2025 (6) TMI 1454 - AT - Income Tax

Employee PF contributions paid after due dates not deductible but customs fines allowed as business expense

Pilot Industries Ltd. Versus DCIT, Central Circle-1, Delhi

ITAT Delhi partially allowed the assessee's appeal regarding customs duty interest and PF contribution disallowances. The tribunal deleted additions ... Nature of interest on custom Duty on import of material and service tax - 'Compensatory' Or 'Penal' - Payment of fines and penalties under sections 125(1) and 112(a) of the Customs Act, 1962 - disallowance u/s. 37 - Intimation u/s 143(1) addition - violation of provisions of Custom Act - payments were made before the due date and some mistakes are there in Tax Audit Report - employees' contribution to the Provident Fund (PF) fund - PF contribution disallowance. HELD THAT:- At the time of hearing, Ld. Counsel for the assessee submitted the payments are not in the penal nature as and they are not penalty. He submitted that they are fines and thus he referred the decision of the tribunal in the case of Akshay Khetterpal vs. ACIT [2022 (6) TMI 122 - ITAT DELHI], by which the instant issue is squarely covered. Ld. DR could not controvert the aforesaid proposition. Respectfully following the aforesaid precedent, we set aside the order of the Ld. CIT(A) and delete the addition in dispute and accordingly, allow the ground raised by the assessee. Disallowance u/s. 36(1)(va) - PF contribution - Upon hearing both the parties and careful consideration, we find that law is quite settled by Apex Court in the case of Checkmate Services Pvt. Ltd.[2022 (10) TMI 617 - SUPREME COURT (LB)], for the proposition that payment made beyond the due date in PF Act is not allowable. However, in the interest of justice, on the plea of the ld. Counsel for the assessee that some payments were wrongly shown as made beyond the due date, however, the same were made before the due date and on this aspect, this issue needs to be remitted back to the AO with the directions to consider the issue afresh and allow only those payments which are actually made before the due date, as specified in the respective Acts. We hold and direct accordingly. In the result, the Appeal filed by the Assessee is partly allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:Whether the expenditure incurred by the Assessee on payment of fines and penalties under sections 125(1) and 112(a) of the Customs Act, 1962, relating to interest on customs duty and service tax, is allowable as a deduction under section 37(1) of the Income Tax Act, 1961, or is disallowable as per Explanation 1 to section 37(1) being penal in nature.Whether the payments characterized as fines and penalties are compensatory or penal in nature, and the consequent tax treatment of such payments.Whether the disallowance under section 36(1)(va) of the Income Tax Act, relating to employees' contribution to the Provident Fund (PF) fund, made due to delay in deposit beyond the prescribed due date, is justified.Whether the issue regarding PF contribution disallowance requires reconsideration in light of alleged errors in the Tax Audit Report and partial timely payments.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Allowability of expenditure on fines and penalties under section 37(1) of the Income Tax ActRelevant Legal Framework and Precedents:Section 37(1) of the Income Tax Act allows deduction of any expenditure incurred wholly and exclusively for the purpose of business or profession. Explanation 1 to section 37(1) excludes expenditure incurred for any purpose which is an offence or prohibited by law, including fines and penalties, from allowable business expenses.The Customs Act, 1962, under sections 111(d), 111(m), 112(a), and 125(1), provides for confiscation of goods, imposition of penalties, and option to pay fine in lieu of confiscation.Judicial precedents include:Prakash Cotton Mills Pvt. Ltd. vs. Commissioner of Income Tax (Apex Court): Held that statutory imposts paid by way of damages, penalty, or interest may be compensatory or penal in nature; only compensatory amounts are allowable deductions under section 37(1).Usha Micro Process Control Ltd. vs. Commissioner of Income Tax (Delhi High Court): Held that redemption fines paid under section 125(1) of the Customs Act are compensatory in nature and allowable as business expenditure.CIT vs. Parthasarathy (Madras High Court): Affirmed that fines paid in lieu of confiscation under section 125(1) are compensatory and deductible.Tribunal decision in Akshay Khetterpal vs. ACIT: Held that fines paid to redeem confiscated goods under Customs Act are compensatory and allowable.Court's Interpretation and Reasoning:The Tribunal carefully examined the nature of the payments made by the Assessee, which included fines under section 125(1) and penalties under section 112(a) of the Customs Act, 1962, imposed due to import of used digital multifunction printers and copying machines without valid license from DGFT. The goods were confiscated, and the Assessee was given an option to redeem them by paying a fine.The Tribunal noted that the Customs Authority's order explicitly offered the Assessee an option to pay a fine in lieu of confiscation, which is a statutory right under section 125(1). The fine was imposed to redeem the goods and not as a punitive penalty for violation of law. This compensatory nature was emphasized by reference to the judicial precedents, particularly the Delhi and Madras High Courts' rulings and the Apex Court's guidance in Prakash Cotton Mills.The Tribunal rejected the Revenue's contention that the payments were penal and hence disallowable. It also dismissed the Assessee's reliance on CBDT Circular No. 722/1998 as not exhaustive and not overriding the statutory provisions and judicial interpretations.Key Evidence and Findings:The Customs Authority's order detailed the confiscation and the option to pay fine to redeem goods. The Assessee had paid fines and penalties totaling Rs. 65,61,700/- (Rs. 48,42,900/- as fine and Rs. 17,18,800/- as penalty). The Tribunal found that the fine under section 125(1) was compensatory and allowable, while the penalty under section 112(a) was also considered in the context of compensatory versus penal nature.Application of Law to Facts:Applying the principles laid down by the Apex Court and High Courts, the Tribunal held that the fine paid under section 125(1) was compensatory in nature, being a payment to redeem confiscated goods, and thus deductible under section 37(1). The penalty under section 112(a) was also considered part of the composite payment related to the redemption process.Treatment of Competing Arguments:The Revenue argued that these payments were penal and inadmissible under Explanation 1 to section 37(1). The Assessee contended they were compensatory. The Tribunal found the Assessee's submissions supported by binding precedents more persuasive and held that the payments were compensatory.Conclusion:The Tribunal set aside the CIT(A)'s order which had disallowed the expenditure and deleted the addition, allowing the expenditure as deductible under section 37(1).Issue 2: Disallowance of employees' contribution to Provident Fund under section 36(1)(va) of the Income Tax ActRelevant Legal Framework and Precedents:Section 36(1)(va) disallows deduction for employer's contribution to PF if not deposited within the due date prescribed under the Employees' Provident Funds and Miscellaneous Provisions Act.The Apex Court decision in Checkmate Services Pvt. Ltd. clarified that contributions made after the due date are not allowable deductions.Court's Interpretation and Reasoning:The Tribunal noted that the Assessing Officer had disallowed Rs. 6,80,732/- on account of delay in deposit of PF contributions. The CIT(A) confirmed the disallowance relying on the Apex Court decision.The Assessee contended that some contributions were deposited before the due date and that the Tax Audit Report contained errors, requesting remand to the Assessing Officer for fresh consideration.Key Evidence and Findings:The Tribunal found the law settled that delayed payments are not allowable. However, acknowledging the Assessee's contention of partial timely payments and possible errors in the Tax Audit Report, the Tribunal considered it just to remit the issue to the Assessing Officer for fresh examination with opportunity to the Assessee to produce evidence.Application of Law to Facts:The Tribunal applied the settled legal position but directed re-examination to ensure only genuinely delayed payments are disallowed.Treatment of Competing Arguments:The Revenue insisted on strict application of the law disallowing all delayed payments. The Assessee sought fair opportunity to prove some payments were timely. The Tribunal balanced the strict legal position with fairness and remitted the matter.Conclusion:The Tribunal remitted the issue to the Assessing Officer for fresh adjudication on the PF contribution disallowance, directing that only those payments actually made after the due date should be disallowed.3. SIGNIFICANT HOLDINGS'The said fine amounts to compensatory in nature and is an allowable expenditure u/s 37(1) of the Act, as also held by the Hon'ble Delhi High Court in the case of Usha Micro Process Control Ltd and Hon'ble Madras High Court in the case of CIT Vs. Parthasmarathy in the identical facts.''When an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim it as an allowable expenditure under Section 37(1) of the I.T. Act. Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest, is claimed as an allowable expenditure under section 37(1) of the I.T. Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal, in nature.''Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.''The provisions of section 125 of the Customs Act, 1962 speak clearly that whenever confiscation of the goods is authorized by the Customs Act, the Customs Authority/Officer adjudging it is empowered to give an option to the owner of the goods to pay in lieu of confiscation such fine as the said officer thinks fit.''The law is quite settled by Apex Court in the case of Checkmate Services Pvt. Ltd. for the proposition that payment made beyond the due date in PF Act is not allowable.'Final determinations:The expenditure incurred by the Assessee on payment of fine under section 125(1) of the Customs Act to redeem confiscated goods is compensatory and allowable as deduction under section 37(1) of the Income Tax Act.The penalty imposed under section 112(a) of the Customs Act is to be examined for its nature, and if compensatory, allowed accordingly.The disallowance of employer's contribution to PF fund under section 36(1)(va) for delayed deposits is justified as per settled law; however, the issue is remitted for fresh adjudication to allow deduction for contributions actually deposited within due dates.