Peregrine Guarding Pvt. Ltd. vs Addl. CIT: Disallowance of EPF/ESIC Contributions and Sponsorship Fee for Director’s Son

Peregrine Guarding Pvt. Ltd. vs Addl. CIT: Disallowance of EPF/ESIC Contributions and Sponsorship Fee for Director’s Son

Case Number: ITA 6613/DEL/2019

Appellant: Peregrine Guarding Pvt. Ltd., New Delhi

Respondent: Addl. CIT, Special Range-7, New Delhi

Assessment Year: 2016-17

Case Filed On: 2019-08-08

Order Type: Final Tribunal Order

Date of Order: 2023-02-10

Pronounced On: 2023-02-10

Background and Issues Raised

Peregrine Guarding Pvt. Ltd. filed an appeal before the Income Tax Appellate Tribunal (ITAT) for the assessment year 2016-17, challenging the disallowance of expenses by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The primary issues in this case revolve around:

1. The disallowance of employees’ contributions to EPF/ESIC under Section 24(x) read with Section 36(1)(va) of the Income Tax Act, 1961, due to late deposit.
2. The disallowance of a sponsorship fee paid by Peregrine Guarding Pvt. Ltd. for the director’s son’s MBA studies in the USA, claimed under Section 37(1) of the Act.

Disallowance of EPF/ESIC Contributions

The AO disallowed Rs. 8,17,84,664/- on account of late deposit of employees’ contributions towards EPF/ESIC, citing that the payments were not made within the due dates prescribed under the respective Acts (EPF and ESIC). The CIT(A) deleted this addition, leading the Revenue Department to appeal the decision.

The ITAT referenced the Supreme Court’s decision in the case of Checkmate Services P. Ltd. vs. Commissioner Of Income Tax-1, where it was held that if employees’ contributions are not deposited within the due dates, the deduction cannot be allowed. The Tribunal overturned the CIT(A)’s decision and reinstated the AO’s disallowance, emphasizing that the timely deposit of such contributions is mandatory for claiming deductions.

Disallowance of Sponsorship Fee for Director’s Son

The second significant issue was the disallowance of Rs. 60,93,623/- incurred by Peregrine Guarding Pvt. Ltd. for sponsoring the MBA education of Mr. Angad Rajain, the son of one of the company’s directors. The sponsorship was claimed as a business expense under Section 37(1) of the Act.

The CIT(A) allowed the claim, considering the agreement between the company and Mr. Angad Rajain, and noted that all conditions of the agreement were fulfilled. The CIT(A) also referenced the judgment of the Delhi High Court in M/s. Kostub Investments Ltd. vs. ACIT, which supported the admissibility of such expenses under Section 37(1).

The Revenue Department challenged this decision, arguing that the agreement was self-serving and did not establish a clear nexus between the expenditure and the company’s business interests.

The ITAT acknowledged the CIT(A)’s detailed consideration of the agreement and the precedent set by the Delhi High Court. However, following a similar case, ITA No. 5968/Del/2017, the Tribunal remanded the issue back to the AO for further examination. The AO was directed to verify whether Mr. Angad Rajain rendered services to the company after completing his studies and to reassess the deductibility of the sponsorship fee accordingly.

Disallowance of Business Promotion Expenses

Peregrine Guarding Pvt. Ltd. also appealed against the disallowance of Rs. 6,66,500/- on account of business promotion expenses made in cash, which were disallowed under Section 40A(3) of the Act. The company argued that these expenses were necessary due to the remote locations of their operations, which required cash transactions.

The AO disallowed the expenses, noting that they violated Section 40A(3) as all payments exceeded Rs. 20,000/-. The CIT(A) upheld this disallowance, and the ITAT, finding that the company failed to substantiate its claim for exceptions under Rule 6DD, upheld the CIT(A)’s decision, dismissing the company’s appeal on this ground.

Conclusion

The ITAT’s final order was a mixed outcome for both the Revenue and the Assessee:

• The disallowance of EPF/ESIC contributions was reinstated.
• The issue of the sponsorship fee was remanded for further examination.
• The disallowance of business promotion expenses was upheld.

This case underscores the importance of adhering to statutory deadlines for tax-related contributions and the need for clear, business-related justifications for claiming deductions, especially when they involve expenses related to family members of company directors.

The appeal was partly allowed for statistical purposes, with the ITAT remanding certain issues back to the AO for reassessment.

Peregrine Guarding Pvt. Ltd. vs Addl. CIT: Disallowance of EPF/ESIC Contributions and Sponsorship Fee for Director’s Son