Tribunal Partially Allows Appeal, Strikes Down Ad-hoc Addition, Upholds Disallowance for Late Payment

The Tribunal allowed the appeal in part, deleting the ad-hoc addition of Rs. 5 lakh but upholding the disallowance of Rs. 6,12,210 for late payment of employees' contribution to PF and ESI. The decision was based on the lack of specific evidence supporting the ad-hoc disallowance and the requirement for timely deposit of employees' contributions as per relevant enactments. The judgment was issued on 2nd March 2021.

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Issues Involved:
1. Partly sustaining the addition of Rs. 5,00,000 out of Rs. 10,00,000 made by the AO on an ad-hoc basis.
2. Disallowance of Rs. 6,12,210/- for late payment of employees' contribution to PF and ESI.

Detailed Analysis:

Issue 1: Partly Sustaining the Addition of Rs. 5,00,000 on an Ad-hoc Basis

Facts:
The assessee, engaged in the business of manpower supply, claimed expenses of Rs. 29,17,36,148/- on account of wages and salary in the profit and loss account. The Assessing Officer (AO) made an ad-hoc addition of Rs. 10 lakh due to unverifiable wages and salary expenses, noting that most payments were in cash and not fully vouched. The Ld. CIT(A) restricted this disallowance to Rs. 5 lakh, referencing similar past additions.

Arguments:
- Assessee's Counsel: Argued that both the AO and Ld. CIT(A) made ad-hoc disallowances without pointing out specific discrepancies or absence of bills/vouchers. Cited decisions from the Hon’ble Delhi High Court in Friends Clearing Agency Private Limited Vs CIT and the Tribunal in Ganapathi Enterprises Ltd., asserting that ad-hoc disallowances without specific evidence are unsustainable.
- Departmental Representative (DR): Relied on the orders of the lower authorities.

Judgment:
The Tribunal found that the AO did not point out any specific defects in the bills or vouchers. The Ld. CIT(A) acknowledged an increase in profit compared to the preceding year and noted that no specific instance of defect was highlighted by the AO. Citing the Delhi High Court's decision in Friends Clearing Agency (P) Ltd. and the Tribunal’s decision in Ganpati Enterprises Ltd., the Tribunal concluded that ad-hoc disallowances without specific evidence cannot be sustained. Thus, the addition of Rs. 5 lakh was deleted, and the ground of the appeal was allowed.

Issue 2: Disallowance of Rs. 6,12,210/- for Late Payment of Employees' Contribution to PF and ESI

Facts:
The AO disallowed Rs. 6,12,210/- towards Employees’ State Insurance (ESI) and Employees’ Provident Fund (EPF) contributions, which were deposited after the due date under respective enactments. The Ld. CIT(A) upheld this disallowance, relying on the Gujarat High Court’s decision in CIT Vs Gujarat State Road Transport Corporation.

Arguments:
- Assessee's Counsel: Argued that the Delhi High Court in PCIT-7 Vs. Pro Interactive Service (India) P. Ltd. held that contributions made before the due date of filing the return of income are allowable, referencing the decision in CIT Vs AIMIL Ltd. & Ors.
- Departmental Representative (DR): Cited the Delhi High Court’s decision in Commissioner of Income-tax Vs. Bharat Hotels Ltd., which held that employees’ contributions should be allowed only if paid within the due date stipulated in respective enactments.

Judgment:
The Tribunal noted the distinction between employer and employee contributions to ESI/EPF. The employer’s contribution is governed by section 43B(b) of the Act, while the employee’s contribution, treated as income under section 2(24)(x), is governed by section 36(1)(iv). The Tribunal upheld the Ld. CIT(A)’s finding, following the Delhi High Court’s decision in Bharat Hotels Ltd., which emphasized that employees’ contributions must be deposited within the stipulated period to be deductible. Consequently, the ground of the appeal was dismissed.

Conclusion:
The appeal was partly allowed. The Tribunal deleted the ad-hoc addition of Rs. 5 lakh sustained by the Ld. CIT(A) but upheld the disallowance of Rs. 6,12,210/- for late payment of employees' contribution to PF and ESI. The judgment was pronounced in the open court on 2nd March 2021.

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