2017 (6) TMI 783 - AT - Income Tax

Disallowance of provident fund contribution made on behalf of the sub contractors claimed as expenditure - expenditure incurred is wholly and exclusively for the purpose of business - Held that - Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee and that it is for the assessee to decide whether the expenses should be incurred in the course of his business or profession or not. Courts have also held that if the expenditure is incurred for the purposes of the business incidental benefit to some other person would not take the expenditure outside the scope of Section 37(1) of the Act. Further it is settled law that the commercial expediency of a businessman s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. We are of the view that in the present case the disallowance of employees contribution of Provident Fund (as made by AO) & that of employers contribution of Provident Fund (as enhanced by CIT (A) was uncalled for and therefore set aside. Thus the grounds of Assessee are allowed.

Summary

Issues Involved:
1. Disallowance of ?9,73,953/- on account of payment made towards provident fund contribution for employees of subcontractors.
2. Enhancement of ?11,04,624/- by disallowing the employer's contribution to provident fund for subcontractor employees.
3. Contractual obligation and commercial expediency related to provident fund contributions.
4. Ad hoc disallowance of ?1,13,281/- out of total disallowance of ?2,26,562/- for various expenses not supported by vouchers/bills.

Issue-wise Detailed Analysis:

1. Disallowance of ?9,73,953/- on Account of Payment Made Towards Provident Fund Contribution for Employees of Subcontractors:
The assessee, engaged in industrial construction, had debited ?20,78,557/- towards provident fund contributions for subcontractors' employees. The Assessing Officer (AO) disallowed ?9,73,953/- of this amount, which represented the employees' contribution, on the grounds that it was not a contractual obligation of the assessee. The AO noted that while the assessee deducted employees' contributions from its own employees’ wages, it did not do so for subcontractors' employees, thereby disallowing the expenditure.

2. Enhancement of ?11,04,624/- by Disallowing the Employer's Contribution to Provident Fund for Subcontractor Employees:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s disallowance and further enhanced the disallowance by ?11,04,624/-, representing the employer's contribution to the provident fund for subcontractors' employees. The CIT(A) reasoned that the assessee had no contractual obligation to make these payments and failed to prove that the payments were made out of commercial expediency.

3. Contractual Obligation and Commercial Expediency Related to Provident Fund Contributions:
The assessee argued that as per agreements with clients, it was responsible for ensuring compliance with labor laws, including provident fund contributions, for subcontractors' employees. The assessee cited provisions from the Employees Provident Funds Scheme, 1952, and the Employers Provident Fund (Miscellaneous Provisions) Act, 1952, which hold the principal employer responsible for provident fund contributions. The tribunal found that the assessee was indeed responsible for these contributions under the law and that the payments were made for business expediency, thus allowable under Section 37(1) of the Income Tax Act.

4. Ad Hoc Disallowance of ?1,13,281/- Out of Total Disallowance of ?2,26,562/- for Various Expenses Not Supported by Vouchers/Bills:
The CIT(A) confirmed the disallowance of ?1,13,281/- out of a total of ?2,26,562/- for various expenses such as worker welfare, labor conveyance, weighment charges, local conveyance, and office expenses, citing a lack of proper supporting vouchers/bills. However, this issue was not pressed by the assessee during the appeal.

Conclusion:
The tribunal concluded that the disallowance of provident fund contributions for subcontractors' employees was uncalled for. The tribunal held that the contributions were made out of commercial expediency and were allowable under Section 37(1) of the Income Tax Act. Consequently, the tribunal set aside the disallowance of both the employees' and employer's contributions to the provident fund. The appeal of the assessee was partly allowed, with the disallowance of ?9,73,953/- and the enhancement of ?11,04,624/- being overturned. The tribunal did not adjudicate on ground no. 7 and dismissed ground no. 6 as not pressed.