2019 (10) TMI 1125 - AT - Income Tax

Employees contribution to PF ESI - disallowance as assessee failed to deposit the same as per the time limit provided in accordance with the respective Acts - HELD THAT - As t the amounts were paid before the due date of filing of the return under section 139(1) of the Act, therefore, the ld. CIT(A) by considering the submissions of the assessee and also by following the decision of the ITAT, Visakhapatnam Bench in the case of Eastern Power Distribution Company of A.P. Ltd. 2016 (9) TMI 1040 - ITAT VISAKHAPATNAM allowed the appeal of the assessee correctly. Disallowance of festival/entertainment expenses pooja expenses - As these expenditure are personal in nature and not related to business activity of the assessee, the entire amount has been disallowed u/sec. 37(1) - CIT(A) restricted the expenditure to 50% - HELD THAT - We find that the ld. CIT(A) reasonably restricted the disallowance to the extent of 50%, therefore no interference is called for.

Summary

Issues Involved:
1. Disallowance of employees' contribution to PF & ESI.
2. Disallowance of festival/entertainment and pooja expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Employees' Contribution to PF & ESI:

The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which directed the deletion of the disallowance of employees' contribution to PF and ESI made by the Assessing Officer (AO). The AO had disallowed the contributions amounting to ?49,74,380/- for PF and ?10,44,749/- for ESI, citing that they were deposited beyond the due dates stipulated under the respective Acts. The CIT(A), however, relied on the decision of the ITAT, Visakhapatnam Bench in the case of DCIT Vs. Eastern Power Distribution Company Ltd., which held that if the employees’ contribution was paid before the due date of filing the return of income, the same should be allowed.

The Tribunal reviewed the submissions and the relevant judicial precedents, including the case of Eastern Power Distribution Company of A.P. Ltd. The Tribunal noted that Section 43B of the Income Tax Act provides that any sum payable by the employer as a contribution to PF or other welfare funds is allowable if paid before the due date of filing the return of income under Section 139(1). The Tribunal emphasized that there is no distinction between employees' and employer's contributions under the PF Act, and both should be treated similarly for the purpose of deduction if paid before the due date of filing the return of income.

The Tribunal also considered various judicial precedents, including decisions from the Karnataka High Court, Hyderabad Tribunal, and Rajasthan High Court, which supported the view that contributions paid before the due date of filing the return should not be disallowed. Consequently, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal on this ground.

2. Disallowance of Festival/Entertainment and Pooja Expenses:

The AO disallowed ?3,10,257/- claimed by the assessee as festival/entertainment expenses and pooja expenses, deeming them personal in nature and not related to business activity. The CIT(A) partially allowed the assessee's claim by restricting the disallowance to 50% of the expenditure, recognizing that the expenses were incurred to encourage staff and maintain morale, which is a common practice in business operations.

The Tribunal reviewed the CIT(A)'s decision and the nature of the expenses. It noted that the assessee had around 3000 employees working at various sites, and such expenses were incurred to foster a sense of belonging and motivation among the staff. Given the inability to maintain detailed bills/vouchers for such expenses, the Tribunal found the CIT(A)'s approach of restricting the disallowance to 50% to be fair and reasonable. Therefore, the Tribunal upheld the CIT(A)'s order on this issue as well and dismissed the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the deduction of employees' contributions to PF and ESI paid before the due date of filing the return of income and to restrict the disallowance of festival/entertainment and pooja expenses to 50%. The judgment emphasized the principle that contributions paid before the due date of filing the return should be allowed and recognized the business necessity of certain expenses even if detailed documentation is not maintained.