2004 (6) TMI 263 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Provident Fund (P.F.) and Employees' State Insurance (E.S.I.) payments under section 43B of the Income Tax Act.
2. Applicability and retrospective effect of the amendment in section 43B by Finance Act, 2003.
3. Ad hoc disallowance of sales promotion expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Provident Fund (P.F.) and Employees' State Insurance (E.S.I.) payments under section 43B of the Income Tax Act:

The main contention revolves around the disallowance of Rs. 17,73,490 representing the payment of P.F. and E.S.I. under section 43B of the IT Act due to delayed payments. The Assessing Officer disallowed these payments as they were not made before the due date prescribed in the respective enactments. The assessee argued that the 15-day period should commence from the end of the month in which the wages were actually paid, not the month to which they relate. The CIT (Appeals) confirmed the disallowance, stating that the P.F. contribution should be paid within the due date under the Provident Fund Act, which is within 15 days from the end of the month to which it relates.

Upon appeal, the Tribunal upheld the CIT (Appeals)'s decision, referencing the judgment of the Madras High Court in the case of CIT v. Madras Radiators & Pressings Ltd. The Tribunal noted that the employer must remit both contributions to the provident fund within 15 days from the close of the month for which the employees earned their salary, and not from the month in which the salary was paid. The Tribunal emphasized that the employer's responsibility is to make the payment of contributions irrespective of when the wages are paid to the employees.

2. Applicability and retrospective effect of the amendment in section 43B by Finance Act, 2003:

The assessee argued that the amendment in section 43B by the Finance Act, 2003, which omitted the second proviso laying down the period within which P.F. and E.S.I. are to be deposited, should be applied retrospectively. The Tribunal, however, disagreed, stating that only amendments intended to remove anomalies or clarify provisions have retrospective effect. The Tribunal referred to the Supreme Court's judgment in Allied Motors (P.) Ltd., which held that the first proviso to section 43B had retrospective effect to remove an unintended consequence. In contrast, the second proviso's omission did not remove any anomaly but extended the time limit for deposits from 1-4-2004 onwards. Therefore, the Tribunal concluded that the amendment does not have retrospective effect and does not apply to defaults committed before 1-4-2004.

3. Ad hoc disallowance of sales promotion expenses:

The Assessing Officer made an ad hoc disallowance of Rs. 59,464 out of sales promotion expenses, which was reduced to Rs. 50,000 by the CIT (Appeals) on an estimate basis without providing reasons. The Tribunal found this ad hoc disallowance impermissible under the law and deleted the addition.

Conclusion:

The Tribunal upheld the disallowance of P.F. and E.S.I. payments made after the due date as prescribed under the respective Acts, rejecting the argument for retrospective application of the amendment in section 43B. However, the Tribunal deleted the ad hoc disallowance of sales promotion expenses, finding it unjustified. Consequently, the appeal of the assessee was partly allowed for statistical purposes.