Income Tax Appellate Tribunal - Ahmedabad
Dynamic Soft Link Pvt.Ltd.,, Surat vs Assessee on 14 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C"
Before Shri A K GARODIA - ACCOUNTANT MEMBER
And Shri KUL BHARAT - JUDICIAL MEMBER
ITA no.2842/Ahd/2011
(Assessment Year:-2008-09)
Dynamic Soft Link Pvt. V/s The Addl. Commissioner
Ltd., 402, Empire State of Income-tax, Range-1,
Building, Ring Road, Surat
Surat
PAN: AABCD 3367 K
[Appellant] [Respondent]
Assessee by :- Shri Sapnesh Sheth, AR
Revenue by:- Shri Vinod Tanwani, Sr. DR
Date of Hearing:- 14-03-2012
Date of Pronouncement:- 13-04-2012
ORDER
PER KUL BHARAT (JM):- This appeal by the assessee is directed against an order dated 22-09-2011 passed by the Learned Commissioner of Income-tax (Appeals)-I, [hereinafter referred to as the "learned CIT(A)"] Surat for Assessment Year (AY) 2008-
09. The following two grounds have been raised by the assessee in this appeal:-
1. On the facts and in circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of the AO in making addition of Rs.5,27,800/- relating to late payment of Employee's contribution to PF and ESI u/s 2(24)(x) of the Act.
2. On the facts and in circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of 2 the AO in rejecting the books of accounts u/s 145 and making addition of Rs.4,42,845/- on account of alleged low gross profit.
2 With regard to Ground no.1 in the appeal, the facts of the case are that on perusal of Annexure-3 of clause 16(b) of Audit Report in Form No.3CD, it was noticed that the assessee company has not deposited the amount received from employees towards contribution to Provident Fund and E.S.I. into the Govt.
account within the due date prescribed for this purpose in certain cases, the break-up in table is given in the order of the learned CIT(A). The assessee was, therefore, asked to explain as to why the amount of Rs.5,27,800/- [PF Rs.4,27,119 + ESI Rs.1,00,681] should not be treated as income u/s 2(24)(x) of the Act. The assessee vide letter dated 27-08-2010 submitted as under:-
"The poor demand and loss of sales revenue during year 2007-08 resulted into the liquidity crisis through out the year. The liquidity crisis was the major reason of delay in P.P. and E.S.I, payments."
After considering the reply of the assessee, the AO observed as under:-
"The explanation furnished by the assessee has been considered carefully. On perusal of the explanation of the assessee it is noticed that the assessee has furnished the explanation regarding the reasons for the delay in payments of employees contribution to P.P. and E.SJ into Government Account. The assessee has not furnished any explanation as to why the same should not be treated as income u/s.2(24)(x) of the if Act.
Section 36(1)(va) of the it act envisages that deduction shall be allowed in respect of the sum received by the assessee from any of the employees to which the provisions of sub-clause-(x) of clause (24) of section-2 of the Act, apply, if such sum is credited by the assessee to the employees account in the relevant fund or funds ©n or before the 2 3 due date. It is pertinent to mention here that the Hon'ble Supreme Court in the case of Alom Extrusions Ltd. [319-ITR-316] held that omissions of second proviso to section 43B by the Finance Act, 2003 has operated retrospectively w.e.f. 01.04.1988 and not prospectively from 01.04.2004. The second proviso has provided that any sum payable by the assessed as an employer, by way of contribution to P.F. or superannuation fund or a gratuity fund or any other fund for the welfare of the employees, would be allowed as deduction only if it is paid within the due date as per the P.F. Act etc. i.e. as per the due date specified in Section 36(1)(va) of the Act. In view of the provision, if the payment was made after the end of the financial year and beyond the due dates specified in Section 36(1)(va) the same was not allowed even if it is was paid before the filing of return. Although the proviso has been deleted but as regards to employees contribution the provisions of Section 36(1)(va) are still on this statute according to which employees contribution which are deducted by the employer while giving their remuneration are part of the employer's, income in view of Section 2(24)(x) and would be allowed deduction u/s. 36(1)(va) only if they are paid on or before the due date of the relevant Act. The decision of the Hon'ble Supreme Court is applicable only in respect of the amounts covered by Section 43B(b) and not incomes which are covered by Section 2(24)(x) r.w.s, 36(1)(va) of the IT Act. This means employer's contribution to welfare funds etc. is allowable if it is paid before the due date of filing of income tax return but the employee's contribution is still governed by section 2(24j)(x) and section 36(1)(va) and hence, it is allowable only if it is paid on or before the due date provided in the relevant Act, In this case, the assessed company has failed to deposit the employee's contribution to P.P. and E.S.I, amounting to Rs.5,27,800/-[P.F. Rs.4,27,119 + ESI Rs.1,00,681] in the relevant account within the due date as prescribed under the relevant Law / Act and, therefore, the said amount is not allowable as deduction. Accordingly, it is held that the above sum forms part of the income of the assessee company u/s.2(24)(x) of the FT Act. The same is, therefore, disallowed and added to the total income of the assessee company."
3 Aggrieved by the order of the AO, the assessee filed an appeal before the learned CIT(A). The learned CIT(A) has confirmed the addition with the following observations:-
3 4"Appellant's arguments:-
1 Addition of Rs.5,27,800/- related to late payment of Employees Contribution to PF and ESI 1.1 The Ld. AO has made disallowances of Rs.5,27,800/- on account of PF of Rs.4,27,119/- and ESI amounting to Rs.1,00,681/- for failure to deposit the same within due as prescribed under the relevant law/Act treated the same as income of the appellant u/s.2(24)(x) of the IT Act.
1.2 The facts of the case are that the appellant company received PF and ESI towards contribution to PF and ESI. The same was deposited by the appellant company into the Government account but in some months there was delay of 6 days to 14 days. But the entire amount was paid before the filing of IT Returns by the appellant company. The Ld. AO observed that the decision of Hon'ble Supreme court in the case of Alom Extrusion Ltd is applicable only in respect of the amounts covered by section 43B and not income which are covered by section 2(24)(x) r.w.s. 36(1)(va) of the Act. Accordingly to the Ld. AO, only employers contribution is allowable if it is paid before the due date of filing of income lax return but the employees contribution is still governed by section 2(24)(x) and section 36(1)(va) and hence, it is allowable only if it is paid on or before the due date provided in the relevant act. As observed by the Ld. AO, the appellant company has failed to deposit the employees contribution to PF and ESI in the relevant account within due date as prescribed under the relevant law/act and accordingly treated the same as income of the appellant company u/s.2(24)(x) of the FT Act.
1.3 It is respectively submitted that the application of section 36(1)(va) r.w.s. 2(24)(x) and treating the unpaid contribution as income could be valid only where no payments was made by the appellant as required u/s.43B, no deduction will be allowed for that amount, but at the same time, those unpaid employer contribution will not become the income of the appellant. In the case of employees contribution I the payments are not made within the period allowed u/s.43B, those contribution are not only to be disallowed if claimed as expenditure but also treated 4 5 as income of the appellant u/s. 2(24)(x). Provisions of section 36(1)(va) r.w.s. 2(24)(x) will apply. In the above case the appellant company had paid the amount well within the prescribed time as required u/s.43B.
1.4 Sir, the law is fairly well settled through various judicial pronouncements. We draw your kind* attention to the under noted decision.
CIT Vs. AIMIL Ltd. (2010) 188 Taxman 265 / 321/ ITR 508 / 229 CTR 418 (Delhi) The Hon'be Delhi High Court has held that Employees Contribution towards PF and ESI would qualify for deduction even though it was paid after the due date prescribed under the Provident Fund Act/ESI Act but before the due date of filing of return. It was held that if the employees 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 payments 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 appellant gets the benefit if the actual payment is made before the return is filed, as per the principal laid down in Vinay Cement Ltd. (2009) 313 ITR (SC) Harrisons Malavalam Ltd. Vs. ACIT 20091 Cochin bench of Hon'ble ITAT following the Supreme Court decision in the Case of Vinay Cement Ltd. (2007)213 CTR 268; (2009) 313 ITR (AT) directed the assessing officer to give deduction for delayed payments made by the assessee before the due date for filing the return in respect of the employees contribution to provident fund and labour welfare fund ...etc. 1.5 From the above facts and merits of the case and various legal pronouncements, your honour would be convinced that addition of Rs.5,27,800/- related to late payment of Employees Contribution to PF and ESI is not justified and the impugned addition may kindly be deleted by your honour.
5 6Decision:-
Arguments of the AO as well as appellant have been considered. There is considerable force in the arguments of the AO. Relying on the reasoning given by the AO, the disallowance is confirmed."
4 We have heard the rival submissions and perused the material available on record and the judgments cited on behalf of the assessee. The assessee has challenged the addition on account of late payment of employee's contribution towards PF and ESI.
The learned AR has relied on various judgments. Since this issue is covered by the judgment of the Hon'ble Delhi High Court in the case of CIT vs. AIMIL Ltd. (2010) 188 Taxman 265 (Delhi). Respectfully following the ratio laid down therein, we reverse the order of the learned CIT(A) and direct the AO to delete the addition made on account of late / delayed payment.
5 As regards Ground no.2 in the appeal, the facts of the case are that during the year under consideration, the assessee has shown gross profit of Rs.1,86,44,028/- on total turnover of Rs.3,18,59,402/- which works but to 58.52% as against the G.P. of 59.91% on total turnover of Rs.3,46,11,057/- shown in the immediate preceding year. Thus, there is a fall in G.P. of 1.39% during the year as compared to immediate preceding year. The assessee was, therefore, asked to explain the fall in G.P. with supporting proof and evidences. In response to the same, the assessee vide its letter dated 27.08.2010 furnished its explanation for the fall in G.P. which is verified and placed on records. The AO observed that the explanation furnished by the assessee is not substantiated with supporting proof and evidences. The AO also 6 7 observed that further, on perusal of the case records and the details furnished during the course of assessment proceedings, the following defects were also noticed.
[i] On perusal of the records it is seen that the consumption of raw material has been increased by Rs.23,12,896/- [49%] i.e. from Rs.46,50,478/- in the previous year to Rs.69,63,374/- during the year under consideration despite the fact that the turnover of the assessee has been decreased by'Rs.27,51,655/- [7.95] i.e. from Rs.3,46,11,057/- in the previous year to Rs.3,18,59,402/- during the year under consideration, [ii] The assessee company is not maintaining any day-to-day stock register which has been confirmed by the assessee vide its letter dated 14.07.2010. The assessee vide its letter dated 14.06.2010 stated that the company is not maintaining subsidiary records. The tax auditor in his audit report in clause 28(b) in Form No.3CD reported that "quantitative details have not been produced before us, hence we are unable to report on the same." In the absence of day-to-day stock register and quantitative details, the consumption of raw materials is not verifiable.
[iii] During the year under consideration the assessee has claimed modeling & shooting expenses of R.3,50,389/- as against Rs.34,450/- claimed in the immediate preceding year. Thus, there is a disproportionate increase in the said expenses during the year as compared to immediate preceding year. This disproportionate increase in the said expenses is despite the fact that the turnover has been decreased from Rs.3,46,11,057/- in the last year to Rs.3,18,59,402/- in the year under consideration. The assessee was asked to furnish complete details of the said expenses with supporting proof and evidences. The assessee has furnished copy of the ledger account of the said expenses. No other supporting proof and evidences has been furnished. Further, on perusal of the ledger account it is seen that most of the payments are made in cash. In the absence of complete supporting evidences, the said expenses are not verifiable.
7 8It would be apt to mention here that in the case of Samir Diamonds Exports Ltd reported in 71 ITD 75, the Hon'ble ITAT, Mumbai, observed as under:
"As this point we may observed that what is meaningful for the Income-tax Officer to find out the correct profits of an assessee, may be meaningless for the assessee (and which we have mentioned can not and is not meaningless in the case of this particular assessee), but it is for the Assessing Officer to determine whether the books of account are correct and complete according to his satisfaction or not. We may quote from section 145(2) of the Income-tax Act (as it stood at the relevant time.) whether the Assessing Officer is not satisfied about the correctness and completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in toe manner provided in section 144". Of Course the appellant authorities are entitled to judge as to whether the Assessing officer was justified in coming to the conclusion that the books of account were not correct and complete, but it may not give a similar authority to an assessee to tell the Assessing Officer that what the Assessing Officer was asking was meaningless. As mentioned above, the way in which the assessee should have actually maintained the lots of its diamond, as admitted before the Commissioner of Income tax (A) mentioned earlier, would only confirm that the assessee had been in fact, noting down and maintaining the details required by the Assessing Officer when it received back the cut and polished diamonds from the labour parties and when it was sorting them in different lots, sizes, quality etc. From this also whether that the assessee had withheld the complete and correct details regarding its accounts from the Assessing Officer and hence, so far as, the Assessing Officer was concerned the accounts which he was allowed to examine were not correct and complete, hence he was justified in invoking the provisions of section 145(2) of the income Tax Act".
Further, the Hon'ble Allahabad High Court in the case of Awadhesh Pratap Sngh Abdul Rehman and Brothers reported in 210 ITR 406 and in the case of Hari Shankar Gopal Hari reported in 97 ITR 716 has held as under:-
8 9"it is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct form which the correct profit cannot be deducted. Whether the presence or the absence of a stock register is material or not would depend upon types of the business. It is true that the absence of a stock register or cash memos in a given situations may not per se lead to an inference that the accounts are false or incomplete. However, where the absence of a stock register, cash memos etc. is coupled with other factors such as that the vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate Inference that all is not well with the books and the .same cannot be relied upon to assessee the income, profits or gains of the assessee".
The Hon'ble High court in the case of Bharat Milk Products reported in 128 ITR 682 considered and held as under:
"The assessee is engaged in the manufacture of condensed milk, cream, khova and skimmed milk. On an examination of the accounts, the ITO found that the purchases and cash sales were not verifiable and that no day to day production and manufacturing record had been maintained. Accordingly, he invoked the proviso to u/s. 145(1) of the Act and on the basis of the milk purchases and sugar consumed as also the past record:
he worked out the shortageiin production and thus made an addition in the sale price of loose condensed milk..............................in the absence of day to day production or manufacturing record, the application of the proviso to s. 145(1) was upheld.
............................In the instant case it has been found as a fact and it was not disputed before us that the assessee did ,not maintain any day to day manufacturing and production account and the question is whether on account of this defect the accounts of the assessee could be rejected. In our opinion, the answer to this question has to be in the affirmative. We do not think that any exhaustive list of defects can be laid down which might justify the rejection of the books. There may be some defects which even individually may be sufficient for rejection the accounts. It would be useful in this behalf to refer to the decisions of the Supreme Court in McMillan & Co. 33ITR 182.9 10
The corresponding provision in the Act of 1922 was contained in s.13 and the proviso to it and in McMillan's case it was observed that the words" in the opinion of the Income tax Officer" in the proviso s.13 do not confer a mere discretionary power, but In their context impose a statutory duty on the ITO to examine in every case the method of accounting employed by the assessee and to see, (1) whether or not it is regularly employed, and (2) to determine ^whether the income, profits and gains of the assessee can property be deducted there from."
It was furthers laid down that the ITO, even when he accepts the method of accounting, is not bound by the figure of profits shown in the accounts. The same view was taken by the Supreme Court in S.N. Namasivayam Chettier 38 ITR 579 and it was lid down (p.588); "....the Income-tax Officer, even if he accepts the assessee's method of accounting is not bound by, the figure of profits shown in the accounts. It is for the income tax authorities to consider the material which is placed before them and, if, after taking into account in any case the absence of stock register coupled with other materials, they are of the opinion that the correct profits band gains cannot be deducted, then they would be justified in applying the proviso to section, 13".
The Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd reported in 188 ITR 44 held as under:-
"It is not only the right, but the duty of the Assessing Officer to consider whether or not the books disclosed the true state of accounts and the correct income can be deducted therefrom. It is incorrect to say that the Officer is bound to accept the system correctness of which had not been questioned in the past. There is no estoppels in these matters and the Officer is not bound by the method followed in the earlier years.' In view of the facts , it can be clearly concluded that the books of accounts of the assessee are not correct and complete and hence not reliable. Therefore, the true profit of the business of the assessee cannot be deducted therefrom. Accordingly, the book result declared by the assessee is rejected, it is the duty of the Assessing Officer to estimate fair and reasonable profit keeping in view the explanation of the assessee and the facts and circumstances of the case. As stated in the above paragraph, the assessee has shown G.P. at 58.22% as against the G.P. of 59.91% shown in 10 11 the immediate preceding year. Thus, there is a fall in G.P. of 1.39%. In view of defects/deficiencies noticed as discussed above and also considering the explanation of the assessee and the facts and circumstances of the case, it would be fair and reasonable to estimate the G.P. of the assessee at 59.91% i.e. at the same percentage of G.P. which was shown in the immediate preceding year. Accordingly, an addition of Rs.4,42,845/- being 1.39% [59.91%-58.52%] of the turnover of Rs.3,18,59,402/- is made to the total income of the assessee on account of fall in G.P."
6 On appeal, the learned CIT(A) has dealt with the issue in detail as under:-
"2.2 Appellants arguments:-
The appellant is a private limited company and is engaged in the business of poster & design sales and software developments. The appellant company has maintained detailed books of accounts in the regular course of business as per the prevailing accounting standards and the said books of accounts are audited. Books of accounts, purchase bill, sale bill, expenditure vouchers etc. were produced before the Ld. AO from time to time. All the expenses are fully vouched and verifiable.
2.2 The Ld. AO the rejected the book result declared by the appellant and estimated gross profit at, 59.91% instead of 58.52% shown by the appellant and made an addition of Rs.4,42,845/- on account of fall in gross profit. The Ld. AO mentioned in Para 4(1) on page 2 of his order that consumption of raw material has been increased by Rs.23,12,896/- i.e. from Rs.46,50,478/- in the previous year to Rs.69,63,374/-during the year under consideration and also alleged that modeling and shooting ^expenses was made mostly in cash and no supporting evidence has been furnished and I therefore the Ld. AO rejected the book results and made an addition of Rs.4,42,845/- on his whims without giving any opportunities to the appellant.
2.3 Sir, it was submitted to the Ld. AO that the reason for the increase in consumption of raw material is that, there was a shift in the demand of digital offset printing compared to other printing 11 12 technology. This is clear from drop in the click printing maintenance, bill of Xerox India from Rs.80,11,986/- in F.Y.2006-07 to Rs.63,29,777/- i.e. Rs.l6,E2,209/-.
2.4 The market demand forced the company to outsource the print volume from other vendors. During the year 2007-08, the company outsourced a print volume of Rs.35,52,713/- from Tasveer and Klick.
This Is the reason for increase in consumption of raw material. At the same time the expenses of repairs and maintenance has been decreased by Rs.16,74,203/- from 64,87,946/- to Rs.48,13,743/-.
2.5 The appellant company has also submitted the complete details regarding modeling and shooting expense for Rs.3,50,389/-. The IT act does not debar appellant from payments of cash. All the expenses are duly supported by vouchers. All the desired details (incl. of details of business expenditure) and documentary evidence were produced before the Id. AO from time to time. Books of accounts and their supporting documents were produced before the Ld. AO several times.
2.6 The Ld. AO without pointing out any defects in the books of account maintained or in the method of accounting regularly employed in the past, has rejected the trading results for the simple reason that the gross profit for the year was low as compared to the immediately preceding year without raising any query during the course of assessment proceedings.
2.7 The Ld. AO stated that the expenses of Modeling and shooting were incurred in cash and has no supporting proof and evidence. However there is no allegation or ascertain that the expenses are recorded at inflated rates or no voucher was maintained by the appellant for the above expenditure. A paper book is enclosed containing ledger account copy of modeling and shooting expenses alongwith supporting evidences. « 2.8 Sir, all the purchases, sales were properly recorded and duly verified by the Ld. AO. Not a single discrepancy was pointed out by the Ld. AO apart from low gross profit, whereas in all the cases relied by the Ld. AO either the purchase or sales are not verifiable. In the case of appellant all the purchases and sales and expenses are duly recorded with supporting evidences and are verifiable.
12 13Non-maintenance of Stock register on day to day basis by itself does not lead to inference that it is not possible to deduce the true income of the appellant from the accounts maintained by the appellant, nor can the account be said to be defective or incomplete of this reason alone.
DECISION:-
Arguments of the AO as well as appellant have been considered. There is considerable force in the AO's arguments. He has given cogent reasons for rejection of books of account and making addition for low GP. Agreeing with the AO, I confirm his action and GP addition is sustained."
7 We have heard both the parties and considered their rival submissions and perused the material on record. The estimation made by the AO is at higher side and it would be subserve interest of justice if the addition of Rs.4,42,845/- is reduced to Rs.2,50,000/-. We hold accordingly.
8 In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the court today on 13-04-2012 Sd/- Sd/-
(A K G ARODI A) (KUL BHARAT)
ACCOUNTANT MEMBER JUDICI AL MEMBER
Date : 13-04-2012
Copy of the order forwarded to:
1. Dynamic Soft Link Pvt. Ltd., 402, Empire State Building, Ring Road, Surat
2. The Addl. Commissioner of Income-tax, Range-1, Surat 13 14
3. CIT concerned
4. CIT(A)-I, Surat
5. DR, ITAT, Ahmedabad Bench-C, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 14