2024 (4) TMI 710 - AT - Income Tax

ITAT upholds ESIC contribution disallowance for delayed remittance but allows sales incentive expenditure appeal under section 43B

ITAT Nagpur upheld disallowance of delayed ESIC contribution remittance, following SC precedent in Checkmate Services that contributions must be deposited ... Disallowance of ESIC contribution - delayed remittance - HELD THAT:- It an admitted fact that due ESIC contribution is remitted beyond the due date prescribed under the relevant law. As rightly submitted by the Ld. AR that, this issue of disallowance has been settled by the Hon’ble Apex Court in ‘Checkmate Services’ [2022 (10) TMI 617 - SUPREME COURT] wherein their Hon’ble Lordship have held that the due date for depositing/remittance of PF/ESIC contribution etc., shall be governed by the respective PF/ESIC Act and assessee shall not be eligible for deduction if such contribution to respective fund is remitted beyond the due date prescribed therein. Consequently such delayed remittance shall not be eligible to shelter under the extended period as prescribed by section 43B of the Act. In view thereof, the disallowance towards delayed remittance of ESIC made in the assessment and confirmed in appellate proceedings stands errorless. The ground raised challenging the disallowance thus stands meritless, hence dismissed. Ad-hoc disallowances - ingenuine sale incentive/expenditure - HELD THAT:- On careful consideration of records it transpired that, neither of the lower tax authorities had pin-pointed any voucher where genuineness of sale incentive/expenditure claimed to have been incurred by the assessee wholly and exclusively for the purpose of its business did not inspire any confidence, nor it was the case of the revenue that any part of the expenditure in question was either found bogus or fictitious, nor was found to have not been incurred by the appellant wholly and exclusively for the purpose of its business. Indeed, it showcased an exercise of running around the circle. Further we neither could come across any provision in Income Tax Statute nor it has been brought to our notice by either parties any provision which subscribes vis-à-vis empower the tax authorities to arrive at this logic of subscribing ad-hoc disallowances. Evidently, there have been no clear findings as to number of vouchers requiring denial of allowances with the amount of expenditure and nature of defects therein or therewith. If the Ld. AO had any doubt with regard to the genuinity of any one of the vouchers produced he could have drawn sample vouchers and called upon the assessee to establish its genuineness. Moreover department could not bring out any deprecative material on record to substantiate its conclusion as logical. We couldn’t even remotely see there is any mention of rationale in arriving at the percentile of disallowance in the present case. For the reasons we find force in the claim of the assessee that, devoid of any specific infirmity in the claim for deduction for sales incentives debited to profit & loss account, the ad-hoc disallowance is arbitrary and could by no means be held to be justified in given situation where books of accounts are subjected to audits. Hon'ble High Court of Madras in ‘V.C. Arunai Vadivelan [2021 (2) TMI 501 - MADRAS HIGH COURT] wherein if the AO had any doubt with regard to the genuinity of any one of the vouchers produced he could have drawn sample vouchers and called upon the assessee to establish its genuineness. Without doing so, making an adhoc disallowance by not specifically assigning any reason to a voucher or bunch of vouchers is not legally tenable.’ Thus in the absence of clear finding about non-genuineness or fictitiousness of portion of expenditure disallowed, we find no favour with the arbitrary view of the tax authorities below. For the reason we vacate the ad-hoc disallowance in its entirety and thereby allow this ground. Issues involved:The judgment involves challenges to the assessment order passed u/s 143(3) of the Income-tax Act, 1961 for the assessment year 2014-15. The issues include disallowance of incentives paid to sales staff, delayed remittance of ESIC contribution, and interest on delayed payment of TDS.Disallowance of ESIC Contribution:The Appellate Tribunal upheld the disallowance of ESIC contribution made by the tax authorities. The Tribunal referred to the settled legal position established by the Hon'ble Apex Court in 'Checkmate Services' case, which stated that contributions remitted beyond the due date are not eligible for deduction. The Tribunal found the disallowance towards delayed remittance of ESIC to be in accordance with the law and dismissed the challenge against it.Ad-hoc Disallowances - Sales Incentives:Regarding the ad-hoc disallowance of sales incentives, the Tribunal ruled in favor of the assessee. It noted that there were no specific findings or evidence to justify the ad-hoc disallowances made by the tax authorities. The Tribunal emphasized that the expenses claimed were genuine and incurred wholly for business purposes. Citing a judgment of the Hon'ble High Court of Madras, the Tribunal highlighted the importance of establishing the genuineness of vouchers before making disallowances. As there was no clear rationale provided for the ad-hoc disallowance and no evidence of non-genuineness, the Tribunal vacated the disallowance entirely, allowing the appeal on this ground.Conclusion:The appeal of the assessee was partly allowed by the Appellate Tribunal. The Tribunal dismissed the challenge against the disallowance of ESIC contribution based on the legal precedent set by the Hon'ble Apex Court. However, the Tribunal ruled in favor of the assessee regarding the ad-hoc disallowance of sales incentives, emphasizing the lack of specific findings or evidence to support the disallowance. The Tribunal vacated the ad-hoc disallowance entirely, allowing the appeal on this ground.