DARSHAN VIJAYSINH BHATIA,HYDERABAD vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-11(1), HYDERABAD

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A-SMC”, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA No.1894/Hyd/2017 Assessment Year: 2013-14 Shri Darshan Vijaysinh vs. ACIT, Bhatia, Circle-11(1), Hyderabad. Hyderabad. PAN- ABXPB8421E (Appellant) (Respondent) Assessee by : Shri Ajay Gandhi Revenue by : Shri B. Suresh Babu Date of hearing : 25-04-2018 Date of pronouncement : 27-04-2018 ORDER PER SHRI B. RAMAKOTAIAH, AM: This is an appeal by Assessee against the order of Ld. CIT(A)-5, Hyderabad dated 28.06.2017. The issue in this appeal by Assessee is with reference to disallowance of an amount Rs. 6,25,027/- as delayed payment of ESI and PF pertaining to employee’s contribution. 2. During the scrutiny proceedings A.O noticed that there were delays in payments of ESI and PF of employee’s contributions, even though they were paid before the filing of tax return. A.O has asked Assessee why the same should not be disallowed as the amounts are deemed to be income under the provisions of Sec. 2(24)(x) r.w.s 36(1)(va) of the IT Act. Assessee submitted that he is eligible to claim the expenses and relied on the decisions of the Hon’ble Supreme

2 ITA Nos. 1894/Hyd/2017 Darshan Vijaysinh Bhatia, Hyderabad. court in the case of CIT Vs Alom Extrusions Ltd., [2009] 319 ITR 306 (SC) and the decision of Hon’ble Allahabad High Court in the case of Sagun Foundry Pvt Ltd., Vs CIT, reported in [2017] 78 taxmann. Com 47 (Allahabad). A.O did not agree and relied upon various case law as noted in para 2.1 of the order and more particularly the judgment of Hon’ble Gujarat High Court in the case of CIT Vs Gujarat Road Transport Corporation reported in [2014] 366 ITR 170 (Guj). The delayed payment of employees contribution towards ESI and PF are brought to tax. 3. Ld. CIT(A) after elaborate discussion in his order more or less agreed with the opinion of AO relying on the Hon’ble Gujarat High Court in the case of CIT Vs Gujarat State Road Transport Corporation (supra) and dismissed Assessee’s appeal. 4. After considering the rival contentions, I am of the opinion that this issue now stands decided in favour of Assessee by the various coordinate bench decisions and that of Hon’ble Allahabad High Court. The Hon’ble Allahabad High Court in the case of Sagun Foundry Pvt Ltd., (supra) has analyzed all the case law on the issue including that of Hon’ble Gujarat High Court and following the Supreme Court Judgment in the case of Alome Extrusions has held as under:

“26. The question, whether benefit under Section 43B, as a result of amendment of Finance Act, 2003, is retrospective or not, came to be considered in Commissioner of Income-Tax Vs Alom Extrusions Ltd. (supra). Court considered the intent, purpose and object in the historical back drop of insertion of Section 43B and its progress by way of various amendments. Referring Section 2(24)(x) it said, income is defined under Section 2(24) which

3 ITA Nos. 1894/Hyd/2017 Darshan Vijaysinh Bhatia, Hyderabad. includes profits and gains. Further in clause (x) of Section 2(24) any sum received by Assessee from employees as 'contributions' to any provident fund/superannuation fund or any fund set up under Act 1948, or any other fund for welfare of such employees constitute 'income'. This is the reason why every Assessee/Employer was entitled to deduction even prior to April, 1, 1984, keeping books on mercantile system of accounting, as a business expenditure, by making provision in his books of account in that regard. Assessee was capable of keeping money with him and just by mentioning in accounts, was able to claim deduction as business expenses. Section 43B was inserted to check this practice and it resulted in discontinuing mercantile system of accounting with regard to tax, contributions etc. With induction of Section 43B an Assessee could claim deduction on actual payment basis. By Finance Act, 1988 Parliament inserted first proviso w.e.f. 01.04.1988 which inter alia provides that any sum payable by Assessee by way of tax, duty, cess or fee, if payment is made after closing of accounting year but before date of filing of Return under Section 139(1), Assessee would be entitled to deduction on actual payment basis. This proviso did not include within its ambit, contributions under labour welfare statutes. By Finance Act, 1988, Second Proviso thus Second proviso was further amended by Finance Act, 1989 w.e.f. 01.04.1989. 27. Court held that Assessee/employer thus would be entitled to deduction only if contribution stands credited on or before due date given in the Act 1952 or Act 1948. Second proviso created difficulties, inasmuch as under Act, 1981, due date was after the date of filing of returns and thus industries made representations to the Ministry of Finance. Court, looking to the history of amendments held, it is evident that Section 43B, when enacted in 1984, commences with a non obstante clause. The underlying object being to disallow deductions claimed merely by making a book entry based on the mercantile system of accounting. At the same time, Section 43B made it mandatory for the Department to grant deduction in computing income under Section 28 in the year in which tax, duty, cess etc. is actually paid. Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under Provident Fund Act, Municipal Corporation Act (Octroi) and other Tax laws. Therefore, by way of First Proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax duty cess or fee is paid before the date of filing of the return under Act 1961, Assessee would than be entitled to deduction. This relaxation /incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer should not sit on the collected contributions and deprive workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds. But when implementation problems were pointed out for different due

4 ITA Nos. 1894/Hyd/2017 Darshan Vijaysinh Bhatia, Hyderabad. dates, uniformity was brought about in first proviso by Finance Act, 2003. Hence, amendment made by Finance Act 2003 in Section 43B is retrospective, being curative in nature and apply from 01.04.1988. In the result when contribution had been paid, prior to filing of return under Section 139(1), Assessee/employer would be entitled for deduction and since deletion of Second Proviso and amendment of First Proviso is curative and apply retrospectively w.e.f. 01.04.1988. 28. From the aforesaid judgment, we find that irrespective of the fact that deduction in respect of sum payable by employer contribution was involved, but Court did not restrict observations, findings and declaration of law to that context but looking to the objective and purpose of insertion of Section 43B applied it to both the contributions. It also observed clearly that Section 43B is with a non-obstante clause and therefore over ride even if, anything otherwise is contained in Section 36 or any provision of Act 1961. 29. Therefore, we are clearly of the view that law laid down by High Courts of Karnataka, Rajasthan, Punjab & Haryana, Delhi, Bombay and Himachal Pradesh have rightly applied Section 43B in respect to both contributions i.e. employer and employee. Otherwise view taken by Gujarat High Court and followed by Kerala High Court, with great respect, we find expedient to dissent therewith”. 5. Though the DR relied upon the certain judicial precedents which are in favour of the Revenue, in view of the decision of the Hon’ble Supreme Court in the case of CIT Vs Vegetable products Limited 88 ITR 192 (SC), wherein Hon’ble Supreme Court held that where two reasonable constructions of a taxing provision are possible that construction which favours Assessee must be adopted, therefore, by respectfully following the decision of the Hon’ble Allahabad Court, I prefer to follow the view expressed by the Court which are in favour of Assessee.

5 ITA Nos. 1894/Hyd/2017 Darshan Vijaysinh Bhatia, Hyderabad. contribution is deposited on or before the due date of furnishing of return of income u/s 139(1) of the IT Act then, no disallowance can be made towards employees contribution alone. Accordingly, I agree with Assessee’s contentions and therefore set aside the order of A.O and CIT(A) on the issue and allow the grounds. AO is directed to allow the amounts. 7. In the result, appeal filed by the Assessee is allowed.

Pronounced in the open court on 27th April, 2018.

Sd/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER

Hyderabad, Dated: 27th April, 2018. KRK 1) Shri Darshan Vijaysinh Bhatia C/o Gandhi & Gandhi CAs, 1002, Paigah Plaza, Basheerbagh, Hyderabad- 63 2) ACIT, Circle-11(1), Hyderabad. 3) CIT(A) -5, Hyderabad. 4) The Pr.CIT-5 Hyderabad. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File