2021 (9) TMI 1581 - AT - Income Tax

Appellate authority's deletions of Section 14A and Section 36(1)(va) adjustments upheld; Revenue appeal dismissed in full

DCIT, Central-10 (2), New Delhi. Versus Crescent EPC Projects and Technical Services Ltd.

ITAT upheld the appellate authority's deletion of the Section 14A disallowance, finding no disallowance warranted as the assessee earned no exempt income; ... Disallowance of 14A - expenditure incurred related to exempt income - HELD THAT:- We find that in so far as disallowance u/s. 14A is concerned, it is an admitted fact that assessee has not earned any exempt income during the year under consideration, and therefore, there was no question of making any disallowance u/s.14A. This proposition is squarely covered by the decision of Cheminvest Ltd. [2015 (9) TMI 238 - DELHI HIGH COURT] which has also been followed by GVK Project Ltd. [2018 (5) TMI 1786 - DELHI HIGH COURT] Thus, the order of the CIT (A) deleting the disallowance is upheld and the grounds raised by the Revenue on this score from 1 to 5 are dismissed. Addition u/s.36(1)(va) on account of delayed payment of employees contribution to the provident fund and ESI - It is not in dispute that the assessee had made the payment after due date under the PF Regulation but before the due date of filing of return, i.e., 30th November, 2015 First of all, most of these payments have been made within the grace period allowed under the PF Regulation provision. Apart from that, there are catena of judgments in favour of the assessee as listed above including those of Hon'ble Jurisdictional High Court. In the judgment of PCIT vs. Pro Interactive Service (India) Pvt. Ltd. [2018 (9) TMI 2009 - DELHI HIGH COURT] following the earlier judgment of CIT vs. AIMIL Ltd. [2009 (12) TMI 38 - DELHI HIGH COURT] as held legislative intent was/is to ensure that the amount paid is allowed as an expenditure only when payment is actual made. We do not think that the legislative intent and objective is to treat belated payment of Employee's Provident Fund (EPD) and Employee's State Insurance Scheme (ESI) as deemed income of the employer under Section 2(24)(x). Amendment has been brought in the statute by the Finance Bill, 2021 by bringing amendment in Section 36(1)(va) by way of insertion of Explanation 2 wherein it has been provided that Section 43B shall not apply for the purpose of determining the due date under this clause. However, the said amendment has been brought w.e.f. Assessment Year 2021-22 as explained in clauses (8) and (9) of the memorandum explaining the Finance Bill, 2021. Appeal of the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under Section 14A of expenditure relatable to exempt income can be made where no exempt income (dividend) was earned in the relevant year. 2. Whether payments of employees' contributions to Provident Fund (PF) and Employee State Insurance (ESI) made after the statutory due date under PF/ESI regulations but before the due date of filing return of income are deductible as business expenditure under Section 36(1)(va) (read with Section 43B), or whether such belated payments must be disallowed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance under Section 14A where no exempt income is earned Legal framework: Section 14A permits disallowance of expenditure incurred in relation to income which does not form part of total income (exempt income). The statutory principle is that expenditure incurred to earn exempt income is not deductible against taxable income. Precedent treatment: The Tribunal relied on authoritative decisions of the Jurisdictional High Court and its own prior rulings holding that where no exempt income is earned in the year, Section 14A disallowance is not sustainable. Interpretation and reasoning: The Tribunal observed it is an admitted fact that no dividend or other exempt income was received in the year; consequently, there was no nexus between any expenditure and exempt income for that year. The Tribunal followed the ratio of the controlling High Court decisions that disallowance under Section 14A requires existence of exempt income in the relevant year and cannot be contrived in its absence. Ratio vs. Obiter: The holding that Section 14A disallowance cannot be made where no exempt income was earned is treated as ratio of the cited High Court authority and applied as binding precedent by the Tribunal. Conclusion: Deletion of the Section 14A disallowance was upheld and the Revenue's grounds challenging that deletion were dismissed. Issue 2 - Deductibility of belated payment of employees' contribution to PF/ESI (Section 36(1)(va) / Section 43B interplay) Legal framework: Section 36(1)(va) denies deduction in respect of employer's contribution to PF/ESI not paid before the due date for filing the return of income; Section 43B prescribes that certain payments are allowable only when actually paid. Section 2(24)(x) (deemed income provision) was also considered tangentially in precedent discussions. Legislative amendment (Finance Bill 2021) later introduced an Explanation excluding application of Section 43B for determining due date under Section 36(1)(va) prospectively (w.e.f. A.Y. 2021-22). Precedent treatment: The Tribunal applied a line of judicial authority, including decisions of the Jurisdictional High Court and several Tribunals, which held that belated payment of employees' statutory contributions made after regulatory due dates but before the return filing due date should not be treated as disallowable under Section 36(1)(va). Those authorities construed the statutory scheme as intending to allow deduction once payment is actually made, and not to treat belated statutory payment as employer's deemed income under Section 2(24)(x). Interpretation and reasoning: The Tribunal examined facts showing employee contributions were deposited after PF/ESI regulatory due dates but within a short delay and, crucially, before the return filing due date (30 November). The Tribunal noted many deposits fell within any regulatory 'grace period' and relied on precedents that emphasize legislative intent: the object is to allow expenditure when actually paid, not to convert belated statutory payments into employer's income or to disallow them where paid before return filing date. The Tribunal further addressed the later Finance Bill, 2021 amendment which clarifies treatment prospectively; because the amendment is not retrospective, it does not affect the assessment year in issue and does not override controlling precedent for that year. Ratio vs. Obiter: The Tribunal applied the ratio of the Jurisdictional High Court's authority (that belated payment before return filing date is allowable) as binding for the facts of the year under consideration. Remarks regarding the Finance Bill, 2021 were explanatory and treated as not altering the binding precedent for the year; such remarks are obiter in the sense that they explain prospective legislative change but do not affect the legal conclusion for the year decided. Conclusion: The Tribunal held that the additions/disallowances under Section 36(1)(va) in respect of belated employee contributions to PF/ESI were not sustainable for the relevant assessment year and upheld the deletion of the addition. The Revenue's challenge on this point was dismissed. Cross-references and applicability Both issues were decided by applying binding precedent of the Jurisdictional High Court and consistent Tribunal authorities; the Tribunal expressly followed the High Court ratio on Section 14A and on belated PF/ESI payments (as interpreted in the cited High Court decision) and noted that subsequent statutory amendment is prospective and does not affect the assessment year under consideration.