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Income Tax Appellate Tribunal, DELHI ‘E’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI KUL BHARAT
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the Revenue is preferred against the order of the ld. CIT(A) - 6 Delhi dated 30.03.2017 pertaining to Assessment Year 2012-13.
The grievances of the Revenue read as under:
“1. Whether on facts and in circumstances of the case, the Ld.CIT(A) is legally justified in deleting disallowance of Rs. 14,92,174/- u/s 36(1 )(ii) of the Income Tax Act, 1961 (the Act) on the basis of his earlier order without even recording his finding that facts and circumstances of this year are identical to preceding year?
2. Whether on facts and in circumstances of the case, the Ld. C1T(A) is legally justified in deleting disallowance of interest > payment of Rs. 14,92,174/- by ignoring a fact that had the assessee not advanced interest free loans to related parties and others it could have repaid a part of bank loan reducing interest burden?
Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. 1,91,74,875/- u/s 14A of the Act read with rule 8D of the Income Tax Rules (the Rule) without considering legislative intent of introducing section 14A by the Finance Act 2001 as clarified by the CBDT Circular No. 5/2014 dated 10.02.2014?
4. Whether on facts and in circumstances of the case, the Ld.CIT(A) is legally justified in not upholding the disallowance u/s 14A of the Act amounting to Rs. 1,91,74,875/- even when section 14A of the Act stipulates mandatory computation of direct and indirect expenses relating to the income not forming part of total income under all the clauses (i),(ii) and (iii) of Rule 8D(2) of the Rule?
5. Whether on facts and in circumstances of the case, the Ld. C1T(A) is legally justified in not upholding the disallowance u/s 14A of the Act read with rule 8D of the Rule without considering legal principles that allowability. Disallowability of expenditure under the Act is not conditional upon the earning of the income upheld by the Hon'ble Supreme Court in the case of CIT Vs. Rajendra Prasad Moody (1978)115 ITR 519?
6. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in not upholding the disallowance u/s 14A of the Act read with rule 8D of the Rule of Rs. 1,91,74,875/- without considering ratio decidendi as upheld in cases of C1T vs. Walfort Share and Stock Brokers Pvt Ltd [2010] 326 ITR 1 (SC) and Maxopp Investment Vs. CIT {2012} 347 ITR 272 {Delhi} on application of provisions of section 14A of the Act?
Whether on facts and in circumstances of the case, the CIT(A) is legally justified in holding that the employee’s contribution to the Employees Provident Fund (EPF) which is deemed as the employer’s income u/s 2(24)(x) of the Act and which is subject to deduction u/s-36( 1 )(va) of the Act is also governed by Section 43 B of the Act?
8. That the appellant craves leave to add, alter, amend or forego any ground(s) of appeal either before or at the time of hearing of the appeal.”
3. The grievances raised vide Ground Nos. 1 and 2 relate to the deletion of disallowance of Rs. 14.92 lakhs based on the findings given in the earlier year.
The Assessing Officer, at Para 2.2 of his order had specifically asked the assessee to explain as to why the additions made in the earlier year be not repeated in the Assessment Year under consideration. This means that in the earlier Assessment Year, similar disallowance was made.
We find that this Tribunal in and 3949/DEL/2011 vide order dated 29.08.2012 has considered this issue and held as under:
“9. The loans in question, on which interest has been paid by the assessee and part of which is sought to be disallowed by the Assessing Officer is given below:-
Nature of loan Amount-Rs. Amount-Rs.
1)Working Capital Loans: - PNB a/c 7,10,58,400/- - Centurion & 14,37,51,079/- Lord Krishna bank - GE Capital 3,12,19,849/- 24,60,29,328/-
2) Term Loans: - PNB A/c 36 19,56,99,172/- - PNB A/c 20 2,45,44,501/- - PNB A/c 717 4,05,25,092/- - Others 3,00,00,001/- 29,07,68,766/- Total: 53,67,98,094/-
It is common knowledge that loans granted by banks for specific purposes such as working capital or term loan are to be utilized for an agreed specified purpose and that the utilization is monitored by the Bank and that the quantum of working capital advance limit depends on the level of stocks and sundry debtors of the organization taking the loans and that term loans are disbursed only on acquiring of specified assets. The working capital limits vary in direct proportion to the net current assets. Similarly term loans granted are tied up for specific purposes and the Banker insists on bills etc. to monitor utilization. The presumption in such cases should be that the Banker have monitored the disbursements and that the loans granted by the banker have been utilized only for the purpose for which they have been granted. This presumption is a rebuttable presumption and the A.O. should have some evidence or material on record to hold otherwise. There is no such evidence in this case.
The earlier Benches of the Tribunal have followed the decision of the Hon'ble P&H High Court in the case of Abhishek Industries. The proposition laid down in this judgement are at variance with the judgement of the Hon'ble Supreme Court in the case of S.A.Builders Ltd. Vs CIT (S.C.)(2007) 288 ITR 1 has held as follows:-
22. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency.
In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in the decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the ITA 3949/Del/2011 Assessment Year 2007-08 Metro Institute of Medical Sciences P.Ltd.
question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed.
The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.
The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done.
32. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant.
What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.
We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits."
In the case of Munjal Sales Corporation Vs. CIT, 298 ITR 298, the Hon'ble Supreme Court has observed as follows.
"17. One aspect needs to be mentioned during the Assessment Year 1995-96, apart from the loan to its sister concern amounting to Rs.5 lakhs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee firm out of its own funds, and, therefore, it was not entitled to claim deduction under Section 36(1)(iii). This finding is erroneous. The opening balance as on April 1, 1994, was Rs.1.91 crores whereas the loan given to the sister concern was a small amount of Rs.5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs.5 lakhs"
Thus applying the propositions laid down by the Hon'ble Supreme Court, we have to uphold the order of the First Appellate Authority. It is not the case of the Assessing Officer that the borrowings in question are not for business purposes. The A.O. has no material to disbelieve the claim of the assessee. Hence the assessee should succeed.”
As no distinguishing decision/facts have been brought on record to our notice, respectfully following the decision of the co-ordinate bench [supra], Ground Nos. 1 and 2 are dismissed.
7. Grievance raised vide Ground Nos. 3 to 6 relate to the deletion of disallowance of Rs. 1,91,74,875/- made u/s 14A of the Act r.w.r 8D of the Rules.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has shown investments earning exempt income. The Assessing Officer was of the firm belief that the facts of the case prompts invoking of provisions of section 14A of the Act r.w.r 8D of the Rules for making disallowance of expenditure incurred for earning exempt income. Accordingly, the assessee was asked to show cause as to why disallowance should not be made u/s 14A r.w.r 8D of the Rules.
9. In its reply, the assessee stated that it has not claimed any exempt income during the year under consideration. Therefore, no disallowance should be made u/s 14A of the Act r.w.r 8D of the Rules.
10. The contention of the assessee did not find any favour with the Assessing Officer who computed the disallowance at Rs. 1,91,74,875/-.
11. The assessee agitated the matter before the ld. CIT(A) and reiterated its contention that it has not earned any exempt income during the year under consideration.
12. The ld. CIT(A) was convinced with the contention of the assessee and drawing support from the decision of the Hon'ble Delhi High Court, wherein the Hon'ble High Court in the case of Cheminvest Ltd 378 ITR 33 has held that held that if there is no exempt income earned, no disallowance u/s 14A of the Act can be made.
We have given thoughtful consideration to the orders of the authorities below. We find that this issue is now well settled by the Hon'ble Jurisdictional High Court of Delhi in the case of Era Infrastructure order dated 20.07.2022 wherein the Hon'ble High Court clarified that an amendment brought in by the Finance Act 2022 in Section 14A is applicable prospectively w.e.f.
Assessment Year 2022-23.
Respectfully following the findings of the Hon'ble High Court of Delhi [supra] we do not find any error or infirmity in the findings of the ld. CIT(A). Ground Nos. 3 to 6 are dismissed.
Ground No. 7 relates to the deletion of addition on account of late deposit of employees contribution to EPF.
During the assessment proceedings, the Assessing Officer noticed that there is a delay in depositing of EPF as under:
Month Amount Due Date Payment Date Apr 11 1,50,228.00 20-05-2011 23-05-2011 20-06-2011 21-06-2011 May 11 1,56,351.00 20-12-2011 22-12-2011 Nov 11 1,63,664.00 Mar 12 1,73,714.00 20-04-2012 09-05-2012
EPF, Vadodra "'-1— — --- —- Month Due Date Payment Date Amount May 11 17,481.00 20-06-2011 23-06-2011 Mar 12 37,647.00 20-04-201? 02-05-2012
EPF, Meerut
Month Amount Due Date Payment Date Aug 11 35,000.00 20-09-2011 21-09-2011 20-12-2011 26-12-2011 Nov 11 37,105.00 Mar 12 36,066.00 20-04-2012 03-05-2012 EPF, Lajpat Nagar Month Amount Due Date Payment Date Mar 12 23,298.00 20.04.2012 10.05.2012
The quarrel is now well settled in favour of the assessee and against the Revenue by the decision of the Hon'ble Jurisdictional High Court of Delhi in the case of CIT Vs. AIMIL Limited 321 ITR 508 vide order dated 23.12.2009. The Hon'ble High Court held as under:
“If the employees‟ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed.”
The ld. DR placed heavy reliance on the decision of the Hon'ble High Court of Delhi in the case of CIT Vs. Bharat Hotels 410 ITR 417 followed by this Tribunal in the case of Vedvan Consultants Pvt Ltd.
We find that this Tribunal in & Others has duly considered the decision of the Hon'ble Delhi High Court in the case of Bharat Hotels [supra] and has further relied upon the decision of the Hon'ble Jurisdictional High Court in the case of PCIT Vs. Pro Interactive Services (India) Pvt. Ltd. in ITA 983/2018 dated 10.09.2018.
Further, this issue has been examined by the Finance Act, 2021 as under:
“Section 2 (24) (x) o f the Income Tax Act, 1961 reads: “any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions o f the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare o f such employees.”
FINANCE ACT, 2021 [13 OF 2021]
An Act to give effect to the financial proposals o f the Central Government for the financial year 2021-2022.BE it enacted by Parliament in the Seventy-second Year of the Republic o f India as follows:— CHAPTER I Short title and commencement .
(1) This Act may be called the Finance Act, 2021. (2) Save as otherwise provided in this Act,—
(a) sections 2 to 88 shall come into force on the 1st day of April, 2021;
(b) sections 108 to 123 shall come into force on such date as the Central Government may, by notification in the Official Gazette , appoint.
Amendment of section 36.
In section 36 of the Income-tax Act, in sub-section (1), in clause (va), the Explanation shall be numbered as Explanation
1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:—
'Explanation 2.—For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the "due date" under this clause;' . Amendment of section 43B.
11. In section 43B of the Income-tax Act, after Explanation4, the following Explanation shall be inserted, namely:—
"Explanation5 .—For the removal o f doubts, it is hereby clarified that the provisions o f this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any o f his employees to which the provisions o f sub-clause (x) o f clause (24) o f section 2 applies." .
We have also perused the Memorandum Explaining the Provisions in the Finance Bill, 2021. Under the head “Provision relating to Direct Taxes” with to rationalization of various provisions, the issue of clause (24) of Section 2 sub- clause (x), Section 36(1) clause (va), Section 43B with regard to provisions of sub-Section (1) of Section 139 have been dealt at length. The gist is as under:
“Rationalization of various Provisions
Payment by employer o f employee contribution to a fund on or before due date
Clause (24) of section 2 of the Act provides an inclusive definition o f the income. Sub-clause (x) to the said clause provide that income to include any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions o f ESI Act or any other fund for the welfare of such employees.
Section 36 of the Act pertains to the other deductions. Subsection (1) of the said section provides for various deductions allowed while computing the income under the head Profits and gains o f business or profession‘.
Clause (va) o f the said sub-section provides for deduction of any sum received by the assessee from any of his employees to which the provisions o f sub-clause (x) o f clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date .
Explanation to the said clause provides that, for the purposes of this clause , "due date to mean the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule , order or notification issued there-under or under any standing order , award, contract o f service or otherwise .
Section 43B specifies the list of deductions that are admissible under the Act only upon their actual payment. Employer's contribution is covered in clause (b) o f section 43B. According to it, if any sum towards employer's contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date for furnishing the return of the income under sub- section (1) of section 139, assessee would be entitled to deduction under section 43B and such deduction would be admissible for the accounting year . This provision does not cover employee contribution referred to in clause (va) o f sub-section (1) of section 36 o f the Act.
Though section 43B of the Act covers only employer‘s contribution and does not cover employee contribution, some courts have applied the provision of section 43B on employee contribution as well. There is a distinction between employer contribution and employee‘s contribution towards welfare fund. It may be noted that employee‘s contribution towards welfare funds is a mechanism to ensure the compliance by the employers o f the labour welfare laws. Hence , it needs to be stressed that the employer‘s contribution towards welfare funds such as ESI and PF needs to be clearly distinguished from the employee‘s contribution towards welfare funds. Employee‘s contribution is employee own money and the employer deposits this contribution on behalf o f the employee in fiduciary capacity. By late deposit o f employee contribution, the employers get unjustly enriched by keeping the money belonging to the employees. Clause (va) o f sub-section (1) o f Section 36 o f the Act was inserted to the Act vide Finance Act 1987 as a measures of penalizing employers who mis-utilize employee‘s contributions.
Accordingly, in order to provide certainty, it is proposed to –
(i) amend clause (va) of sub-section (1) o f section 36 of the Act by inserting another explanation to the said clause to clarify that the provision o f section 43B does not apply and deemed to never have been applied for the purposes o f determining the ―due date under this clause; and (ii) amend section 43B of the Act by inserting Explanation 5 to the said section to clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of sub-clause (x) o f clause (24) o f section 2 applies. These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.” [Clauses 8 and 9] 33.
Thus, the matter has been finally decided and the controversy has been put to rest.”
After considering the facts of the case in totality, in light of judicial decisions discussed hereinabove, and considering the decisions relied upon by the ld. DR, we are of the considered opinion that no disallowance is called for belated payment of employee’s contribution to the respective PF and ESI in the case of the assessee who has deposited the same before the due date of filing of Income tax return being 29.09.2012. The Assessing Officer is directed to delete the impugned addition. Ground No. 7 is dismissed.
In the result, the appeal of the Revenue in is dismissed.
The order is pronounced in the open court on 06.09.2022.
[KUL BHARAT] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 06th September, 2022.
VL/