SHETH REALTORS,MUMBAI vs. ACIT-CC-7(1), MUMBAI

Ground No. 3 - Disallowance on account of delay in payment of Employee's contribution to Provident Fund & ESIC of Rs. 40,865:

The appellant prays that: a. Disallowances under addition made to Work in Progress for the year 2016- 2017 of Rs. 52,94,101/- may be deleted. b. Disallowance on penalty/interest paid on late payment of TDS of Rs.4,15,168/- may be deleted. c. Disallowance on account of delay in payment of Employee's contribution to Provident Fund & ESIC of Rs. 40,865 may be deleted. d. any other relief your honours may deem fit.”

The issue arising in Ground No.1, raised in assessee’s appeal, pertains to the disallowance of expenditure incurred by the assessee on the purchase of material, labour cost, selling and marketing expenses and other expenses.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a partnership firm incorporated on 12/03/2012 and is engaged in the business of development and construction of real estate. The assessee firm has constructed a project at Hill Road, Bandra (West), Mumbai, in the name of “Beau Pride”. For the year under (A.Y. 2018-19) 4 consideration, the assessee filed its return of income on 08/10/2018, declaring Nil income. The return filed by the assessee was selected for complete scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has claimed material purchases of Rs.6,42,94,166, labour cost of Rs.5,24,20,829, selling and marketing expenses of Rs.1,08,11,511 and staff cost of Rs.11,60,799, during the year under consideration. In order to verify the genuineness of purchases of material, labour, sales and marketing expenses, notice under section 133(6) of the Act was issued to various parties. Since many parties did not respond to the notices issued under section 133(6) of the Act, the assessee, vide notice dated 22/02/2021, was asked to submit details of expenditure along with documentary evidence. In response thereto, the assessee submitted partial details of expenses along with documentary evidence. After considering the submissions filed by the assessee, which were partial in nature, the Assessing Officer (“AO”), vide order dated 30/09/2021, passed under section 143(3) of the Act, considered expenditure to the tune of Rs.1,37,35,456 as non-genuine and disallowed the same. Accordingly, the AO reduced the work-in-progress declared by the assessee. The disallowance made by the AO in respect of each of the parties is as follows: – Name of the Purchase Status of notice Bills produced by Disallowance Supplier/ Head Amount u/s 133(6) the assessee of Expenses issued Builders Centre 7,32,110 Served, but no Bills submitted by 96,786 response assessee are of received Rs.6,35,324 only Navdeep 84,56,961 Served; - - Construction Response company received

The learned CIT(A), vide impugned order, granted partial relief to the assessee and upheld the disallowance only to an extent of Rs.52,94,170. The (A.Y. 2018-19) 6 relevant findings of the learned CIT(A) on this issue are reproduced as follows:– “7.4. I have considered the discussion in the assessment order and the submission of the appellant. During the assessment proceedings, the AO conducted enquiries with the vendors of the appellant by issuing notices u/s 133(6) of the Act. It was observed that the notices u/s 133(6) of the Act were served to all parties however, the parties had not replied to the notices. Further, the appellant could not furnish all the bills & invoices in support of some purchases/expenses. Therefore, an addition of 1,37,35,456/- was made as disallowance of expenses. Before me, the appellant has provided detailed explanation with respect each expenditure/purchases disallowance by the AO. As seen from the explanation submitted by the appellant, the party at serial no 1 of the table above, had not responded to the notice of the AO but the appellant has submitted sample documentary evidence in support of its contention. It is seen that the said party also figure as vendors in the subsequent years and no addition with respect to the purchases made from the said party is made in these years. With these findings, I hold that the purchases from the party at Sr no 1 as explained. 7.4.1. With respect to parties at Sr no 7 to 9, it is seen that the said parties had not responded to the notices issued by the AO. Further the appellant had not produced the bills & invoices with respect to these purchases. Therefore, I uphold the disallowance of Rs 33,58,536/- made by the AO. 7.4.2. With respect to the purchase/expenses listed at s no 2 to 6, appellant has claimed that it had submitted major invoices along with the details such as PAN, and addresses to prove the genuineness of the parties. It is observed that these parties had not responded to notices issued by the AO. Total disallowance with respect to the parties at sr no 2 to 6 above comes to Rs 58,65,368/-. While on one hand the AO has held these expenses as disallowable based on the enquires conducted during the assessment proceedings, Appellant has claimed to have provided all the supporting document with respect of major expenses/purchases. To meet the end of justice, the disallowance with respect to these expenses/purchases is restricted to 33% of Rs 58,65,368/- which comes to Rs 19,35,571/-. 7.4.3. Considering the discussion above, the total disallowance of WIP is restricted to Rs 52,94,107/-(Rs 33,58,536/- + Rs 19,35,571/-). The appellant gets part relief of Rs 84,41,349/-.”

During the hearing, the learned Senior Counsel, appearing for the assessee, submitted that in the assessee’s own case for the assessment year (A.Y. 2018-19) 7 2017-18, the coordinate bench of the Tribunal vide order dated 30/09/2025 restricted the similar disallowance to an extent of 15% from 33% / 100% made by the learned CIT(A). The learned Senior Counsel further submitted that in the year under consideration, two of the parties with whom the assessee had transactions are similar to those in the preceding year. By referring to the application seeking admission of additional evidence, the learned Senior Counsel submitted that ledger confirmations, PAN details of suppliers and their addresses in respect of each of the parties are available, and none of the transactions by the assessee is bogus/non-genuine.

On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the order passed by the lower authorities and submitted that only those expenses have been disallowed where the assessee failed to produce the necessary documentary evidence.

Having considered the submissions of both sides and perused the material available on record, in the present case, it is evident that the assessee had transactions with 15 parties in the nature of purchase of material, labour or selling and marketing expenses, etc., totalling to Rs.3,41,48,920. During the assessment proceedings, in order to verify the genuineness of the purchases by the assessee, the AO issued notices under section 133(6) of the Act to these parties. However, none of these parties respond to the notices issued under section 133(6) of the Act. In response to the notice issued to the assessee during the assessment proceedings, the assessee furnished certain bills in respect of these purchases, and accordingly, the AO made the disallowance of Rs.1,37,35,465 in respect of the expenses (A.Y. 2018-19) 8 which were not corroborated by any documentary evidence. The learned CIT(A), vide impugned order, granted partial relief to the assessee, and where major invoices along with details such as PAN and addresses to prove the genuineness of the parties were furnished by the assessee, restricted the disallowance to 33%. However, in cases where neither the parties had responded to the notices issued by the AO nor the assessee had produced the bills/invoices with respect to the purchases, the learned CIT(A) upheld the entire disallowance.

In the appeal before us, it is the plea of the assessee that all the documents in respect of these parties are available with the assessee. Accordingly, the assessee has filed the ledger confirmation, bank statements, and other supporting documents in respect of the expenses debited to the work in progress as additional evidence before us, which forms part of the paper book from pages 170-2375. As noted in the foregoing paragraphs, the lower authorities made the impugned addition as the assessee failed to furnish the necessary documentary evidence in support of the purchases. Since the evidence now furnished before us has not been examined by any of the lower authorities, we deem it appropriate to restore this issue to the file of the jurisdictional AO for de novo adjudication after duly examining/verify the evidence furnished by the assessee before us. At this stage, it is also pertinent to note that the coordinate bench of the Tribunal in the assessee’s own case in Sheth Realtors vs. ITO, in vide order dated 30/09/2025, has restricted the similar disallowance to an extent of 15%. Accordingly, we direct the AO to also keep in consideration the aforesaid (A.Y. 2018-19) 9 decision of the coordinate bench while deciding this issue afresh. Needless to mention, no order shall be passed without affording reasonable and appropriate opportunity of hearing to the assessee. With the above directions, the impugned order on this issue is set aside, and ground no.1 raised in assessee’s appeal is allowed for statistical purposes.

The issue arising in ground no.2, raised in the assessee’s appeal, pertains to the disallowance of interest on the delayed payment of TDS.

Having considered the submissions of both sides and perused the material available on record, we find that the AO, vide order passed under section 143(3) of the Act, disallowed the interest amounting to Rs.4,15,168 on delayed payment of TDS under section 37(1) of the Act. Vide impugned order, the learned CIT(A) failed to adjudicate the ground raised by the assessee on this issue. Being aggrieved, the assessee is in appeal before us. As per the assessee, the interest on delayed payment of TDS is compensatory and not penal in nature. Accordingly, as per the assessee, the same is allowable under section 37(1) of the Act.

We find that the Hon’ble Bombay High Court in Ferro Alloys Corporation Ltd. vs. CIT, reported in (1992) 196 ITR 406 (Bom), held that the interest levied for delayed payment of TDS is not an allowable business expenditure. The relevant findings of the Hon’ble Bombay High Court, in the aforesaid decision, are reproduced as follows: - “At the instance of the assessee, the following question of law is referred for the opinion of this court under section 256(1) of the Income-tax Act, 1961:

We further find that the issue whether the interest under section 201(1A) of the Act paid by the assessee was an expenditure incidental to business and allowable as a deduction from the profits and gains of the business, came up for consideration before the Hon’ble Madras High Court in CIT vs. Chennai Properties & Investment Ltd., reported in [1999] 239 ITR 435 (Madras). While answering the issue in negative and in favour of the Revenue, the Hon’ble Madras High Court, after considering the decision of the Hon’ble Supreme Court in the case of Bharat Commerce & Industries Ltd. vs. CIT, reported in [1998] 230 ITR 733 (SC), observed as follows: - “14. As already noticed, the payment of interest which takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be paid but not paid in time, which rendered (sic) the assessee liable for payment of interest, was in the nature of a direct tax and in settlement of the income-tax payable under the Income-tax Act. The interest (A.Y. 2018-19) 11 paid under section 201(1A), therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by the learned counsel for the assessee.

The counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Mahalakshmi Sugar Mills Co. (supra) also relied on the decisions of the Apex Court in the cases of Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR 684 / 67 Taxman 546 ; Malwa Vanaspati & Chemical Co. v. CIT[1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. v. CIT[1994] 205 ITR 163. In all those cases, the Court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further, liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure.

The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce & Industries Ltd. (supra) rejected the argument advanced by the assessee that retention of money payable to the State as tax or income-tax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention, would assume the character of business expenditure. The Court held that an assessee could not possibly claim that it was borrowing from the State the amounts payable by it as income-tax and utilising the same as capitalization in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure.

The question referred to us, therefore, is required to be and is answered in the negative, in favour of the revenue and against the assessee. The revenue shall be entitled to costs in the sum of Rs. 1,000.”

The learned Senior Counsel placed reliance upon certain decisions of the coordinate bench of the Tribunal on this issue, which are in favour of the assessee. However, no decision of the higher forum contrary to the decisions of the Hon’ble High Courts, as noted above, on this aspect has been relied on behalf of the assessee. Further, the decision of the Hon’ble Supreme Court in Lachmandas Mathuradas vs. CIT, reported in (2002) 254 ITR 799 (SC), relied on behalf of the assessee, pertains to the interest on arrears of sales tax. As noted in the foregoing paragraph, the Hon’ble Madras High Court in Chennai (A.Y. 2018-19) 12 Properties & Investment Ltd. (supra), after considering the decisions rendered in the context of Indirect Tax, in paragraphs 15 and 16 of its judgment, specifically held that the ratio of those cases is not applicable in the context of the Income Tax.

Thus, respectfully following the decisions of the Hon’ble High Courts as cited supra, we do not find any merit in the claim of the assessee in seeking a deduction under section 37(1) of the Act in respect of interest on delayed payment of TDS. Accordingly, the impugned order on this issue is upheld, and Ground No.2 raised in the assessee’s appeal is dismissed.

Ground No.3, raised in assessee’s appeal, pertains to the addition made on account of the delayed payment of employees’ contribution to the Provident fund and ESIC.

Admittedly, this issue is covered against the assessee by the decision of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd vs. CIT, reported in [2022] 448 ITR 518 (SC). Accordingly, respectfully following the aforesaid decision, Ground No.3 raised in the assessee’s appeal is dismissed.

In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 19/01/2026