 as a penalty for an offense and proposed disallowance. The assessee argued that the payment was towards compounding fees and not penal in nature. The AO and CIT(A) held the expenses as penal and disallowed them. The Tribunal, after examining the facts, concluded that the expenditure was compensatory and necessitated by commercial expediency. The Tribunal found the payment to be compensatory in nature, not penal, and allowed the deduction under section 37(1) of the Income Tax Act. The Tribunal disagreed with the AO's decision and deleted the disallowance, allowing the assessee's appeal partially.

In conclusion, the Tribunal upheld the disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance but allowed the deduction of legal expenses paid as they were compensatory in nature. The appeal of the assessee was partly allowed, and the decision was pronounced in the open court on 13th August 2018.