2023 (8) TMI 1583 - AT - Income Tax

Disallowing Employee's contribution to PF/ESIS - HELD THAT - When there is no delay in payment of EPF/ESIC which is in violation of due date given in respective Acts, then no disallowance can be made u/s 36(1)(va). It has been further brought to our notice that on similar fact in case of group company of the assessee, M/s Modern Facility Management Pvt. Ltd where the coordinate bench of the ITAT vide order dated 05/07/2023 has set aside the matter to AO to verify the additional evidence and delete the addition since there is no delay as per revised certificate of the Tax auditor. We also find from perusal of the records that in the case of assessee, salary due and payable is only in the subsequent month, when the client certifies the attendance of the employee so deputed at his place and as per the agreement salary is payable to such employee within 10 days in next month. Thus, salary payable and salary paid falls due in subsequent month and therefore, the due date as per the PF and ESCI Act also falls in subsequent to the month when the salary is due. This is evident from the copy of ledger account of the salary as noted above and it is seen that there is no delay in most of the payments which is evident from documents appearing at pages 197-207. Later on, the tax auditor have also clarified that there is no delay. Accordingly, we set aside this issue to the file of the ld. AO to examine the details and the revised certificate of the auditor and if it is found that there is no delay, then no disallowance should be made as in the case of the assessee the delay is to be seen when the salary payable and salary paid falls due in subsequent month and the due date has to be reckoned from the subsequent month. The AO is directed to verify and grant consequential relief. Issue of gratuity payment tax auditor due to oversight in AY 2018-19 reported the said gratuity provision in form 3CD as disallowable u/s 43B of the Act. Based on this report the said amount was added to the total income in the intimation issued u/s 143(1) of the Act. Later when the said fact was brought to the attention of tax auditor, he realised his mistake and issued a certificate that since the said provision is based on actuary valuation hence the same is allowable u/s 40A(7)(b) of the Act. Section 40A(7)(b) states that a provision made by the assessee by way of contribution towards an approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the previous year, however, would not be hit by section 40A(7)(a). The provision made by the assessee as per valuation of actuary is amount payable to the employee as per AS-15 of ICAI. Hence considering these facts, the Tax auditor issued certificate clarifying the above position of law. Copy of certificate of tax auditor. Since the adjustment u/s 143(1) of the Act was carried out based on the report of the Tax Auditor and since the tax auditor has clarified by issuing a certificate withdrawing his comment in the earlier report, hence it has been argued before us that the said disallowance is no longer sustainable. Thus, looking to the fact that now the tax auditor have issued the certificate clarifying the said position of law and the adjustment have been made only based on earlier report of the tax auditor therefore, we direct the ld. AO to consider the revised certificate of the tax audit report and we admit all the additional evidences filed before us and direct the ld. AO to verify and grant consequential relief and to work out disallowance as per revise certificate of tax auditor.

Summary

Issues Involved:

1. Disallowance of Employee's Contribution to PF/ESIS for AY 2018-19 and 2019-20.
2. Disallowance of Provision for Gratuity for AY 2018-19.

Issue-wise Detailed Analysis:

1. Disallowance of Employee's Contribution to PF/ESIS for AY 2018-19 and 2019-20:

The primary issue in both assessment years was the disallowance of the Employee's contribution to Provident Fund (PF) and Employee State Insurance Scheme (ESIS) under Section 36(1)(va) of the Income Tax Act. The Centralized Processing Centre (CPC) disallowed the sums of Rs. 18,33,82,186/- for AY 2018-19 and Rs. 20,40,79,237/- for AY 2019-20 on the grounds that these contributions were not paid within the due date as prescribed under the Act. The assessee, a security services company, argued that there was no delay in the payment of employee contributions as per the provisions of the Provident Fund scheme. The company contended that the salary is due and payable only in the subsequent month when the client certifies the attendance of the employee, and thus, the due date for PF/ESIS contributions falls in the subsequent month. The Tax Auditor initially reported the payments as delayed, but later issued a revised certificate clarifying that there was no delay. The Tribunal considered this revised certificate and directed the Assessing Officer (AO) to verify the details and grant relief if there was no delay as per the revised certificate. The Tribunal noted that similar facts in a group company case led to a set-aside order for verification, and thus, adopted a similar approach for the current case.

2. Disallowance of Provision for Gratuity for AY 2018-19:

The second issue was the disallowance of Rs. 11,84,46,784/- towards the provision for gratuity. The assessee had made a provision for gratuity based on actuarial valuation as per Accounting Standard-15 issued by the Institute of Chartered Accountants of India (ICAI). The Tax Auditor erroneously reported this provision as disallowable under Section 43B in the tax audit report, leading to its disallowance in the intimation issued under Section 143(1). However, the Tax Auditor later issued a certificate correcting this mistake, stating that the provision was allowable under Section 40A(7)(b) as it was based on actuarial valuation. The Tribunal directed the AO to consider the revised certificate and verify the additional evidence submitted. The Tribunal also noted that for AY 2019-20, the provision was correctly reported, and no disallowance was made, indicating consistency in the assessee's approach. The Tribunal instructed the AO to grant consequential relief based on the revised certificate and additional evidence.

In conclusion, the Tribunal partly allowed the appeals for statistical purposes, directing the AO to verify the revised certificates and additional evidence to determine the correct tax treatment for the disallowed amounts.