PRAKASH COTTON MILLS P LTD MUMBAI vs DCIT 7(1) MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “C”, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) &SHRI.RAJENDRA (A.M.) ITA NO.

7197/Mum/2010(A.Y.2006-07) M/s.

Prakash Cotton Mills Pvt.

Ltd., Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013.

PAN:AAACP0550H (Appellant) Vs.

The DCIT, Cir.7(1), 6th Floor, Room No.622, Aaykar Bhavan, Mumbai - 400 020. (Respondent) Appellant by : Shri Hari S.

Raheja Respondent by : Shri A.K.Nayak Date of hearing : 24/04/2012 Date of pronouncement : 30/04/2012 ORDER PER N.V.VASUDEVAN, J.M This is an appeal by the assessee against the order dated 9/7/2010 of CIT(A)-13, Mumbai relating to the assessment year 2006-07.

Ground No.1 & 2 raised by the assessee read as follows: “1.

On the facts and in the circumstances of the case, the learned Commissioner of Income tax (Appeals) erred in confirming the addition of Rs.9,35,127/- made by the Assessing Officer under section 2(24)(x) read with explanation to section 36(1)(va) of the lnc94 1961 bein9 employees contribution to Provident Fund.

The appellant submits that the payments have been made within time and hence no disallowance is called for and therefore the addition ought to be deleted.

2.

On the facts and in the circumstances of the case, the learned Commissioner of Income tax (Appeals) erred in confirming the addition of Rs.14,0401- made by the Assessing Officer under section 2(24)(x) read with explanation to section 36(1)(va) of the Income tax Act, 1961 being amount paid to labour welfare fund.

The appellant submits that ITA NO.

7197/Mum/2010(A.Y.2006-07) 2 the payments have been made within time and hence the addition ought to be deleted.” 2.

The assessee is a company engaged in the business of manufacture and sale of cotton yarn, fabrics and made up.

In Annexure -5 to the Tax Audit Report a reference was made to the payment of employees contribution to PF and ESIC as under: A.

Contribution to Provident Fund: Month Employees Contribution Due Date Date of payment April 05 1046349 20.

046349 20.05.2005 14.05.2005 May 05 942663 20.06.2005 15.06.2005 June 05 865335 20.07.2005 15.07.2005 July 05 882824 20.08.2005 16.08.2005 Aug.05 950853 20.09.2005 15.09.2005 Sep 05 890062 20.10.2005 15.10.2005 Oct 05 918639 20.11.2005 16.11.2005 Nov 05 909040 20.12.2005 15.12.2005 Dec 05 927811 20.01.2006 16.01.2006 Jan 06 941390 20.02.2006 15.02.2006 Feb 06 872456 20.03.2006 16.03.2006 Mar 06 935127 20.04.2006 16.04.2006 Contribution to Labour Welfare Fund June 05 14040.00 14.07.2005 19.07.2005 According to the AO the auditors should have qualified in its report that the assessee has made the aforesaid payments were made by the Assessee beyond the due dates as prescribed under the relevant law relating to PF and ESIC contribution.

According to the AO the payments have to be made 15 days within the end of the relevant month, but the Auditor has taken 5 days grace period allowed under the relevant law relating to PF and ESIC and has mentioned the due date for payment accordingly.

The AO accordingly disallowed a sum of Rs.

9,35,125/- and Rs.

14,040/- being contribution to PF & labour welfare fund respectively.

On appeal by the assessee the CIT(A) ITA NO.

7197/Mum/2010(A.Y.2006-07) 3 confirmed the order of the AO.

Aggrieved by the order of the AO the assessee has raised ground No.1 & 2 before the Tribunal.

3.

We have considered the rival submissions.

In Commissioner of Income-tax v.

Shri Ganapathy Mills Company Ltd.

243 ITR 879 (Mad) the Hon’ble Madras High Court has held that the payments towards provident fund and employees State insurance made within the grace time allowed under the relevant statutes cannot be disallowed u/s.43-B of the Act.

Salem Co-operative Spinning Mills Ltd.

284 ITR 621 (Mad), the aforesaid decision has been followed by the Hon’ble Madras High Court.

In view of the above, we do not find any justification for the impugned disallowance made by the AO and sustained by the CIT(A). he CIT(A).

Apart from the above, we find that in CIT vs.

AIMIL Limited The Hon’ble Delhi High Court in ITA No.

1063 of 2006 ITA No.755 of 2008 ITA No.

204 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 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)(va).

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.

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’ ITA NO.

7197/Mum/2010(A.Y.2006-07) 4 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) /s 2 (24) (x) on receipt by the assessee and allowed as a 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.

Dharmendra Sharma 297 ITR 320 (Del) & P.M.

Electronics 313 ITR 161 (Delhi) followed; (iii) 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 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.

Insofar 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.

ITA NO.

7197/Mum/2010(A.Y.2006-07) 5 In view of the above we are of the view that Ground No.1 & 2 raised by the assessee deserves to be allowed.

The addition made by the AO is directed to be deleted.

4.

Ground No.3 raised by the assessee reads as follows: “3.

On the facts and in the circumstances of the case, the learned Commissioner of Income tax (Appeals) erred in confirming the addition of Rs.14,51 ,324/- being prior period expenses - “ESIC demand relating to earlier years determined and paid during the year”.

The appellant submits that the demand of ESIC is determined and paid during the year and the same is allowable under the provisions of the Income tax Act, 1961.” 5.

There were disputes regarding assessee’s obligation to make contribution under ESIC Act 1948.

Act 1948.

The dispute was with reference to the assessee’s obligation to make contribution in respect of certain items of expenditure and relates to the period April 1997 to March 1998 and April 1998 to March 1999.

The Dy.

Director, ESIC by an order dated 5/4/2005 determined the following amounts as payable by the assesse and the same was also paid by the Assessee as detailed in the chart given below.

Years Date of order Date of payment Amount 1997-98 05.04.2005 14.04.2005 382345.00 1998-99 05.04.2005 16.04.2005 387184.00 1997-98 30.06.2005 13.07.2005 101559.00 1998-99 30.06.2005 13.07.2005 62003.00 2000-01 08.12.2005 25.12.2005 106967.00 2001-02 04.01.2006 18.01.2006 88444.00 1997-98 & 1998 - 99 16.01.2006 25.01.2006 271869.00 2002-03 08.02.2006 15.02.2006 50953.00 Total: 1451324.00 According to the revenue authorities the expenditure related to the earlier assessment years and cannot be claimed as a deduction in the present ITA NO.

7197/Mum/2010(A.Y.2006-07) 6 assessment year because as per mercantile system of accounting only expenditure relating to the previous year can be allowed as deduction.

Aggrieved by the order of the CIT(A) the assessee has preferred ground No.3 before the Tribunal.

6.

We have heard the rival submissions.

Section 43B of the Income Tax Act, 1961 is an exception to the method of accounting followed by an assessee.

It lays down that notwithstanding anything contained in any other provisions of the Income Tax Act any payment payable under any law or the time being in force shall be allowed as a deduction only on actual payment irrespective of the period to which it relates and irrespective of the method of accounting followed by the assessee.

The disallowance was made in respect of the amount payable by the assessee as an employer under ESIC Act 1948, which was disputed by the assessee.

The dispute was finally adjudicated by the concerned authority during the previous year and the assessee has made payment during the previous year. ious year.

Thus under the provisions of section 43B of the Act as well as under the mercantile system of accounting deduction claimed has to be allowed.

The liability to the assessee crystallized during the previous year and, therefore, even under the mercantile system of accounting deduction claimed has to be allowed.

For the reasons given above we direct that the deduction claimed by the assessee be allowed.

7.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on the 30th day of April 2012 Sd/- Sd/- (RAJENDRA) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 30th April 2012 ITA NO.

7197/Mum/2010(A.Y.2006-07) 7 Copy to: 1.

The Appellant 2.

The Respondent 3.

The CIT City –concerned 4.

The CIT(A)- concerned 5.

The D.R”C” Bench. (True copy) By Order Asst.

Registrar, ITAT, Mumbai Benches MUMBAI.

Vm.