2022 (8) TMI 1471 - AT - Income Tax

Freezer deposit liability cessation doesn't trigger section 41(1) addition; delayed PF ESI remittance disallows section 36(1)(va) deduction

The ITAT Cochin ruled on two issues. First, regarding additions under section 41(1) for cessation of liability related to freezer deposits, the Tribunal ... Additions u/s 41(1) - Cessation of liability - Freezer Deposit considered as lapsed liability u/s 41(1) - HELD THAT:- As in assessee’s own case [2016 (11) TMI 1584 - ITAT COCHIN] by following the earlier Tribunal order, had held that addition u/s 41(1) is not warranted. The relevant finding of the Tribunal for assessment year 2011-2012. Disallowance of belated payment of employees’ contribution to PF & ESI - HELD THAT:- The assessee is claiming deduction of delayed remittance of employees’ contribution to PF and ESI, stating that the same has been deposited before the due date of filing return u/s 139(1) of the I.T. Act. However, the Hon’ble jurisdictional High Court in the case of CIT v. Merchem Limited [2015 (9) TMI 560 - KERALA HIGH COURT] and in the case of Popular Vehicles & Services Private Limited v. CIT [2018 (8) TMI 133 - KERALA HIGH COURT] had clearly held that employees’ share of PF and ESI, which was not deposited within the due date under the respective Acts, is not an allowable deduction u/s 36(1)(va) of the I.T. Act. Therefore, following the judgments of the Hon’ble jurisdictional High Court in the case of CIT v. Merchem Limited [2015 (9) TMI 560 - KERALA HIGH COURT] and Popular Vehicles & Services Private Limited [2018 (8) TMI 133 - KERALA HIGH COURT] we hold that since the employees’ contribution to PF and ESI was not deposited within the due date specified in the relevant Acts, the same cannot be allowed as a deduction u/s 36(1)(va). It is ordered accordingly. Issues:1. Freezer deposit considered as lapsed liability u/s 41(1) of the I.T. Act.2. Belated payment of employees' contribution to PF & ESI.Issue 1: Freezer Deposit considered as lapsed liability u/s 41(1) of the I.T. Act:The appellant, a private limited company engaged in ice-cream and frozen foods manufacturing, contested the addition of Rs. 43,99,905 as lapsed liability under section 41(1) of the I.T. Act regarding a freezer deposit. The Assessing Officer and CIT(A) upheld the addition. The appellant cited a previous Tribunal order in their favor for a similar issue. The Tribunal, following precedent, ruled that the freezer deposits cannot be considered income until the agency agreement terminates. The Tribunal emphasized that the appellant never treated the amount as income in their books and consistently held it as a liability. The Tribunal referred to various legal cases supporting the appellant's stance. The High Court appeal by the Revenue was withdrawn due to low tax effect, leading to the deletion of the addition under section 41(1) of the I.T. Act.Issue 2: Belated Payment of Employees' Contribution to PF & ESI:The appellant's deduction claim for belated remittance of employees' PF and ESI contributions was disallowed under section 36(1)(va) of the I.T. Act for not meeting the due date. The CIT(A) upheld the disallowance. The appellant argued that the payments were made before the return filing due date under section 139(1) of the I.T. Act. However, the Tribunal, relying on judgments of the jurisdictional High Court, held that delayed remittance of employees' PF and ESI contributions is not an allowable deduction under section 36(1)(va) of the I.T. Act. Consequently, the appeal was partly allowed, affirming the disallowance of the deduction.In conclusion, the Tribunal upheld the appellant's appeal regarding the freezer deposit addition under section 41(1) of the I.T. Act based on precedent and legal principles. However, the disallowance of the deduction for belated payment of employees' PF and ESI contributions was upheld, following judgments of the jurisdictional High Court. The Tribunal's decision was pronounced on August 4, 2022.