STEEL CITY BEVERAGES LIMITED,NEW DELHI vs. ITO,WARD-24(1), NEW DELHI

4. Aggrieved the order of the AO the assessee has filed the appeal before the Ld CIT(A) who vide his order dated 05-09- 2023 dismissed the appeal, against which the assessee is in appeal before us.

5. The Ld CIT(A) has observed in his order as under :-

“4.2 Decision on Ground of Appeal No. Ground no 1, 3 and 4 related to disallowance of Rs 57,83,824/- on account of Gratuity Payable in respect of business which was sold by assessee. This amount was shown as opening balance as on 01.04.2017 and assessee claimed as deduction in AY 2018-19 in computation of income. Assessee claimed that this amount was disallowed in earlier years and now this business has been transferred to another entity during the year so this liability has been transferred to transferee unit, so it is allowable u/s 40(A)(7). Assessing officer (AO) disallowed the amount as the conditions of section 40(A)(7) were not complied with. The assessee has claimed this amount as deduction in computation of income. Assessee has also relied on various case laws. Here it is to be noted that this amount was disallowed in earlier years as the same was not paid in those years and amount was shown as payable as on 31.03.2017 and it has become NIL as on 31.03.2018 as the amount payable has been transferred to the buyer of business. However this was item of balance sheet as on 01.04.2017 and it will become balance sheet item of buyer on date of purchase of business. The new entity to whom business was transferred will be able to claim as deduction in the year of payment only. For the appellant this item is not item of profit and loss account in past as well as current year. Balance sheet item can not be claimed as deduction of expenditure during the year. What has been transferred is liability from appellant to new entity who has purchased the business of the assessee. Therefore the AO Has rightly disallowed this amount, this ground is rejected.

Ground no 2 is related to disallowance of Rs 11,18,470/- on account of delayed payments of PF and ESIC. Assessee has claimed this amount as the same was not paid within due date of respective acts but paid before due date of filing of return. The appellant has submitted that though these deposits have been made after the due date as prescribed in the respective Acts, the same has been deposited before the due date of filing the Return of Income and are therefore allowable u/s 43B of the Income Tax Act. The appellant has relied upon various judicial decisions.

4.3 As regards the facts of this appeal, the appellant has disputed this action of AO in making disallowance of Rs 11,18,470/- on account of delayed deposit of employee's contribution to PF and ESI and adjusting the income accordingly.

4.4 The submissions of the appellant has been carefully considered. The AO has made additions of Rs 11.18.470/- to the returned income of assesses u/s 143(3) on account of late deposit of employee contribution to PF and ESI while processing the return of income.

4.5 It is observed that the controversy in the present appeal relates to allowance of any sum received by the appellant as an employer from his employees for the purpose of PF and ESIC, if it is paid beyond the due date as mentioned in section 36(1)(va) of the IT Act. While resolving the issue, the AC has considered the provisions of subsection 36(1)(va) while the appellant has considered the provisions of section 43B of the IT Act.

4.6 This issue of deposit of employee's contribution towards PF/ESI that has been deposited beyond the due date stipulated in the respective Act but deposited before the due date of filing of Return of Income under the Income Tax Act has been highly contentious issue and different Courts have taken different positions, with some in favor of assessee and some against the assessee. The decisions relied upon by the appellant in its written submissions are few such decisions.

4.7 In order to settle the dispute, the Finance Act, 2021 made certain amendments to Section 36(1)(vi) and in Section 43B of the Income Tax Act which is as under- "In section 36 of the Income-tax Act, in sub-section (1), in clause (va), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:-

Explanation 2.-For the removal of doubts, it is hereby clarified that the provisions of section 438 shall not apply and shall be deemed never to have been applied for the Purposes of determining the "due date" under this clause;"

In section 43B of the Income-tax Act, after Explanation 4, the following Explanation shall be inserted, namely:-

Explanation 5.-For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub- clause (x) of clause (24) of section 2 applies.

4.8 Thus, while all delayed deposit of employees contribution to PF and ESI shall not be allowed as a deduction D/s 43B w.e.f. AY 2021-22 onwards explicitly, there still remains to be decided as to whether these deposits are to be allowed U/s 43B for AYs prior to 2021- 22 in view of various favourable decisions of the jurisdictional High 4.9 In this connection it is noted that the Hon'ble Supreme Court has laid to rest all such controversy and dispute for AYs prior to 2021-22 vide its order in the case of Checkmate Services Pvt Ltd dated 12.10.2022. In the said decision the Supreme Court has held that the employer receiving the employees contribution to PF and ESI is doing so in the capacity of a Trust and hence has a greater liability imposed upon it to comply with the statutory deadlines and before the due date mentioned in such welfare enactments and it remains to be in the nature of an income of the employer till it is actually deposited within the due date into the Govt account. The relevant para of the judgment is reproduced as under:

"In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 438 which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, Interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non- obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction.

4.10 In view of the above stated decision of Hon’ble Supreme Court the decisions relied upon by the appellant are no longer relevant since they stand overruled. The grounds of appeal of the appellant are therefore dismissed and the action of the AO in adding back an amount of Rs.11,18,470/- on account of delayed deposit of Employees contribution to PF and ESI is upheld.”

6. The Ld counsel for assessee has pressed the ground no 2 only. The Ld AR has submitted that the business has been transferred to another entity during the yearso the liability has been transferred to transferee unit so it is allowable u/s 40(A)(7) of the Act. Reliance has placed on the following judgments as under;

1. J.R. Diamonds Ltd vs Assistant Commissioner of income Tax ITA On 984 of 1998 decided on 31-08-1998

Section 43(2): "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession"

Section 43B, as far as it is relevant, is as follows:

"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of - (a)************** (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.

(c)****** shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him."

The case of the assessee is that even though there is no actual payment of this amount, it is enough if the liability is incurred the day on which the liability is transferred in favour of Suraj Diamond Industries Ltd. and as such the gratuity amount of Rs. 22,153 should be taken to have been paid. In support of this contention, the learned Representative for the assessee had cited the following decision:

W. T. Suren & Co. Ltd v. CIT [1998] 97 Taxman 126 (SC).

The facts of that case are quite similar to the facts on hand. There, the question was about allowability of the gratuity amount due to the employees. In that case, one unit of the assessee-company was closed and the same was transferred to another who employed employees of closed units continuity of service. Assessee at the instance and consent of the employees paid gratuity amounts due to the employees to the transferee unit for the benefit of the employees. The Hon'ble Supreme Court held that the transferee held the amount in order to pay to employees on their retirement. On the question whether the payment of gratuity to the transferee could be allowed as a deduction in assessee’s hands, the Hon’ble Supreme Court answered it in the affirmative. The headnote of the decision brings out the facts as well as the relevant portion of the gist of the decision of the Hon’ble Supreme Court rendered on those facts :

"The assessee, subsidiary company of R, had closed one of its distribution unit and same had been taken over by 'R'. The employees of the assessee were offered similar employment with 'R' on same terms and conditions as it was with the assessee. Some of the employees did accept the offer given by R and some did not. In respect of the employees whose services had been terminated and who had accepted the offer to join R with continuity of services as offered, their gratuity amount was paid over by the assessee to R, which amount was held by Ron trust for the benefit of the assessee's employees. R made declaration that it had no beneficial interest in the said sum or any part thereof. Though a part of the assessee's business was closed and taken over by R, the other business continued. The assessee claimed gratuity amount paid as deduction. The Assessing Officer held that R alone would be entitled to claim the amount when paid by them to the assessee's employees at the time of their respective retirement and therefore, he disallowed its claim. On appeal, the Commissioner (Appeals) held that there was no actual termination of the services of the employees and the discharge of the liability in question was capital in nature, and he upheld the Assessing Officer's order. On second appeal, the Tribunal held that there was termination of the employment of the employees from the service of the assessee; that there was valid discharge of the payment of gratuity; that the assessee was still functioning; and that payment of gratuity amount was rightly claimed as deduction.

The gratuity was, thus, payable on the termination of employment of the employee on any account except dismissal and calculated on the basis of number of years of service and at the rate prescribed in the scheme. In the instant case, the amount of gratuity which was paid to R on behalf of the employees was not on account of transfer of the distribution unit of the assessee but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. Other business of the assessee, as held by the Tribunal, continued. The payment of gratuity amount to R was not made by the assessee of its own but at the instance and on behalf of the employees whose services though terminated in the assessee-company were taken over with the promise of continuity of service. As far as the assessee was concerned, it was bound to make payment of gratuity to the employees whose services were terminated and, in fact, the employees who did not join were directly paid gratuity. The assessee was obliged to pay gratuity to those employees who had joined. Instead of those employees getting the gratuity amount directly, got that amount paid from R, who put that amount in trust in a separate account for the exclusive use of the transferred employees and payable to them after their services terminated including the gratuity due on account of service rendered as per the scheme relating to gratuity of that company. The payment of amount of gratuity to R was made as per the scheme of the assessee and it was not an ex gratia or some isolated payment. It was never disputed and, in fact, no question raised if the services of the employees of the assessee were not terminated and that being the position, the obligation of the assessee to make payment of gratuity to its employees was an obligation in praesenti. The payment of gratuity amount was with the consent of the employees transferred. the case was an expenditure wholly laid or expended for the purpose of the business of the assessee and was allowable deduction."

Apart from the above Supreme Court, the learned Representative also had relied upon the Bombay High Court decision in CIT v. Salem Magnesite (P.) Ltd [1991] MANU/MH/0185/1990 189 ITR 154/54 Taxman 123 and the Madras High Courtdecision in CIT v. Sarada Binding Works [1985] MANU/TN/0089/1983: 152 ITR 520 besides citing the Madras decision rendered by the Tribunal found reported in the casee of ITO v. Mount Stuart red state [1986] 19 ITD 761 (Mad.). In the Madras case, the Tribunal held that the Template uires a right to gratuity if he had rendered continued service forhe employee acquires. The Tribunal further held that when the assessee has sold one of its concern which is a part of its business, it is bound to that gratuity to the employees upon termination of employment notwithstanding the fact that the employees were absorbed by the purchaser. So, the gratuity had become presentle payable on account of the transfer of business and any 'provision', as understood in the ordinary sense of the term, made by the assessee for the purpose of payment of gratuity is exigible for deduction in such circumstances in terms of the second limb of section 40A(7)(b)(i). In the facts of that case the assessee had agreed to provide by accepting a sum of Rs. 5,40,000 from out of the sale consideration towards gratuity that may become payable to the employees of the assessee and the purchaser had agreed to discharge the gratuity liability to the employees of the transferor. Thus, no actual payment had been made and the gratuity that has become presently payable was provided for in the ordinary sense of the term 'provision' occurring in the second limb of sub-clause (i)(b) of section 40A(7). Ultimately, the Tribunal took the view that the assessee was entitled to deduction under section 40A(7). In the facts of this case, the payment to the transferee company was made with the consent and approval of the employee, Shri Ajit Shah. He also passed a receipt. The gratuity liability which w hitherto subsisting against the assessee-company was taken over by the transfer company since the amount was made over by the transferee company to the transfer company on 6-7-1991, the date on which the assessee-company terminated the service of Shri Ajit Shah. Under the circumstances, the gratuity amount payable to Shri Shah should be taken to have been paid within the meaning of section 43(2). meaning of the word 'paid' under section 43(2) is duty applicable while interpreting meaning of the words used in section 43B. Therefore, I have no hesitation to com the conclusion that the assessee is entitled to claim the deduction of the amount o 22,153 under section 40A(7). The Impugned order passed by the CIT(A) is set aside the appeal of the assessee allowed.

Whether on the facts and in the circumstances of the case, the Tribunal should not have upheld the disallowance of the said amount in view of the decision of [1982] 138 ITR 91 (Bom.)?

We have been taken through our decision in CIT v. W.T. Suren and Co. LtdMANU/MH/0078/1981: [1982]1381TR91 (Bom). In this case, no right to gratuity had accrued in favour of the employees whose services were alleged to have been terminated. This was so in view of the assessee's agreement with the transferee-company to take them up in employment with continuity of employment. There was thus no liability to pay gratuity to the employees as such. The assessee-company had merely made the payment in connection there with to the transferee-company under an agreement.

In the present case, the assessee-company had not only computed the amount payable to the employees but was also willing to make payment to them. It was the workers who did not want to receive the payment direct as they wanted continuity of service. There were negotiations between the workers and the Government of Tamil Nadu. After the agreement between them, the assessee- company paid the said amount of Rs. 44 lakhs to the Tamil Nadu Government. Thus, even though the workers had the benefit of continuity of service, it was not on account of the assessee-company but as a result of a separate arrangement/agreement between the workers and the Government of Tamil Nadu. This Court's decision in CIT v. W.T. Suren and Co. Ltd. MANU/MH/0078/1981: [1982]1381TR91(Bom) was, therefore, rightly distinguished."

Ground No. 2. The Ld. AO and the Ld. CIT(A) have erred in law and on the facts and circumstances of the case in making/ upholding the additions under section 40A of the Act amounting to Rs.57,83,824/-.

Ground No.3. The Ld. CIT(A) has grossly erred in upholding the addition/ adjustment made by the CPC / AO for an amount of Rs.11,18,470/- under Section 36 (1) (va). The Ld CIT(A) has confirmed the addition of Rs 11,18,470/- on account of delayed deposit of Employees Contribution to PF and ESI.

Order pronounced in the open court on 25.11.2024.