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Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
Before: SHRI C.N. PRASAD & SHRI M. BALAGANESH
This appeal filed by the assessee is directed against the order of CIT(A) – 5, dated 29/07/2016, Hyderabad for AY 2013-14.
The first issue to be decided in this appeal is, as to whether the ld. CIT(A) was justified in confirming the disallowance of interest paid on borrowed capital @ 12% on an estimated basis in respect of amount alleged to be diverted as interest free advances to sister concern.
We have heard the rival submissions and perused the material on record.
We find that the assessee company is engaged in the business transportation, packing and moving of household goods of logistic business. We find that the ld. AO on verification of the balance sheet
2 DRS Dilip Roadlines Pvt. Ltd., Hyd. of the assessee company together with schedules and sub-schedules had observed that the assessee had given interest free advance to the following parties: 1. DRS Body Building Rs. 23,69,040 2. DRS Educational Society Rs. 12,00,000 3. DRS Labs(India) Pvt. Ltd. Rs. 59,03,070 4. DRS Logistics Pvt. Ltd. Rs.4,36,20,845 5. MDN Edify Education Pvt. Ltd. Rs. 1,00,000 6. DN Welfare Trust (Credit balance) (8,440) Total Rs. 5,31,84,515 We find that the ld. AO had observed that the assessee on the one hand had paid interest on its borrowings totalling to Rs. 3,33,30,483/- and on the other hand had made certain interest free advances to its sister concerns. Accordingly, the assessee was show-caused as to why proportionate disallowance of interest be not made as borrowed funds were diverted for non-business purposes. The assessee submitted that these advances were made for the purposes of business and also placed reliance on the decision of the Hon’ble Supreme Court in the case of Hero Cycles Pvt. Ltd. Vs. CIT (Central) in Civil Appeal No. 514 of 2008. The ld. AO distinguished the said case as not applicable to the assessee and proceeded to make addition @ 14% of the interest free advances given and made an addition of Rs. 74,45,832/-.
On first appeal, the ld. CIT(A) observed that the ld. AO ought not to have made any addition on notional interest income @ 14% and the facts of the instant case demand disallowance of interest on the ground that the borrowed funds were diverted for non-business purposes. Accordingly, he proceeded to disallow interest on borrowed funds on proportionate basis @ 12% on the interest free advances given by the assessee. Against this direction the revenue is not in appeal before us.
We find that the assessee has filed break-up of finance charges, which are as under:
Interest on term loan (vehicles) Rs. 1,11,01,,643 2. Interest on overdraft Rs. 1,21,66,462 3. Bank charges Rs. 52,65,044 4. Bank Commission (CC) Rs. 20,000 5. Bank interest Rs. 65,399 6. Interest – Others Rs. 42,17,740 7. Interest on service tax Rs. 4,94,194 Total Rs. 3,33,30,483 ============= From the above, it can be safely concluded that except interest on overdraft amounting to Rs. 1,21,66,462/-, bank interest of Rs. 65,399/- and interest – others of Rs. 42,17,740/-, the other interest and bank charges paid by the assessee could not have been utilized for the purpose of making interest free advances. Admittedly, overdraft account of the assessee is an account having common funds i.e. both borrowed as well as own funds from where interest free advances had been made to the sister concerns. Hence, in any case, proportionate interest @ 12% could have been disallowed only in respect of the aforesaid three payments of interest and not on the whole interest. Be that as it may, the assessee placed on record the details of availability of interest free funds as on 31/03/2012 amounting to Rs. 5,64,91,115/-, the break up of which are as under: 1. Share capital Rs. 3,00,00,000 2. Reserves and Surplus Rs. 43,39,440 3. Total depreciation upto 31/03/2012 Rs. 2,21,51,675 Interest free own funds available as On 01/04/2012 Rs. 5,64,91,115 ============= From the above, it can be safely construed that as on 01/04/2012, the assessee had sufficient interest free own funds in its kitty in order to make interest free advances to its group concerns. We also find that the own funds available with the assessee are much more than the 4 DRS Dilip Roadlines Pvt. Ltd., Hyd. interest free advances given to the group concerns. Hence, it can be safely presumed that interest free advances given to the group concerns were only out of own funds of the assessee and not out of borrowed funds. Reliance in this regard is placed on the decision of Hon’ble Bombay High Court in the case of Reliance Utilities Power Ltd., reported in 313 ITR 340 and in the case of HDFC Ltd. reported in 366 ITR 505. Respectfully following the ratio decidendi of the same decision, we hold that there cannot be any disallowance of interest on borrowed capital in the facts and circumstances of the case. Accordingly, grounds Nos. 1 & 2 raised by the assessee are allowed.
Ground Nos. 3, 4 & 5 relate to employees contribution to PF and ESI amounting to Rs. 18,04,793/- and Rs. 3,73,568/- respectively.
We have heard the rival submissions and perused the material on record. We find that employees contribution to PF & ESI amounting to Rs. 18,04,793/- and Rs. 3,73,568/- respectively had been remitted beyond the due date prescribed under the respective statutes, but, the same had been remitted before the due date of filing of return u/s 139(1) of the Act.
8.1 We find that the ld. AR has placed reliance on the coordinate bench decision of this Tribunal in the case of VBC Industries Vs. DCIT in and others, dated 08/05/2015 wherein this issue has been dealt with elaborately by the Tribunal considering various decisions of High Courts (both for and against the assessee), as under: “11. The only other issue raised by the department in appeal filed for AY 2010-11 is with regard to ld. CIT(A) deleting disallowance made for an amount of Rs. 7,70,901 on account of non remittance of employees contribution to PF and ESI within the due date.
5 DRS Dilip Roadlines Pvt. Ltd., Hyd.
As can be seen from the facts on record, in course of assessment proceeding AO on verifying the information available on record noticed that assessee has made delayed remittance of employees contribution to PF &ESI to the extent of Rs. 6,32,941 and Rs. 84,972 respectively. He, therefore, held that as the remittance was not within the due date, the expenditure claimed is not allowable as per the provisions of section 36(1)(va) and has to be treated as income as per section 2(24)(x) of the Act. AO further observed that employees contribution would not be covered by section 43B of the Act. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT(A).
Ld. CIT(A) after considering the submissions of assessee in the light of the decision of the Hon’ble Supreme Court in case of CIT Vs. Alom Extrusions Ltd., 319 ITR 366 and some other decisions of different High Courts held that even where the employees contribution to ESI and PF were not paid within the due date as per section 36(1)(va), but, were paid before the due date of filing of return u/s 139(1), the same is allowable as expenditure u/s 43B of the Act.
The ld. DR submitted before us, the expenditure which is covered u/s 43B is employer’s contribution and not employee’s contribution. Ld. DR submitted, as far as employee’s contribution is concerned, the employer is merely custodian, hence, there should not be any delay in remitting the same to the appropriate account. It was submitted, amendment made to section 43B would not apply to employees contribution as such amendment is not with reference to section 36(1)(va). In support of such contention, he relied upon a ITA No. 143/H/13 and others VBC Industries Ltd. decision of Hon’ble Gujarat High Court in case of CIT Vs. Gujarat State Road Transport Corporation, 366 ITR 170.
Opposing the contention of ld. DR, ld. Counsel for assessee submitted before us, after deletion of the second proviso to section 43B of the Act, even employee’s contribution to PF & ESI if remitted before due date of filing of return as provided u/s 139(1) is allowable as deduction u/s 43B of the Act. In support of such contention, ld. AR relied upon decisions of the Hon’ble Himachal Pradesh High Court in case of CIT Vs. Nipso Polyfabriks Ltd., 350 ITR 327 and the decision of the Hon’ble Karnataka High Court in case of CIT Vs. Savari Enterprises 298 ITR 141. He therefore submitted that the view taken by ld. CIT(A) being in terms with the decisions of the Hon’ble High courts, the order of ld. CIT(A) on the issue should not be disturbed.
6 DRS Dilip Roadlines Pvt. Ltd., Hyd.
We have heard the parties and perused the orders of revenue authorities as well as the materials on record. We have also carefully applied our mind to the decisions placed before us by the parties. There is no dispute as far as the factual aspects are concerned. It is a fact on record that employees contribution to PF & ESI have not been remitted to the Govt. account/appropriate fund within the due date as per Explanation to section 36(1)(va). At the same time, it is also not disputed that assessee has remitted the employees contribution to PF & ESI before the due date of filing of return u/s 139(1) of the Act. Thus, the only issue to be decided whether such delayed payment of employee’s contribution to PF & ESI is an allowable deduction u/s 43B. As can be seen, the Hon’ble Gujarat High Court in case of CIT Vs. Gujarat State Road Transport Corporation (supra) has decided the issue against assessee by holding that employee’s contribution to PF & ESI is not covered under the provisions of section 43B. However, it is worth mentioning, in the very same decision, Hon’ble Gujarat High Court has referred to decisions of at least four other high courts expressing the view that employee’s contribution to PF and ESI if deposited within the due ITA No. 143/H/13 and others VBC Industries Ltd. date of filing return u/s 139(1), same would be allowable as deduction. In fact, Hon’ble HP High Court in case of Nipso Polyfabriks Ltd. (supra) while considering identical issue of delayed remittance of employees contribution to PF and ESI have held that both employees and employer’s contribution to PF & ESI stand at par and the provisions of section 43B would apply. Thus, as can be seen, while there is only one decision in favour of the department, there are decisions of at least four different high courts in favour of the assessee. Moreover, when view expressed on a particular issue by non jurisdictional high courts are conflicting and the decision of jurisdictional high court on the issue is not available, the principle to be followed, as held by the Hon’ble Supreme Court in case of CIT Vs. Vegetable Products Ltd., 88 ITR 192, is the view favourable to assessee has to be adopted. Keeping in view the aforesaid proposition of law and following the decision of Hon’ble Himachal Pradesh High Court in case of CIT Vs. Nipso Polyfabriks Ltd. (supra) we hold that employees contribution to PF & ESI remitted before the due date of filing of return u/s 139(1), will be allowable as deduction. Accordingly, we uphold the order of ld. CIT(A) on this issue by dismissing the ground raised by revenue. Following the aforesaid decision of the Tribunal, we hold that the facts of the assessee’s case in hand are materially similar to the said decision of the Tribunal, we have no hesitation in directing the AO to delete the disallowance made on account of 8.2 Respectfully following the said decision, we hold that there cannot be any addition towards employees contribution to PF & ESI when the said contributions were duly remitted before the due date of filing of return of income u/s 139(1) of the Act. The grounds raised in this regard are allowed.
In the result, appeal of the assessee is allowed. Pronounced in the open Court on 4th September, 2020.