2022 (8) TMI 349 - AT - Income Tax

Deductions for Employees' Contributions Allowed, Interest on Delayed TDS Disallowed

The Tribunal allowed the deduction for employees' contributions to PF and ESI as they were paid before the due date for filing the return. It disallowed ... Disallowance of employees’ contribution to provident fund (PF) and employees state insurance (ESI) u/s. 2(24)(x) r.w.s. 36(1)(va) r.w.s. 43B - HELD THAT:- As in the case of Essae Teraoka Pvt. Ltd.[2014 (3) TMI 386 - KARNATAKA HIGH COURT] we hold that the employee’s contribution paid by the assessee before the due date of filing the return of income u/s.139(1) of the Act is allowable as a deduction and the addition is deleted. Disallowance of interest on TDS - AO held that expense towards interest on TDS which is penal in nature and not allowable u/s. 37(1) - HELD THAT:- The coordinate Bench of this Tribunal in Velankani Information Systems Ltd. [2018 (10) TMI 68 - ITAT BANGALORE] dealt with this issue and held that interest on delayed payment of TDS cannot be allowed as deduction. As it is clear that the basis why tax or interest is not allowed as deduction u/s.37(1) of the Act is on the reasoning that it cannot be regarded as an expense incurred wholly or exclusively for the purpose of Assessee’s business. Therefore the allowability of interest on taxes paid should not be looked out from the definition of tax as given in Sec.2(43) of the Act. The submissions made by the learned counsel for the Assessee are based on a misconception that the definition of interest u/s.2(43) of the Act is relevant and that the disallowance in question has to be judged in the parameters of Sec.40(a)(iib) In our considered view this contention of the ld AR is completely out of context as we have already held that Sec.40(a)(ii) is not relevant to the present issue before us at all. Moreover, the levy of interest on delayed payment of TDS u/s.201(1A) though held to compensatory in nature, the allowability of the same cannot be decided simply based on that. The levy of 201(1A) is a levy for delay in the remittance of tax that is deducted and not paid into the government account and is levied towards the use of funds belonging to the exchequer. The interest u/s.201(1A) can be equated to the levy of interest u/s.234. Interest u/s.234 is a levy on delay in the payment of income tax and the TDS is nothing but the income tax paid on behalf of the payee and therefore the interest on the same u/s.201(1A) is also in the nature of interest levied on the income tax. On that count also interest on delayed payment of TDS cannot be claimed as a deduction. Comparison of the provisions of section 40(a)(ii) and section 179 - Section 179 is a provision for recovery from the directors of a private company and in that context the legislature has defined the word ‘tax due’ . As we have already held that Section 40(a)(ii) is not applicable to the present case at all, we are of the view that the contentions raised in this regard are untenable. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered two primary issues in this appeal:1. Whether the disallowance of the employees' contribution to provident fund (PF) and employees' state insurance (ESI) under sections 2(24)(x), 36(1)(va), and 43B of the Income-tax Act, 1961 was justified given the payment was made before the due date for filing the return of income.2. Whether the disallowance of interest on delayed payment of TDS as a business expenditure under section 37(1) of the Income-tax Act, 1961 was appropriate.ISSUE-WISE DETAILED ANALYSISIssue 1: Disallowance of Employees' Contribution to PF and ESI- Relevant Legal Framework and Precedents: The disallowance was made under sections 2(24)(x), 36(1)(va), and 43B of the Income-tax Act, 1961. The Finance Act, 2021 amended these sections prospectively from 1.4.2021. The Tribunal referred to the jurisdictional High Court's decision in Essae Teraoka (P.) Ltd. v. DCIT, which allowed deductions if contributions were made before the due date of filing the return under section 139(1).- Court's Interpretation and Reasoning: The Tribunal found that the amendment by the Finance Act, 2021 is prospective and not retrospective. It relied on the jurisdictional High Court's decision, which held that contributions made before the due date of filing the return should be allowed as deductions.- Key Evidence and Findings: The Tribunal noted that the assessee had remitted the employees' contributions before the due date for filing the return.- Application of Law to Facts: The Tribunal applied the jurisdictional High Court's ruling and directed the A.O. to allow the deduction.- Treatment of Competing Arguments: The Tribunal rejected the revenue's argument based on the Gujarat High Court's decision, which was contrary to the jurisdictional High Court's ruling.- Conclusions: The Tribunal allowed the deduction of the employees' contribution to PF and ESI as the payment was made before the due date for filing the return.Issue 2: Disallowance of Interest on Delayed Payment of TDS- Relevant Legal Framework and Precedents: The disallowance was based on section 37(1) of the Income-tax Act, 1961. The Tribunal referred to the Madras High Court's decision in CIT v. Chennai Properties & Investment Ltd., which held that interest on delayed payment of TDS is not allowable as a business expenditure.- Court's Interpretation and Reasoning: The Tribunal followed the Madras High Court's ruling, which characterized interest under section 201(1A) as not being a business expenditure.- Key Evidence and Findings: The Tribunal found that the interest was paid for delayed remittance of TDS, which is penal in nature.- Application of Law to Facts: The Tribunal applied the Madras High Court's decision and ruled that the interest on delayed payment of TDS is not deductible.- Treatment of Competing Arguments: The Tribunal considered various arguments and case laws presented by the assessee but found them either irrelevant or not applicable to the issue of interest on delayed payment of TDS.- Conclusions: The Tribunal upheld the disallowance of interest on delayed payment of TDS as it is not an allowable business expenditure.SIGNIFICANT HOLDINGS- Core Principles Established: The Tribunal reaffirmed the principle that amendments to tax provisions are generally prospective unless explicitly stated otherwise. It also reinforced the distinction between compensatory and penal interest, with the latter not being deductible as business expenditure.- Final Determinations on Each Issue: The Tribunal allowed the deduction for employees' contributions to PF and ESI as they were paid before the due date for filing the return. It disallowed the deduction of interest on delayed payment of TDS, following the Madras High Court's precedent.