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Income Tax Appellate Tribunal, PUNE ‘SMC’ BENCH, PUNE
Before: HON’BLE SHRI SATBEER SINGH GODARA & SHRI G. D. PADMAHSHALI
आदेश / ORDER PER G. D. PADMAHSHALI, AM; This appeal of the assessee for assessment year 2018-19 [for brevity ‘AY’] is assailed against DIN & Order No. ITBA/NFAC/S/250/2023-24/1052333362(1) dt. 25/04/2023 passed u/s 250 of the Income-tax Act, 1961 [for brevity ‘the Act’] by National Faceless Appeal Centre, Delhi [for brevity ‘NFAC’], which in turn ascended out of order of assessment dt. 11/02/2021 passed u/s 143(3) r.w.s.143(3A) & 143(3B) of the Act by National e-Assessment Centre, Delhi, [for brevity ‘AO’].
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Solapur DCC Bank Employees Co-op Society Ltd., ITA No.713/PUN/2023 A.Y. 2018-19 2. The long and short of the case is that, 2.1 The appellant assessee is Co-operative Society engaged in the business of providing credit facilities to its member in whose case the return was subjected to complete scrutiny and the regular assessment u/s 143(3) of the Act was completed by making disallowance u/s 36(1)(va) of the Act owning to assessee’s failure to remit contribution of ₹98,276/- within due date specified under relevant Act.
2.2 Aggrieved assessee assailed aforestated disallowance in an appeal on twofold contentions (1) disallowance u/s 36(1)(va) of the Act in its case is unwarranted and (2) addition on account of disallowance would in turn qualify for VI-A deduction in terms of CBDT Circular No. 37/2016; the Ld. NFAC however finding no force in the contentions of the assessee dismissed the appeal u/s 250(6) of the Act.
2.3 Dissatisfied by the actions of both the tax authorities below, the assessee brought up the dispute in present appeal on following grounds; ‘1.On the facts and in the circumstances of the case and in law, the order passed by Ld. CIT-Appeal u/s 250 is bad in law and hence, may please be quashed. 2. On the facts and in the circumstances of the case and in law, the order passed by Ld. AO u/s 143(3) is bad in law and hence, may please be quashed. 3. On the facts and in the circumstances of the case and in law and without prejudice to other grounds, Ld. CIT-Appeal has erred in upholding the addition made by Ld. AO of Rs. 98,276/- by disallowing the expenses u/s 36(1) (va) of the Act. 4. On the facts and in the circumstances of the case and in law and without prejudice to other grounds, even if otherwise the expense is to be disallowed u/s 36(1) (va) of the Act, the appellant is still eligible to claim deduction u/s 80P of the Act of the said addition of Rs. 98,276 and hence, the tax demand raised may please be directed to be deleted.” 5. The appellant craves leave to add, amend, modify, alter, revise substitute or not press any or all grounds of the appeal, if deemed necessary at the time of hearing of the appeal, in the interest of justice.’
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Solapur DCC Bank Employees Co-op Society Ltd., ITA No.713/PUN/2023 A.Y. 2018-19 3. The appeal was called out as many as three times at physical hearing, however none found appeared for the appellant, in the larger interest of justice with able assistance from the Ld. DR we proceeded to hear the matter ex-parte in absence of appellant u/r 24 of Income Tax Appellate Rules, 1963 [ for brevity ‘ITAT Rules’]
The sole and substantive issue under consideration revolves around denial of deduction u/c VI-A of the Act for consequential increase in business income of ₹98,276/- arisen on account of disallowance made u/s 36(1)(va) of the Act.
We have heard the rival contentions of both parties; subject to provisions of rule 18 of ITAT Rules, perused material placed on records, case laws relied upon by rival parties and duly considered facts of the case in light of settled legal position, which are forewarned to parties present.
Insofar as the disallowance u/s 36(1)(va) is concerned, it remained an undisputed fact that, after having collected PF/ESI fund contribution from its employees, the appellant assessee failed to remit the same to the respective fund within the due date prescribed thereunder i.e. on or before 15th day following the month of deduction/collection of contribution from salaries/wages paid/payable to its employees. In this facts and circumstance, the disallowance made by the Ld. AO found solidified by the Ld. NFAC in an appeal by placing reliance on binding judicial precedents laid down by the Hon’ble Supreme Court in ‘Checkmate Services P. Ltd. & Ors. Vs CIT & Ors’ reported in 448 ITR 518. For equi-reasons we see the present disallowance is no-more res-integra, consequently the actions of tax authorities left flawless. As a result, the ground number 1 to 3 remains legless to make any difference in the present appeal, ergo stands dismissed. ITAT-Pune Page 3 of 7
Solapur DCC Bank Employees Co-op Society Ltd., ITA No.713/PUN/2023 A.Y. 2018-19 7. Now remains the question of allowability of deduction u/c VI-A of the Act more precisely u/s 80P(2)(a)(i) of the Act against the amount of enhancement in business income/profit which in turn spew out of disallowance made u/s 36(1)(va) of the Act.
We observed that, for the claim of deduction u/s 80P of the Act, the assessee pressed into service the CBDT Circular No. 37/2016 dt. 02/11/2016, however the Ld. NFAC denied to allow such deduction on the premise that, addition u/s 36(1)(va) does not fall in any of category of disallowance covered in the CBDT Circular (supra). The view of Ld. NFAC is that, the disallowance u/s 36(1)(va) made in the present case falls out of qualifying list enumerated in the CBDT Circular (supra), therefore assessee’s claim for 80P(2)(a)(i) deduction against the consequential enhanced business income is inadmissible.
We note that, the issue of whether income enhanced in the course of assessment on account of various disallowances made by the AO, is eligible for deduction u/c VI-A of the Act, has been a subject matter of debate before various High Courts. On the one hand, the Hon’ble Gujarat High Court in ‘ITO Vs Keval Construction’ reported in 354 ITR 13, and Hon’ble Bombay High Court in ‘CIT Vs Sunil Vishwambhamath Tiwari’ reported in 388 ITR 630 and also Honb’le Allahabad High Court in ‘PCIT Vs Sunya Merchant’ reported in 72 taxmann.com 16, have held that, the deduction under Chapter VI-A is admissible on the profits enhanced by way of the disallowance. Per contra, Hon’ble Rajasthan High Court in the case of ‘CIT Vs Harshwardhan Chemicals’ reported in 131 Taxman 813 categorically denied chapter VI-A deduction on enhanced business income
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Solapur DCC Bank Employees Co-op Society Ltd., ITA No.713/PUN/2023 A.Y. 2018-19 arisen on account of any disallowance holding it since was not derived from business activities of the taxpayer. The Board after considering these decisions has accepted the ratio laid by Hon’ble Bombay, Gujarat, and Allahabad High Court for allowing the deduction and issued the aforestated circular (supra) to that effect. The relevant text of para 3 thereof reads as under; In view of the above, the Board has accepted the settled position that the disallowances made under section 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.
We have given our thoughtful consideration to the circular (supra) and the judicial precedents pursuant to which the circular came into effect. The intent of this circular can well be gathered from para 2 thereof which unconditionally makes enhanced business profit/income available for VI-A deduction. The list of cases discussed in sub-para (i) & (ii) of therein is illustrative and not exhaustive one. In our considered view, the words, ‘and other specific disallowances’ appearing after the list of illustrative sections explicitly provides for inclusion of all kinds of capable business disallowance, therefore we see that, irrespective of section under which any disallowance is made while computing business income u/c IV-D of the Act, the assessee remains entitle to the claim a deduction u/c VI-A of the Act against such enhanced business profit/income arisen on account of any such disallowance made.
In similar case of disallowance i.e. disallowance u/s 36(1)(va), the Hon’ble Jurisdictional Bombay High Court had occasioned to consider the allowability of deduction u/s 10A based on enhanced business income/profits, in the case of ‘CIT ITAT-Pune Page 5 of 7
Solapur DCC Bank Employees Co-op Society Ltd., ITA No.713/PUN/2023 A.Y. 2018-19 Vs Gem Plus Jewellery India Ltd.’ reported in 330 ITR 175 (Bom) wherein vide para 11 their lordships have categorically answered the question in favour of the assessee and against the revenue as; Re Question b : 11. For the purposes of the appeal it is necessary to refer to the admitted position which is that the assessee had deposited both the employer’s and the employees’ contribution towards Provident Fund and ESIC, though beyond the due date including the grace period. The Assessing Officer added these payments to the total income of the assessee and made an addition in the amount of Rs.71.59 lacs. However, for the deduction under Section 10A, the addition made on account of the employees’ contribution was ignored in calculating the profits eligible for deduction on the ground that these receipts were not generated out of the manufacturing activity of the assessee company.
By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited (319 ITR 306) the employer’s contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer’s as well as the employees’ contribution towards Provident Fund /ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the Assessing Officer to grant the exemption under Section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer’s and the employee’s contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the Provident Fund/ ESIC payments has been made because of the statutory provisions – Section 43B in the case of the employer’s contribution and Section 36(1)(va) read with Section 2(24)(x) in the case of the employee’s contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on
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Solapur DCC Bank Employees Co-op Society Ltd., ITA No.713/PUN/2023 A.Y. 2018-19 account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee. (Emphasis supplied)
In the light of aforestated discussion and the ratio laid by binding judicial precedents (supra) we are of the view that, both the tax authorities below appears to have overlooked the plain and unambiguous language of the CBDT Circular (supra) in denying the deduction u/c VI-A against the enhanced business income/profit arisen consequent to disallowance made u/s 36(1)(va) of the Act. In the present facts and circumstances, the rationale for the Revenue’s contention is entirely misplaced, for the reasons we set-aside the impugned order of first appellate authority and direct the Ld. AO to allow the eligible deduction u/s 80P(2) of the Act to the appellant assessee and recompute the total income in accordance with the applicable provisions of law. Thus the ground number 4 stands allowed.
In result, the appeal of the assessee is PARTLY ALLOWED in above terms. In terms of rule 34 of ITAT Rules, order pronounced in open court on this Wednesday 20th day of September, 2023.
-S/d- -S/d- SATBEER SINGH GODARA G. D. PADMAHSHALI JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / PUNE ; ददनाांक / Dated : 20th day of September, 2023. आदेश की प्रनिनलनप अग्रेनषि / Copy of the Order forwarded to : 1.अपीलाथी / The Appellant. 2. प्रत्यथी / The Respondent. 3. The Pr.CIT, -4, Pune (MH-India) 4. The NFAC, Delhi, New Delhi 5. DR, ITAT, Pune Bench ‘SMC’, Pune 6. गार्डफ़ाइल / Guard File. Ashwini आदेशानुसार / By Order वररष्ठ दनजी सदिव / Sr. Private Secretary आयकर अपीलीय न्यायादधकरण, पुणे / ITAT, Pune.
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