Income Tax Appellate Tribunal - Mumbai
Skypack Service Specialists Ltd. , Mum vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "J",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR REDDY (A.M)
ITA NO.8698/MUM/04(A.Y. 2001-02)
Skypak Service Specialists Ltd. The DCIT- 8(3),
Marol, Andheri (East), Aaykar Bhavan, MK Road,
Mumbai - 400 059. Vs. Mumbai - 20.
PAN:AADCS 4819B
(Appellant) (Respondent)
ITA NO.8890/MUM/2004(A.Y. 2001-02)
The DCIT- 8(3), Skypak Service Specialists Ltd.
Aaykar Bhavan, MK Road, Marol, Andheri (East),
Mumbai - 20. Vs. Mumbai - 400 059.
(Appellant) PAN:AADCS 4819B
(Respondent)
Assessee by : None
Revenue by : Shri S.K.Singh
ORDER
PER N.V.VASUDEVAN, J.M,
ITA No.8698/M/04 is an appeal by the assessee while ITA
No.8890/M/04 is an appeal by the revenue. Both these appeals are directed against the order of CIT(A) XXIX, Mumbai dated 30/9/04 relating to assessment year 2001-02. The grounds raised by the assessee in its appeal read as follows:
"1. The Commissioner of Income Tax (Appeals) XXIX [hereinafter referred to as the CIT(A)] erred in holding that the Deputy Commissioner of Income Tax 8(3), Mumbai [hereinafter referred to as 2 ITA NO.8698&8890/M/04(A.Y. 2001-02)) the DCIT] was right in disallowing the loss of Rs. 1,32,02,572/- arising on the assignment of the debt due from M/s. Skypak Fisheries Private Limited for the reasons mentioned by him in the assessment order. The Appellants submit in view of the submission made before CIT(Appeals), he ought to have held that the said loss has been incurred wholly and exclusively during the course of and for the purposes of their business and was therefore allowable as a business deduction in computing their total income. The Appellants therefore pray that the DCIT be directed to allow deduction in respect of the loss of Rs. 1,32,02,572/- in computing their total income for the above year.
2. The CIT(A) erred in holding that the DCIT was right in disallowing Rs.9,20,053/- out of interest paid by the Appellants to their sister concerns. The Appellants submit that they have not made any interest free loans to the sister concerns and the amounts given to the sister concerns are purely in the nature of trade advances and are not in the nature of loans and even otherwise the amounts have been advanced out of their own funds and not out of borrowed funds. The Appellants further submit that the interest paid is on amounts borrowed wholly and exclusively for the purposes of their business and the CIT(A) ought not to have held that the DCIT was right in disallowing Rs. 9,20,053/- out of interest paid during the year. The Appellants therefore pray that the DCIT be directed to delete the disallowance of Rs.9,20,053/- made by him on this account.
3. The CIT(A) erred in holding that the DCIT was right in disallowing advances written off of Rs. 5,92,936 in computing the Appellants total income for the above year. The Appellants submit that the advances given to various parties are in the nature of trade advances and since the same could not be recovered in spite of efforts made, the same have been written off as bad and irrecoverable and are therefore allowable as a deduction under section 37 and the CIT(A) ought not to have held that the DCIT was right in disallowing the same under section 36(1)(vii) in computing their total income for the above year. The Appellants therefore pray that the DCIT be directed to delete the addition of Rs.5,92,936/- made by him on this account."
2. When the case was called for hearing none appeared on behalf of the assessee. No adjournment petition seeking adjournment of the case was also filed. The above conduct on the part of the assessee shows that it is not interested in prosecuting the appeal filed by it. Therefore, following the decision of the Tribunal reported in the case of CIT vs. Multiplan India (P) 3 ITA NO.8698&8890/M/04(A.Y. 2001-02)) Ltd.38 ITD 320 (Del) and the decision of the Hon'ble Madhya Pradesh High Court in the case of Estate of Late Tukojirao Holkar vs. CWT, 223 ITR 480 (M.P) the appeal filed by the assessee is dismissed in limine. However, if the assessee through proper application can satisfy the Tribunal for such non-appearance on the appointed date, the Tribunal at its discretion may recall this order.
3. Now we will take up ITA No.8890/M/04, appeal by the revenue. Ground No.1 raised by the revenue reads as follows:
"1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting of Rs. 90,00,000/- treating it as a capital receipt, without appreciating the facts of the case."
4. The assessee is a company engaged in the business of courier services. In the course of assessment proceedings the Assessing Officer noticed that the assessee has claimed a sum of Rs. 1,32,02,572/- under the head loss on assignment of debts. The Assessing Officer also noticed that in the balance sheet of the assessee the assessee has shown a sum of Rs. 90 lacs as capital reserve. The facts with regard to the claim of deduction on account of loss on assignment of debts and a sum of Rs. 90 lacs shown as capital reserve in the balance sheet arise out of connected transactions and, therefore, the facts relating to both the addition are being narrated.
5. The facts with regard to the assessee's claim of deduction on account of loss on assignment of debts is subject matter of ground No.1 of assessee's appeal. The facts are as follows.
6. M/s. Skypak Fisheries Private Limited, one of the Assessee's group companies has availed of a term loan of Rs. 180 lacs from SCICI Limited during the year 1993-94. The said loan has also been guaranteed by the assessee as they were one of the co-promoters of M/s. Skypak Fisheries Private Limited. In the year 1996, the assessee were in need of funds for 4 ITA NO.8698&8890/M/04(A.Y. 2001-02)) expansion of their business and therefore approached SCICI for a term loan of Rs. 120 lacs. SCICI agreed to grant them this loan on the condition that they took over the of of Rs. 180 lacs of Skypak Fisheries Limited, which the latter had availed in the year 1993-94. The assessee had already guaranteed the repayment of the loan of Rs. 180 lacs. The assessee therefore took over the liabilith of Rs. 180 lacs due to SCICI by Skypak Fisheries Ltd. The term loan granted by SCICI to the assessee was accordingly enhanced to Rs. 300 lacs and was shown as a liability and correspondingly Rs. 180 lacs was shown as receivable by the assessee from Skypak Fisheries Ltd.
7. The business of Skypak Fisheries Limited had taken a complete down turn on account of the recession in Japan, who were their main customers as also on account of stringent non pollution guidelines prescribed by the Supreme Court. Skypak Fisheries Limited was therefore in no position to repay Rs. 180 lacs due to the Appellants. The networth of Skypak Fisheries Private Limited as on 31/3/2001 was Nil. According to the Assessee it took a business decision to assign the debt of Rs. 180/- lacs due to it by M/s. Skypak Fisheries Private Limited to to Dilip Holdings Pvt. Ltd. for Rs.50 lacs. The loss on this account is Rs. 130 lacs. The same was claimed as a business expenditure. In the assessee's view, since the loss had been incurred during the course of carrying on their business, and was wholly and exclusively incurred for the purposes of their business it should have been allowed as a deduction. The AO did not accept the claim of the assessee. According to him, the assessee has taken over the assets of M/s. Skypak Fisheries Pvt. Ltd. and sold the same in order to incur loss. The AO was also of the view that the intention of this transaction of taking over the assets and selling it at a lower value was made solely with the intention of avoiding tax and therefore he relied on the decision of the Supreme Court in the case of Mc. Dowell & Co. (154 ITR 148). In this regard the AO also held that the assessee has not taken over any assets or sold the same but 5 ITA NO.8698&8890/M/04(A.Y. 2001-02)) merely assigned the debt of Rs.180 lacs to M/s. Dilip Holdings Private Limited for Rs. 50 lacs.
8. We have already seen that the Assessee took over the liability of M/s. Skypack Fisheries Private Limited of Rs. 180/- lacs payable to SCICI and further availed of a loan of Rs. 120 lacs in the year 1996. During the year ended 31/3/2001, the assessee entered into a one time settlement of the loan availed from ICICI of Rs. 300 lacs. In view of the amnesty being extended to defaulting creditors by financial institutions, SCICI has settled the entire issue of payment of this loan and the interest on the condition that the assessee repay Rs. 210 lacs. Thus SCICI had waived a sum of Rs. 90 lacs due on the principal loan of Rs.300 lacs. The accrued interest of Rs. 130 lacs has been credited to the Profit & Loss Account and the remission in the loan has been credited to the reserves. The assessee contended that the provisions of section 41(1) will be applicable where an allowance or deduction has been made in any assessment year in respect of loss, expenditure or trading liability and the assessee has obtained in any subsequent year some benefit on account of the remission of cession of such trading liability. Accordingly, in the assessee's view the provisions of section 41(1) would be applicable where both of the following conditions were satisfied.:
i) An allowance or deduction had been allowed in any assessment year for an expenditure or trading liability and
ii) There was a cession or remission of such trading liability in the subsequent year.
According to the assessee, unless both the conditions were satisfied, the provision of section 41(1) were not applicable. The assessee submitted that there was ceasation of liability to repay the loan to the extent of Rs. 90 lacs but since no deduction had been allowed in respect of this loan in the prior years, the amount of Rs. 90 lacs would not be liable for tax as the provisions 6 ITA NO.8698&8890/M/04(A.Y. 2001-02)) of section 41(1) would not be applicable. The assessee has therefore, contended that the amount of Rs. 90 lacs was not liable for tax. The AO did not accept the claim. He held that the Assessee got the benefit of one time settlement of Rs. 90 lacs. On the one hand the Assessee borrowed loans for the purpose of business and used them to meet expenses and on the other hand on waiver of loan, the benefit is not offered to have tax. According to him the whole set of transactions needs to be seen together. According to him the intent of the Assessee was to reduce tax and therefore the benefit of waiver of Rs. 90 lacs was brought to tax by the AO. The AO also held that this gain of Rs.90 lacs was part of the deal of waiver of interest of Rs.1,32,02,572/- which was claimed as loss on assignment of debts.
9. On appeal by the assessee on the issue of allowing deduction on account of loss incurred on assignment of debt the CIT(A) held as follows:
"Before allowing deduction of an expenditure u/s. 37(1), it has to be seen whether any claim made at all is in the nature of an expenditure. Appellant has assigned the debt of Rs. 182 lacs for Rs. 50 lacs. There was no obligation on the part of the appellant to assign such debt and that too a sister concern. It is not understandable as to what benefit has accrued to the appellant by assigning the debt except incurring the loss of Rs. 132 lacs. Appellant is not in the business of financing, raising and advancing the loans and of assigning the debts and, therefore, the loss of assigning of a transaction of a debt to a sister concern, in my opinion, cannot be said to be an expenditure at the first instance itself and secondly, cannot be said and expenditure incurred wholly and exclusively for the purposes of business. Therefore, even without the applicability of decision of the Hon'ble Supreme Court in the case of Mc. Dowell, loss of Rs. 132 lacs cannot e allowed as deduction as the same at the first instance cannot be said an expenditure and secondly if at all it is an expenditure it is not incurred wholly and exclusively for the purpose of business. Even if it is presumed, though not admitted, that this expenditure is a loss to the appellant it at best can be termed as a capital loss. It is pertinent to state here that the appellant company has made a one time settlement with SCICI now ICICI and has obtained benefit of Rs. 90 lacs by way of waiver of its loan. Appellant has claimed the same as a 7 ITA NO.8698&8890/M/04(A.Y. 2001-02)) capital receipt though the AO has treated it as appellant's income, which has been contested by the appellant separately in ground of appeal no.2. It is surprising and rather intriguing to learn that while appellant company has claimed deduction of loss on assignment of debt at Rs.132 lacs out of the loan of Rs. 300 lakhs as business expenditure the company has claimed Rs. 90 lakhs arising on the settlement of loan of Rs. 300 lakhs as a capital receipt. In other words, appellant company has given two different treatment to the income and loss arising out of the same source of funds of Rs. 300 lacs. In fact, it is relevant to state here that against the addition of Rs. 90 lacs made by the AO, appellant has stated that said amount of Rs.90 lacs would not partake the character income but is a capital receipt. If the amount of Rs.90 lacs is a capital receipt, I am afraid loss of Rs. 132 lacs arising on the assignment of debt out of same amount of loan cannot partake the character of allowable business expenditure / loss. In view of the above discussion, it appears that the appellant company alongwith its two sister concerns namely Skypak Fisheries Private Limited and M/s. Dilip Holdings Private Limited and probably with the implicit consent of SCICI used the aforesaid set of transactions as a device giving it a decorate cover to take over the loss and / or liability of M/s. Skypak Fisheries Private Limited to reduce its taxable income."
10 With regard to some of Rs. 90 lacs which was treated as income chargeable to tax by the Assessing Officer the CIT(A) held as follows:
"As regards addition of Rs.90 lacs, contentions of the appellant are acceptable. Appellant has stated that the amount of Rs. 90 lacs is not in the nature of trading liability and no deduction has been claimed/ allowed in respect of this loan in the earlier assessment years and, therefore, same cannot be held liable to tax u/s. 41(1) of the Act. As already said, provisions of section 41(1) will be applicable where (a) an allowance or deduction has been allowed in any assessment year for an expenditure or trading liability (b) there was a cessation or remission o such trading liability in the subsequent years. Though there was a cessation of the liability to the extent of Rs. 90 lakhs but the same has not been claimed and allowed as an allowance or a deduction in any assessment year as an expenditure or a trading liability. AR / appellant has relied upon various case laws mentioned above in which it has been held that waiver of loan or writing back of loan would not be the profits chargeable to tax u/s. 41(1) and would clearly be a capital receipt not liable to tax. In my opinion and keeping in view various case laws relied upon by the appellant, the 8 ITA NO.8698&8890/M/04(A.Y. 2001-02)) amount of Rs. 90 lacs represent capital receipt not liable to tax. Accordingly, addition of Rs. 90 lakhs is deleted."
11. Aggrieved by the order of the CIT(A) holding that the sum of Rs. 90 lacs shown as capital reserve in the balance sheet is a capital receipt not chargeable to tax the revenue has raised ground No.1 before the Tribunal.
12. We have heard the submissions of the ld. D.R, who reiterated the stand of the AO as reflected in the order of assessment. He further relied on the decision of the Hon'ble Bombay High Court in the case of Solid Containers Ltd. vs. DCIT [308 ITR 417] where it was held that waiver of loan which was taken for trading activities was taxable as income. He also submitted that the claim of the Assessee has to be viewed in the light of his action in assigning the debt payable by M/s. Malabar Fisheries Private Limited and claiming on loss on such assignment and simultaneously also claiming the benefit of remission of liability by SCICI as capital receipt not chargeable to tax.
13. We have considered the rival submissions. The Jurisdictional High Court in the case of Mahindra & Mahindra Ltd., 261 ITR 501 (Bombay) had to deal with a case where there was waiver of loan and the question as to whether the same was chargeable to tax either u/s. 41(1) or u/s. 28 (iv) of the Act. The Hon'ble Court found that loan had been borrowed for the purchase of capital assets. Therefore, the Hon'ble Court held that section 28(i) which provides that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year or Sec. 28(iv) which provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, was not attracted. The Hon'ble Court also held that in order to apply section 41(1), an assessee should have obtained a deduction in the 9 ITA NO.8698&8890/M/04(A.Y. 2001-02)) assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee had not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee had paid interest at 6 per cent over a period of ten years on Rs. 57,74,064. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable. Secondly, even assuming that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly, the tooling constituted capital assets and not stock-in-trade. Therefore, taking into account all the above facts, section 41(1) of the Act was not applicable. The Hon'ble Bombay High Court in the case of Solid Containers (supra) had to deal with a case of waiver of loan and taxability of benefit received by the assessee on account of such waiver. After considering the earlier ruling in the case of Mahindra & Mahindra (supra), the Hon'ble Court held that where the resultant benefit to an Assessee is waiver of loan taken for trading activity, the same would be taxable. In both the decision the decision of the Hon'ble Supreme Court in the case of CIT vs. T.V.Sundaram Iyengar & Sons (222 ITR 344](SC) was also considered.
14. In the present case we have seen the order of the Assessing Officer and find that the purpose for which the term loan was availed by Skypak Fisheries Pvt. Ltd. is not known. It was the contention of the ld. D.R that both these transaction namely the loss on account of assignment of debts and benefit as a result of one time settlement have to be viewed together. We have considered his submissions and are of the view that the contention of the ld. D.R requires examination by the Assessing Officer afresh. In this regard we are of the view that an examination of the purpose for which the loan were availed by Skypak Fisheries Private Limited or the loan availed by the assessee in 1996 of Rs. 120 crores from SCICI need to be seen as to whether they were for capital purpose or revenue purpose. To the extent 10 ITA NO.8698&8890/M/04(A.Y. 2001-02)) the aforesaid borrowings are towards meeting trading liability its remission would given rise to income chargeable to tax in the hands of the Assessee, in view of the decision of the Hon'ble Bombay High Court in the case of Solid Containers (supra). We therefore, remand this issue to the Assessing Officer for fresh consideration on the lines indicated above. Thus ground No.1 raised by the revenue is treated as allowed for statistical purposes.
15. Ground No.2 raised by the revenue reads as follows:
"2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of long term capital loss amounting to Rs. 60,33,353/- without appreciating the facts of the case.
16. The above ground is against disallowing long term capital loss of Rs. 60,33,553/- arising on the transfer of 36480 equity shares of Rs. 100/- each of M/s.Skypak Fisheries Private Limited. During the year, assessee has held 36480 shares of Rs. 100/- each of M/s. Skypak Fisheries Private Limited. These shares were purchased in the year 1993-94. During the year appellant company has sold these shares at Rs. 1 per share to Dilip Holdings Pvt. Ltd. and has claimed long term capital loss of Rs. 60,33,553/- as under:
Purchase cost (1993) 36480 shares@100 = 36,48,000
Indexed cost 406 x 36,48,000 = 60,74,033
-------------------
244
Less: Sale price 36480 shares @ Rs.1 per share = 36,480
---------
Long term capital loss: (-) 60,33,553
The AO asked the assessee to explain and furnish the break-up value of the share of M/s. Skypak Fisheries Private Limited. Assessee submitted before the AO that the above price was arrived at after considering net worth of M/s. Skypak Fisheries Private Limited and poor performance during the last several years. However, AO was not satisfied with the aforesaid explanation of the assessee. The AO held that this transaction of sale of shares of M/s.
11 ITA NO.8698&8890/M/04(A.Y. 2001-02))Skypak Fisheries Private Limited is an extension of the elaborate plan of the assessee to book the losses of M/s. Skypak Fisheries Pvt. Ltd. The assessee company has shown sale of shares of M/s. Skypak Fisheries Private Limited, a closely held company whose 100% share holding are held by the directors of the assessee company and is named after one of the directors Shri Dilip M. Kulkarni. The assessee has entered into circular transactions among the related entities, with a game plan to reduce its taxable income. In view of the above and relying on the decision of the Hon'ble Supreme Court in the case of Mc Dowell and Company (154 ITR 148 (Sc)], AO disallowed the loss of Rs. 60,33,553/-.
17. Before CIT(A), the assessee submitted that it had transferred the shares at a value determined on the basis of the net worth of the company. The net worth of the company as on 31/3/2000 was a negative of Rs.72.83. Copy of the Balance Sheet evidencing this fact was also filed. The assessee had also furnished a certificate from the Chartered Accountant certifying that the net worth of Skypak Fisheries Ltd. is Rs. 72.83. It was submitted that the AO did bring any material on record to prove that the sale value is not the correct value of the shares. The assessee therefore prayed that the DCIT be directed to allow long term capital loss of Rs. 60,33,533/-.
18. The CIT(A) observed as under:
"I have considered the submission made by the AR / Appellant. It is seen that the appellant during the year has incurred long term capital loss of Rs.60,33,533/- on the sale of shares of M/s. Skypak fisheries Private Limited. However, AO has disallowed the same on the ground that the above loss has been incurred by the appellant company in its scheme of reducing tax. I am afraid the aforesaid contention of the AO to disallow loss is not tenable. Appellant had held 36480 shares of Rs. 100/- each of M/s. Skypak Fisheries Private Limited. M/s. Skypak Fisheries Private Limited has a negative net worth as is evident from the balance sheet for the year ended 31/3/2000 and certificate of the CA, copy of which has been filed on page 170 of the paper book. In the aforesaid certificate, M/s. GS Nayak and company, CAs have certified that the value of each share of 12 ITA NO.8698&8890/M/04(A.Y. 2001-02)) M/s. Skypak Fisheries Private Limited is on 31/3/2000 is negative at Rs.72.83. Though in the aforesaid working, CA has not considered expenditure during the construction period at Rs. 1,46,78,826/- while valuing the equity shares for the reason that the same is carried forward for last so may years and is not productive. Even if same is considered company continues to have negative worth. It is in this background that the appellant has sold its shares at Rs.1/- and I find no illegality in the aforesaid transaction. Appellant has purchased and sold the shares keeping in view the business consideration. Appellant and for that matter any assessee is free to take its decisions of course within the four corners of law to further its business interest best suited to him. Aforesaid transaction, in my opinion, cannot be tainted with illegality and termed as illegitimate and, therefore, long term capital loss of Rs.60,33,533/- is allowable to the assessee. AO's reliance on the decision of the Hon'ble Supreme Court in the case of Mc Dowell is not justified. M/s. Skypak Fisheries Pvt.Ltd. had negative worth and, therefore, value of its share had crashed. In the light of above discussion, I am of the opinion that appellant has entered into a legal and genuine transaction and, therefore, long term capital loss of Rs.60,33,533/- cannot be disallowed. AO is accordingly directed to allow the long term capital loss of Rs. 60,33,533/-."
19. We have considered the submissions of the ld. DR who relied on the order of the Assessing Officer. In our view , the CIT(A) has rightly allowed the claim of the assessee. The company M/s. Skypak Fisheries Pvt. Ltd. had a negative worth as on 31/3/2000. It is not disputed that the transaction of sale and purchase was not genuine. In these circumstances it is the assessee's discretion to sell the shares. The Assessing Officer cannot sit in the arm chair of an assessee and decide as to when he has to transfer a capital asset when the transaction is within the frame work of law. The valuation as on date of sale has been duly certified by Chartered Accountant. In these circumstances we are of the view that CIT(A) was justified in allowing the loss claimed by the assessee. We, therefore, confirm the order of the CIT(A) and dismiss the ground No.2 raised by the revenue.
20. Ground No.3 raised by the revenue reads as follows:
13 ITA NO.8698&8890/M/04(A.Y. 2001-02))"3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of Rs. 2,28,060/- being employees contribution towards PF u/s. 43B, without appearing the facts of the case.
21. The AO disallowed a sum of Rs. 2,28,060 being employees contribution towards PF paid beyond the grace period as according to him the same is not allowable and is treated as deemed income under section 2(24)(x) r.w.s. 36(1)(va). The CIT(A) accepted the submission of the assessee that the due date for payment of contribution to Provident Fund is 20th of each succeeding month since 5 days grace period is provided vide Circular No.E-11/28 (14B Amendment) 73 dated 24/10/1973 the claim for deduction should be allowed. The assessee relied on the following decisions in support of its claim:-
a) CIT vs. Shri Ganapapthy Mills Co. Ltd. (234 ITR 879)
b) Hunsur Plywood Works Ltd. Vs. DCIT (54 ITD 394)
c) Modern Steel Ind. Vs. Asstt. CIT (DEL) (65 TTJ 357)
d) CIT vs. Salem Co-op. Spinning Mills Ltd. (258 ITR 360) The CIT(A) allowed the claim of the assessee accepting the above submissions. Against the order of the CIT(A), the revenue has raised ground No.3.
22. We have heard the submission of the learned D.R. who relied on the order of the AO. In CIT vs. AIMIL Limited , the Hon'ble Delhi High Court in ITA No.1063 of 2006 ITA No.755 of 2008 ITA No.203 of 2009 ITA No.1214/2008 with ITA No.1246/2008 ITA No.50/2009 ITA No.78/2009 judgment dated December 23, 2009 had to deal with a case of disallowance u/s. 36(1)(va) of the Act. The Hon'ble Court discussed the provisions of S.2 (24) (x) which provides that amounts received by an assessee from employees towards PF contributions etc. shall be "income" and S.36 (1)(va) which provides that if such sums are contributed to the employees account in the 14 ITA NO.8698&8890/M/04(A.Y. 2001-02)) relevant fund on or before the due date specified in the PF etc. legislation, the assessee shall be entitled to a deduction. The Court also noticed that the second proviso to s. 43B(b) provided that any sum paid by the assessee as an employer by way of contribution to any provident fund etc. shall be allowed as a deduction only if paid on or before the due date specified in 36(1)(vi). After the omission of the second Proviso w.e.f. 1.4.2004, the deduction is allowable under the first Proviso if the payment is made on or before the due date for furnishing the return of income. The Hon'ble Court also noticed that in Alom Extrusions 319 ITR 306(SC), the deletion of the second Proviso has been held to be with retrospective effect. The High Court had to consider whether the benefit of s. 43B can be extended to employees' contribution as well which are paid after the due date under the PF law but before the due date for filing the return. The Hon'ble Court held that:
(i) Though the revenue has argued that a distinction is to be made between "employers' contribution" and "employees' contribution" and that employees' contribution being in the nature of trust money in the hands of the assessee cannot be allowed as a deduction if not paid on or before the due date specified in the PF etc. law, the scheme of the Act is that employees' contribution is treated as income u/s. 2(24) (x) on receipt by the assessee and allowed as deduction u/s.36(1) (va) on making deposit with the concerned authorities. S. 43B (b) stipulates that such deduction would be permissible only on actual payment;
(ii) The question as to when actual payment should be made is answered by Vinay Cements 213 CTR 268 where the deletion of the second Proviso to s. 43B w.e.f. 1.4.2004 was held applicable to earlier years as well. As the deletion of the 2nd Proviso is retrospective, the case has to be governed by the first Proviso.15 ITA NO.8698&8890/M/04(A.Y. 2001-02))
(iii) If the employee's contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. In so far as the Income-tax Act is concerned , the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down in Vinay Cement.
23. In view of the above said decision of the Hon'ble Delhi High Court, we hold that the CIT(A) was justified in allowing the claim of the Assessee on account of employees contribution paid on or before the due date of filing the return of income as deduction.
24. In the result, appeal by the revenue is treated as partly allowed for statistical purposes.
25. In the result, the appeal by the assessee is dismissed and the appeal by the revenue is partly allowed for statistical purposes.
Order pronounced in the open court on the 31st day of May, 2011.
Sd/- Sd/- (J.SUDHAKAR REDDY ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 31st May.2011
Copy to: 1. The Assessee 2. The Revenue 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"J" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
16 ITA NO.8698&8890/M/04(A.Y. 2001-02))
17 ITA NO.8698&8890/M/04(A.Y. 2001-02))
Details Date Initials Designation
1 Draft dictated on 18/5/11 Sr.PS/PS
2 Draft Placed before author 19/5/11 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order