2024 (7) TMI 1640 - HC - Income Tax

Assessing authority's Section 40(a)(ia) disallowance overturned but Section 36(1)(va) EPF/ESI disallowance upheld for late deposits

Unitac Energy Solutions (India) Pvt. Ltd. Versus The Assistant Commissioner Of Income Tax, Corporate Circle-2 (1), Kochi

Unitac Energy Solutions (India) Pvt. Ltd. Versus The Assistant Commissioner Of Income Tax, Corporate Circle-2 (1), Kochi - 2024:KER:52169, [2025] 474 ITR ... 1. ISSUES PRESENTED and CONSIDEREDThe judgment considered the following core legal questions:(a) Whether the disallowance made under Section 40(a)(ia) of the Income Tax Act was justified, specifically concerning payments made to transport contractors without deduction of tax at source, and the applicability of the exemption under Section 194C(6) in respect of such payments.(b) Whether the remand of the issue relating to Section 40(a)(ia) by the Appellate Tribunal to the Assessing Officer for fresh adjudication was appropriate.(c) Whether the disallowance under Section 36(1)(va) of the Income Tax Act was valid on account of delay in payment of employees' contribution under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees' State Insurance Act, 1948.(d) Whether the payments of employees' contribution made belatedly but within the due date for filing the return of income under Section 139(1) are eligible for deduction under Section 36(1)(va).(e) The applicability and interpretation of the non-obstante clause in Section 43B of the Income Tax Act regarding the timing of deduction for employees' contributions.(f) The legal correctness of the Appellate Tribunal's reliance on precedent decisions concerning the timing and conditions for allowing deductions under Section 36(1)(va).(g) The correctness of the Tribunal's approach in remanding the matter to verify contracts when the statute requires only furnishing of PAN and declarations for claiming exemption under Section 194C(6).(h) The applicability of Section 40(a)(ia) only to amounts outstanding as on the last day of the previous year (31.03.2013 in the instant case).2. ISSUE-WISE DETAILED ANALYSISIssue 1: Disallowance under Section 40(a)(ia) relating to payments to transport contractors and applicability of Section 194C(6)The legal framework involves Section 40(a)(ia), which mandates disallowance of expenditure where tax is required to be deducted at source but is not deducted, and Section 194C(6), which exempts deduction of tax at source on payments made to transport contractors owning ten or fewer goods carriages, subject to furnishing of a declaration and PAN.The Assessing Officer disallowed expenses under Section 40(a)(ia) on the ground that the appellant did not deduct tax at source on payments to contractors. However, the appellant contended that it had obtained declarations under Section 194C(6) from contractors, entitling it to exemption from deduction of tax at source.The Assessing Officer rejected the exemption, holding that payments were made to agents of transport contractors, not the contractors themselves, thus disallowance was justified. The First Appellate Authority, after examining the declarations, accepted the appellant's plea and deleted the disallowance.The Tribunal, however, doubted whether payments were made to contractors engaged in transport business and remanded the matter for fresh consideration.The Court analyzed that the Assessing Officer had not challenged the production of declarations, nor given reasons for rejecting them, merely making an arbitrary finding that payments were to agents without basis. The First Appellate Authority's acceptance of declarations was correct, and the Tribunal's remand was unnecessary.The Court emphasized that if the Assessing Officer had doubts, he should have considered the declarations and given reasons for rejecting them. Since he did not, his disallowance was without basis.Thus, the Court concluded that the exemption under Section 194C(6) applied, and disallowance under Section 40(a)(ia) was not justified in this case.Issue 2: Validity of remand by the Appellate Tribunal to Assessing Officer for fresh adjudication on Section 40(a)(ia) issueThe Tribunal remanded the matter for fresh consideration on whether payments were made to transport contractors and the validity of declarations.The Court held that since the Assessing Officer had not disputed the production of declarations and had not given reasons for rejecting them, the remand was unwarranted. The First Appellate Authority had already examined and accepted the declarations.The Court found the remand to be unnecessary and set it aside.Issue 3: Disallowance under Section 36(1)(va) on account of delay in payment of employees' contributionSection 36(1)(va) disallows deduction of employees' contribution to provident fund and insurance schemes if not paid within the prescribed time.The Assessing Officer disallowed the deduction on the ground of delay in payment to statutory authorities.The First Appellate Authority relied on a Rajasthan High Court decision holding that if payments are made within the due date for filing the return of income under Section 139(1), deduction should be allowed despite delay.The Tribunal, however, relied on Kerala High Court decisions which held that delay beyond the statutory due date prescribed under the welfare statutes attracts disallowance under Section 36(1)(va), regardless of payment within the return filing date.The Court noted that the Tribunal's reliance on binding Kerala High Court precedents was appropriate and declined to interfere with the disallowance.Issue 4: Applicability of non-obstante clause in Section 43B to employees' contribution deductionsSection 43B contains a non-obstante clause mandating that certain deductions are allowable only on actual payment.The appellant argued that this clause mandates allowance of deduction on actual payment made, irrespective of delay.The Court found that the statutory provisions and judicial precedents support the view that deduction under Section 36(1)(va) is conditional upon payment within the prescribed statutory time, not merely actual payment at any time.Therefore, the non-obstante clause does not override the timing requirements under the welfare statutes.Issue 5: Applicability of Section 40(a)(ia) only to amounts outstanding as on 31.03.2013The appellant contended that Section 40(a)(ia) applies only to amounts outstanding as on the last day of the previous year and not to payments made during the year.The Court agreed with this interpretation, holding that disallowance under Section 40(a)(ia) is restricted to amounts remaining unpaid as of the end of the financial year.Issue 6: Whether the Tribunal erred in remanding the matter to verify agreements between contractors and assessee when statute requires only furnishing of PAN and declarationThe appellant argued that the statute under Section 194C(6) requires only furnishing of PAN and declaration from contractors, and the Tribunal erred in remanding the matter to verify contracts.The Court concurred, observing that the statutory requirement is limited to furnishing PAN and declaration, and the Tribunal's direction for verifying contracts was unnecessary.3. SIGNIFICANT HOLDINGSThe Court held:'The disallowance by the assessing authority at first instance was not for the reason that the declarations were not produced as required under Section 194C(6). The disallowance was on a specious finding that the payments made by the appellant assessee were not to transport contractors but to their agents... In the absence of such a finding by the assessing authority, his finding that the payments were made only to agents had to be seen as wholly without any basis, and against the documents made available before him.'This established the principle that an assessing authority must base disallowance on cogent reasons and cannot arbitrarily disregard statutory declarations without examination.On the issue of delay in payment of employees' contribution, the Court affirmed the principle that disallowance under Section 36(1)(va) arises if payment is not made within the prescribed statutory due dates, regardless of payment within the return filing date, consistent with binding High Court precedents.Further, the Court clarified that Section 40(a)(ia) applies only to amounts outstanding as on the last day of the previous year, and the statutory requirement for exemption under Section 194C(6) is satisfied by furnishing PAN and declaration, not by production of contracts.Ultimately, the Court answered the appellant's questions of law by allowing the appeal on issues related to Section 40(a)(ia) and Section 194C(6), and dismissing it on issues related to Section 36(1)(va) and timing of payments under welfare statutes.