Addl. CIT Special Range-4, New Delhi vs Garg Acrylics Ltd.: Disallowance of Expenses and PF/ESI Contributions for AY 2016-17

Addl. CIT Special Range-4, New Delhi vs Garg Acrylics Ltd.: Disallowance of Expenses and PF/ESI Contributions for AY 2016-17

Case Number: ITA 6435/DEL/2019
Appellant: Addl. CIT, Special Range-4, New Delhi
Respondent: Garg Acrylics Ltd., New Delhi
Assessment Year: 2016-17
Date of Order: 2022-07-08
Order Type: Final Tribunal Order
Case Filed On: 2019-07-31

Background of the Case

The case concerns the appeal filed by the Additional Commissioner of Income Tax (Addl. CIT), Special Range-4, New Delhi, against Garg Acrylics Ltd., New Delhi, for the assessment year 2016-17. The appeal challenges the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to delete the disallowances made by the Assessing Officer (AO) regarding vehicle maintenance expenses, depreciation on vehicles, and traveling expenses, as well as the delayed payment of employee’s contributions to Provident Fund (PF) and Employees’ State Insurance (ESI).

The appeal was heard by the Income Tax Appellate Tribunal (ITAT), Delhi Bench, with Shri Shamim Yahya, Accountant Member, and Shri Narender Kumar Choudhry, Judicial Member, presiding over the case. The order was pronounced on 8th July 2022.

Key Issues in the Appeal

The Revenue raised two primary issues in this appeal:

• Disallowance of Expenses: The AO had disallowed 10% of the vehicle maintenance expenses, depreciation on vehicles, and traveling expenses, totaling Rs. 36,54,670/-. The AO based this disallowance on the grounds that some of the expenses were not properly vouched, payments were made in cash, and there was a possibility of personal use of vehicles by the directors and their family members.
• Disallowance of PF and ESI Contributions: The AO had also disallowed Rs. 23,82,106/- in respect of the delayed payment of employee’s contributions to PF, ESI, and other welfare funds, arguing that these payments were governed by Section 2(24) read with Section 36(1)(va) and not by Section 43B of the Income-tax Act, 1961.

Tribunal’s Analysis and Findings

Disallowance of Expenses

The AO had noted during the assessment that some expenses were not properly vouched and were incurred in cash. Given the potential for personal use of vehicles by the company’s directors, the AO decided to disallow 10% of the vehicle maintenance expenses, depreciation, and traveling expenses, resulting in a disallowance of Rs. 36,54,670/-. The AO justified this disallowance by referencing earlier assessment years where similar disallowances had been made.

Upon appeal, the CIT(A) had deleted this disallowance, reasoning that the assessee was a private limited company with audited books of accounts and that the AO made the disallowance in a routine manner without rejecting the books of accounts.

In its decision, the ITAT noted that while the AO had pointed out that some expenses were not properly vouched, the CIT(A) had deleted the disallowance on the grounds that the company was private and its books were audited. The Tribunal disagreed with the CIT(A)’s conclusion, stating that the absence of vouchers was a valid concern and warranted a disallowance. However, the Tribunal also felt that the 10% disallowance by the AO was excessive. Therefore, the Tribunal partially allowed the Revenue’s appeal by reducing the disallowance to 5% instead of 10%, reflecting a more balanced approach.

Disallowance of PF and ESI Contributions

The AO had disallowed Rs. 23,82,106/- for the delayed deposit of employee’s contributions to PF, ESI, and other welfare funds, arguing that such payments should be disallowed under Section 36(1)(va) if not made within the due date prescribed under the respective statutes. The CIT(A) had deleted this disallowance, citing the jurisdictional Delhi High Court’s decision in CIT vs AIMIL Ltd., which held that payments made before the due date of filing the income tax return should be allowed under Section 43B.

The ITAT concurred with the CIT(A)’s reasoning and upheld the deletion of the disallowance. The Tribunal acknowledged that the issue was well-settled by the Delhi High Court, and since the Revenue could not provide any substantial argument against it, the Tribunal confirmed the CIT(A)’s decision to allow the PF and ESI contributions.

Conclusion

The case of Addl. CIT, Special Range-4, New Delhi vs Garg Acrylics Ltd., New Delhi, for the assessment year 2016-17 highlights the importance of substantiating expenses and ensuring compliance with statutory requirements for employee benefits. The ITAT’s decision reflects a balanced approach by recognizing the need for disallowances where documentation is inadequate while also moderating the extent of disallowance to ensure fairness.

The Tribunal’s ruling also reaffirms the established legal principle that employee contributions to PF and ESI made before the due date of filing the income tax return are allowable under Section 43B, following the Delhi High Court’s judgment. This case serves as a reminder to both taxpayers and tax authorities to maintain proper documentation and adhere to statutory deadlines to avoid unnecessary disputes and disallowances.

The final judgment in this case underscores the ITAT’s role in ensuring that disallowances are justified and proportionate, providing clarity on the interpretation and application of the Income-tax Act in cases involving business expenses and employee welfare contributions.

Addl. CIT Special Range-4, New Delhi vs Garg Acrylics Ltd.: Disallowance of Expenses and PF/ESI Contributions for AY 2016-17