2006 (6) TMI 143 - AT - Income Tax

Business Expenditure - salaries and perquisites - payment of the incentive - commercial expediency - Whether there was a liability on the part of the assessee to pay the amount of taxes which the employees were liable to pay in respect of the salaries received by them outside India from Marubeni Corporation, the Japanese company?- HELD THAT - The assessee merely agreed to pay the salary to the employees when their services were seconded by the Japanese company. If there is no contractual liability, then the amounts cannot be claimed as a deduction for the years under appeal. It is also difficult to imagine that the assessee-company, well advised in its income tax matters, would not have claimed the liability as a deduction in the returns for the years filed originally since the amounts were quite substantial. What seems to have happened, as pointed out by the CIT(A) in rather strong terms, is that the assessee was compelled to pay the taxes in respect of the salaries of the employees received by them outside India from the Japanese company, which the Japanese company ought to have deducted and paid to the Indian Government under section 192 of the Act. Since it failed to do so and since it was a non-resident company, and since the assessee was its 100 per cent subsidiary, there was pressure brought upon the assessee-company to settle the matter with the Income-tax Department by paying the tax component referable to the salaries paid to the employees by the Japanese company outside India. We are not merely referring to the difficulty in ascertaining the amount of the incentive. Even the very question whether the assessee was liable to pay the taxes as incentive was not clear, according to the assessee. The statement that the employees were eligible for some bonus and incentive for working inIndia in the letter is quite ambiguous and non-committal. Nothing can be inferred therefrom in favour of the assessee. Thus, we hold that the Income-tax authorities were right in saying that there was no ascertained liability for payment of the taxes as incentives. We have already seen that there was no contractual liability undertaken by the assessee at the time when the services of the employees were seconded to it by the Japanese company to pay the tax in question as incentive to them and as p part of their salary payable by the assessee-company. If such a liability had been undertaken, it was not necessary for the assessee to put forth its claim on the principle of commercial expediency at all. It is only in that year that the amount was actually paid without any pre-existing liability and therefore, this argument is open to the assessee to be raised only in that year. We, therefore, do not see how the amounts can be allowed as a deduction on the principle of commercial expediency for the years under consideration. Thus, we are unable to allow the amount of taxes paid by the assessee as incentive, as a deduction in the assessment years 1997-98 and 1998-99. In the result, the appeal for assessment year 1997-98 is dismissed and the appeal for assessment year 1998-99 is partly allowed.

Summary

Issues Involved:
1. Deductibility of taxes paid by the assessee on behalf of expatriate employees.
2. Disallowance of employer's contribution to the provident fund under section 43B.
3. Disallowance of employees' contribution to the provident fund under section 2(24)(x).

Issue-wise Detailed Analysis:

1. Deductibility of Taxes Paid by the Assessee on Behalf of Expatriate Employees:
The assessee-company, a subsidiary of Marubeni Corporation of Japan, claimed deductions for taxes paid on behalf of expatriate employees for the assessment years 1997-98 and 1998-99. The Assessing Officer disallowed these claims on several grounds:
- The assessee did not provide agreements or documents proving liability under terms of employment.
- The liability to pay the amounts was not ascertained.
- The liability was contingent at the time of closing accounts and filing returns.
- The accounts could not be interfered with after three years.

The CIT(A) upheld the disallowance, stating that the assessee failed to deduct taxes from salaries paid to expatriate employees, and the payments were disguised as incentives. The CIT(A) also endorsed the Assessing Officer's view that there was no ascertained liability and no enforceable contractual liability.

The Tribunal considered the arguments from both sides. The assessee's counsel argued that there was an oral arrangement to pay the taxes as incentives, citing commercial expediency and relying on relevant case law. However, the Tribunal found no evidence of such an arrangement and noted that the payments were made under pressure from tax authorities, not due to any contractual obligation. The Tribunal concluded that there was no liability to pay the taxes as incentives and thus, the amounts could not be allowed as deductions.

2. Disallowance of Employer's Contribution to the Provident Fund under Section 43B:
For the assessment year 1998-99, the assessee contested the disallowance of Rs. 1,77,477/- as the employer's contribution to the provident fund. The Tribunal referred to the Special Bench's decision in Kwality Milk Foods Ltd., which held that amendments to section 43B by the Finance Act, 2003, were curative and retrospective. Therefore, contributions paid up to the due date for filing the return under section 139(1) should be allowed as deductions. The Tribunal directed the Assessing Officer to verify the payment details and allow the deduction accordingly.

3. Disallowance of Employees' Contribution to the Provident Fund under Section 2(24)(x):
The assessee also contested the disallowance of Rs. 1,96,204/- as employees' contribution to the provident fund. The Tribunal noted conflicting judgments from different High Courts regarding the allowance of contributions paid within the grace period. Adopting the view favorable to the assessee, the Tribunal directed the Assessing Officer to verify the payment dates and allow deductions for contributions paid within the grace period as per provident fund law.

Conclusion:
- The appeal for the assessment year 1997-98 was dismissed.
- The appeal for the assessment year 1998-99 was partly allowed, with directions to verify and allow deductions for provident fund contributions as per specified conditions.
- No costs were awarded.