2020 (9) TMI 756 - AT - Income Tax

Disallowance u/s. 36(1)(va) r.w.s.2(24)(x) - Delayed payment of employee contribution made by the assessee towards ESI - whether the sum was deposited within 21 days from the end of the month of payment of salary as contemplated under the provisions of Employees Provident Funds Miscellaneous Provisions Act, 1952 and Employees State Insurance Act, 1948? - HELD THAT - Payment under section 36(1)(va) would be allowed in respect to the payment of employee contribution towards ESI if such payment is made on/before due date as specified under the relevant Act (i.e. 15 days from the month for which salary is due). Thus the payment made by the assessee on account of employee contribution towards ESI after due date stands disallowed in view of the judgment in the case of M/s Checkmate Facility and Electronics Solutions Pvt. Ltd. 2018 (10) TMI 994 - GUJARAT HIGH COURT . We uphold the order of the lower authorities. Hence the ground of appeal of the assessee is dismissed. Disallowance u/s 36(1)(iii) - interest free loan to its subsidiaries - diversion of interest bearing fund for non-commercial activities - HELD THAT - We note that the assessee has treated the advances received from the customers as part of the capital which is not correct. It is because the advances received by the assessee from the customers represents the current liability which has to be utilized for the supply of the goods/materials to the concerned parties. As such amount represents the current working capital of the assessee which cannot be used for advancing the interests free advances as discussed above. We hold that the amount of advances received from the customers cannot form part of own fund of the assessee. Therefore, the amount of interest on the borrowed funds diverted to the non-interest bearing advances should be disallowed. Amount of capital including reserve available to the assessee, shall be presumed to have been utilized in advancing such interest free advance. In holding so we draw support from the judgment in case of CIT v. Max India Ltd. 2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT No disallowance of interest expense claimed by the assessee can be made on account of diversion of fund to the extent of own fund available with it as on 31-3-2015 - we direct the authorities below to work out the amount of disallowance towards interest expenses after considering/adjusting the own fund including reserve available to the assessee as on 31-3-2015. Hence, this ground of appeal of the assessee is party allowed.

Summary

Issues Involved:
1. Disallowance of ?2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Income-tax Act.
2. Disallowance of estimated interest expenses of ?25,98,864/- under section 36(1)(iii) of the Income-tax Act.
3. Alleged breach of principles of natural justice by lower authorities.
4. Levying of interest under section 234A/B/C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of ?2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Income-tax Act:

The assessee, a Private Limited Company engaged in manufacturing of metals, was found by the AO to have either made late payments or not paid the amount of ESI on behalf of employee contributions amounting to ?3,01,624/-. The AO noted that the assessee itself disallowed ?93,300/- in its books of account but agreed to disallow the remaining ?2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Act. The Ld. CIT(A) confirmed this disallowance.

The assessee argued that the payments, although late as per the relevant Act, were made before the due date of filing the return of income, invoking section 43B of the Act. However, Ld. CIT(A) disregarded this, stating that the payments were not made within the due date as per section 36(1)(va). The ITAT upheld the lower authorities' decision, referencing the Gujarat High Court's judgment in CIT v. Gujarat State Road Transport Corporation and M/s Checkmate Facility and Electronics Solutions Pvt. Ltd. v. DCIT, which held that payments made after the due date specified in the relevant Act should be disallowed.

2. Disallowance of estimated interest expenses of ?25,98,864/- under section 36(1)(iii) of the Income-tax Act:

The AO observed that the assessee had given interest-free loans to its subsidiaries amounting to ?7,16,59,975/- while claiming interest expenditure of ?2,10,55,848/- on borrowed funds. In the absence of evidence showing that the funds were provided for business purposes or from own funds, the AO made a proportionate disallowance of ?25,98,864/- under section 36(1)(iii).

The Ld. CIT(A) confirmed the AO's decision, noting that the assessee was paying substantial interest on borrowings while making interest-free advances, and the bank statements indicated that these advances were made from loan accounts.

The assessee argued that the advances were made out of commercial expediency to its subsidiary and that it had substantial interest-free funds exceeding the interest-free advances. Citing various judgments, the assessee contended that no disallowance was warranted. The ITAT noted that the advances from customers should not be considered as part of own funds and upheld the disallowance to the extent of borrowed funds used for non-commercial purposes. However, it directed the authorities to adjust the disallowance considering the own funds available.

3. Alleged breach of principles of natural justice by lower authorities:

The assessee claimed that the lower authorities passed orders without properly appreciating the facts and submissions, breaching the principles of natural justice. However, this issue was not separately addressed in detail in the judgment, implying that the ITAT did not find substantial merit in this claim.

4. Levying of interest under section 234A/B/C of the Income-tax Act:

The assessee contested the levy of interest under section 234A/B/C, but the judgment does not provide a detailed discussion on this issue, indicating that the ITAT did not find grounds to interfere with the levy of interest.

Conclusion:

The ITAT upheld the disallowance of ?2,08,324/- under section 36(1)(va) and partially upheld the disallowance of interest expenses under section 36(1)(iii), directing adjustments for own funds. The appeal was partly allowed, reflecting a balanced consideration of the issues raised by the assessee.