2016 (1) TMI 749 - AT - Income Tax

Disallowance made u/s.40(a)(ia) - disallowance on the reason that the expenditure is covered u/s.28 and not covered under sections 30 to 38 - CIT(A) deleted the disallowance - Held that - The provisions of sec.194C of the Act cannot come into play when the payments have been made to agents of a non-resident company and relied on the order of the Kolkata Bench of the Tribunal in the case of Taj Leather Works v. ACIT (2012 (7) TMI 300 - ITAT KOLKATA ). To uphold this argument also there is no details of non-resident companies whether they have any PE business connection in India or not. Without bringing any material on record the argument of the assessee s counsel cannot be upheld. The Special Bench of the Tribunal in the case of Merilyn Shipping and Transports v. ACIT (2012 (4) TMI 290 - ITAT VISAKHAPATNAM ) held that when the payments are not outstanding as payable at the end of the close of the year relevant to the assessment year the provisions of sec.40(a)(ia) cannot be invoked. Considering the judgment of the Special Bench of the Tribunal in the case of Merilyn Shipping and Transports v. ACIT (supra) we are inclined to remit the issue for fresh consideration. - Decided in favour of revenue for statistical purposes. Disallowance u/s 43B - addition made in respect of employees contribution to PF and ESI - whether the sum were remitted within the due date of filing the return of income? - CIT(A) deleted the addition - Held that - Sums were not credited by the respective assessee to the employees accounts in the relevant fund or funds (in the present case Provident Fund and/or ESI Fund on or before the due date as per the explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees contribution to the employees account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act. Consequently all these appeals are allowed and the impugned judgement and orders passed by the CIT(A) in deleting the disallowances made by the AO are hereby quashed and set aside and the disallowances of the respective sums with respect to the Provident Fund / ESI Fund made by the AO is hereby restored. - Decided against assessee

Summary

Issues:
1. Deletion of disallowance under section 40(a)(ia) of the Income Tax Act, 1961.
2. Deletion of addition made in respect of employees' contribution to PF and ESI remitted within the due date of filing the return of income.

Issue 1: Deletion of disallowance under section 40(a)(ia) of the Income Tax Act, 1961:

The Revenue appealed against the deletion of disallowance made under section 40(a)(ia) concerning payments to various entities. The Commissioner of Income-tax (Appeals) allowed the expenses as direct business costs under section 28, not subject to sections 30 to 38. The CIT(A) relied on precedents like the Teja Construction case and the ACIT v. Lakshmi Jewellery case. The Tribunal noted the arguments regarding the applicability of section 40(a)(ia) only to amounts standing payable at the end of the previous year. However, the Tribunal vacated the CIT(A)'s finding that the charges were direct expenses, lacking a basis in the financial statements. The Tribunal also considered the Delhi High Court judgment in CIT v. Ansal Land Mark Township regarding the retrospective effect of the second proviso to section 40(a)(ia). The Tribunal found insufficient evidence that the payee had filed income tax returns and paid taxes on the received amounts. The argument that section 194C of the Act does not apply to payments to agents of non-resident companies lacked supporting details. Following the Special Bench's decision in Merilyn Shipping and Transports, the Tribunal remitted the issue for fresh consideration.

Issue 2: Deletion of addition made in respect of employees' contribution to PF and ESI remitted within the due date of filing the return of income:

The Revenue challenged the deletion of addition related to employees' contribution to PF and ESI, not remitted within the due date. The CIT(A) allowed the claim as the remittance was made before filing the return of income. The Tribunal considered the Gujarat High Court judgment in CIT v. Gujarat State Road Transport Corporation, distinguishing it from the Supreme Court's decision in CIT v. Alom Extrusions Ltd. The co-ordinate Bench's decision in ACIT v. SFO Technologies P. Ltd. was cited, holding that deductions for employees' contributions are subject to timely crediting to the employees' accounts in the relevant funds. Following this precedent, the Tribunal decided against the assessee, reinstating the disallowances. Consequently, the appeal by the Revenue was partly allowed for statistical purposes, and the cross-objection by the assessee was also partly allowed for statistical purposes.

In conclusion, the Tribunal addressed the issues of disallowance under section 40(a)(ia) and employees' contribution to PF and ESI, providing detailed analyses and referencing relevant legal judgments to support its decisions. The appeal of the Revenue and the cross-objection of the assessee were allowed for statistical purposes.