Tribunal decision on deduction under section 36(1)(va) and legal expenses

The Tribunal upheld the disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance, citing that the due date for depositing the sum deducted from employees' salary is as per the relevant Act, not the Income Tax Act. However, the Tribunal allowed the deduction of legal expenses paid, determining them to be compensatory in nature rather than penal. As a result, the Tribunal partially allowed the assessee's appeal, with the decision announced on 13th August 2018.

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Issues:
1. Disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance.
2. Disallowance of legal expenses paid.

Analysis:
1. The first issue pertains to the disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance. The Assessing Officer (AO) noticed that the assessee did not deposit the amount received from employees towards PF and ESIC on time. The AO proposed disallowance, and after the assessee's reply was not accepted, the disallowance was made and added to the income. The CIT(A) reduced the disallowance, but the Tribunal upheld the disallowance. The Tribunal clarified that the due date for depositing the sum deducted from employees' salary with the relevant fund is as per the relevant Act, not as per the Income Tax Act. Citing relevant case law, the Tribunal dismissed the assessee's claim for deduction under section 36(1)(va).

2. The second issue concerns the disallowance of legal expenses paid. The AO considered a payment of Rs. 26,000 as a penalty for an offense and proposed disallowance. The assessee argued that the payment was towards compounding fees and not penal in nature. The AO and CIT(A) held the expenses as penal and disallowed them. The Tribunal, after examining the facts, concluded that the expenditure was compensatory and necessitated by commercial expediency. The Tribunal found the payment to be compensatory in nature, not penal, and allowed the deduction under section 37(1) of the Income Tax Act. The Tribunal disagreed with the AO's decision and deleted the disallowance, allowing the assessee's appeal partially.

In conclusion, the Tribunal upheld the disallowance of deduction under section 36(1)(va) towards Provident Fund and Employees State Insurance but allowed the deduction of legal expenses paid as they were compensatory in nature. The appeal of the assessee was partly allowed, and the decision was pronounced in the open court on 13th August 2018.

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