CIT FARIDABAD vs. M/S LAKHANI RUBBER UDYOG LTD.

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ITA/215/2010HC Punjab & HaryanaPHHC01093126201022 September 2015Author: MR. JUSTICE SURINDER GUPTA,MRS JUSTICE DAYA CHAUDHARY8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that for issues I and II concerning the late deposit of employees' and employers' contributions to PF/EPF, the substantial questions of law were covered against the Revenue by the Apex Court's judgment in Commissioner of Income Tax vs. Alom Extrusions Limited (2009) 319 ITR 306. The Court, following its own Division Bench decision in CIT vs. Rai Agro Industries Limited (2011) 334 ITR 122, which relied on Alom Extrusions, concluded that the omission of the second proviso to Section 43B by the Finance Act, 2003, was curative and retrospective from April 1, 1988. Therefore, the ITAT was right in allowing the assessee's claim for contributions paid after the due date but before the due date for filing the return. Regarding issue III, concerning depreciation on the let-out building, the Court noted that the Tribunal had affirmed the CIT(A)'s finding that only 10% of the building area was let out to associated concerns, and the remaining 90% was used by the assessee for its factory premises. The disallowance of depreciation was restricted to this 10% portion. The Revenue's counsel pointed out no error in the findings of the CIT(A) and the Tribunal. Consequently, the substantial questions of law were answered against the Revenue, and the appeal was dismissed.

What were the facts?

The Revenue appealed against an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 1999-2000. The ITAT had upheld the Commissioner of Income Tax (Appeals) [CIT(A)] order, which deleted additions made by the Assessing Officer (AO). The AO had made additions on account of late deposit of employees' and employers' contribution to Provident Fund (PF) and Employees' Pension Fund (EPF), and also disallowed depreciation on a let-out building. The assessee, M/s Lakhani Rubber Udyog P. Limited, had filed its return, and later assessment proceedings under Section 147 were initiated. The AO completed the assessment at a higher income, making these additions. The CIT(A) partly allowed the assessee's appeal, and the Revenue appealed to the ITAT, which dismissed the Revenue's appeal. The High Court admitted the Revenue's appeal on specific substantial questions of law.

What were the issues?

1. Whether the ITAT was right in law in confirming the deletion of an addition of ₹19,36,019/- made by the AO on account of late deposit of employees' contribution to PF, disregarding that payments were made beyond due dates, thus not allowable under Section 36(1)(va) and to be treated as income under Section 2(24)(x) of the Income Tax Act, 1961, contrary to CIT vs. Pamwi Tissues Limited? 2. Whether the ITAT was right in law in confirming the deletion of an addition of ₹17,88,364/- made by the AO on account of late deposit of employer's contribution to EPF and FPF, without appreciating that payments were not made within prescribed due dates, contrary to CIT vs. Pamwi Tissues Limited? 3. Whether the ITAT's findings were perverse and contrary to evidence regarding the disallowance of ₹12,09,031/- on account of depreciation on a let-out building, as the assessee allegedly failed to adduce a rent agreement, and the portions let out and used for business were not verifiable, and the AO decided the issue without giving an opportunity for verification? Assessee's Contentions: The judgment does not explicitly record the assessee's arguments for issues I and II, but implies reliance on the Apex Court's decision in CIT vs. Alom Extrusions Limited. For issue III, the assessee contended that only 10% of the factory premises was let out to associated concerns for administrative work, facilitating group operations, and rent was offered as business income. The CIT(A) corrected the AO's mistake by allowing depreciation on the remaining 90% area. Revenue's Contentions: For issues I and II, the Revenue argued that the late deposit of employees' and employers' contributions to PF/EPF were not allowable under Section 36(1)(va) and Section 43B, citing CIT vs. Pamwi Tissues Limited. For issue III, the Revenue argued that the AO disallowed depreciation on the entire building as let out because the assessee failed to provide a rent agreement and the portions used for business were not verifiable, and the AO decided the issue without proper verification.

Which sections of the Income-tax Act were involved?

Section 260A,Section 36(1)(va),Section 2(24)(x),Section 143(1),Section 147,Section 148,Section 143(3),Section 43B,Section 139(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 215 of 2010 Date of decision: 22.9.2015 Commissioner of Income Tax, Faridabad ……Appellant M/s Lakhani Rubber Udyog P. Limited …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE RAMENDRA JAIN

1.

Whether Reporters of local papers may be allowed to see the judgment?

2.

To be referred to the Reporters or not?

3.

Whether the judgment should be reported in the Digest? Present: Mr. Tajender K.Joshi, Advocate for the appellant-revenue. Ms.Rajni Pal, Advocate for the respondent-assessee.

Ajay Kumar Mittal,J.

1.

The revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 19.6.2009, Annexure A.III passed by the Income Tax Appellate Tribunal Delhi Bench 'D' New Delhi (in short, “the Tribunal”) in ITA No.4527/Del. of 2007 for the assessment year 1999-2000, claiming following substantial questions of law:- “I. Whether, on the facts and in the circumstances of the case, the learned ITAT was right in law in confirming the order of the learned CIT(A) in deleting the addition of ` 19,36,019/- made by the Assessing Officer on account of late deposit of GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh employees' contribution to PF disregarding the fact that the Tissues Limited, 215 CTR 150 (Bom.)? II) Whether, on the facts and in the circumstances of the case, the learned ITAT was right in law in confirming the order of the learned CIT(A) in deleting the addition of ` 17,88,364/- made by the Assessing Officer on account of late deposit of employer's contribution to EPF and FPF as without CTR 150 (Bom.)? III. Whether, on the facts and in the circumstances of the case, the findings recorded by the learned ITAT are perverse and contrary to the evidence available on record as disallowance of ` 12,09,031/- on account of depreciation on let out building was made by the Assessing Officer as the assessee had failed to adduce, any rent agreement, the portions of building let out and used for purposes of business as claimed by assessee was not verifiable and without giving an opportunity of being heard for necessary verification by the Assessing Officer decided the issue?”

2.

A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. On 29.12.1999, the assessee filed return declaring income of ` 93,92,140/- which was processed under section 143(1) on 26.2.2001. Thereafter, proceedings under section 147 of the Act were initiated by issuing and serving notice under section 148 of the Act on the assessee on 19.1.2006. The assessment was GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh completed under sections 147/143(3) of the Act on 29.9.2006, Annexure A.I at an income of ` 1,40,90,510/-. The Assessing Officer made addition of ` 12,09,031/- on account of depreciation in respect of whole of the building as let out and addition of ` 18,04,473/- on account of late payment of employees' contribution to Provident Fund and ` 17,88,364/- on account of employer's contribution to EPF and FPF. The assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 13.9.2007, Annexure A.II, the appeal was partly allowed giving relief of ` 46,80,965/- to the assessee. The revenue went in appeal before the Tribunal. following the decision of the Apex Court in Alom Extrusions Limited's case (supra) held as under:- “5. The point for determination in this appeal is, whether the amendment made by Finance Act, 2003, effective from 1.4.2004 whereby second proviso to Section 43B stands GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh omitted would govern the earlier cases from 1.4.1988 also.

6.

It would be appropriate to delve into brief legislative history and the purpose of enacting the provisions of Section 43B of the Act before embarking on the adjudication of the controversy involved in the present appeal.

7.

Section 43B provides for disallowance of unpaid statutory liability. This Section was inserted by the Finance Act, 1983, with effect from 1.4.1984. The purpose of this provision is to discourage those assesses who failed to clear their statutory liability relating to payment of excise duty, employees’ contribution to provident fund etc. within time whereas they laid claim for deductions in respect thereof from their income on the plea that liability to pay these amounts had occurred during the relevant previous year. After the insertion of Section 43B, the assessee was entitled to claim deduction on account of these payments only on actual payments even where the assessee had been following mercantile system of accountancy. The provision at that time comprised of only clauses (a) and (b) and Explanation which was later re-numbered as Explanation 1. The two provisos before the Explanation to the Section were incorporated by Finance Act, 1987 effective from Ist April, 1988. The Finance Act, 1988 amended clause (a) with effect from Ist April, 1989. The rigours of clause (a) were lessened by first proviso which permitted deduction of tax liability wherever it was established that it had been discharged, though not during the previous year, but before the due date for filing of return under Section 139(1) of the Act. However, the second proviso which related to liabilities falling under clause (b) had more rigid conditions. The second proviso, which is relevant for decision of this appeal, reads thus: “Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation before clause (va) GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh of sub-section (1) of section 36.” The Finance Act, 2003 effective from 1.4.2004 made an amendment whereby second proviso to Section 43B of the Act was omitted from the statute book. The issue relating to retrospective operation of omission of second proviso to Section 43B of the Act was considered by the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC) wherein it was held that it is curative in nature and would apply retrospectively, with effect from,April 1, 1988. The relevant observations of the Supreme Court are as under (Page 316): “........We hold that the Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from April 1, 1988 (when the first proviso came to be inserted). For the above reasons, we find no merit in this batch of civil appeals filed by the Department which are hereby dismissed with no order as to costs.” In view of the above, the Tribunal was right in allowing the claim of the assessee in respect of payments made for ESI contributions and the same could not be disallowed under Section 43B of the Act. The question of law is, thus, answered against the Revenue and in favour of the assessee.” In view of the above, the Tribunal was right in allowing the claim of the assessee.

6.

As regards question No.III, the Assessing Officer disallowed ` 12,09,031/- on account of depreciation by taking the whole of the building as let out and income was assessed under the head “income from house property”. On appeal by the assessee, the CIT(A) upheld the action of the Assessing Officer in disallowing the depreciation on the rented building but held that the total area in dispute relating to Plot Nos.131 and 235 which GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh was shared for purposes of sister concerns came to 1,27,993 square feet i.e. 1/10th of the actual property involved, the depreciation should be disallowed only to the extent of 1/10th and not the entire depreciation as the rest of the building was clearly the factory premises out of the said rented building. Therefore, 1/10th of ` 12,09,031/- came to ` 1,20,903/- and the balance disallowance of ` 10,88,128/- was deleted. The CIT(A) in para 5.2. of its order recorded as under:- “5. 2. I have carefully considered the submissions of the learned AR and perused the assessment orders where the matter has been discussed in para 3 to 7 and the learned AR's arguments appeared at page 13 of the paper book vide letter addressed to the ACIT, Range II, Faridabad, on this point from pages 13 to 19 of the said paper book. During the discussions with the learned AR, he has left the matter regarding the treatment of income from business to income from house property to be decided on merits. Keeping in view the present position of the entire facts and circumstances and the arguments and discussions held by the AO in his assessment order, the income from rented building treated as rental income by the appellant company is considered under the head income from house property, and therefore, the action of the AO in disallowing the depreciation on the rent building in these two orders is upheld. However, keeping in view the plea of the appellant that the total area in dispute for the purpose of Plot No.131 and 35 comes to 1,27,993 square feet i.e. 1/10th of the actual property involved, the depreciation should be disallowed only to the extent of 1/10th and not the entire depreciation, as the rest of the building is almost clearly the factory premises of the said rented building. Therefore, 1/10th of ` 12,09,031/- comes to ` 1,20,903/- and of ` 14,23,431/- comes to ` 1,42,343/- and these are disallowed accordingly and the balance GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh disallowances are deleted in both the assessment years.”

7.

On appeal by the revenue, the Tribunal affirmed the findings recorded by the CIT(A) as under:- “7. Learned counsel for the assessee contends that depreciation was disallowed under a mistake by AO. Assessee had let out 10% part of the factory premises to its associated concerns for administrative work which facilitated the assessee's group operations, rent was charged from such associated concerns and offered as business income. In the course of assessment proceedings, AO asked about the extent of building let out. Assessee by a chart submitted the same which is part of the record. AO without asking further questions, by mistake held that 10% is utilized by the assessee and 90% is let out besides the rental income was treated under the head business income. Assessee preferred first appeal where correct position was explained to CIT(A), who on proper verification corrected the issue of depreciation by holding that10% area was let out and thereby depreciation to this extent was disallowed: xx xxx xxx xx xx xx xx

8.

We have heard the rival contentions and perused the material on record. From the perusal of the paper book,it emerges that assessee had supplied details about let out area before AO, besides CIT(A) has carried out enquiries and ascertained that 1/10th area was let out to associated concerns, the finding of CIT(A) is based on factual verification, which is supported by assessee's submissions before AO. In view thereof, we see no infirmity in the order of the CIT(A) which is upheld on this issue.”

8.

It has been categorically recorded by the Tribunal while affirming the findings arrived at by the CIT(A) that only 10% area was let out by the assessee to its associated concerns for administrative work GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh whereas the remaining area was being used by it. Thus, depreciation only to the extent of 1/10th was disallowed. No error was pointed out by the learned counsel for the revenue in the findings recorded by the CIT(A) as well as the Tribunal. Thus, the substantial questions of law are answered accordingly. The appeal stands dismissed. (Ajay Kumar Mittal) Judge September 22, 2015 (Ramendra Jain) 'gs' Judge GURBAX SINGH 2015.11.02 16:48 integrity of this document High Court Chandigarh

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