2014 (9) TMI 118 - AT - Income Tax

Delay in depositing employee s contribution to Provident Fund/ESIC - Addition u/s 36(1)(va) Held that - The provisions dealing with late payment of the employees contribution and employer s contribution towards certain funds are not same in The Commissioner of Income Tax Versus M/s Kichha Sugar Company Ltd. 2013 (6) TMI 98 - UTTARAKHAND HIGH COURT it has been held that due date mentioned in 36(1)(va)is the due date mentioned in section 43B(b) of the Act - If the legislature in its wisdom thought it fit to introduce amendment in section 43B and to leave the provisions of section 36(1)(va) intact then we have to follow its decision and intention - Allowing an assessee to keep the employees contribution beyond grace period envisaged in the respective Acts would result in undue enrichment of that assessee - once the contribution from the employees is received by an assessee, it becomes custodian of the contribution and it has no right to keep it beyond due date or to use it - there is no ambiguity in the language of sections 2(24) (x)and 36(1)(v)of the Act - It is the assessee, who wants to bring ambiguity in these sections by importing the language of section 43B - there is no confusion or ambiguity in the definition of income as envisaged by the section 2(24)(x)of the Act nor there can be any difference of opinion about the provisions of section 36(1)(v). - Decided against the assessee. Payment of technical-service fees Capital expenses or not Held that - The agreement with HAL and DIL were entered in to by the assessee in the year 2000 and 1995 respectively for the first time - Agreements with HAL provided that the assessee would not sell directly the trolley to any other party in or out India during the currency of the agreement, that HAL might give licence to the assessee to use the know how to manufacture Trolley for export, that it was in application up to July, 2005, that it would treat the design, reports, processes, drawings, specialisation and technical information pertaining to manufacture of trolley as confidential and would not divulge to any third party without prior permission of HAL - the assessee was allowed to use know-how and technology only and it could not part with the knowledge without the permission of HAL - The assessee was barred from disclosing information with third party - it cannot be held that expenditure incurred by it towards payment to the two companies was of capital nature, as assessee had not acquired a thing that resulted in providing enduring benefits - the provisions of section 32(1)(ii) of the Act were applicable from 01.04.1998 and the agreements were entered in to before first day of April, 1998 invocation of the provisions by the AO cannot be held to be justified - in the case of KCL agreement was for providing consultancy to the assessee at a fix rate for a specified time - expenditure incurred by the assessee towards payment to KCL was of revenue nature Decided in favour of assessee. Computation of deduction u/s 80HHC Computation of profit of business instead of returned income Held that - Assessee had raised a specific issue about deduction to be computed u/s. 80HHC, but it was not adjudicated by him - AO had erred in working out the deduction u/s 80HHC by considering the returned income instead of the assessed income for the purpose of computing the profits of the business - FAA had not decided the issue, though he had deliberated upon the other issues related with computation of 80HHC deduction thus, the matter is to be remitted back to the FAA for fresh adjudication Decided in favour of Assessee.

Summary

Issues Involved:
1. Computation of deduction under Section 80HHC.
2. Addition of Rs. 27,94,454/- under Section 2(24)(x) read with Section 36(1)(va) due to delay in depositing employee's contribution to Provident Fund/ESIC.
3. Treatment of technical-service fees and consultancy charges as capital expenditure instead of revenue expenditure.

Detailed Analysis:

1. Computation of Deduction under Section 80HHC:
The assessee-company contested that the CIT(A) did not decide on the computation of deduction under Section 80HHC by considering the assessed income instead of the returned income for computing the profit of the business. The Tribunal found that the CIT(A) had not addressed this specific issue, although other related issues were deliberated upon. Consequently, the Tribunal restored the matter to the file of the CIT(A) for fresh adjudication, ensuring a reasonable opportunity of hearing for the assessee. This ground was decided in favor of the assessee, in part.

2. Addition of Rs. 27,94,454/- under Section 2(24)(x) read with Section 36(1)(va):
The AO added Rs. 27,94,454/- to the total income of the assessee due to a delay in depositing the employee's contribution to Provident Fund/ESIC. The CIT(A) upheld the AO's decision, relying on the case of IMP Power Ltd. and other precedents, stating that Section 43B was not applicable to employee contributions, and such deductions were not allowable as per Section 2(24)(x) and Section 36(1)(va). The Tribunal referred to the conflicting judgments of the Hon'ble Uttarakhand High Court and the Hon'ble Gujarat High Court. The Tribunal favored the detailed and comprehensive judgment of the Gujarat High Court, which held that the due date for employee contributions is the date specified in the respective Acts, and not the due date for filing the return under Section 139(1). Thus, this ground was dismissed, upholding the addition made by the AO.

3. Treatment of Technical-Service Fees and Consultancy Charges as Capital Expenditure:
The AO treated the technical-service fees paid to Hindustan Aeronautic Limited (HAL) and Dresser Industries Limited (DIL), and consultancy charges paid to KAP Co. Ltd. (KCL) as capital expenditure, allowing depreciation thereon. The CIT(A) upheld this treatment, asserting that the payments resulted in enduring benefits and were covered under Explanation 4 to Section 32(1)(ii).

Upon appeal, the Tribunal found that the agreements with HAL and DIL allowed the assessee to use the technical know-how for a limited period and did not result in the acquisition of any enduring benefit. The Tribunal noted that similar expenditures were treated as revenue expenditure in earlier years without any deviation by the AO. It was held that the expenditure towards HAL and DIL was of revenue nature and not capital. Similarly, the consultancy charges paid to KCL were also deemed revenue expenditure, considering the nature of the services and their treatment in previous years. Consequently, this ground was allowed in favor of the assessee.

Conclusion:
The appeal was partly allowed, with the Tribunal directing a fresh adjudication on the computation of deduction under Section 80HHC and reversing the capital expenditure treatment of technical-service fees and consultancy charges, while upholding the addition under Section 2(24)(x) read with Section 36(1)(va). The order was pronounced in the open court on 30th April, 2014.