DEVI CONSTRUCTION CO PVT LTD,,PUNE vs. INCOME TAX OFFICER,, PUNE

The assessee has assailed the order of First Appellate Authority by raising following grounds of appeal : “1. The learned CIT(A)-1, Pune erred in law and on facts, in disallowing the payment of Rs.5,85,971/- for Employees' State Insurance Corporation (ESIC) and Rs.11,81,255 for Employees Provident Fund (EPF) u/s 37(1) of the Income tax Act, 1961, voluntarily paid on behalf of the sub-contractors employing labourers at the appellants project site. While arriving at the conclusion learned CIT(A)-1, Pune ought to have appreciated that, in absence of such voluntary compliances under respective ESIC and PF act, ultimate cascading liability is on the Appellant. 2. Alternate and without prejudice to the Ground no 1 above, learned CIT(A)-1, erred in law and on facts in not appreciating that the said expenses is incurred on account of commercial expediency and hence should be allowed u/s 37 of ITA 1961. 3. The learned CIT(A)-1, Pune erred in law and on facts, in partially sustaining the disallowance of expenses u/s 14A of the ITA, 1961 made by the learned ITO, Ward 1(3), Pune. The learned CIT(A)-1, Pune ought not to have sustained disallowance of Rs.3,90,531/- made under rule 8D(iii) of the ITA, 1961, considering the facts of the case and various legal propositions. 4. The appellant craves, leave to add / modify / delete all or any of the grounds of appeal.”

Shri Kishor Phadke appearing on behalf of the assessee submitted that the assessee is a Private Limited Company and is engaged in the business of Civil Engineering and Industrial Construction. The assessee had hired the services of sub-contractors to execute job work. The sub- contractors did not comply with the statutory provisions of Employees Provident Fund (EPF) and Employees State Insurance Corporation (ESIC). The assessee discharged the liability and paid EPF and ESIC aggregating to Rs.17,67,226/- in respect of contract labourers not on the rolls of the assessee. The ld. AR submitted that these were the statutory compliances made by the assessee on behalf of the sub-contractors. However, such

On the other hand Ms. Shabana Parveen representing the Department vehemently defended the impugned order. The ld. DR submitted that the assessee was not under obligation to discharge the

Both sides heard. Orders of the authorities below perused. In ground Nos. 1 and 2 of the appeal the assessee has assailed disallowance of payments made by the assessee under EPF and ESIC in respect of the employees of sub-contractors. The assessee had claimed expenditure in respect of aforesaid payments u/s. 37(1) of the Act. The ESIC payments made by the assessee and the payments made for EPF in respect of contract labours aggregating to Rs.17,67,226/- are not disputed by the Department. The only reason for disallowing the payments is that the assessee was not under contractual obligation to make such payments as the payments were in respect of labourers of sub-contractors who were not on the rolls of the assessee. The ld. AR has brought our attention to the decision of Co-ordinate Bench of Tribunal in the case of Ratilal Bhagwandas Construction Co. (P.) Ltd. Vs. Income Tax Officer (supra). In the said case under somewhat similar circumstances payments were made under Employees Provident Fund Act, 1952 in respect of sub-contract labourers. The Co-ordinate Bench after examining the facts of the case and provisions of Employees Provident Fund Act, 1952 allowed assessee’s claim therein by observing as under : “10. The perusal of the aforesaid sections of the Employees Provident Fund & Miscellaneous Provisions Act 1952 and Employees Provident Fund Scheme 1952 together with the clauses of the agreement that the Assessee had entered into with his clients shows that Assessee is responsible for the deduction of provident fund dues of the employees including those employed through subcontractor and its deposit with the appropriate authorities. In the

In the instant case though the assessee was not under contractual obligation but the assessee was severally liable for the compliances of the provisions of Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the scheme framed under the said Act. Further, the assessee as part of good corporate governance complied with the provisions of beneficial legislature qua the contract labourers who were working for the assessee. The rendering of service and payments have not been doubted by the Department. The payments were wholly and exclusively for the purpose of business of assessee. Thus, in view of the facts of the case and the decision of Co-ordinate Bench, we are of considered view that the assessee’s claim of such payments u/s. 37(1) of the Act deserves to be allowed. We accept assessee’s alternate contention raised in ground No. 2 of the appeal. Accordingly, ground No. 1 of the appeal is dismissed and the ground No. 2 of the appeal is allowed.

In ground No. 3 of the appeal, the assessee has assailed disallowance of expenditure u/s. 14A r.w. Rule 8D(iii) amounting to Rs.3,90,531/-. A perusal of impugned order shows that the Assessing Officer had made disallowance of Rs.13,22,343/- u/s. 14A r.w. Rule 8D(ii) and (iii). In First Appellate proceedings the Commissioner of Income Tax (Appeals) deleted disallowance of Rs.9,31,812/- in respect of interest expenditure, i.e. disallowance made under Rule 8D(ii). The Commissioner of Income Tax (Appeals) sustained statutory disallowance of 0.5% of the average value of investments under Clause (iii) of Rule 8D. We observe that the findings of Commissioner of Income Tax (Appeals) on this issue

The ground No. 4 of the appeal is general in nature, hence, requires no adjudication.

In the result, the appeal of assessee is partly allowed in the terms aforesaid.