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Facts
The assessee is engaged in manufacturing RCC, PCC Poles. For AY 2018-19, the assessee's case was selected for scrutiny regarding unsecured loans and excess contribution to provident fund. The AO made additions for disallowance of excess PF contribution and unexplained cash credits, which were partly confirmed and partly deleted by the CIT(A)/NFAC. The assessee filed an appeal before the Tribunal.
Held
The Tribunal condoned the delay of 35 days in filing the appeal. Regarding the excess PF contribution, the Tribunal held that the assessee had not contravened Rule 87 of the IT Rules, as the contribution was within the 27% limit of the total salary paid (including capitalized salary), and directed the AO to delete the addition. Regarding the addition of Rs. 15,32,615/- as unexplained cash credit from Smt. Seema Sharma, the Tribunal held that the assessee had discharged its duty by providing necessary documents and the onus shifted to the AO, which was not discharged. Therefore, this addition was also deleted.
Key Issues
Whether the disallowance of excess contribution to provident fund under Rule 87 of the IT Rules is justified, and whether the addition of unsecured loans as unexplained cash credits under Section 68 of the Act is valid when the assessee has provided sufficient evidence.
Sections Cited
250, 143(2), 142(1), 143(3), 68, 115BBE, 87, 144B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
PER KESHAV DUBEY, JUDICIAL MEMBER:
This Appeal at the instance of the assessee is directed against the order of ld. CIT(A)/NFAC dated 9.8.2024 vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1067471201(1) passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”) for the assessment year 2018-19.
The assessee has raised the following grounds of appeal:
As submitted by the AR of the assessee, there is a delay of 35 days in filing the appeal before this Tribunal. The ld. Counsel for the assessee has also drawn our attention on the petition for condonation of delay in filing appeal by submitting that the assessee due to certain personal exigencies had to travel to Rajasthan due to which the assessee could not file the appeal within the time prescribed under the Act.
On going through the petition, we find that the main reason as cited for delay in filing the appeal before this Tribunal is that the assessee due to his personal exigency had to travel to Rajasthan due to which the assessee could not file the appeal within the time. We are of the considered opinion that the delay was neither intentional nor deliberate and the assessee cannot be said to be callous in its approach in filing the appeal before us. Being so, when substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserve to be preferred, for the other side cannot claim to have vested right for injustice being done because of non-deliberate delay. It is not the case of the revenue that the belated appeal was filed deliberately. Therefore, we have to prefer substantial justice rather than technicality in deciding the same. Therefore, in our opinion, this is a fit case to condone the short delay of 35 days in filing the appeal before this Tribunal. Accordingly, the delay is condoned and the appeal is admitted for adjudication.
Abhay Hemrajji Sharma, Koppal Page 3 of 9 5. Now the brief facts of the case are that the assessee is engaged in the business of manufacturing RCC, PCC Poles in the name and style of M/s. Ghanshyam Enterprises. The assessee for the impugned assessment year 2018-19 filed his return of income on 26.02.2019 by declaring total income of Rs.6,11,040/-. Thereafter, the case of the assessee was selected for complete scrutiny assessment on the following issues: 1. Unsecured loans 2. Excess contribution to provident fund, superannuation fund or gratuity fund. 5.1 Accordingly the notices u/s 143(2) as well as u/s 142(1) of the Act were issued calling for various details and information. Further, the show-cause notice dated 22.04.2021 was also issued by the AO and the assessee made his submission on 14.10.2019 and 15.10.2020. The AO concluded the assessment u/s 143(3) of the Act on 11.5.2021 determining the total income at Rs.62,38,477/- by making total addition of Rs.56,27,437/- under the following heads: a) Excess contribution to provident fund:- During the course of assessment proceedings, the AO found that the expenses towards salary paid and claimed for the year in question are only to the tune of Rs.4,33,616/-. However, it was observed that assessee had claimed contribution to provident fund amounting to Rs.2,57,706/- and contribution to any other fund amounting to Rs.66,336/- totaling Rs.3,24,042/-, which in the opinion of the AO was excess contribution claimed by the assessee to the tune of Rs.2,06,966/- by invoking the provision of rule 87 of the I Tax Rules. The AO was of the opinion that Rule 87 of the I.T. Rules along with the concurrent reading of the EPF and Miscellaneous Provisions Act, 1952, the claim of deduction to the extent of 27% of the salary paid shall be allowed. Therefore, the excess Abhay Hemrajji Sharma, Koppal Page 4 of 9 contribution claimed by the assessee to the tune of Rs.2,06,966/- (Rs.3,24,042/- (-) Rs.1,17,076/-) was disallowed as per Rule 87 of the I.T. Rules. b) Large increase in unsecured loans:- During the course of assessment proceedings, the AO found that there was a large increase in unsecured loans during the financial year 2017-18, the total increase being Rs.94,94,328/-. However, the AO found that the total increase in unsecured loans to the extent of Rs.52,84,910/- has not been proven to be genuine by the assessee and accordingly the said sum is deemed to be unexplained credit u/s 68 of the Act and added to the income of the assessee u/s 68 of the Act. c) Disallowance of interest paid on loans:- As the above loans are held to be non-genuine by the AO, the interest totaling to Rs.1,35,561/- claimed to be paid/payable to the said parties on the loans are also disallowed amounting to Rs.1,35,561/- and added to the income of the assessee.
Aggrieved by the assessment completed u/s 143(3) r.w.s. 144B of the Act dated 11.5.2021, the assessee preferred an appeal before ld. CIT(A)/NFAC.
The ld. CIT(A)/NFAC dismissed the first issue i.e. the alleged excess contribution claimed by the assessee amounting to Rs.2,06,966/- holding that the same should be disallowed as per Rule 87. Further, with regard to total addition amounting to Rs.52,84,910/- added u/s 68 of the Act as unexplained credit, the ld. CIT(A)/NFAC grants relief amounting to Rs.37,52,295/- out of total addition of Rs.52,84,910/- & confirmed the addition of Rs. 15,32,615/- i.e. the alleged loan taken from Smt. Seema Sharma. Lastly, the addition amounting to Rs.1,35,561/- is also deleted by Abhay Hemrajji Sharma, Koppal Page 5 of 9 the ld. CIT(A)/NFAC and accordingly the appeal filed by the assessee was partly allowed by the ld. CIT(A)/NFAC.
Aggrieved by the order of ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal. The assessee has also filed the paper book comprising 230 pages enclosing therein various documents/records in support of his case.
Before us, the ld. A.R. of the assessee submitted that the assessee had in fact paid total salary and wages to his employees amounting to Rs.12,40,616/- and not Rs.4,33,616/- as claimed by AO. It is also submitted that the assessee has paid total contribution towards the employee benefit expenses on a total amount of Rs.12,40,616/- which includes amount of salary paid being capitalized amounting to Rs.8,07,000/-. Therefore, the AR of the assessee submitted that the assessee can contribute up to 27% of Rs.12,40,616/- which works out to Rs.3,34,966/-. However, the assessee has made total contribution of only Rs.3,24,042/- which is much less than the statutory limit prescribed under Rule 87 of the I.T. Rules. Further, with regard to addition of Rs.15,32,615/-, as confirmed by the ld. CIT(A)/NFAC, the assessee submitted that the assessee had received loan from Smt. Seema Sharma, Prop: Moti Industries, Koppal during the Assessment year under consideration. It is also submitted that a detailed written submission before the CIT(A)/NFAC together with the financial statements and confirmation letter of Seema Sharma were submitted.
The ld. D.R. on the other hand, supported the orders of the authorities below and submitted that the authorities below have correctly by invoking rule 87 had disallowed the excess contribution claimed by the assessee to the tune of Rs.2,06,966/-. Further with Abhay Hemrajji Sharma, Koppal Page 6 of 9 regard to the addition of Rs.15,32,615/-, as confirmed by the ld. CIT(A)/NFAC, the ld. DR submitted that the assessee has failed to furnish the evidence of creditworthiness of the lender by not producing the bank statement & copy of ITR/Balance sheet of the lender.
We have heard the rival submissions and perused the materials available on record. With regard to disallowance of excess contribution to PF & any other fund amounting to Rs.3,24,042/-, the assessee claimed before us that during the assessment year under consideration, the total salaries paid by the assessee is Rs.12,40,616/- as under: i. Salary debited to profit & loss account Rs. 4,33,616/- ii. Salary capitalized Rs. 8,07,000/- Total Rs.12,40,616/- 11.1 Further before us, the ld. A.R. of the assessee vehemently submitted that assessee can contribute up to 27% of Rs.12,40,616/- which works out to Rs.3,34,966/-. However, in the present case, the assessee has made total contribution of Rs.3,24,042/- which is much less than the statutory limit prescribed under Rule 87 of the I.T. Rules. Before proceedings further, for the sake of clarity the provisions of Rule 87 of the I.T. Rules are reproduced below for ease of reference and record. “Ordinary annual contributions: 87. The ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed (Twenty-seven) percent of his salary for each year as reduced by the employer’s contribution, if any, to any provident fund (whether recognized or not) in respect of the same employee for that year.”
11.2 On going through the above Rule, we find that the annual contribution by the employer to a fund in respect of employee shall Abhay Hemrajji Sharma, Koppal Page 7 of 9 not exceed 27% of his salary for each year as reduced by the employer’s contribution. From the above it is clear that the Rule does not make any difference in so far as payment of salary is concerned i.e. whether the salary is claimed as revenue expenditure or treated as capital in nature. The annual contribution to PF & any other fund by the employer always depend upon the Salary paid to the employees. The annual contribution to PF & any other fund by the employer are to be restricted to 27% of the salary each year irrespective of the fact that how the employer treats the Salary for their accounting purposes.
11.3 On going through the assessment order, we find that the AO has observed that salary and wages paid for the year were only to the tune of Rs.4,33,616/-. Further the AO has also observed that the salary capitalized is Rs. 8,07,000/- being paid towards the building supervision. However, the ld. AO invoked the provisions of Rule 87 of the I.T. Rules and thereby restricted the total contribution to 27% of the salaries amounting to Rs.4,33,616/- which are revenue in nature. We are of the considered opinion that even the provisions of the provident fund Act do not make any difference so far as how the employer treats the salary i.e. whether revenue or capital in nature in their books of accounts. The provisions of Rule 87 also do not restrict that the salary which are capitalized shall not be treated as Salary for the purposes of Rule 87 of IT Rules. The Rule only emphasize that annual contribution in respect of any particular employee shall not exceed 27% of his salary for each year. The emphasis is on his Salary i.e. Employees’s Salary. In view of the above, we are of the opinion that the assessee has not contravene the provisions of Rule 87 and accordingly we direct the AO to delete this addition as made by him by invoking Rule 87 of the I.T. Rules. Accordingly, this ground of appeal of the assessee is allowed.
Abhay Hemrajji Sharma, Koppal Page 8 of 9 11.4 Now coming to the addition of Rs.15,32,615/- as confirmed by the ld. CIT(A)/NFAC, the ld. A.R. of the assessee submitted that a detailed written submission along with the financial statements, confirmation letter from Smt. Seema Sharma has been filed before the ld. CIT(A). However, ld. CIT(A) grossly erred in overlooking the submission made by the assessee in so far as providing the proof and evidence with regard to the loan availed from Smt. Seema Sharma. Before us, the ld. A.R. of the assessee also drew our attention on the ledger account copy of Moti Industries as well as confirmation letter of Smt. Seema Sharma filed before the ld. CIT(A). Further, before us, the ld. A.R. of the assessee also submitted that the ITR-V of Smt. Seema Sharma for 3 years were also filed before the AO. Therefore, in our opinion, the assessee has primarily discharged his duty by providing the financial statement, confirmation letter, Ledger A/c Copy along with the income tax returns by providing the identity, creditworthiness and genuineness of the loan transactions. Once the assessee furnishes the details of the loan creditor and the transaction, the onus shifts to the AO to prove that the transaction is not genuine. In view of the above, we delete the addition confirmed by the ld. CIT(A) of Smt. Seema Sharma u/s 68 of the Act. In the result, this ground of appeal is also allowed.