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Income Tax Appellate Tribunal, ‘SMC’ ‘B’ BENCH, CHENNAI
Before: Shri A. Mohan Alankamony
आदेश / O R D E R
This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)- 8, Chennai dated 18.09.2015 in for the assessment year 2007-08 passed u/s.250(6) r.w.s.143(3) & 254 of the Act.
The assessee has raised several grounds in its appeal; however the crux of the issue is that:-
i. The Ld.CIT(A) has erred in upholding the order of Ld.AO, who had disallowed the amount of Rs.2,69,590/- , invoking the provisions of Section 36(1)(va) of the Act, being the employee’s contribution to provident fund remitted beyond the period stipulated under the relevant PF Act. ii. The Ld.CIT(A) has erred in upholding the order of Ld.AO, who had disallowed the amount of Rs.32,654/- , invoking the provisions of Section 36(1)(va) of the Act, being the employee’s contribution to ESI remitted beyond the due date prescribed under the relevant P.F Act. iii. The Ld.CIT(A) has erred in upholding the order of Ld.AO, who had disallowed the professional consultancy charges paid to M/s. Manohar Chowdhry & Associates and to M/s.
SAP BPO Services Pvt. Ltd. for Rs.1,21,648/- & Rs.1,57,404/- respectively due to short deduction of tax at source invoking the provisions of Section 40(a)(ia) of the Act. iv. The Ld.CIT(A) has erred in upholding the order of Ld.AO, who had excluded the gain on foreign exchange fluctuations from export turnover while computing deduction U/s.10B of the Act. who had disallowed the excess claim of depreciation amounting to Rs.13,45,141/-.
With respect to ground No.v, supra, viz., depreciation, the Ld.AR did not press the ground; accordingly the ground is dismissed as not pressed.
4. The brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing doors & frames and other products having both domestic and export sales, filed its return of income for the assessment year 2007-08 on 29.10.2007, admitting ‘Nil’ income. Subsequently assessment was completed. Thereafter in the appellate proceeding the Tribunal set aside the entire assessment and remitted back the matter to the file of the Ld.A.O. Finally, the Ld.A.O passed Order U/s.143(3) r.w.s. 254 of the Act dated 28.03.2014, wherein he made several disallowances which was further confirmed by the Ld.CIT(A). Aggrieved by the Order of the Ld.CIT(A) the assessee is now in appeal before us. contribution towards Provident Fund:-
During the course of scrutiny assessment, it was noticed by the Ld.AO that the assessee had remitted the employee’s contribution to Recognized Provident Fund for Rs.2,69,590/- beyond the period specified under the P.F Act, thereby violating the provisions of Section 36(1)(va) of the Act. Therefore, the Ld.AO disallowed the amount of Rs.2,69,590/-. On appeal, the Ld.CIT(A) confirmed his order by observing as order:-
“I have considered the appellant's submissions. The appellant has entirely relied on case law which is relevant to disallowance under section 438 and is based on the decision of apex Court in the case of Commissioner Of Income Tax vs. Vinay Cement Ltd. (2007) 213 CTR 0268 wherein the Hon’ble Supreme Court observed that contribution made to provident fund before filing of the return could not be disallowed under sec.43B as it stood prior to the amendment w.e.f. 1st April, 2004. With the deletion of the second proviso to Section 43B the due date for employer's contribution to PF, ESI, etc., has changed but for employees contributions it remains to be as per the Explanation below clause (va) of sub-section 10f section 36. Clause (va) of sub-section 1 of section 36 of the Income Tax Act reads as under: (va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date.
Explanation: For the purposes of this clause, "due date" means the date by which the assessee is required-as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification
(emphasis supplied)
Thus, the due date for filing of the return of income has nothing to do with the due date under section 36(1)(va). No change has been brought about under this clause. The Assessing Officer nowhere mentions that the disallowance has been made under section 43B. In fact, the Assessing Officer has rightly denied the deduction as per clause (va) of sub-section 1 of section 36. The disallowance made u/s 36(1)(va) is in order and is confirmed. The appellant fails on this ground.”
5.1 Before us, the Ld.AR submitted that though there was violation of Section 36(1)(va) of the Act by the assessee, he had remitted the amount within the due date of filing of the Income Tax Return. Therefore it was argued that by virtue of the provisions of Section 43 of the Act, the belated remittance should be allowed as deduction. The Ld.DR on the other hand relied on the orders of the Revenue authorities.
5.2 I have heard the rival submissions and carefully perused the materials available on record. We do not find any merit in the submission of the assessee on this issue. Section 36(1)(va) of the Act specifically provides that if the assessee remits the employee’s contribution to Provident Fund within the due date mentioned in the relevant Act P.F Act, then the deduction reproduced herein below for reference:-
36(1)(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.
Explanation:- For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued there-under or under any standing order, award, contract of service or otherwise; Further Section 43B of the Act, only provides that deduction will be allowed with respect to employer’s contribution to provident fund if the same is remitted within the due date of filing the return of income. The relevant portion of Section 43B is extracted herein below for reference:-
“[Certain deduction tobe only on actual payment.] 43B “notwithstanding anything contained in any other provisions 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 the employees” ------------------ ------------------ ------------------- 7 provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.”
Thus Section 36(1)(va) of the Act refers to employee’s contribution to P.F while as Section 43B of the Act refers to employer’s contribution to P.F, hence Section 43B of the Act has no application with respect to employee’s contribution to P.F. Therefore Section 43B of the Act will not override the provisions of Section 36(1)(va) of the Act with respect to employee’s contribution to provident fund. It is pertinent to mention that though employee’s & employer’s contribution to P.F are remitted by the employer, they are separate and distinct for which independent provisions have been cast under the Act.
Employee’s contribution to P.F., is nothing but appropriation of a portion of the salary which is legitimately due to the employee and remitted by the employer in the Government treasury on behalf of the employee in accordance with the provisions of the relevant P.F., Act. Hence it is crystal clear from Section 36(1)(va) of the Act that with respect to remittance of employee’s contribution to recognized Provident Fund, remitted within the due date mentioned in the relevant P.F. Act and with respect to employer’s contribution to recognized Provident Fund, Section 43B of the Act makes it clear that deduction will be allowable if the remittance is made with in the due date of filing the return of income. For the above stated reasons I do not find any infirmity in the order of the Ld. Revenue Authorities. Accordingly, I confirm the Order of the Revenue Authorities on this issue.
Ground No.ii: Belated remittance of Employees contribution towards ESI:- Since with respect to employee’s contribution to ESI, provisions of Section 36(1)(va) of the Act apply by virtue of Section 2(24)(x) of the Act, the decision with respect to employee’s contribution towards PF supra will hold good. Accordingly, this issue is also held against the assessee.
Ground No.iii: Professional consultancy charges paid without deducting TDS:-
It was revealed that the assessee had not deducted tax at source at the specified rate provided under the Act towards the Chowdhry Associates and M/s. SAP BPO Services Pvt. Ltd. Therefore, the Ld.AO invoking the provisions of Section 40(a)(ia) of the Act, disallowed the expenditure of Rs.1,21,648/- and Rs.1,57,404/- paid to M/s. Manohar Chowdhry Associates and M/s. SAP BPO Services Pvt. Ltd., towards short deduction of tax.
On appeal, the Ld.CIT(A) upheld the order of the Ld.AO by observing as under:-
“I have considered the appellant’s submissions.The jurisdictional Bench of the Hon’ble ITAT on a similar issue in the case of Frontier Offshore Exploration (India) Ltd. vs. Deputy Commissioner of Income Tax (2009) 118 ITD 0494 observed as follows:
The argument of assessee that s. 40(a)(i) shall not apply in case of short deduction of tax is not tenable, Once It is shown that tax has not been deducted in accordance with provisions of Chapter XVII-B, the burden is on the assessee to show that either tax has been deducted or assessee was not required to do so.
Respectfully following the view taken by the Chennai A Bench in the above case, I hold that the provisions 40(a)(ia) are applicable in the case of short deduction of tax as well.
As far as the argument of paid and payable is concerned i.e., provisions of section 40 (a) (ia) of the Act would get attracted for making disallowance of deduction claimed only on the amounts shown as payable as at the end of the previous year relating to the Assessment Year is concerned the argument of the appellant is on a weak ground. The contention of the appellant that the provisions of s.40(a)(ia) are not applicable 10 with regard to expenses payable is also not in order. As observed by the AO, as per the TDS provisions, the liability to deduct tax arises either at the time of credit to deductee's account or at the time of payment, whichever is earlier. It is a basic accounting principle that credit to an account precedes actual payment. Therefore, only the payable will attract 'the provisions of 40(a)(ia) and not the paid amount, has no meaning. That would definitely not the intention of the legislature. This view is supported by the decisions in the following cases,
(i) CIT v. Crescent Export Syndicate, 216 taxman 2S8 (Cal.HC) (ii) CIT v. Sekanderkhan N Tanvar (ITA No.90S of 2012) (Guj.HC)
On the other hand, the case of Merilyn Shipping & Transports v. Addl.CIT (136 ITD 23) (Vizag.) (SB) the decision of the ITAT Vizag. (SB) was stayed by the High Court of Andhra Pradesh.
There is a difference between the word 'paid' and 'payable'. The legislature has used the word 'payable' very carefully in sec. 40(a)(ia). As no tax can be deducted after the amount is actually paid, the legislature has used the word 'payable' and not the word 'paid'. The amount of tax is required to be deducted before the payment and not after the payment, as it is not possible to deduct after the payment has been made. Deduction can be made till the amount is in the hands of the payer and not when it reaches the hands of the payee. The literal meaning of the word deduction in the context of the provisions of sec 40(a)(ia.) could be 'subtraction' which can be made only till the time the amount is in the hands of the payer.
In view of the above discussions, I am of the considered opinion that the provisions of 40(a)(ia) will attract both the situations of paid and payable, Therefore, the disallowance made by the Assessing Officer is in order. The ground raised by the appellant is dismissed.”
7.1 Before us, the Ld.AR submitted that the recipient of the professional charges viz., M/s. Manohar Chowdhry Associates and M/s. SAP BPO Services Pvt. Ltd., had filed their return of income and paid tax by including the professional & consultancy charges received from the assessee as income. He further submitted that the provisions of Section 40(a)(ia) of the Act, is amended by Finance Act, 2012 w.e.f. 01.04.2013, wherein it was stipulated that the assessee will not be held to be in default if the recipient has disclosed in their return of income and paid tax accordingly. He further relied in the decision of the Hon’ble Delhi High Court in the case CIT vs. Ansal Landmark Township Pvt. Ltd. reported in 377 ITR 635, wherein it was held that second proviso to Section 40(a)(ia) of the Act is declaratory and curative in nature and therefore has retrospective effect from 01.04.2005. He therefore argued that the matter may be remitted back to the file of Ld.AO for verifying whether the recipients of the professional & consultancy charges have included the professional & consultancy charges as income in their return of income and paid tax accordingly and if found so, delete the disallowance made by the Ld.AO. The Ld.DR on the other hand relied on the orders of the Revenue authorities.
7.2 I have heard the rival submission and carefully perused the material on record. I find merit in the submission of the Ld.AR. Therefore, I hereby remit back the matter to the file of the Ld.AO to decide the issue in the light of the decision of the Hon’ble Delhi High Court supra, after duly verifying the return of income filed by M/s. Manohar Chowdhry Associates and M/s. SAP BPO Services Pvt. Ltd which shall be produced by the assessee before the Revenue Authorities with all requisite particulars. This issue is accordingly disposed off.
Ground No.iv: Deduction U/s.10B of the Act with respect to interest income:- On perusing the Profit & Loss account, it was revealed that the assessee had disclosed interest income of Rs.20,48,746/-. The Ld.AO opined that the interest income cannot be treated as income eligible for deduction U/s.10B of the Act. Therefore, he excluded the interest income while computing deduction U/s.10B of the Act. On appeal, the Ld.CIT(A) confirmed the order of the Ld.AO, by observing as under:- “4.3. Re-working of deduction u/s.10B: The next ground of appeals relates to the re-computation of deduction u/s.1OB by the Assessing Officer. On this ground, tile relevant portion of the assessment order is as under:
Deduction u/ s 10B 4.1. Export Turnover: The export realization details furnished by the assessee shows that the realized value includes Gain arising out of Foreign exchange fluctuation. In the business of export the assessee raises bills against the customer. The rates mentioned in the bill raised is recorded in the books of accounts of the assessee. At the same time he debits the account of the foreign buyer. At the year end also if the sale proceeds are not received by the assessee the foreign buyer is shown as sundry debtor. If the proceeds are not received the same financial year and received after one or two years the fluctuation arising at that time may not have any relevance to the turnover reported for the previous year in which the sale occurred. Further the assessee looses its rights over the sold items on despatch of the same. The sale proceeds should be value recorded on the books and the increase or decrease in exchange fluctuation on the bill amount is only a subsequent accrual after the completion of the transaction. The increase/decrease in exchange fluctuation arises out of market forces. Thus the increase in exchange fluctuation is only an accretion to the amount due to be received by the assessee and not an accretion to the sale price of items exported. It is a treasury income. Though this gain arises in the course of the export business it has no direct nexus with the business of the undertaking and hence needs to be excluded from the Export turnover.
4.2. Profit of the Undertaking:
On similar footing discussed above the exchange gain is excluded from the profit of the undertaking in the computation of eligible deduction u/s 10B.
4.3. Interest:
The Profit & Loss account includes other income also which incorporates interest of Rs. 20,48,7461-. Interest income cannot be treated as income eligible for deduction u/s 10B. as per Sec. 10B it is an income derived from the undertaking which is eligible for deduction. Any income which is incidental to or attributable to the main business of the assessee cannot be treated as income derived from the undertaking for the purpose of deduction u/s 10B. therefore, the interest income is excluded in the computation of Deduction u/s 10B.
During the appellate proceedings, the appellant submitted as under:
The Third Issue in the present appeal relates to the re-workinq of the deduction claimed in terms of section 10B of the Act by excluding the exchange gain from the profit of the eligible undertaking. The Appellant in this regard submits that the said foreign exchange gain was directly related to the export activity and has a close nexus with the export sale of the assessee thereby making it part of the profit of the export undertaking eligible for deduction in terms of section 10B of the Act.
The said view of the Appellant is supported by the decision of the Jurisdictional Madras High Court in the case of C1T vs Pentasoft Technologies Ltd and also the decisions of the Jurisdictional Bench of the Income Tax Appellate Tribunalin the case of M/s.Changepond Technologies vs the ACIT & in the case of M/s. MPS Ltd vs the ACIT (copies of decisions enclosed) wherein the court has held that when the fluctuation in foreign. exchange rate was solely attributable to the export business of the assessee and the higher rupee value earned by virtue of such exports carried out by the assessee, the benefit of such deduction would also be extended to such gains.
The decision of the Mumbai Bench of the Income Tax Appellate Tribunal in the case of M/ s Renaissance Jewellery P Ltd vs the ITO, the decision of the Ahmedabad Bench of the Income Tax: Appellate Tribunal in the case of the DCIT vs Harsha Engineers P Ltd. & decision of the Delhi Bench of the Income Tax Appellate Tribunal in the case of the ACIT vs M/ s Headstrong Services India P Ltd (copies of decisions enclosed) while following the decision of the Madras High Court earlier referred to have affirmed the arguments of the Appellant. The Calcutta High Court in the case, reported in 330 ITR 57 (copy of decision enclosed) while dealing with an identical issue in the context of deduction u/s 80HHC of the Act has affirmed the arguments of the Appellant. On the cumulative consideration of the facts and in the circumstances of the case, the Appellant prays for negating the re-working of the computation of deduction u/s 10B of the Act in allowing the related grounds of appeal in the interest of justice.
15 Alternatively, the Appellant by placing reliance on the decision of the Special Bench decision of the Jurisdictional income Tax Appellate Tribunal in the case of the ITO vs M/s Sak Soft Ltd (copy of decision enclosed) prays for exclusion of the said sum from the export turnover as well as the total turnover in the interest of justice.
This issue of foreign exchange gain is covered by the jurisdictional High Court decision in the case of CIT v Pentasoft Technologies Ltd.(347 ITR 578). Respectfully following the Jurisdictional High Court's decision, the appellant's plea is allowed. The appellant succeeds on this account.”
8.1 Before us the Ld.AR submitted that the interest income should be excluded not only from the export turnover but also from the total turnover while computing deduction U/s.10B of the Act, following the ratio in the case decided by the Hon’ble Jurisdictional High Court in CIT v. Pentasoft Technologies Ltd. reported in 347 ITR 578, which was followed by the Ld.CIT(A) in the assessee’s case while deciding the issue on foreign exchange fluctuations with respect to sundry debtors for the relevant assessment year. The Ld.DR could not controvert to the submissions of the Ld.AR.
8.2 After hearing both sides, I find merit in the submission of the assessee because the interest income will neither form part of export turnover nor total turnover as it has to be taxed under 16 the head ‘Income from other sources’. Therefore the ratio laid down in the case Pentasoft Technologies Ltd., supra will apply in the case of the assessee. Hence, I hereby direct the Ld.AO to delete the interest income from the export turnover and total turnover if the same is so included in the export turnover &/or total turnover, while computing deduction U/s.10B of the Act. It is ordered accordingly.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the court on the 21st June, 2017.