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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HONBLE & SHRI NARENDRA KUMAR BILLAIYA, HONBLE
PER NARENDRA KUMAR BILLAIYA, AM: This appeal by the assessee is directed towards the order of the PCIT, Mumbai -3 [hereinafter the “ld. Pr. CIT"] dated 26/03/2024 pertaining to AY 2017-18 framed u/s 263 of the Act.
The sum and substance of the grievance of the assessee is that the ld. Pr. CIT erred in framing juri iction u/s 263 of the Act holding the assessment order as erroneous and prejudicial to the interest of the revenue.
Representatives were heard at length. Case records carefully perused and the relevant documentary evidence brought on record duly considered in the light of Rule 18(6) of the ITAT Rules.
Briefly stated, the facts of the case are that the assessee filed its return of income on 23/10/2017 declaring total income of Rs.6,39,09,320/-. The return was selected for scrutiny assessment under CASS and accordingly assessment was framed u/s 143(3) of the Act vide order dated 13/12/2019. 5. The assessment was reopened after recording reasons to do so. The reasons recorded for reopening the assessment read as under:- “In this case, assessment was completed u/s.143(3) of the I.T.Act on 13.12.2019 at total income of Rs.1,91,72, 796/-.
Disallowance u/s.37(1) on account of contingent liabilities:- On perusal of Balance Sheet, it is observed that the assessee has shown "provision for expenses" amounting to Rs.3,32,93,342/- under the head "short term provisions" and same is apparently claimed in profit and loss account under the head "other manufacturing expenses". The Hon'ble Apex court in the case of M/s.Rotork Controls India Pvt.Ltd had laid down three conditions for provision to be regarded as liability. The Hon'ble Supreme Court while answering the question as to what is a provision opined that a provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. The Hon'ble Supreme Court held that if the above three conditions are not met, no provision can be recognized. In this case the assessee has failed to demonstrate the provision for expenses incurred in the past years and on the basis of which they have made the provision during the year under consideration. The conditions laid down by the Hon'ble Supreme Court is that because of a past event the future liability is likely to be incurred and the basis of such expenditure to be incurred is a reliable scientific estimate. When the assessee is in a line of business for a very long time then he should be in a position to demonstrate that making provision against the sale as provision for anticipated liability on account of provision for expenses is based on its own past experience. Even otherwise for the sake of argument, if we accept that Provision for expenses is an allowable expense then also the assessee has violated the provision for section 40(a)(ia) of the I.T. Act., by not deducting the TDS on the provision for expenses as per the provision for section 40(a)(ia) of the I.T. Act. Further, having made book entries claiming the expenditure it was the legal obligation of the assessee to deduct the TDS and failure thereof will render the expenditure disallowable in clear term of section 40(a)(ia) of the I.T. Act. Thus, the provision for expenses claimed by the assessee is totally unascertainable, un-crystallised and fanciful. It does not assume the character of ascertained mercantile liability. Even in the case of mercantile liability, section 40(a)(ia) of the I.T. Act clearly mandates that the expenditure cannot be allowed in the absence of corresponding TDS payment in the government treasury. Reliance is placed on the decision of Hardik Jigishbhai Desai Vs DCIT, Cir-3, Surat in ITA No. 1084/Ahd/2013 dated 14.10.2016. The Hon'ble Tribunal Bangalore Bench in the case of IBM India Private Ltd. vs ITO: ITA No. 749 to 752/Bang/2012 & 1588 to 1591/Bang/2012 (Bang) held that the assessee was liable to deduct tax at source on provision for expenses made in the books of account on quarterly basis on the ground that statutory provisions dealing with collection and recovery of tax envisage collection, irrespective of charge under Section 4(1) of the IT Act. The Tribunal further observed that various Sections 194C, 194J, 194H, 1941, etc., as applicable to the case, did not use the expression "income", and instead used the expression "sum" and tax deduction is required on the "sum so paid". The said section do not use the expression "chargeable to tax", unlike Section 195 applicable on payment of sum to non-residents. Since the assessee was the person responsible for making payment to residents, it was the duty of the assessee to deduct tax at source. With regard to the argument of the assessee that in the absence of there being no charge under section 4 (1) of the IT Act in the hands of the payee, TDS provisions are not triggered, the Tribunal referring to the provisions of section 190 and Chapter XVII of the IT Act dealing with collection and recovery of tax held that the statutory provisions envisage collection at source de hors the charge under section 4(1) of the IT Act. The sum collected by way of tax collection at source is appropriated as tax paid by the payee only on assessment in the hands of the payee. The Hon'ble Cochin Bench of ITAT in the case of Abad Builders (P) Ltd. held that provisions of sec. 194C clearly states that the assessee is liable to deduct tax at source either at the time of credit to the account of the contractor or at the time of payment thereof, whichever is earlier.
In view of the above facts and circumstances of the case, it is clear from statutory provisions of TDS that liability to deduct tax at source exists when amount in question is credited to a 'suspense account' or any other account by whatever name called, which will also include a 'provision' created in books of account. Statutory provisions of withholding tax clearly envisage deduction of tax at source de hors charge under section 4(1), hence assessee was liable to deduct tax on provision for expenses created in books of account. Accordingly, disallowance u/s 40(a)(ia) of the I.T. Act is to be made and added to the total income of the assessee. To sum up, since the assessee has claimed for provision for expenses to the tune of Rs.3,32,93,342/-, which is contingent in nature and not allowable expenses as per section 37(1) of the I.T. Act the question of further disallowance u/s 40(a)(ia) of the I.T. Act does not arise. In view of the above, disallowance of Rs.3,32,93,342/- is to be made u/s 37(1) of the I.T. Act on account of provision for expenses which is contingent in nature and not an allowable expense. Disallowance u/s.43B:- On perusal of Balance Sheet, it is observed that the assessee has shown "provision for expenses" amounting to Rs.51,50,853/- under the head "short term provisions". The provision for unpaid excise duty on finished goods is not an allowable expense under the I.T. Act since duty was not paid. As per Sec.43B of the I.T. Act, if a payment is made before filing return of income, the expense claimed in the profit and loss is an allowable expenditure. Since the payment was not made, provision to be disallowed. The improper claim of the assessee has lead to underassessment of income to that extent and the same has also escaped assessment. Expenditure of Capital nature claimed as Revenue expenditure:- It was observed from the Profit & Loss Account that the assessee company had claimed expenses in respect of repair to building amounting to Rs.9,38,39%-. It is found that that these expenses have been claimed in respect of a tenanted premise and therefore not entitled to claim for the reason that the same can by no means be regarded as 'current repairs', the ambit of which is fairly restricted, denoting a repair that is required to be attended to as soon as the need for it arises. 'Repairs', though a term of wider scope, yet cannot extend beyond that of the term itself. A repair, by definition, is towards the maintenance and preservation of an 'existing' asset. Surely, the advantage or asset, in terms of its functional utility and capacity for the business, needs to be maintained, so that expenditure for retaining the same is essentially revenue expenditure, which, again, by definition, does not lead to or result in an enhancement or improvement. The expenditure in the instant case has been incurred on repair of a rented premise, in an inoperable state, so as to make it fit for use. It is therefore, wrong to classify or describe it as 'repairs'. The expenditure was incurred to render it in a functional state and, therefore, is clearly in the capital field. The ingredients and prerequisites of a capital expenditure would remain the same, and not undergo any change depending on the object matter of the expenditure, i.e., whether an owned or leased premises. Total repairs, leading to substantial improvements, is only capital expenditure, further the amendments to section. 30 and 31 w.e.f. 01.04.2004, by way of Explanations thereto, to the effect that the cost of repairs and, as the case may be, current repairs, shall not include any expenditure in the nature of capital expenditure.
In view of the above facts, the expenditure incurred on repair to the tune of Rs. 9,38,398/- is capital in nature which is not allowable as revenue expenditure and therefore, required to be added back to the total income for the year under consideration. Donation u/s.80.G:- On perusal of return of income, it is observed that assessee has paid donation of Rs.10,00,000/- and claimed expenses in profit and loss account. The said expense has been disallowed by assessee company while computing the total income. Further, the same has been claimed as deduction under chapter VI-A to the tune of Rs.5,00,000/-. This issue needs verification as it appears to be incurred by the assessee on account of CSR activities. As per explanation 2 below section 37 of the Act, the amount spent on CS activities under section 135 of the Companies Act is not allowable as expenditure incurred for business and profession. Disallowance u/s.36(1)(va) r.w.s.2(24)(X):- On perusal of the Tax Audit Report (Form No.3CD), it is observed from Clause No. 20b "details of contributions received from employees for various funds as referred to in section 36(1)(va)" that the assessee has paid Employees Contribution towards Provident Fund. As per provision of Income Tax Act, any sum received by the assessee from its employees as contribution to any such employees, is income in the hands of the assessee as per section 2(24)(x) of the I.T. Act and the same is allowable as a deduction u/s.36(1)(va), only if it is paid to the relevant fund by the due date as prescribed in the relevant legislation. In view of the above facts and position of the law, the aforesaid belated payments of employee's contribution towards PF & ESIC are considered as income of the assessee in view section 2(24)(x) r.w.s.36(1)(va). However, it is seen from the computation of income that assessee has not added back the above payments in its computation of income. Further, the deduction of the employee's contribution which is deemed as the employer's income u/s.2(24)(x), and which is subject to deduction u/s.36(1)(va) is, thus, without doubt not governed by section 43B. It further held that the Employees Contribution collected by the Employer is deemed to be its income u/s.2(24)(x) and is allowable as a deduction u/s.36(1)(va) only if it is paid to the relevant fund by the due date as prescribed in the relevant legislation. This view has also fortified by the Hon'ble CBDT vide Circular No. 22 / 2015 dated 17.12.2015 which is a subject matter of allowability of employer's contribution to funds for the welfare of employees in terms of Section 43B(b) of the Income Tax Act.
In view of the above facts and position of the law, the aforesaid belated payments of employee's contribution towards EPF should have been considered as income of the assessee in view section 2(24)(x) r.w.s.36(1)(va) and therefore, the disallowance to the tune of Rs.1,75,734/- is to be made on account of delayed payment of employees' contribution towards EPF. Thus, the claim of the assessee is improper and the income of the assessee to that extent has underassessed and has also escaped assessment. Disallowance u/s.14A:- On perusal of balance sheet it is observed that the assessee company has made investment to the tune of Rs.40,000/-. The disallowance US 14A is required to be computed as per rule 8D. Further CBDT circular 05/2014 also mandates that disallowance is attracted even when no exempt income is earned during the year under consideration. However, the assessee company has failed to compute the disallowance u/s14A r.w Rule 8D. However, no disallowance u/s.14A r.w.R 8D has been made by the assessee. The claim of the assessee is incorrect and the disallowance u/s.14A r.w.Rule 8D of the Income Tax Act, 1961 is required to be made in this case. In addition to the above, on perusal of the Profit & Loss account, it is seen that the assessee has claimed service tax expenses to the tune of Rs.36,92,278/- and on further perusal of Balance Sheet, it is observed that during the year under consideration the assessee has shown statutory liabilities amounting to Rs.22,65,857/-. These issues are also required to examined with respect of the genuineness of the claim made by the assessee.
Considering the above, it is clear that the assessee company has not disclosed the full and true material in the return of income filed and therefore, the condition specified in the proviso to Sec 147 are fulfilled. It is pertinent to mention here that even though the assessee audited P&L Account and Balance Sheet or other details/schedules, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discover by the AO and could not have been discovered with due diligence. For the above reasons, it is not a case of change of opinion. Therefore, I am satisfied that the assessee had failed to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration.
In view of the above, it is a fit case for initiation of proceedings us.147 of income Tax Act, 1961, in order to frame proper assessment to bring to tax appropriate income attributable to the above, which has escaped assessment. Assuming juri iction conferred upon him by the provisions of Section 263 of the Act, the ld. Pr. CIT observed as under:- “6. On perusal of the records of reassessment proceedings, it is observed that the FAO, NFAC has failed to make detailed enquiries or verification of following issues.
Disallowance u/s.37 (1) of Rs.3,32,93,342/- on account of provision of expenses which is contingent in nature and not an allowable expenses has not been examined.
Disallowance u/s.43B of Rs.51,50,853/ on account of provision for unpaid excise duty on finished goods as the payment was not made before filing return of income has not been examined
Expenditure incurred on repair to the tune of Rs.9,38,398/- has not been examined being capital in nature is not allowable as revenue expenditure.
Claim of Donation u/s.80G of Rs.5,00,000/- has not been verified whether same is incurred on account of CSR activities. As per explanation 2 section 37 of the Act, the amount spent on CSR activities is not allowable as busine expenditure.
Disallowance of Rs.1,75,734/- on account of delayed payment employee's contribution fund towards EPF/PF/ESIC u/s.36(1)(va) r.w.s.2(24)(X) has not been examined.
Disallowance u/s.14A has not been examined whether the same has been computed as per rule 8D.
The assessee has claimed Service tax expenses to the tune of Rs.36,92,278/- and on further perusal of Balance Sheet, it is observed that during the year under consideration the assessee has shown statutory liabilities amounting to Rs.22,65,857/-. The same has not been examined with respect of the genuineness of the claim made by the assessee."
We have given a thoughtful consideration to the order of the authorities below. We find that the issues which permitted the ld. Pr. CIT to assume juri iction u/s 263 of the Act were the issues, subject matter of reopening of the assessment, as is evident from the reasons recorded for reopening the assessment, extracted elsewhere.
We find that on each and every point, the assessee has filed detailed reply which was considered by the AO during the re- assessment proceedings. The detailed reply of the assessee is exhibited at pages 214 to 270 of the paper book. Further supported by evidence/submissions exhibited at page 271 to 283 of the paper book. After considering the detailed submissions along with the supporting documents, the proceedings u/s 147 r.w.s.144B of the Act, was completed vide order dated 30/03/2022. 9. The aforementioned facts go on to demonstrate that to specific queries, specific replies were furnished by the assessee and the assumption of juri iction u/s 263 of the Act is nothing but review of what has been considered and accepted in the re-assessment proceedings. Therefore, we are of the considered view that the assessment order dated 30/03/2022 is neither erroneous nor prejudicial to the interest of the revenue except on the issue of disallowance of Rs. 1,75,734/- on account of delayed payment of employees' contribution towards EPF/PF/ESIC u/s 36(1)(va) r.w.s.2(24)(x) of the Act. To this extent, subsequent to the decision of the Hon'ble Supreme Court in the case of Checkmate Services (P) Ltd. v. CIT (2022) 448 ITR 518 (SC), in our view, the assessment order is erroneous and prejudicial to the interest of the revenue. Therefore, only to this limited extent and for this limited issue, the order of the ld. Pr. CIT is upheld. On other issues, it is set aside.
In the result, appeal of the assessee is partly allowed. Order pronounced in the Court on 19th February, 2025 at Mumbai. (SAKTIJIT DEY) VICE-PRESIDENT (NARENDRA KUMAR BILLAIYA) ACCOUNTANT MEMBER Mumbai, Dated 19/02/2025 *SC SMPS आदेश की प्रतिलिपि अग्रेषित/