2025 (4) TMI 1438 - AT - Income Tax

Disallowance of labour expenses made u/s 36(1)(va) on account of employee s contribution to the Labour Welfare Fund - HELD THAT - The assessee in the statement of facts filed before CIT(A) had also stated that due date was further extended to 30.06.2020 by the Welfare Commissioner Haryana Labour Welfare Board vide letter dated 02.06.2020. Assessee had duly remitted the Labour Welfare Fund dues within the due date prescribed thereon. The said due dates were beyond the due date of filing of income tax return u/s 139(1) of the Act. Hence the ld CPC Bengaluru while processing the return had erroneously construed this employees contribution to have not been remitted within the due date prescribed under the respective Labour Act and made addition u/s 36(1)(va) of the Act in the sum which was also confirmed by the assessee CIT(A). We find that in view of section 9 of Haryana Labour Welfare Board Act the labour welfare fund dues in the instant case had been duly remitted within the respective dates prescribed under the Labour Laws. Hence the decision in the case of Checkmate Services 2022 (10) TMI 617 - SUPREME COURT relied by the NFAC is not applicable to the facts of the instant case. Hence we direct the ld AO to delete the addition in the sum u/s 36(1)(va). Accordingly Ground No. 2 raised by the assessee is allowed. Disallowing the Employee State Insurance Corporation fund u/s 43B by making double addition - HELD THAT - Assessee had made suo moto disallowance being the employees contribution to ESI in the return of income which is evident from the tax audit report enclosed at page 19 of the paper vide Sl. No. 7 thereon. This fact was ignored by the ld ld CPC while processing the return and addition was made by the CPC. The assessee had brought this point to the knowledge of the CIT(A)/ NFAC. The fact was ignored by the ld NFAC thereby resulting in double addition. We are convinced with this fact that there was indeed double addition. Upward adjustment - inconsistency between amount reported in the tax audit report and the deduction claimed in the income tax return towards gratuity component and other comprehensive income - HELD THAT - The entire addition has been made by the lower authorities without understanding the requirement of IND-AS which has been duly explained by the assessee before the lower authorities. Further the ld AR also submitted that in AY 2017-18 CIT(A) granted relief on this issue and revenue did not challenge the same before the Tribunal which goes to prove that the revenue had accepted the same in AY 2017-18. The copy of the said CIT(A) order for AY 2017-18. The relevant observation of the CIT(A) in order where these issues were deleted by the CIT(A. It is pertinent to note that the ld CIT(A) while addressing this issue for the year under consideration had erroneously looked at clause 26(i)(A)(a) in Form 3CD instead of clause 26(i)(B)(a) which had lead the ld NFAC to arrive at the conclusion. Accordingly ground No. 4 raised by the assessee is allowed. Chargeability of interest u/s 234C - The law is very well settled that the interest u/s 234C of the Act could be charged only on the returned income and not on the assessed income. Credit of advance relating to company which got merged with the assessee with an appointed date of 01.04.2021 - HELD THAT - Amalgamating entities paid an advance tax of Rs. 1.50 crores. Later the two amalgamating entities got amalgamated with the assessee. The appointed date is 01.04.2021. The fact of advance tax payment made by the amalgamating entity in the sum of Rs. 1.35 crores and Rs. 0.15 crores are reflected in Form 26AS. Since the entire transactions of the amalgamating entities are reflected in the hands of the assessee credit for advance tax paid by the amalgamating entity should be given to the assessee. We direct the ld AO accordingly and allow Ground No. 4 raised by the assessee.

Summary

The core legal questions considered by the Tribunal in these appeals pertain to: (1) the disallowance of labour expenses under section 36(1)(va) of the Income-tax Act, 1961, specifically relating to employees' contribution to the Labour Welfare Fund; (2) the alleged double addition of Employee State Insurance (ESI) contributions disallowed under section 43B; (3) the upward adjustment made on account of inconsistency between amounts reported in the tax audit report and deductions claimed towards gratuity and other comprehensive income (OCI) components; (4) the chargeability of interest under sections 234B and 234C of the Act; and (5) the credit entitlement of advance tax and TDS paid by amalgamating entities post-merger.

Regarding the disallowance of labour expenses under section 36(1)(va), the Tribunal examined whether the employees' contribution to the Labour Welfare Fund amounting to Rs. 3,66,830/- was remitted within the due dates prescribed under the Haryana Labour Welfare Board Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) had disallowed this amount on the premise that the contribution was not remitted within the due date under the respective labour law. However, the assessee demonstrated that the payments were made within the extended due date of 30.06.2020, as per the Welfare Commissioner's letter, which was beyond the income tax return filing date but valid under the labour statute. The Tribunal relied on section 9 of the Haryana Labour Welfare Board Act and distinguished the facts from the Supreme Court decision in Checkmate Services, which was found inapplicable. Consequently, the Tribunal directed deletion of the addition under section 36(1)(va), allowing the ground raised by the assessee.

On the issue of double addition of employees' contribution to the Employee State Insurance Corporation (ESIC) fund under section 43B, the Tribunal scrutinized the tax audit report and the return of income. It was established that the assessee had already made a suo moto disallowance of Rs. 29,20,974/- in the return itself, which was ignored by the AO and CIT(A), resulting in a double addition. The Tribunal accepted the assessee's submission, supported by the tax audit report and return details, and ordered deletion of the addition, allowing this ground as well.

The Tribunal then addressed the upward adjustment of Rs. 18,85,57,096/- made by the AO on account of an alleged inconsistency between the gratuity amount reported in the tax audit report and the deduction claimed in the income tax return. The assessee's accounts were prepared in accordance with Indian Accounting Standards (IND-AS), which require gratuity expenses to be recognized in the profit and loss account, while actuarial gains or losses related to gratuity re-measurement are recognized under Other Comprehensive Income (OCI). The total gratuity expense was Rs. 73,09,94,025/-, out of which Rs. 54,24,36,929/- was charged to profit and loss, and Rs. 18,85,57,096/- was routed through OCI. The AO's disallowance was based on a misunderstanding that the OCI component was not allowable. The Tribunal clarified that adjustments under the Income-tax Act are made to profit before tax, and since the gratuity expense was fully paid within the prescribed due date under section 139(1), the entire amount was deductible under section 43B. The Tribunal also noted that similar relief was granted in AY 2017-18 and was not challenged by the revenue. The CIT(A) had erred by considering an incorrect clause of Form 3CD, leading to the erroneous disallowance. The Tribunal thus allowed the ground, deleting the addition.

On the issue of interest levied under section 234C, the Tribunal reiterated settled law that interest under this section can only be charged on the returned income and not on the assessed income. Accordingly, the Tribunal ordered deletion of the interest charged under section 234C.

Concerning the claims for credit of advance tax and Tax Deducted at Source (TDS) relating to amalgamating entities, the Tribunal considered the merger of Endeavour Software Technology Pvt Ltd and Axis Risk Consulting Pvt Ltd with the assessee, effective from 01.04.2021. The amalgamating entities had paid advance tax aggregating Rs. 1.50 crores, reflected in Form 26AS. The Tribunal held that since the transactions of the amalgamating entities are reflected in the hands of the assessee post-merger, the credit for advance tax and TDS paid by these entities must be allowed to the assessee. The AO was directed to grant such credits accordingly.

The Tribunal also declined to admit additional evidence filed by the assessee under Rule 29 of the Income Tax Appellate Tribunal Rules, deeming it unnecessary for adjudication.

In conclusion, the Tribunal allowed all grounds raised by the assessee in both appeals for AY 2019-20 and AY 2022-23, directing deletion of disallowances and granting credits as claimed.

Significant holdings include the following verbatim legal reasoning: "In view of section 9 of Haryana Labour Welfare Board Act, the labour welfare fund dues of Rs 3,66,830/- in the instant case had been duly remitted within the respective dates prescribed under the Labour Laws. Hence, the decision of Hon'ble Supreme Court in the case of Checkmate Services... is not applicable to the facts of the instant case."

Another key principle established is the recognition and treatment of gratuity expenses under IND-AS vis-`a-vis the Income-tax Act, with the Tribunal stating: "Since payment of Rs. 54,24,36,929 out of the total payment of Rs. 73,09,94,025 towards gratuity payments was already debited in the profit and loss statement while arriving at 'Profit before tax', the assessee claimed the balance payment of Rs. 18,85,57,096, as allowable deduction, routed through OCI, in accordance with the provisions of the section 43B of the Act."

Further, the Tribunal emphasized the settled legal position on interest under section 234C: "The law is very well settled that the interest u/s 234C of the Act could be charged only on the returned income and not on the assessed income."

Finally, on merger-related tax credits, the Tribunal held: "Since the entire transactions of the amalgamating entities are reflected in the hands of the assessee, credit for advance tax paid by the amalgamating entity should be given to the assessee."