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Income Tax Appellate Tribunal, VISAKHAPATNAM “SMC” BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE
अपीलधथी की ओर से/ Appellant by : Shri C.Subrahmanyam, AR प्रत्यधथी की ओर से / Respondent by : Shri O.N.Hari Prasada Rao, DR सुनवधई की तधरीख / Date of Hearing : 21.06.2023 घोर्णध की तधरीख/Date of Pronouncement : 08.08.2023 आदेश /O R D E R
Per Shri Duvvuru RL Reddy, Judicial Member :
This appeal is filed by the assessee against the order of Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC), Delhi vide DIN & Order No.ITBA/NFAC/S/250/2022-23/1050557046(1) dated 09.03.2023, arising out of assessment order passed u/s 143(3) of the Income Tax Act, 1961 (in short ‘Act’) dated 26.02.2021 for the Assessment Year (A.Y.) 2018-19. Personnel Interact, Visakhapatnam
Brief facts of the case are that the assessee is a partnership firm, supplies manpower to companies such as EID Parry etc., also renders service as PF and ESI consultant and also engaged in the auxiliary service of paying PF on behalf of companies. The assessee firm receives service charges as income for the service rendered. The assessee filed it’s return of income on 03.08.2018, declaring an income of Rs.5,09,920/-. The Assessing Officer (AO) during the course of assessment proceedings observed that the assessee claimed the PF contribution at Rs.29,69,546/- in the P&L account, whereas the total expenditure under salaries and wages are Rs.95,42,693/-, which is in excess as per Rule 87 of the Income Tax Rules, as the Rule says “the ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed twenty seven percent of his salary for each year as reduced by the employer’s contribution, if any, to any provident fund in respect of the same employee for that year” . The assessee vide notice u/s 142(1) dated 12.12.2020 was asked to provide the reason and justification of the allowability of the excess contribution of the provident fund of the employees, in reply to which the assessee submitted that the assessee is a service provider for M/s EID Parry India Ltd. to supply low end jobs i.e skilled to unskilled category and for some category of employees the Personnel Interact, Visakhapatnam assessee used to pay only EPF contribution in line with the agreement with M/s EID Parry India Ltd. The assessee stated that the assessee made total contribution to EPF at Rs.29,69,546/-, but has not paid any excess amounts to EPF. Difference or excess contribution in question was due to the contribution made to some of the employees without paying any salaries to them. Not being satisfied with the reply submitted by the assessee, the AO held that as per section 36(iv) read with Rule 87 of the Income Tax Rules, 27% of total salaries and wages should have been allowed as PF contribution i.e. 27% of Rs.95,42,693/- comes to Rs.25,76,527/-. Accordingly restricted the expenditure claimed towards PF of Rs.29,69,546/- to Rs.25,76,527/- and disallowed the excess claim of Rs.3,93,019/- and added to the total income of the assessee.
Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) and the Ld.CIT(A) upheld the order passed by the AO and dismissed the appeal of the assessee.
Aggrieved by the order of the Ld.CIT(A), the assessee preferred an appeal before the Tribunal by raising the following grounds of appeal :
1. The Ld.Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.3,93,019/- made by the AO by invoking rule 87 of the Income Tax Rules, 1962. Personnel Interact, Visakhapatnam
2. The Ld.CIT(A) failed to understand that rule 87 of the IT Rules falls under ‘Part XIII – Employers contribution to Superannuation Funds’ and therefore the said rule cannot be made applicable to the provident fund constribution.
3. The Ld.CIT(A), having re-produced the submissions of the assessee on the above ground, disposed the case in a summary and casual manner, thereby failed to consider the submissions of assessee in the right manner. 4. For these and such other grounds that may be adduced at the time of hearing. Hon’ble Tribunal is prayed that the disallowance made by AO in this regard be deleted in the interest of justice. 5. All grounds of appeal relate to confirming the disallowance made by the AO of Rs.3,93,019/- by invoking rule 87 of the Income Tax Rules, 1962. At the outset, the Ld.AR submitted that as per agreement with M/s EID Parry India Ltd., the assessee supplied manpower and in the instant case, the assessee has collected and paid PF on behalf of the Principal Employer for which he has received service charges in order to fulfil the legal obligation of the Principal Employer. The Ld.AR further submitted that the assessee paid EPF contribution of Rs.29,69,546/- and has not paid any excess amount to EPF. The difference or excess amount in question was due to the contribution made to some of the employees without paying any salaries to them. The Ld.AR further submitted that the AO has ignored the business model of the assessee and has methodically passed the order by simply computing the percentage and Personnel Interact, Visakhapatnam made the disallowance which was upheld by the Ld.CIT(A) injudiciously. He, therefore, pleaded to set aside the order passed by the Ld.CIT(A) and delete the addition made by the AO.
6. Per contra, the Ld.DR relied on the order passed by the Ld.CIT(A) and pleaded to uphold the order passed by the Ld.CIT(A) and dismiss the appeal filed by the assessee.
7. I have heard both the parties and perused the material available on record. In the instant case, it is undisputed fact that the assessee had made contribution of Rs. 29,69,546/- in respect of PF. The assessee was asked to furnish information with evidence with regard to expenditure claimed towards contribution made towards superannuation fund or provident fund exceeding the statutory limit of 27% of salaries. The Ld.AR contended that no disallowance is warranted as per rule 87 of IT Rules and the disallowance made by the AO deserves to be deleted. The rule 87 of Income Tax Rules, 1962 falls under Part XIII-Approved Superannuation Fund, which reads as under :
The ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed twenty-seven percent of his salary for each year as reduced by the employer’s contribution, if any, to any provident fund (whether recognized or not) in respect of the same employee for that year.
Personnel Interact, Visakhapatnam In the instant case, it is observed that the AO applied 27% on total salary without reducing PF from salary and arrived at the excess contribution of Rs.3,93,019/-, which is not correct. The AO ought to have reduced PF from salary while applying 27% on salary and compared with the superannuation fund. The Ld.DR also fairly conceded that rule 87 of IT Rules is not applicable to the assessee’s case. Therefore, I hold that the word “annual contribution” in the said rule refers to contribution made by the employer in a year towards Supernnaution fund of the employee. I find that the AO had erroneously applied Rule 87 of IT Rules, calculated 27% on the total salary and compared with the contribution to ESI and PF to arrive at the excess contribution of Rs.3,93,019/-, which was upheld by the Ld.CIT(A). I, therefore, set aside the orders passed by the lower authorities and allow the appeal of the assessee.