2022 (8) TMI 349 - AT - Income Tax

Disallowance of employees contribution to provident fund (PF) and employees state insurance (ESI) u/s. 2(24)(x) r.w.s. 36(1)(va) r.w.s. 43B - HELD THAT - As in the case of Essae Teraoka Pvt. Ltd. 2014 (3) TMI 386 - KARNATAKA HIGH COURT we hold that the employee s contribution paid by the assessee before the due date of filing the return of income u/s.139(1) of the Act is allowable as a deduction and the addition is deleted. Disallowance of interest on TDS - AO held that expense towards interest on TDS which is penal in nature and not allowable u/s. 37(1) - HELD THAT - The coordinate Bench of this Tribunal in Velankani Information Systems Ltd. 2018 (10) TMI 68 - ITAT BANGALORE dealt with this issue and held that interest on delayed payment of TDS cannot be allowed as deduction. As it is clear that the basis why tax or interest is not allowed as deduction u/s.37(1) of the Act is on the reasoning that it cannot be regarded as an expense incurred wholly or exclusively for the purpose of Assessee s business. Therefore the allowability of interest on taxes paid should not be looked out from the definition of tax as given in Sec.2(43) of the Act. The submissions made by the learned counsel for the Assessee are based on a misconception that the definition of interest u/s.2(43) of the Act is relevant and that the disallowance in question has to be judged in the parameters of Sec.40(a)(iib) In our considered view this contention of the ld AR is completely out of context as we have already held that Sec.40(a)(ii) is not relevant to the present issue before us at all. Moreover, the levy of interest on delayed payment of TDS u/s.201(1A) though held to compensatory in nature, the allowability of the same cannot be decided simply based on that. The levy of 201(1A) is a levy for delay in the remittance of tax that is deducted and not paid into the government account and is levied towards the use of funds belonging to the exchequer. The interest u/s.201(1A) can be equated to the levy of interest u/s.234. Interest u/s.234 is a levy on delay in the payment of income tax and the TDS is nothing but the income tax paid on behalf of the payee and therefore the interest on the same u/s.201(1A) is also in the nature of interest levied on the income tax. On that count also interest on delayed payment of TDS cannot be claimed as a deduction. Comparison of the provisions of section 40(a)(ii) and section 179 - Section 179 is a provision for recovery from the directors of a private company and in that context the legislature has defined the word tax due . As we have already held that Section 40(a)(ii) is not applicable to the present case at all, we are of the view that the contentions raised in this regard are untenable.

Summary

Issues Involved:
1. Disallowance of employees' contribution to provident fund (PF) and employees' state insurance (ESI).
2. Disallowance of interest on TDS.

Detailed Analysis:

1. Disallowance of Employees' Contribution to PF and ESI:
The assessee company, engaged in construction services, filed its return of income declaring Rs.3,21,57,430. The AO disallowed Rs.6,19,914 related to employees' contribution to PF and ESI under sections 2(24)(x), 36(1)(va), and 43B of the Income-tax Act, 1961, which was upheld by the CIT(Appeals).

The assessee argued that the contributions were paid before the due date of filing the return under section 139(1) and thus should be allowable under section 43B. The Tribunal found this issue covered in favor of the assessee by the decision in M/s. Shakuntala Agarbathi Company v. DCIT and the jurisdictional High Court in Essae Teraoka (P.) Ltd. v. DCIT, which held that contributions paid before the due date of filing the return are deductible.

The Tribunal concluded that the amendment to sections 36(1)(va) and 43B by the Finance Act, 2021, is prospective and applicable from 1.4.2021. Thus, for the assessment year 2017-18, the contributions paid before the due date of filing the return should be allowed as a deduction. The Tribunal directed the AO to grant the deduction accordingly.

2. Disallowance of Interest on TDS:
The AO disallowed Rs.5,45,375 debited under the head "Interest €“ delayed statutory payments," considering it as penal in nature and not allowable under section 37(1). The CIT(Appeals) confirmed this relying on various judicial precedents, including the ITAT Delhi Bench in New Modern Bazaar v. ITO and the Madras High Court in CIT v. Chennai Properties & Investment Ltd.

The Tribunal upheld this disallowance, citing the coordinate Bench decision in Velankani Information Systems Ltd., which held that interest on delayed payment of TDS is not deductible. The Tribunal emphasized that interest under section 201(1A) is compensatory for withholding tax due to the exchequer and cannot be regarded as a business expenditure under section 37(1).

The Tribunal rejected the assessee's various contentions and judicial precedents cited, clarifying that the allowability of interest on delayed TDS payment should be examined under section 37(1) and not section 40(a)(ii). It concluded that interest on delayed TDS payment is akin to interest on delayed income tax payment and thus not deductible.

Conclusion:
The Tribunal allowed the appeal partly by granting the deduction for employees' contribution to PF and ESI paid before the due date of filing the return but dismissed the appeal regarding the disallowance of interest on TDS. The stay petition filed by the assessee was dismissed as infructuous.