2020 (9) TMI 756 - AT - Income Tax

ITAT Decision: Disallowance Upheld, Interest Adjusted, Appeal Partly Allowed

The ITAT upheld the disallowance of Rs. 2,08,324/- under section 36(1)(va) and partially upheld the disallowance of interest expenses under section ... Deductibility of employee's contribution paid after statutory due date under 36(1)(va) read with 2(24)(x) - Computation of employer's deduction in relation to statutory funds where payment is made after prescribed period - Disallowance of interest expenditure on borrowed funds diverted to interest free advances under 36(1)(iii) - Presumption of utilisation of interest free/own funds for investments or advances when such funds are sufficient - Remand for quantification/adjustment of disallowance after taking into account own funds and reservesDeductibility of employee's contribution paid after statutory due date under 36(1)(va) read with 2(24)(x) - Computation of employer's deduction in relation to statutory funds where payment is made after prescribed period - Payment of employees' contribution to ESIC made after the due date prescribed by the relevant statute is not allowable as a deduction under section 36(1)(va) and is includible as income under section 2(24)(x). - HELD THAT: - The Tribunal found that the assessee made employees' contributions to ESIC beyond the statutory due date (15 days from the month for which salary is due). Reliance was placed on the Gujarat High Court decision in M/s Checkmate Facility and Electronics Solutions Pvt. Ltd. v. DCIT, which holds that where such statutory payments are not made on or before the prescribed date, deduction is not available under section 36(1)(va) and the amount is taxable under section 2(24)(x). The assessee's contention that payment before the due date for filing the return would suffice (invoking section 43B) was rejected because the statutory requirement is payment on or before the due date under the relevant enactment. Consequently the disallowance of the amount paid after the due date was upheld. [Paras 5, 6, 8, 9, 11]The disallowance under section 36(1)(va) read with section 2(24)(x) in respect of employees' contribution paid after the statutory due date is upheld and the ground of appeal is dismissed.Disallowance of interest expenditure on borrowed funds diverted to interest free advances under 36(1)(iii) - Presumption of utilisation of interest free/own funds for investments or advances when such funds are sufficient - Remand for quantification/adjustment of disallowance after taking into account own funds and reserves - Whether proportionate disallowance of interest under section 36(1)(iii) is justified for interest free advances to subsidiaries, and the manner of working out such disallowance. - HELD THAT: - The AO made a proportionate disallowance treating interest bearing funds as having been diverted to interest free advances to subsidiaries. The assessee contended that adequate interest free/own funds were available and relied on precedent that where sufficient interest free funds exist, investments/advances are presumed to be made from those funds. The Tribunal examined the composition of the assessee's funds and rejected the assessee's inclusion of customer advances as part of own funds because such advances are current liabilities/working capital and not available for making long term interest free advances (drawing support from CIT v. Doctor & Co.). The Tribunal accepted that the assessee's capital and reserves (own funds) to the extent available at the relevant date should be presumed applied to the advances (supported by authorities such as Max India Ltd., Reliance Utilities & Power Ltd., and other High Court decisions). In view of these findings, the Tribunal held that disallowance is warranted only to the extent the interest bearing borrowed funds exceeded the own funds available for the advances. The matter was therefore remitted to the assessing authority to compute and work out the disallowance after adjusting the own funds including reserves available as on 31-03-2015. [Paras 12, 13, 14, 15, 17]The appeal is partly allowed: disallowance under section 36(1)(iii) is sustained to the extent borrowed funds were actually diverted after excluding own funds; the assessment is remitted for recomputation/adjustment of the disallowance by the authorities below.Final Conclusion: The appeal is partly allowed: the disallowance under section 36(1)(va) read with section 2(24)(x) in respect of employees' contribution paid after the statutory due date is upheld; the disallowance under section 36(1)(iii) for interest on borrowed funds diverted to interest free advances is to be recomputed by the assessing authority after adjusting for the assessee's own funds and reserves as on 31-03-2015, and the matter is remitted for quantification. Issues Involved:1. Disallowance of Rs. 2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Income-tax Act.2. Disallowance of estimated interest expenses of Rs. 25,98,864/- under section 36(1)(iii) of the Income-tax Act.3. Alleged breach of principles of natural justice by lower authorities.4. Levying of interest under section 234A/B/C of the Income-tax Act.Issue-wise Detailed Analysis:1. Disallowance of Rs. 2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Income-tax Act:The assessee, a Private Limited Company engaged in manufacturing of metals, was found by the AO to have either made late payments or not paid the amount of ESI on behalf of employee contributions amounting to Rs. 3,01,624/-. The AO noted that the assessee itself disallowed Rs. 93,300/- in its books of account but agreed to disallow the remaining Rs. 2,08,324/- under section 36(1)(va) r.w.s. 2(24)(x) of the Act. The Ld. CIT(A) confirmed this disallowance.The assessee argued that the payments, although late as per the relevant Act, were made before the due date of filing the return of income, invoking section 43B of the Act. However, Ld. CIT(A) disregarded this, stating that the payments were not made within the due date as per section 36(1)(va). The ITAT upheld the lower authorities' decision, referencing the Gujarat High Court's judgment in CIT v. Gujarat State Road Transport Corporation and M/s Checkmate Facility and Electronics Solutions Pvt. Ltd. v. DCIT, which held that payments made after the due date specified in the relevant Act should be disallowed.2. Disallowance of estimated interest expenses of Rs. 25,98,864/- under section 36(1)(iii) of the Income-tax Act:The AO observed that the assessee had given interest-free loans to its subsidiaries amounting to Rs. 7,16,59,975/- while claiming interest expenditure of Rs. 2,10,55,848/- on borrowed funds. In the absence of evidence showing that the funds were provided for business purposes or from own funds, the AO made a proportionate disallowance of Rs. 25,98,864/- under section 36(1)(iii).The Ld. CIT(A) confirmed the AO's decision, noting that the assessee was paying substantial interest on borrowings while making interest-free advances, and the bank statements indicated that these advances were made from loan accounts.The assessee argued that the advances were made out of commercial expediency to its subsidiary and that it had substantial interest-free funds exceeding the interest-free advances. Citing various judgments, the assessee contended that no disallowance was warranted. The ITAT noted that the advances from customers should not be considered as part of own funds and upheld the disallowance to the extent of borrowed funds used for non-commercial purposes. However, it directed the authorities to adjust the disallowance considering the own funds available.3. Alleged breach of principles of natural justice by lower authorities:The assessee claimed that the lower authorities passed orders without properly appreciating the facts and submissions, breaching the principles of natural justice. However, this issue was not separately addressed in detail in the judgment, implying that the ITAT did not find substantial merit in this claim.4. Levying of interest under section 234A/B/C of the Income-tax Act:The assessee contested the levy of interest under section 234A/B/C, but the judgment does not provide a detailed discussion on this issue, indicating that the ITAT did not find grounds to interfere with the levy of interest.Conclusion:The ITAT upheld the disallowance of Rs. 2,08,324/- under section 36(1)(va) and partially upheld the disallowance of interest expenses under section 36(1)(iii), directing adjustments for own funds. The appeal was partly allowed, reflecting a balanced consideration of the issues raised by the assessee.