2025 (9) TMI 610 - AT - Income Tax

Assessee wins reversal of PF and superannuation disallowance; spouse salary partly disallowed under s.40A(2)(a) 10%

Pratap Narayan Desai Versus ITO, Ward-1, Ratnagiri

ITAT allowed the assessee's ground overturning the disallowance of provident fund and superannuation contributions, finding the contributions covered both ... Disallowance of payment of contribution to PF - as argued payment does not exceed limit as per Rule 87 of 27% of salary, the appellant being the business of man power supplier and his main expenditure is salary for staff at various locations - HELD THAT:- We find merit in the contention of ld. Counsel for the assessee. Going through the GSL labour charges ledger and GSL salary ledger for F.Y. 2017-18 along with PF summary and challans placed as note that the assessee had made the contribution to PF and Superannuation fund on the labour charges as well as salary and since ld. AO failed to take note of the labour charges paid during the year, addition is uncalled for. Finding of CIT(A) is set aside and Ground No.1 raised by the assessee is allowed. Disallowance of salary expenditure paid to the assessee’s wife - AO has made the disallowance u/s. 40A(2)(a) - HELD THAT:- AO prior to making any disallowance has to form an opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities. Now in absence of any specific finding of the ld. AO about the excessive or unreasonable expenditure having regard to the fair market value of the services for which the salary has been paid, ld. AO could not have disallowed the total salary of Rs. 3.60 lakh paid by the assessee to his wife. It is also not the case of the Revenue that the nature of services provided by the assessee wife require any technical expertise. Considering the fact that the salary to the wife has been paid consistently for past many years and duly offered to tax and also taking into account that the assessee has not filed sufficient details to justify the quantum of salary given to assessee’s wife, disallow 10% of the alleged sum and confirm the addition Partly. ISSUES PRESENTED AND CONSIDERED 1. Whether contributions to Provident Fund and Superannuation Fund in excess of 27% of salary, as assessed by the Assessing Officer, are properly chargeable to assessment where employer also incurs substantial labour charges on which provident fund and superannuation contributions were made. 2. Whether salary paid to the assessee's wife (a person within the definition of 'relative' in section 40A(2)(b)) can be disallowed in full under section 40A(2)(a) as excessive or unreasonable where the Assessing Officer has not recorded specific findings comparing the payment to fair market value or legitimate needs of the business. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of employer's PF and Superannuation contributions claimed despite alleged excess beyond 27% of salary Legal framework: Employer's contributions to provident fund and superannuation are deductible business expenses subject to statutory and rule-based limits (rule 87 / 27% ceiling of salary was the benchmark applied by the Assessing Officer for limiting employer contribution against salary). Precedent Treatment: No specific judicial precedents were cited or applied by the authorities in the record. The Tribunal relied on documentary ledger, PF summary and challans produced during assessment and appeal. Interpretation and reasoning: The Tribunal examined the GSL labour charges ledger, salary ledger, PF summary and challans and concluded that employer contributions were made not only against stated salary but also in respect of substantial labour charges (labour supplied/staff at various locations). The Assessing Officer's computation applying the 27% ceiling to the salary figure only overlooked the additional labour-charge head that was subject to PF and superannuation contributions. Because the AO did not take those labour-related payments into account, the basis for treating contributions as excess was flawed. Ratio vs. Obiter: Ratio - where employer contributions to PF and superannuation materially relate to remuneration-like labour charges (separate from the stated 'salary' ledger) and supporting challans/ledgers show such payments, the statutory/ rule-based ceiling cannot be applied solely to the salary column to disallow contributions; the Assessing Officer must consider all remuneration elements on which contributions were in fact made. Obiter - none of the Tribunal's remarks expand or alter the statutory ceiling beyond the factual holding. Conclusions: The addition of Rs. 9,18,951 for alleged excess PF/superannuation contribution was unjustified because the AO failed to consider labour charges on which contributions were made. The Tribunal set aside the finding and allowed the ground challenging the addition. Issue 2 - Disallowance under section 40A(2)(a) of salary paid to a relative (wife) Legal framework: Section 40A(2)(a) provides that where payments are made to persons referred in section 40A(2)(b) (relatives), the Assessing Officer may disallow so much of the expenditure as he considers excessive or unreasonable having regard to (i) fair market value of the goods/services/facilities, (ii) legitimate needs of the business/profession, or (iii) benefit derived by or accruing to the assessee. Precedent Treatment: No authorities were invoked by either party or the Tribunal; the analysis is statutory and fact-specific. Interpretation and reasoning: The Tribunal emphasized the statutory precondition that the AO must form an opinion that the payment is excessive or unreasonable after evaluating fair market value or legitimate business needs. In the present case the AO recorded disallowance of the entire salary without a specific finding or comparison to fair market value or any detailed quantification showing excess. Facts considered by the Tribunal included (a) the wife was regularly engaged in business affairs, (b) salary was paid consistently over several years, and (c) salary had been offered to tax. However, the assessee did not furnish sufficient contemporaneous particulars to fully justify the quantum. Balancing these factors, the Tribunal held that a total disallowance was not sustainable but some reduction was warranted for lack of supporting particulars as to quantum. Ratio vs. Obiter: Ratio - In the absence of an explicit AO finding that a payment to a relative is excessive or unreasonable with reference to fair market value or legitimate business needs, complete disallowance under section 40A(2)(a) is not sustainable; the Tribunal may adjust the disallowance to account for lack of supporting details. Obiter - the Tribunal's 10% reduction of the payment (i.e., confirming disallowance of 10% as reasonable adjustment) is a fact-specific exercise and does not establish a general rule for percentage disallowance absent evidence. Conclusions: The AO's total disallowance of Rs. 3,60,000 paid to the wife was not justified for want of specific findings on excessiveness vis-à-vis fair market value or legitimate business need. The Tribunal allowed the ground in part, disallowing only 10% (Rs. 36,000) and granting the assessee relief to the extent of Rs. 3,24,000.