2012 (7) TMI 44 - AT - Income Tax

Disallowance of salary & depreciation expenses upheld, provident fund contribution allowed by Tribunal

Niho Construction Limited, Versus DCIT, Circle 13 (1),

The disallowance of expenses related to salary and depreciation was upheld by the Appellate Tribunal due to insufficient evidence of business necessity, ... Disallowance of salary paid - AO noticed that assessee company has paid huge salary to the ladies who are relatives of Directors / CEO - Held that:- Except the oral statement that the services were rendered by this four relatives of the Directors, no other material is placed which reveal that any services were rendered by these persons to the assessee - as assessee failed to justify the reasonableness of salary payments made, the additions need to be made - against assessee. Disallowance of 100% depreciation of mobile phones - A.O. allowed depreciation @ 15% - Held that:- As the items which are entitled to 100% depreciation are specifically mentioned in the Income Tax Act/Rules and since assessee has failed to show any provision in the Rules related to 100% depreciation is justified on the mobile phones they can be allowed depreciation only at the rates applicable to plant and machinery - against assessee. Disallowance on account of provident fund being employees’ contribution paid before the due date of filing the return of income - Held that:- As decided in CIT vs. AIMIL Limited [2009 (12) TMI 38 (HC)]that as soon as employees' contribution towards PF or ESI is received by the assessee by way of deduction or otherwise from the salary/wages of the employees, it will be treated as 'income' at the hands of the assessee and on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of s. 36(1)(va) - 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 Acts permit the employer to make the deposit with some delays - Insofar as the IT Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed - Since the amount has been paid prior to the date of filing the return ground of assessee is allowed. Issues involved:1. Disallowance of expenses related to salary and depreciation.2. Disallowance of provident fund contribution.Analysis:Issue 1: Disallowance of expenses related to salary and depreciationThe first issue involves the disallowance of expenses related to salary and depreciation. The Assessing Officer noted that the company had paid significant salaries to the relatives of Directors/CEO without justifying the reasonableness of the payments. The Appellate Tribunal upheld the addition, citing the requirement for expenses to be wholly and exclusively for business purposes. The Tribunal emphasized that the burden of proof lies with the assessee to demonstrate the business necessity of such expenses. As the assessee failed to provide sufficient evidence beyond oral statements, the disallowance was sustained based on the precedent set by the Hon'ble Delhi High Court. The Tribunal, in line with the ITAT order for a previous assessment year, affirmed the disallowance, emphasizing the need for commercial expediency and prudent business judgment in expense claims.Issue 2: Disallowance of provident fund contributionThe second issue pertains to the disallowance of provident fund contribution amounting to Rs.6,63,966. The Tribunal ruled in favor of the assessee, citing precedents from the Hon'ble jurisdictional High Court and the Supreme Court. The decision highlighted that as soon as employees' contributions towards provident fund or ESI are received by the assessee, they are treated as income. However, if not deposited with the authorities on time, they are taxed as income. The Tribunal referenced specific provisions under the relevant Acts and the importance of actual payment for deduction purposes. Given that the contribution was paid before the return filing date, the Tribunal allowed this ground of the assessee's appeal, aligning with the legal principles established by the aforementioned court decisions.This detailed analysis covers the disallowance of expenses related to salary and depreciation, as well as the disallowance of provident fund contribution, providing a comprehensive understanding of the judgment's key aspects and legal interpretations.