SUNFIN REALTY PRIVATE LIMITED,VADODARA vs. THE DY.CIT, CENTRAL CIRCLE-2, VADODARA

That on facts, and in law the learned CIT(A), Ahmedabad-12, has grievously erred in holding that the re-opening of assessment u/s.147 of the Act is valid.

That on facts, and in law, it ought to have been held that the re-opening is time-barred, invalid and assessment order ought to have been quashed as void-ab-initio.

That on facts and in law, the learned CIT(A) Ahmedabad-12 has grievously erred in confirming the addition of Rs.1,07,108/- u/s 36(1)(va) of the Act in respect of late payment of Employee’s contribution to ESIC and EPF.

That on facts in in law, the learned CIT(A), Ahmedabad-12 has grievously erred in confirming the disallowance of depreciation of Rs.41,840/- u/s 32 of the Act.”

1 The appellant contends that the reassessment proceedings are vitiated due to a violation of the principles of natural justice, specifically citing the non-receipt of foundational documents such as the 'reasons to believe' and the sanction under Section 151, prior to the filing of its return of income. The appellant argues that this omission contravenes the procedural guidelines issued by the CBDT and denies them a fair opportunity to make an informed representation. They further assert that the subsequent provision of these documents does not cure the initial defect, thereby rendering the proceedings void ab initio. However, on perusal of the assessment order, it is observed that the necessary annexures and approval-related documents were provided to the assessee as attachments to the notice under Section 142(1) dated 05.08.2024. The appellant duly acknowledged receipt of these documents by filing detailed objections on 12.08.2024. This sequence of events aligns with the judicial mandate established by the Hon'ble Supreme Court in GKN Driveshafts (India) Ltd. v. ITO, which prescribes that the reasons be furnished after the filing of the return, followed by the filing of objections by the assessee and their disposal by the AO. In this case, the reasons were provided well before the conclusion of the assessment on 28.02.2025, granting the appellant ample opportunity to be heard. Since the appellant participated fully in the proceedings and filed objections which were considered, the claim of a violation of natural justice is untenable.

2 Further, the appellant challenges the jurisdiction of the Assessing Officer on the grounds that the notice under Section 148 was issued beyond the limitation period of three years without satisfying the monetary threshold of Rs.50 lakhs as required under Section 149(1)(b). Additionally, the appellant argues that the notice itself was defective because it failed to mention the specific date on which the approval under Section 151 was granted, preventing the appellant from verifying the validity of the sanction at the threshold stage. In this regard, it is observed that the proceedings in this case were initiated pursuant to a search action under Section 132 conducted on 24.02.2022, wherein incriminating material was found. By virtue of the proviso to Section 148A, the requirement to conduct a prior inquiry and pass an order under Section 148A(d) is explicitly waived for search cases. Furthermore, Explanation 2 to Section 148 creates a deeming fiction for search cases, establishing that the AO is in possession of "information which suggests that income chargeable to tax has escaped assessment." Consequently, the specific monetary threshold arguments applicable to other cases do not apply in the same manner here, as the search material itself forms the jurisdictional basis. Regarding the omission of the approval date on the notice, it is stated that this is a minor procedural defect curable under Section 292B of the Act. The main jurisdictional fact is the existence of a valid approval from the specified authority prior to the issuance of the notice, which the AO has confirmed and demonstrated by sharing the approval copy.

3 The appellant's final ground of challenge is that the 'satisfaction note' recorded by the Assessing Officer is based on factually incorrect information. Specifically, the appellant asserts that the data relied upon predates the company's incorporation on 09.11.2011, and therefore, could not logically form the basis for a belief that the company's income had escaped assessment. The appellant argues that relying on such pre- incorporation material indicates a non-application of mind. rendering the satisfaction invalid. In this context, it is mentioned that the satisfaction was not derived from a single isolated document but from the totality of incriminating material found during the search the cases of Darshanam, Vihav, and Samruddhi Groups. This material indicated a pattern of large- scale tax evasion involving the promoters and related entities. It is a settled legal principle that promoters often engage in preparatory business activities or enter into agreements in their individual capacities prior to the formal incorporation of a company. If such pre-incorporation activities are part of a continuing scheme of evasion that extends into the corporate entity's existence, they constitute relevant and tangible material. The standard required at the stage of initiating proceedings is a "reason to believe," not conclusive proof. The nexus between the material - 5– found and the formation of the belief is sufficiently established. The veracity of the specific transactions is a subject matter for the assessment proceedings themselves and does not constitute a valid ground to quash the jurisdiction at the threshold. Considering the above discussed facts, the grounds of appeal no. 4 and 5 are dismissed.

The ground of appeal no. 6 is against the disallowance of Rs.1,07,108/- u/s.36(1)(va) of the Act.

1 On perusal of the assessment order, it is observed that the appellant had filed its return of income u/s 139(1) on 10.10.2014 declaring total income of Rs. 21,62,208/-. The reassessment proceedings were initiated on the basis of information emanating from a search action u/s 132 conducted on 24.02.2022 in the case of Darshanam and Vihav Groups of Vadodara, wherein incriminating material relating to unaccounted land dealings, on-money receipts and cash transactions was found, and the name of the assessee figured as a related entity. After obtaining approval from the specified authority, notice u/s 148 was issued on 19.03.2024 and, in response. the assessee e-filed its return on 17.05.2024. Thereafter, notice u/s 143(2) dated 08.07.2024 and notices u/s 142(1) along with detailed questionnaires dated 22.07.2024 and 29.07.2024 (with further annexures and approval documents vide letter dated 05.08.2024) were issued, to which the assessee filed submissions and supporting details through the e-proceedings facility.

2 During the assessment, the AO noticed that employees' contributions towards PF and ESIC aggregating to Rs. 1,07,108/- had been deposited beyond the due dates prescribed under the respective welfare enactments and that no corresponding disallowance had been made in the computation of income. Accordingly, the AO held that the payments were admittedly made after the statutory due dates and, relying on section 36(1)(va) r.w.s. 2(24)(x) and the ratio of the Hon'ble Supreme Court in Checkmate Services Pvt. Ltd., treated the delayed employees' contributions as income and added Rs.1,07,108/- to the total income.

3 During the appellate proceedings the appellant has submitted that the AO, without furnishing any specific working, chart or particulars of the alleged delays, has treated the entire sum of Rs. 1,07,108/- as delayed payment and disallowed the same in toto. The appellant points out that a detailed statement of payments alongwith combined challans, was furnished before the AO as well as before the undersigned, wherein only those entries highlighted in yellow represent instances where there was a marginal delay beyond the presenbed due dates. All other payments, it is contended, were deposited within the statutory time-limits and hence were fully allowable. The appellant has prayed that the disallowance - 6– made in respect of payments deposited within the due dates be deleted and that the addition sustained, if at all, be confined strictly to the amounts demonstrably paid beyond the due dates as reflected in the said statement.

4 The appellant claims that contributions deposited within the prescribed due dates should be allowed and, if any disallowance is to be made, it should be restricted only to the amounts demonstrably paid late. The claim of the appellant has been examined from tax audit report for the year under consideration, including the particulars furnished in Form No. 3CD relevant part of which is reproduced herein below:- As evident from the above excerpt of the audit report that the sum of Rs. 1,07,108/-being contribution received from employees was deposited by the appellant after the ”due date” prescribed under the respective ESIC/PF statutes. This factual position has been correctly noticed and relied upon by the AO in the assessment order and has not been effectively controverted by the appellant. Further, I found that entire issued covered against appellant by decision of Hon’ble Gujarat High Court in the case of State Road Transport Corporation (366 ITR 170) wherein it is held as under: "Section 438, read with section 36(1) (va) of the Income-tax Act, 1961-Business disallowance - Certain deductions to be allowed on actual payment (Employees contribution) - Whether where an employer has not credited sum received by it as employees' contribution to employees' account in relevant fund on or before due date as prescribed in Explanation to section 36(1)(va), assessee shall not be entitled to deduction of such amount though he deposits same before due date prescribed under section 43B i.e., prior to filing of return under section 139(1)-Held, yes Assessee State transport corporation collected a sum being provident fund contribution from its employees However, it had deposited lesser sum in provident fund account - Assessing Officer disallowed same under However, Commissioner (Appeals) deleted disallowance on ground that employees contribution was deposited before filing return - Whether since assessee had not deposited said contribution in respective fund account on date as prescribed in Explanation to section 36(1) (va), disallowance made by Assessing Officer was just and proper - Held, yes [Para 8] [In favour of revenue) section 43B - 7–

5 More Importantly, I observe that the Hon'ble Supreme Court in the case laid the issue at rest by confirming the issue in favour of Revenue. The Three Member Bench of the Apex Court in the case Checkmate Services (P.) Ltd. vs CIT-1, Vadodara [2022] 143 taxmann.com 178 (SC) held as under:- "Headnote: Section 36(1)(va), read with sections 2(24)(x) and 43B, of the Income-tax Act, 1961 Employee's contributions (PF/ESI) Whether there is a marked difference between nature and character of assessee-employer's contribution and amounts retained by assessee from out of employee's income by way of deduction wherein one is liability to be paid by employer and second is deemed income as per section 2(24)(x) which is held in trust by assessee-employer, thus, said marked difference was to be borne while interpreting obligation of assessee-employer under section 43B Held, yes Whether non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was not part assessee- employer's income, thus, said clause would not absolve assessee-employer from its liability to deposit employee's contribution on or before due date as a condition for deduction - Held, yes [Paras 53 and 54] [In favour of revenue]

When Parliament introduced section 43B, what was on the statute book, was only employer's contribution (Section 34(1)(iv)). At that point in time, there was no question of employee's contribution being considered as part of the employer's earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting section 36(1)(va) and simultaneously inserting the second proviso of section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions -especially second proviso to Section 43B was introduced to ensure timely payments were made - 8– by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee's income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of "income" amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time by way of contribution of the employees' share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers' contribution (Section 36(1) (iv)) and employees' contribution required to be deposited by the employer (Section 36(1)(va)) was maintained and continues to be maintained. On the other hand, section 43B covers all deductions that are permissible as expenditures, or out- goings forming part of the assessees' liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of section 43B is to ensure that if assessees are following the mercantile method of accounting. nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.

The distinction between an employer's contribution which is its primary liability under law in terms of section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers' income, and the later retains its character as an income (albeit deemed), by virtue of section 2(24)(x) - unless the conditions spelt by Explanation to section 36(1)(va) are satisfied i.e., - 9– depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts - the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees' income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under section 438. 54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 438 which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability in the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, can not apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit - 10– the employee's contribution on or before the due date as a condition for deduction.

In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed."

""थ"/ The Respondent. 2. संबंिधतआयकरआयु"/ Concerned CIT 3. 4. आयकरआयु"(अपील) /The CIT(A)- 5. िवभागीय"ितिनिध, आयकरअपीलीयअिधकरण, अहमदाबाद/ DR, ITAT, Ahmedabad 6. गाड"फाईल /Guard file. आदेशानुसार/ BY ORDER,सहायकपंजीकार (Dy./Asstt.