2008 (7) TMI 460 - AT - Income Tax

Addition u/s. 43B - delayed payment of employer's contribution towards PF - Payments in respect of welfare dues - Applicability of the Explanation to s. 37(1) - Disallowance of expenditure incurred in respect of payment of commission - Disallowance of u/s 14A - expenditure incurred towards earning income - Addition u/s. 43B - delayed payment of employer's contribution towards PF - Payments in respect of welfare dues - Applicability of first proviso and the second proviso to s. 43B - AO made an addition u/s. 43B r/w s. 36(1)(iv) and (va) of the Act for not crediting the amount to the employee's account, on due date - CIT(A) deleted the disallowance as unjustified, on the ground of the mandate of Circular dt. 29th April, 1967 -HELD THAT - The Finance Act, 2003 w.e.f. 1st April, 2004, omitted the second proviso to s. 43B of the Act, mandating that no deduction shall be allowable, if not paid on due date - The core issue emerging from the omission of the second proviso and the amendment to the first proviso brings into sharp focus the legal effect, that may ensue on all matters, pending assessment, containing the issue of payments in respect of welfare dues, made before the due date of filing the return. The first proviso and the second proviso to s. 43B of the Act contain due dates for various payments, enumerated in sub-cls. (a) to (f) of s. 43B of the Act. Consequently, these provisos contained identical legislative intent, on the issue of due date of payments, covered u/s. 43B of the Act - In view of this, the decision of the Hon'ble Supreme Court of India, in the case of Allied Motors (P) Ltd. vs. CIT 1997 (3) TMI 9 - SUPREME COURT is squarely applicable to the deleted second proviso and amendment to first proviso to s. 43B of the Act. In the case of Allied Motors (P) Ltd., the apex Court of the land has categorically held, following the rule of reasonable construction of the statutory provisions, that the first proviso to s. 43B of the Act is retrospective in operation. On the same analogy, the decision of the Supreme Court is applicable to the amendment made by the Finance Act, 2003 w.e.f. 1st April, 2004 - Therefore, we do not find any reason to interfere with the finding of the learned CIT(A) on the issue in question, and hence, the findings of the learned CIT(A) are upheld. Applicability of the Explanation to s. 37(1) - Disallowance of expenditure incurred in respect of payment of commission - CIT(A) deleted the addition - HELD THAT - Revenue has not disputed the eligibility of the claim under s. 37(1) of the Act. The claim has been rejected, by invoking the Explanation below s. 37(1) of the Act and placed reliance mainly on the assessment order to support the addition - The decisions relied upon by the AO have been validly distinguished by the learned CIT(A), as not being applicable to the fact-situation of the present case. The learned CIT(A) found that the AO misread and misapplied the case law, quoted to support its contention, as the fact-situation of the present case does not have even the semblance of the resemblance, to the fact-situation of the cases relied upon. Consequently, the learned CIT(A) has properly distinguished such case law. It is established legal proposition that reliance on judicial precedents can be placed when legal and factual position of both the cases are identical, as is evident from ensuing discussion - In the case of Union of India vs. Major Bahadur Singh 2005 (11) TMI 467 - SUPREME COURT , the Hon'ble Supreme Court, while dealing with a similar situation and referring to the principles, in the matter of applying precedents held that ''Judgments of the Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions. But, the discussion is meant to explain and not to define. Judges interpret statutes; they do not interpret judgments. They interpret words of statute; their words are not to be interpreted as statutes. - Therefore, it can be reasonably concluded that the AO has misread and misapplied the decisions of the case law, to invoke the provisions of Explanation to s. 37(1) of the Act. as categorically observed by the learned CIT(A), in the impugned appellate order - No evidence has been placed by the Revenue before the CIT(A) or before the Bench establishing any violation of public policy or provisions of any statute. It is well-settled legal proposition that Revenue cannot decide on an issue without proper facts supporting its decision. A decision based on the foundation of mere assertion or surmises or suspicion is liable to be quashed by higher Court. The decision must be supported by concrete facts and cogent evidences. This is a fundamental rule of justice - The Supreme Court has often frowned upon such tendency of the AO to frame the assessment order, on mere surmises and set aside these cases. This view has been held by the Supreme Court in the cases of Dhirajlal Girdhanlal vs. CIT 1954 (10) TMI 8 - SUPREME COURT , Omar Salay Mohamed Sait vs. CIT 1959 (3) TMI 2 - SUPREME COURT , Dhakeshwari Cotton Mills Ltd. vs. CIT 1954 (10) TMI 12 - SUPREME COURT and Lalchand Bhagat Ambica Ram vs. CIT 1959 (5) TMI 12 - SUPREME COURT - Thus, in a given fact-situation of the instant case, the Revenue has failed to justify invocation of the said Explanation and consequent addition, as the parties to whom commission was paid, mode of payment through account payee cheques, quantum of commission, for the purpose of business and for the services rendered by the parties, remained undisputed facts, emanating from the assessment order, CIT(A)'s order and submissions - Therefore, No reason and justification to warrant any interference with the findings of the CIT(A), based on proper appreciation of the legal and factual position of the case, as discussed in detail in the impugned appellate order. Consequently, the order of the CIT(A), on this ground, is upheld. Disallowance of u/s 14A - expenditure incurred towards earning income - not form part of the total income - non-applicability of the provisions of s. 14A - interest free funds available with the assessee company at the beginning of the financial year as also at the close of the relevant assessment year exceeded the funds invested in shares/interest free loans and advances given to the group companies - HELD THAT - AO applied the ratio of funds, i.e., interest free funds and borrowed funds to the total funds available and worked out the interest on this presumption that interest-bearing funds might have also been used for such investment and loans to group companies. The Revenue failed to substantiate such contention by way of corroborative factual findings. It is further added that interest free advances to subsidiary and other companies and investment in shares of group/subsidiary companies have been made out of interest free funds available with the assessee, has been accepted in the past and no disallowance was made out of interest expenses. AO failed to establish nexus between the interest-bearing funds and the investment on loans and advances to the group companies - It is important to know that Explanatory Memorandum clearly states that the new provision was only clarificatory in nature. The word 'incurred' clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income - The newly inserted s. 14A of the Act, has not conferred specific powers on the AO to estimate the expenditure which the assessee would have, in the opinion of the AO, incurred in relation to the exempted income. There must exist nexus between the expenditure incurred and the exempted income. The expression in relation to is the concept that the AO should be in a position to pinpoint, that the expenditure was incurred by the assessee to produce non-taxable income. In the case, the AO has failed to do so, as notional expenditure has been estimated based on certain assumed fact-situation - Therefore, we do not find any reason to interfere with the findings of the CIT(A), on the issue in question. Therefore, the finding of the learned CIT(A), on this ground of appeal is upheld. In the result, the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition under Section 43B of the IT Act for delayed payment of employer's contribution towards PF.
2. Deletion of addition on account of disallowance of expenditure incurred in respect of payment of commission.
3. Deletion of addition under Section 14A of the IT Act on account of disallowance of expenditure incurred towards earning income which does not form part of the total income.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 43B for Delayed Payment of Employer's Contribution Towards PF
The Revenue challenged the deletion of the addition of Rs. 3,73,793 and Rs. 96,404 made under Section 43B of the IT Act due to delayed payment of employer's contribution towards PF. The Assessing Officer (AO) had made the addition based on the decision in CIT vs. South India Corporation Ltd. The CIT(A) deleted the disallowance, citing that the payments were made within the grace period allowed by PF authorities and referencing the Circular dated 29th April 1967. The CIT(A) also noted that the second proviso to Section 43B was omitted by the Finance Act, 2003, and the amendment should be construed as retrospective, supported by the Supreme Court decisions in Allied Motors (P) Ltd. vs. CIT and CIT vs. Podar Cement (P) Ltd. The Tribunal upheld the CIT(A)'s findings, emphasizing that the amendment to Section 43B was curative and retrospective, as held in the Allied Motors case.

Issue 2: Deletion of Addition on Account of Disallowance of Expenditure Incurred in Respect of Payment of Commission
The Revenue contested the deletion of the addition of Rs. 48,44,030 made for commission payments to M/s Indus Pipe Lines (IPL) and Global Marketing Corporation (GMC). The AO disallowed the expenditure, invoking the Explanation to Section 37(1) of the IT Act, arguing that the payments were made to procure orders from government undertakings, which was against public policy. The CIT(A) found that the payments were made through account payee cheques, the parties were identifiable and assessed to tax, and the payments were for services rendered. The CIT(A) concluded that the AO's disallowance was based on suspicion without evidence. The Tribunal agreed with the CIT(A), noting that the AO failed to establish that the payments were for purposes prohibited by law or that they constituted a colorable device. The Tribunal emphasized that the onus was on the AO to prove the applicability of the Explanation to Section 37(1), which was not discharged.

Issue 3: Deletion of Addition under Section 14A on Account of Disallowance of Expenditure Incurred Towards Earning Income Not Forming Part of Total Income
The Revenue appealed against the deletion of the addition of Rs. 11,10,00,000 made under Section 14A of the IT Act for disallowance of interest and expenses related to earning exempt dividend income. The AO had disallowed the interest, alleging that part of the borrowed funds was used for making investments in group companies. The CIT(A) deleted the disallowance, noting that the assessee had sufficient interest-free funds to cover the investments and loans to group companies. The CIT(A) found no evidence that borrowed funds were used for these purposes and emphasized that the AO failed to establish a nexus between the borrowed funds and the investments. The Tribunal upheld the CIT(A)'s decision, highlighting that the AO's disallowance was based on assumptions without concrete evidence. The Tribunal referenced the jurisdictional Tribunal's decision in Asstt. CIT vs. Eicher Ltd., which held that only actual expenditure incurred to earn exempt income could be disallowed under Section 14A, and there was no material to show that the assessee incurred any such expenditure.

Conclusion
The Tribunal upheld the CIT(A)'s decisions on all three grounds, emphasizing the lack of evidence and reliance on assumptions by the AO. The appeal of the Revenue was dismissed.