TaxTMI 
TaxTMI 
2006 (1) TMI 171
X X X X Extracts X X X X
X X X X Extracts X X X X
.... International Court of law on account of dispute? 3. That whether on facts and circumstances of the case, the learned CIT(A) was justified by upholding the disallowance of Rs. 22,18,828 being employees' contribution on account of delayed payments? 4. That whether the learned CIT(A) was justified by not saying a single word about ground No. 5 for disallowance of Rs. 373 on account of penalty." 4. Facts: The assessee is a public limited company, engaged in the manufacturing of power and distribution transformers; electrical equipments, meters and testing equipments. The assessee filed its return of income on 31st Oct., 2001, declaring total income at nil after claiming deduction under s. 80-IB for Rs. 51,87,187. However, the assessee declared profit of Rs. 1,30,25,600 as per the provisions of s. 115JB and the tax was paid thereon accordingly. The case was processed under s. 143(1)(a) and subsequently was selected for scrutiny. Assessment under s. 143(3) of the Act was completed on 26th March, 2004 at Rs. 75,31,880 after making disallowances as discussed in the assessment order. 5.1 The relevant facts relating to ground No. 1 are that the AO noted from Form 3-CD that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as and when the employees submitted the bills. With respect to the purchases, he drew our attention to the relevant page Nos. 11 to 25 of the paper book to show that there were specific circumstances, which led to recording of the purchases in the year under consideration. With reference to the method of accounting relating to expenses, he contended that it was consistently followed by the assessee and therefore, the same should have been upheld. For allowance of expenses in the year under consideration, he relied on the decision of the Tribunal in the case of P.K. Overseas vs. ITO (2004) 84 TTJ (Chd) 709 : (2005) 1 SOT 427 (Chd). 5.5 The learned Departmental Representative, besides relying on the order of the CIT(A), contended that the assessee was following mercantile system of accounting and there were no circumstances which could be termed as beyond the control of the assessee, resulting into recording of the expenses in the year under consideration. He also contended that the auditors had also qualified their report, and, therefore, the assessee had no case. He further contended that had there been a case of business loss, and if such practice was to be allowed, that would r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ills were submitted much earlier to the date of the filing of the return, therefore, the same should have been incorporated as expenditure of the relevant accounting year. Although the learned counsel tried to justify the assessee's case but the fact is that the accounts of the assessee are mandatorily audited, both under the provisions of the Companies Act, 1956, as well as the IT Act, 1961, therefore, the assessee should have made provisions in the relevant accounting period for the expenses based upon the bills/vouchers received subsequently. The contention of the assessee that it is following this method of accounting consistently, does not help the cause of the assessee inasmuch as if a practice is adopted which is not correct, as per law, then the same is liable to be rejected. Further, the said practice also violates the principle of matching of cost with revenue and also results into hybrid system of accounting which is not at all permitted now. The assessee placed its reliance on the decision of the Tribunal in the case of P.K. Overseas wherein the expenditure pertaining to earlier year, was allowed as deduction in the subsequent year. A perusal of the aforesaid decisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ish the circumstances where non-recording of such purchases can be justified, then the assessee can be entitled to claim the purchases in the year of recording for the reason that if the purchases so recorded are not allowed as deduction that would lead to a situation where the sales pertaining to such goods would be taxed at gross value or if such goods form part of closing stock then this would lead to a distorted figure of profit and both situations would result into taxation of unreal income. 5.10 In respect of the category of goods mentioned at sl. No. (a) above, goods have been admittedly received in April, 2000, and recorded in the books of account, therefore, all consequential results should follow. To put it differently, either these goods have been consumed or sold or form part of closing stock of the year under consideration. Therefore, the same is held as allowable as deductible in the year under consideration. 5.11 With regard to the goods mentioned at sl. Nos. (b) and (c), the assessee has contended that there were quality problems and, therefore, goods were not accepted earlier. The assessee accounted for the goods when the correct replacements were made by the sup....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esident in India. (vi) That no income therefore, is deemed to have arisen in India. Vide Circular No. 786, dt. 7th Feb., 2000 [(2000) 158 CTR (St) 61]. the CBDT has classified that if all the above tests are satisfied then in that case no tax should be deducted from commission. Based on the above principle it is submitted that the ratio of principle enunciated in the above circular, our payment is squarely covered by the same principle and should therefore be allowed. We have been advised that since the payee is not assessed: provisions of s. 195 i.e., Chapter XVII are not applicable and once Chapter XVII is not applicable, the provisions of s. 40(1)(i) will also become redundant. Moreover, our country has a DTAA with Great Britain and, therefore, no amount of TDS is to be deducted. Needless to add that payment made by us is a running payment and the matter is still pending before the Court. In any case, if any payment is to be deducted, the same should be deducted and paid at the time of final settlement of account, with the solicitors." 6.2 The AO was of the view that Circular No. 786, relied upon by the assessee, operated in different field of expenses and, therefore, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y CIT (2001) 170 CTR (Mad) 238 : (2001) 251 ITR 53 (Mad); 4. Wipro Ltd.'s case; 5. Lufthansa Cargo India (P) Ltd.'s case; 6. Lucent Technologies Hindustan Ltd. vs. ITO (2004) 82 TTJ (Bang) 163 : (2005) 92 ITD 366 (Bang); 7. Ind. Telesoft (P) Ltd., In re (2004) 189 CTR (AAR) 287 : (2004) 267 ITR 725 (AAR); 8. G.V.K. Industries Ltd. vs. ITO (1997) 228 ITR 564 (AP). 6.6 In addition, he further placed reliance on Circular No. 786, dt. 7th Feb., 2000 [(2000) 158 CTR (St) 61], issued by the CBDT. 6.7 The learned Departmental Representative, on the other hand, strongly supported the orders of the Revenue authorities. 6.8 The learned counsel, in rejoinder, contended that the CIT(A) while confirming the action of the AO, misinterpreted the letter of the assessee in regard to the nature of payment inasmuch as he ignored the words "In any case if any payment is to be deducted" to mean, that the assessee himself admitted, that it would deduct the payment at the time of the final settlement of account with the solicitors. 6.9 We have considered the submissions of both sides, material on record and the orders of the lower authorities. Admittedly, the services to the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....confirms the view that requirement of deduction at source under s. 195 would arise only if the impugned payment to the non-resident is chargeable to tax in India. In this view of matter, we consider no necessity to further discuss other judicial precedents, relied upon by the assessee. In view of the above discussions, we are of the considered opinion that the Revenue authorities were not justified in disallowing the expenditure relating to legal fee paid to UK based solicitors amounting to Rs. 23,87,187 and therefore, we reverse the same. The AO is, accordingly, directed to allow the same in computing the income of the assessee in the year under consideration. This ground of the assessee is, thus, accepted. 7.1 The relevant facts relating to ground No. 3 are that the AO noted that the statutory auditors in Annex. III to Form 3-CD had pointed out regarding the delay in deposit of the employer's contribution as well as the employees' contribution and the amount involved was Rs. 32,92,112. The AO, after discussing the provisions of the Act, disallowed Rs. 22,18,828 relating to employer's contribution towards PF and ESIC and Rs. 18,17,267 relating to employees' contri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ospectively, and accordingly payments which have been made before the due date of filing of return of income, have been held as allowable even in the cases pertaining to earlier years. The same principle has been reinforced by the Tribunal in the decision of the Vestas RRB (India) Ltd. The Revenue has placed strong reliance on the decision of Tribunal in the case of Swrup Vegetable Industries Ltd. but considering the majority view on this issue, we decline to follow the same. Accordingly, we allow this ground of the assessee. 7.8 With regard to the assessee's claim for allowance of the employees' contribution towards PF and ESIC, the assessee's case deserves to be rejected because s. 43B is not applicable at all in respect of the employees' contribution towards PF and ESIC and assessee's claim in this regard has to be considered under s. 36(1)(va) and s. 2(24)(x) of the IT Act, 1961. The same view has been taken by the Tribunal in the case of APL (India) (P) Ltd., which has been cited by the Revenue. However, the assessee has strongly placed its reliance on the decision of the Vestas RRB (India) Ltd. wherein the Tribunal has held that the employees' contrib....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of s. 36(1)(va) was made which again goes to show that the legislature, in its wisdom, did not think it proper to provide the employers any leeway in respect of the deposit of the employees' contribution towards PF and ESIC. Ours is a welfare State and the legislature is bound by the Directive Principles of State Policy, as enshrined in the Constitution of India, in making the laws although such principles are not justiciable. It is also true that IT Act, 1961, is not a mere piece of fiscal legislation. It also tries to remove imbalances in the social and economic sphere of the country while providing fiscal incentives in respect of the expenses incurred for social welfare such as provisions of weighted deduction in respect of the promotion of family planning, employment to handicapped persons, etc., and simultaneous it also provides for harsh measures like the provisions of ss. 2(24)(x) and 36(1)(va) being necessary to protect the interests of employees. The PF and ESIC are measures of social securities to the employees. In this view of the matter, the legislature has specifically enacted a deeming provision whereby treating the employees' contribution as income of the ass....