2006 (1) TMI 171 - AT - Income Tax

Disallowance of Prior-period expenses - Non-furnishing/producing of the bills - legal expenses - whether the learned CIT(A) was justified in confirming the disallowance of legal expenses by invoking s. 40(a)(i) paid to an international UK based firm to appear before the International Court of law on account of dispute? - employee s contribution on account of delayed payments - Applicability of sec 43B - TDS u/s 195. HELD THAT - The assessee placed its reliance on the decision of the Tribunal in the case of P.K. Overseas 2004 (6) TMI 249 - ITAT CHANDIGARH-A wherein the expenditure pertaining to earlier year was allowed as deduction in the subsequent year. A perusal of the aforesaid decision brings out the fact that in that case there was dispute regarding the amount of brokerage which was settled in the year in which such expenses were booked although the same pertained to the sales made in the earlier years and the reason for this was that the claim of brokerage was finally settled only in that year. However in the present case there is no dispute regarding the assessee s liability towards all these expenses. Thus the case law relied upon by the assessee hardly extends any help to the cause of the assessee. Thus as far as the various expenses are concerned the assessee s case is not justified and is not in accordance with law. Accordingly the findings of the Revenue authorities with respect to disallowance of expenditures are upheld. Disallowance of purchase of goods - In respect of the category of goods mentioned at sl. No. (a) above goods have been admittedly received in April 2000 and recorded in the books of account therefore all consequential results should follow. To put it differently either these goods have been consumed or sold or form part of closing stock of the year under consideration. Therefore the same is held as allowable as deductible in the year under consideration. With regard to the goods mentioned at sl. Nos. (b) and (c) the assessee has contended that there were quality problems and therefore goods were not accepted earlier. The assessee accounted for the goods when the correct replacements were made by the supplier. Technically speaking if the goods are not accepted due to quality problems transaction of purchase is as such not complete as per the provisions of the Sale of Goods Act and the assessee cannot be denied of its due merely because the invoices pertained to the earlier accounting periods. Having stated so however we find that the assessee has not placed proper evidences on record to prove the fact of replacements in lieu of defective goods. Therefore we deem it fit and proper to restore this issue to the file of the AO for verification of the supporting evidences to be submitted by the assessee in this regard and after affording adequate opportunity of hearing to the assessee allow deduction of purchases in respect of these goods. Similarly in case of goods at sl. No. (d) above the assessee has not placed material on record and therefore this issue is also restored back to the file of the AO to be disposed of in terms of our direction for goods as mentioned in respect of goods at sl. Nos. (a) and (b). Thus this ground of the assessee stands partly allowed. Legal/consultation fees expenses - We are of the view that there is no conflict in the provisions of s. 195 and s. 40(a)(i) of the Act because the purpose of s. 195 is to ensure deduction of tax at source on payments to non-resident which are chargeable under the provisions of this Act and s. 40(a)(i) also states the same principle in a sense that disallowance of deduction in respect of any sum which is chargeable under this Act and where the tax has not been deducted at source. Thus the basic condition is charge ability of the sum paid to the non-resident under the provisions of the IT Act 1961. Although the said circular directly deals with the export commission but it essentially confirms the view that requirement of deduction at source u/s 195 would arise only if the impugned payment to the non-resident is chargeable to tax in India. In this view of matter we consider no necessity to further discuss other judicial precedents relied upon by the assessee. Thus we are of the considered opinion that the Revenue authorities were not justified in disallowing the expenditure relating to legal fee paid to UK based solicitors amounting and therefore we reverse the same. The AO is accordingly directed to allow the same in computing the income of the assessee in the year under consideration. This ground of the assessee is thus accepted. Employer s contribution as well as the employee s contribution - Admittedly there is a delay in deposit of both the employer s and employees contributions towards PF and ESIC although the same have been deposited before the due date of filing of return of income. With regard to the delay in deposit of the employer s contribution there are catena of decisions wherein amendment to s. 43B by way of deletion of second proviso to s. 43B and amendment to first proviso w.e.f. 1st April 2004 has been declared of curative nature and hence applicable retrospectively and accordingly payments which have been made before the due date of filing of return of income have been held as allowable even in the cases pertaining to earlier years. Accordingly we allow this ground of the assessee. With regard to the assessee s claim for allowance of the employees contribution towards PF and ESIC the assessee s case deserves to be rejected because s. 43B is not applicable at all in respect of the employees contribution towards PF and ESIC and assessee s claim in this regard has to be considered u/s. 36(1)(va) and s. 2(24)(x) of the IT Act 1961. Assuming a situation for the sake of argument that if it is held that the assessee may get deduction if the amount is deposited before the due date of filing of return of income it would enable the employer to deposit the employees contribution towards PF and ESIC deducted in the month of April 2005 by 31st October 2006 which is too long a period to be given to the employers because if any adverse business situation emerges in the intervening period which results in non-deposit of the employees contributions the employees would be made to suffer without any default on their part. Further such a long period would also tempt the employers to utilise the money for their business which would be manifestly against the objectives of the provisions. The principle of equitable construction is based on principle of equity. As far as the concept of equity is concerned it must be applied in favour of the weaker party. In this case the employer is weaker than the State and the employee is weaker than the employer. Therefore even on the principle of equity the interests of the employees should be taken care of particularly in a country like ours where social equality is a matter of grave concern for each individual. Thus both in law and in equity we are of the considered opinion that the provisions of s. 43B being not applicable in respect of the employees contribution towards PF and ESIC the orders of the Revenue authorities in this regard are justified and accordingly we uphold the same. Thus this ground of the assessee stands partly allowed. In the result the appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of prior-period expenses
2. Disallowance of legal expenses under Section 40(a)(i)
3. Disallowance of employees' contribution due to delayed payments
4. Disallowance of penalty

Detailed Analysis:

1. Disallowance of Prior-Period Expenses:
The assessee, a public limited company, charged Rs. 26,33,535 as prior-period expenses, including travelling, staff welfare, car expenses, and purchases. The AO disallowed these expenses, asserting that they were not in line with the mercantile system of accounting followed by the assessee. The CIT(A) upheld this disallowance, stating that the assessee failed to establish circumstances justifying non-booking of expenses in the relevant previous years. The Tribunal noted that the assessee should have recorded expenses in the relevant accounting year when the liability crystallized, and upheld the disallowance of Rs. 6,83,662.34. However, for the disallowed purchase of goods amounting to Rs. 18,51,872.96, the Tribunal allowed the deduction for goods received in April 2000 and restored the issue of goods not accepted earlier due to quality problems back to the AO for verification.

2. Disallowance of Legal Expenses Under Section 40(a)(i):
The assessee incurred Rs. 23,87,187 as legal expenses paid to a UK-based firm. The AO disallowed this amount under Section 40(a)(i) for non-deduction of TDS. The CIT(A) confirmed this disallowance, interpreting the assessee's letter as an admission to deduct tax at the final settlement. The Tribunal reversed this decision, stating that the services were rendered outside India by a non-resident with no agent/office in India. It held that there was no obligation to deduct tax under Section 195, as the payment was not chargeable to tax in India, referencing the Tribunal's decision in the case of Maharashtra Electricity Board and CBDT Circular No. 786.

3. Disallowance of Employees' Contribution Due to Delayed Payments:
The AO disallowed Rs. 22,18,828 relating to the employer's contribution and Rs. 18,17,267 relating to employees' contribution due to delayed deposit. The CIT(A) upheld this disallowance. The Tribunal allowed the employer's contribution, referencing the curative amendment to Section 43B, which applies retrospectively, allowing deductions if payments are made before the due date of filing the return. However, it disallowed the employees' contribution, stating that Section 43B does not apply, and the claim must be considered under Section 36(1)(va) and Section 2(24)(x). The Tribunal emphasized that the timely deposit of employees' contributions is crucial to protect employees' interests and prevent misuse by employers.

4. Disallowance of Penalty:
The assessee did not press this ground before the CIT(A), and therefore, it was not adjudicated. Consequently, this ground was dismissed by the Tribunal as not maintainable.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the disallowance of prior-period expenses except for specific purchases, reversed the disallowance of legal expenses, allowed the employer's contribution to PF and ESIC, and disallowed the employees' contribution due to delayed payments. The penalty disallowance was dismissed as not maintainable.