SHALIMAR FABRICATORS PVT LTD,KOLKATA vs. ITO, WARD 6(1), KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘A’ BENCH, KOLKATA (Before Sri Aby T. Varkey, Judicial Member & Sri Manish Borad, Accountant Member) I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd................................................Appellant [PAN: AAMCS 1382 C] Vs. ITO, Ward-6(1), Kolkata.......................................................Respondent Appearances by: Sh. K.K. Khemka, Adv., appeared on behalf of the Assessee. Sh. Biswanath Das, Addl. CIT, appeared on behalf of the Revenue. Date of concluding the hearing : February 23rd, 2022 Date of pronouncing the order : March 03rd, 2022 ORDER Per Manish Borad, Accountant Member:

These appeals filed by the assessee pertaining to the Assessment Years (in short “AY”) 2017-18 & 2018-19 are directed against the order of ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC) [in short ld. “CIT(A)”] dated 27.09.2021 & 11.10.2021 vide Appeal No. CIT(A), Kolkata-5/10080/2019-20 & Appeal No. CIT(A), Kolkata- 5/10053/2019-20 which are arising out of the assessment order framed u/s 143(1) of the Income Tax Act, 1961 (in short the “Act”) dated 11.12.2019 & 16.10.2019 by AO, CPC, Bangalore.

Assessment Year 2017-18:

“1. That the NFAC has erred in law and on facts in confirming disallowance of employees’ contribution to PF&ESI totalling Rs.7,71,710/- although the same was paid within the date of filing returns. 2. That the NFAC has erred in law and on facts in confirming the charging of interest of Rs.4,54,728/- under Section 234B and Rs.98,243/- under Section 234C.

2 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. 3. That the assessee craves leave to alter/amend any grounds of appeal and to take additional grounds before or at the time of hearing of the appeal.” Assessment Year 2018-19:

“1. That the NFAC has erred in law and on facts in confirming disallowance of expenditure of Rs.2,58,270/- being TDS late payment interest under section 37. 2. For that the erred in law and on facts in not giving specific directions to allow claim under section 43B of Rs.8,43,343/- paid this year (AY 2018-19) on payment basis attach added Bank in earlier years. 3. That the NFAC has erred in law and on facts in confirming disallowance of employees’ contribution to PF&ESI totalling Rs.11,64,817/-. Although the same was paid within the date of filing returns. 4. That the NFAC has erred in law and on fats in confirming the charging of interest u/s 23A Rs.20,246/- and of Rs.2,20,480/- under section 234B and Rs.102244 under section 234C. 5. That the assessee craves leave to alter/comment any grounds of appeal and to take additional grounds before or at the time of hearing of the appeal.” 3. The first common issue relates to disallowance u/s 36(1)(va) of the Act for delay in payment of employees’ contribution towards PF&ESI in the respective fund of the Government. The alleged amount is Rs.7,71,710/- for AY 2017-18 and Rs.11,64,817/- for AY 2018-19. Brief facts for both the years relating to the issue are that in the course of assessment proceedings ld. AO, based on the observation of the auditor in the Tax Audit Report, u/s 44AB of the Act noticed that some of the employees’ contributions towards PF&ESI has not been deposited before the due date following the immediate next month though it was observed that the alleged amounts have been paid before the due date of filing the returns of income u/s 139(1) of the Act. Ld. AO invoked the provisions of Section 36(1)(va) of the Act and disallowed the amount and the matter was carried before the ld. CIT(A). He also confirmed the view and further held that the amendment brought in by the Finance Act, 2021 inserting Explanation to Section 36(1)(va) of the Act stated is retrospective in nature and therefore provision of Section 43B of the Act will not apply on the employees’ contribution towards PF&ESI and the same deserves to be disallowed.

3 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. 18 & 2018-19 relating to disallowance of employees’ contribution towards PF&ESI is squarely covered in favour of the assessee by the decision of the co-ordinate Bench in the case of Lumino Industries Ltd. vs. ACIT, Circle-5(1), Kolkata in ITA No. 365/Kol/2021 order dated 17.11.2021.

“17. Have heard both the parties. We note that the Finance Bill, 2021 has brought in an amendment which disallows the employees’ contribution made in PF and ESI if not made within the due date as prescribed by the respective statutes (PF and ESI Act). So after the amendment has been inserted according to Shri Miraj D Shah takes effect from 1st April, 2021 i.e. AY 2021-22 and subsequent assessment year and if the remittance of PF/ESI Employees’ Contribution is not made within the time prescribed by the PF/ESI Act then the remittance cannot be allowed as a deduction which is prospective in operation. Whereas according to Ld. CIT(A), the amendment brought in is clarificatory in nature so, retrospective in operation. So we have to adjudicate this issue whether the amendment brought in by Finance Act, 2021 is prospective or retrospective in operation. We note that before this amendment has been inserted by Finance Bill, 2021, the Hon’ble Jurisdictional Calcutta High Court in the case of Shri Vijayshree Ltd. Ltd.(supra), M/s Philips Carbon Black Ltd.(supra), M/s Coal India Ltd.(supra), M/s Akzo Nobel India Ltd. (supra) has held that the payment of employees’ contribution if made by an assessee before the due date of filing of return of income u/s 139(1) of the Act, is allowable as a deduction. We note that by Finance Act, 2021, the provision of Section 36(1)(va) as well as Section 43B has been amended to this extend by inserting the Explanation 2 whereby it is clarified that the provision of Section 43B shall not apply and shall be deemed never to have been applied for the purpose of determining the due date under this clause. For ready reference, we reproduce the Explanation-2 to Section 36(1)(va) as under: “Section 36(1)(va) Explanation-2 - For the removal of doubts, it is hereby clarified that the provisions of Section 43B shall not apply and shall be deemed never to have been applied for the purpose of determining the ‘due date* under this clause.” 18. We find that this amendment has been brought in the Act to provide certainty about the applicability of Section 43B in respect of belated payment of employees’ contribution. In order to test whether the amendment brought in later is retrospective or not one has to apply the test as laid by the Hon’ble Supreme Court in the case of M/s Snowtex Investment Ltd. (supra) wherein the Hon’ble Supreme court took note of the law laid down on this issue by the Constitution Bench in M/s Vatika Township Ltd. and held that the intent of the Parliament/legislature need to be looked into for ascertaining whether the amendment should be

4 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. retrospective or not. In Vatika Township Ltd. (supra) the Hon’ble Supreme Court held that the notes on clauses appended to the Finance Bill will throw light as to the legislative intent; because it has to be borne in mind that Parliament/legislature is aware of three concepts before an amendment is brought in, which can be discerned from reading of the “Notes on Clauses” to the Bill which are (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. So when we adjudicate whether the view of Ld CIT(A) that the explanation 2 brought in by Finance Act, 2021 is retrospective, let us look at the “Notes on Clauses and the relevant clauses 8 & 9 of the Finance Bill, 2021 (supra) pertaining to the issue in hand which in clear and unambiguous terms spells out the intention of Parliament that the amendment shall take effect from 1st April, 2021 and therefore will accordingly apply to Assessment Year 2021-22 and subsequent years. So since the legislative intent is clear, the amendment brought in by Finance Act, 2021 on this issue as discussed is prospective and Ld. CIT(A) erred in holding otherwise. So till AY 2021-22, the Jurisdictional High Court’s view in favor of assessee will hold good and is binding on us. As discussed the decision of the Hon’ble Delhi High Court in Bharat Hotels Ltd. (supra) which was in favor of revenue has not considered the decision of the Co-ordinate Division Bench decision in M/s Aimil Ltd.(supra) which is in favour of assessee. So we note that later decision of the Delhi/Hyderabad Tribunal have followed the decision favouring assessee in the light of the Hon’ble Supreme Court decision in M/s Vegetable Products (supra). In the light of the aforesaid decision and relying on the ratio of the Hon’ble Supreme Court in the case of Vatika Township Pvt. Ltd. (supra) and M/s Snowtex Investment Ltd. (supra) and also taking note of the binding decision of the Hon’ble Jurisdictional Calcutta High Court on this issue before us in Shri Vijayshree Ltd. Ltd.(supra), M/s Philips Carbon Black Ltd.(supra), M/s Coal India Ltd.(supra), M/s Akzo Nobel India Ltd. (supra), we set aside the impugned order of Ld CIT(A) and direct the AO to allow the claim of deduction in respect of employees’ contribution shares towards ESI, PF, by the assessee before the due date of filing of return u/s 139(1) of the Act. Therefore the appeal of assessee succeeds and so, it is allowed in favor of assessee.” 7. Ld. Counsel for the assessee brought to our notice that the assessee has remitted the PF&ESI dues before the due date of filing of return of income u/s 139(1) of the Act and this fact remains uncontroverted by ld. D/R.

5 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. are deleted. Accordingly ground no. 1 raised for AY 2017-18 and ground no. 3 raised for AY 2018-19 are allowed.

“7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of

6 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra). The relevant extract of the judgment reads as under: FACTS During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer levied interest under section 215 as well as under section 139. The assessee claimed that since taxes which were payable were delayed, the assessee's financial resources increased which were available for business purposes. Hence, the interest which was paid to the Government was interest on capital that would be borrowed by the assessee otherwise. Hence, the amounts should be allowed as deduction. The revenue did not allow such deduction. The High Court affirmed the view. On appeal to the Supreme Court: HELD When interest is paid for committing a default in respect of a statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of income- tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessee’s income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Act, the payment of such interest is inextricably connected with the assessee’s tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction. Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37. In the above judgment, the claim of the assessee for interest expenses was denied as it defaulted to make the payment of advance tax as per the provisions of the Act. The advance tax is nothing but income tax only which the assessee has to pay on his income. In the instant case the default relates to the delay in the payment of advance tax and consequently interest was charged on the delayed payment of advance tax. In the above judgment the Hon’ble Apex Court held that as Income Tax paid by the assessee is not allowable deduction and therefore interest emanating from the delayed payment of income tax (advance tax) is also not allowable deduction. However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand. The issue of delay in the payment of service tax is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura Vs. CIT

7 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgment is reproduced below : “The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the scud view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FB) wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue. ” In view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction. The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand. Thus, in our considered view, the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) is not applicable in the instant facts of the case. Thus, we hold that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra). We also find that the Hon'ble Supreme Court in the case of Lachmandas Mathura (Supra) has allowed the deduction on account of interest on late deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act. In this view of the matter, we find no reason to interfere in the order of Ld. CIT(A) and we uphold the same. Hence, this ground of Revenue is dismissed.” 16. On perusal of the above finding of the Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), we find that the fee paid u/s 234E of the Act for the delay in filing of the quarterly returns has been held to be a business expenditure allowable u/s 37(1) of the Act. This ratio is squarely applicable on the issue raised before us. Ld. Sr. D/R failed to bring any binding precedence in favour of the Revenue on this issue. We, therefore, respectfully following the decision of this Tribunal, hold that the assessee’s

8 I.T.A. Nos.: 386 & 428/Kol/2021 Assessment Years: 2017-18 & 2018-19 Shalimar Fabricators Pvt. Ltd. claim of payment of fee u/s 234E of the Act deserves to be allowed as an expenditure u/s 37(1) of the Act. We accordingly set aside the finding of the ld. CIT(A) and allow the ground no. 1 raised by the assessee for AY 2018-19.

Sd/- Sd/- [Aby T. Varkey] [Manish Borad] Judicial Member Accountant Member Dated: 03.03.2022 Bidhan (P.S.) Copy of the order forwarded to: 1. Shalimar Fabricators Pvt. Ltd., 10/D/2, 5th Floor, Kemwell Tower, Ho Chi Minh Sarani, Kolkata-700 071. 2. ITO, Ward-6(1), Kolkata. 3. CIT(A)- National Faceless Appeal Centre (NFAC) 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata.