2020 (6) TMI 241 - AT - Income Tax

Addition of unsecured loan from its employees as unexplained cash credit - Unsecured loan accepted from employees is very nominal and that is treated as a security money kept with the employer and paid back when they left the service - HELD THAT - If the AO had any doubt regarding their identity, creditworthiness and genuineness of the transactions, he could have at least issued any notice either u/s.131 or u/s.133(6) of the Act to any of the employees but merely stating that the assessee could not produce the identity card of the 21 employees and they had no PAN and not filing their income tax returns, cannot be accepted - unsecured loan accepted from employees is very nominal and that is treated as a security money kept with the employer and paid back when they left the service - employees identity cards were produced before the AO and the nominal amount collected from each employees was treated as a security money, therefore, it cannot be treated as unsecured loan and there is no violation of Section 68 of the Act, 1961. Looking to the facts and circumstances of the case as well as considering the submission of the assessee, we direct the AO to delete the addition made on account of unexplained cash credit. Addition on account of leave Encashment and gratuity - amount paid to employees in lieu of leave i.e. payment made for working on weekly off days and paid holidays - Whether this is a wrong head being reflected in the Profit Loss Accounts as leave encashment instead of salary in lieu of leave? - HELD THAT - It is a small organization and some of the employees have left out the organisation after spending sometimes. Generally the employees engaged in the organisation have kept their money pending with the organisation and when they go to their villages, they collect all the money on account of their dues from the organisation at a time. We found substance on the arguments advanced by the ld.AR that it was not a leave encashment as per Section 43B of the Act as envisaged. In the small organization upto some extent they do not follow the strict rule for leave etc. In respect of gratuity it was the submission of ld. AR before us that it is in the nature of compensation paid to employees after leaving to the institution for some period and there is no complaint against the employees and these employees worked for goodwill of the assessee company, therefore, they are paid a lumpsum amount as a gratuity but due to mistake of the accountant the wrong nomenclature has been given in the books of accounts which has subsequently been paid to the employees. We allow both the grounds of appeal of the assessee and direct the AO to delete the additions made on account of leave encashment and gratuity to employees. Disallowance of employees contribution to provident fund - addition made on account of ESI contribution - assessee has not deposited the employees contribution within the due date as specified in that particular Act - HELD THAT - The due date is defined under the Explanation to section 36(1)(va) of the Act by stating that the due date referred under the relevant Act and certainly not the due date for filing the return. We also found that this very similar issue has also been decided by this bench of the Tribunal in the case of Milind Gupta, 2019 (10) TMI 128 - ITAT CUTTACK wherein the Tribunal has restored the issue to the file of AO to examine the contributions made with reference to the dates when they were actually made and grant relief to such of claim which qualified for such relief in terms of prevailing provisions of the Act - we restore this issue to the file of AO to decide the same as per the case laws quoted by both the sides. Thus, the ground of appeal of the assessee is allowed for statistical purposes. Non deduction of TDS - non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) - HELD THAT - As reling on OM SRI NILAMADHAB BUILDERS PVT. LTD. VERSUS ITO, WARD-1 (3) , BHUBANESWAR 2019 (11) TMI 1373 - ITAT CUTTACK we direct the AO to restrict the disallowance made u/s.40(a)(ia) of the Act on account of non-compliance of TDS to 30%. This ground of appeal of the assessee is partly allowed. Levy of penalty u/s.271(1)(c) - HELD THAT - Penalties have levied by the AO on the addition made on account of leave encashment paid to the employees and addition made u/s.68 of the Act, which we have deleted the same while deciding the quantum appeal of the assessee. When the quantum addition upon which the AO has imposed the penalty have been deleted by us, therefore, the levy of penalty on the above two additions has no legs to stand and accordingly, we delete the same. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Summary

Issues Involved:
1. Addition of unsecured loan as unexplained cash credit.
2. Addition on account of leave encashment.
3. Addition of gratuity amount.
4. Disallowance of employees' contribution to Provident Fund.
5. Disallowance of EPF amount.
6. Disallowance of ESI contribution.
7. Disallowance of audit fees and legal fees due to non-deduction of TDS.
8. Levy of penalty under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Addition of Unsecured Loan as Unexplained Cash Credit:
The assessee contested the addition of ?10,02,312/- as unexplained cash credit, asserting that these were security deposits from employees, each below ?20,000/-, and identity cards for 40 out of 61 employees were provided. The Tribunal found that the AO did not issue any notices under Sections 131 or 133(6) to verify the employees' identities and merely doubted the transactions. The Tribunal directed the AO to delete the addition, accepting the assessee's explanation that the amounts were security deposits and not unsecured loans, and there was no violation of Section 68 of the Act.

2. Addition on Account of Leave Encashment:
The AO added ?87,83,626/- towards leave encashment, treating it as a provision not allowable under Section 43B(f). The Tribunal accepted the assessee's explanation that the amount was for employees working on holidays and was not a provision as envisaged under Section 43B. The Tribunal directed the AO to delete this addition.

3. Addition of Gratuity Amount:
The AO added ?6,77,823/- towards gratuity, considering it not paid to an approved fund under Section 40A(7). The Tribunal accepted the assessee's contention that this amount was compensation paid to employees upon leaving, erroneously labeled as gratuity. The Tribunal directed the AO to delete the addition.

4. Disallowance of Employees' Contribution to Provident Fund:
The AO disallowed ?18,29,501/- for delayed payment of employees' contribution to PF, not within the due date as per the relevant Act. The Tribunal, referencing the Delhi High Court decision in Bharat Hotels Ltd., restored the issue to the AO for verification of the actual payment dates and compliance with Section 36(1)(va).

5. Disallowance of EPF Amount:
Similar to the PF disallowance, the AO disallowed ?4,81,965/- for delayed EPF payments. The Tribunal restored this issue to the AO for verification, following the same reasoning as for the PF disallowance.

6. Disallowance of ESI Contribution:
The AO disallowed ?1,97,901/- for delayed ESI contributions. The Tribunal restored this issue to the AO for verification, consistent with the approach taken for PF and EPF contributions.

7. Disallowance of Audit Fees and Legal Fees Due to Non-Deduction of TDS:
The AO disallowed ?1,03,500/- and ?70,000/- for non-deduction of TDS on audit and legal fees under Section 40(a)(ia). The Tribunal, referencing the decision in Nilamadhab Builders Pvt. Ltd., directed the AO to restrict the disallowance to 30% of the claimed expenditure, considering the amendment to Section 40(a)(ia) as retrospective.

8. Levy of Penalty under Section 271(1)(c):
The Tribunal found that the penalty was imposed on additions related to leave encashment and unexplained cash credit, which were deleted in the quantum appeal. Consequently, the Tribunal deleted the penalty, noting that the AO did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars.

Procedural Issue on Pronouncement Delay:
The Tribunal addressed the delay in pronouncement due to the COVID-19 lockdown, citing the extraordinary circumstances and referencing judicial decisions that allowed for such delays.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to verify certain issues, and fully allowed the appeal against the penalty, deleting the imposed penalties. The detailed analysis provided a comprehensive review of all issues, ensuring adherence to legal standards and principles.