Hitech Exports, Ahmedabad vs Assessee

Date of heari ng : 02-06-2015 Date of pronouncement : 19-06-2015 I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 2 ITO vs. Hitech Export

आदेश /ORDER

PER : RAJPAL YADAV, JUDICIAL MEMBER:-

The assessee and revenue are in cross appeal against the order of Commissioner of Income Tax (Appeals) dated 17th March, 2011 passed for Assessment Year 2007-08.

2. The registry has pointed out that appeal of the assessee is time barred by 42 days. The assessee has filed an application for condonation of delay. On due consideration of the application of the assessee coupled with the fact that order of the Commissioner of Income Tax (Appeals) is under challenge before the Tribunal in the appeal of revenue also, It is open for discussion and assessee could file cross objection on receipt of notice in the revenue's appeal. We condone the delay and proceed to decide both the appeals on merit.

3. The solitary grievance of the assessee is that Ld. Commissioner of Income Tax (Appeals) has erred in confirming the addition for Rs. 19,82,993/-.

4. Brief facts of the case are that assessee is a company engaged in the export of back office operation and software development. It has registered as 100% EOU export oriented unit with the software technology parks of India on 18th January, 2002. It has filed its return of income on 30th October, 2007 declaring total income at Rs. 98,361/- after claiming deduction u/s. 10B of Rs. 5,12,42,970/-. The assessee had declared total software turnover of Rs. 17.69 crore and claimed exemption u/s. 10B of Rs. 5,12,42,970/-. The case of the assessee was selected for scrutiny I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 3 ITO vs. Hitech Export

assessment and a notice u/s. 143(2) was issued and served upon the assessee. On scrutiny of the accounts, it revealed to the Assessing Officer that assessee has received contributions from the employees for the provident funds and ESI. However, it failed to deposit those amounts within the due date prescribed by PF and ESI acts. Ld. Assessing Officer was of the view that as per sub-clause 10 of section 2(24) r.w.s. 36(1)(va) of the Income Tax Act, these employee's contribution will be deemed as an income of the assessee and if it is not paid within 20 days from the end of the month then, it is not allowable to the assessee as a deduction. It was also observed that though section 43B allows deduction on actual payments of the amounts, but the deduction, otherwise ought to be admissible to the assessee. Income tax act, section 36(1)(va) provides that if payments made after 20 days from the end of the month then it is not, allowable. In other words, the payments of employees' contribution to the PF fund after 20th April following the end of previous year will not be allowable to the assessee. The ld. Assessing Officer therefore disallowed the claim of the assessee.

5. Appeal to the Commissioner of Income Tax (Appeals) did not bring any relief to the assessee.

6. With the assistance of Ld. representatives, we have gone through the record carefully. The issue in dispute is squarely covered against the assessee by the decision of Hon'ble Gujarat High Court rendered in the case of Gujarat Road Transport Corporation reported in 366 ITR page 170 wherein Hon'ble High Court has held that employees' contribution if not paid within the due date provided in the PF and ESI Act then, deduction will not be admissible to the assessee. The view of the ld. Commissioner I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 4 ITO vs. Hitech Export

of Income Tax (Appeals) is in line with the hon'ble High Court's decisions therefore, we do not find any merit in this ground of appeal. No other grounds in the appeal of assessee are pressed. Accordingly, it is dismissed.

Now we take up ITA No. 1506/Ahd/2011

7. The revenue has taken five grounds of appeal. Out of which ground no. 4 and 5 are general grounds of appeal, which do not call for recording of any finding, hence rejected. Ground no. 1, 2 and 3 are inter-connected with each other. They read as under:-

"1. The Ld. Commissioner of Income-tax [A] has erred in law and on facts in deleting the disallowance of Rs 4,30,223/- made u/s 40(a)(ia) being the amount of expenses on which Tax Deducted at Source (TDS) was not deposited into the Government account within due date .

2. The Ld. Commissioner of Income-tax [A] has erred in law and on facts in deleting the disallowance of Rs 54,88,828/- made u/s 40(a)(ia) being the amount of expenses on which tax at source was not deducted.

3. The Ld. Commissioner of Income-tax (A) has erred in law and on facts in directing the Assessing Officer to verify the contentions of the Assessee, in respect of disallowance of Rs 1,00,430/- being contribution to Surat Flood Victim , in contravention of Sec. 251 of the Income Tax Act, 1961 , the direction amounting to setting-aside the issue to the file of the Assessing Officer."

8. As stated earlier, assessee is a 100% export oriented unit with software technology park of India. It is entitled exemption u/s. 10B. The assessee has claimed exemption at Rs. 5,12,42,970/- u/s. 10B of the Act. Ld. Assessing Officer has pointed out certain expenses which are I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 5 ITO vs. Hitech Export

disallowed with the help of section 40(a)(ia) of the Income Tax Act, 1961 on the ground that assessee either failed to deduct the TDS on certain payments or after deducting TDS failed to deposit in the Government account, therefore, it is not entitled for deduction of those expenses. He accordingly, disallowed the claim of assessee. On appeal, Ld. First Appellate Authority, has observed that once this expenditure is to be added in the total income of the asessee then, it will enhance the business profit and accordingly assessee will be entitled for exemption u/s. 10B of the Act and it will be revenue neutral. There will no variation in the ultimate taxability of the income of the assessee. Accordingly, ld. Commissioner of Income Tax (Appeals) did not go into merits of those issues to delete the disallowance.

9. Before us, ld. Departmental Representative relied upon the order of Assessing Officer and submitted that the disallowance be confirmed and it be excluded from the exemption of section 10B. However ld. Departmental Representative failed to point as to how these can be disallowed from the exemption, because the moment amount is to be added back then, it will reduce the expenditure and increase profit element. The profit element will ultimately go for computation of the eligible profit for grant of exemption u/s. 10B.

10. With the assistance of ld. representatives we have gone through the record carefully. The details noticed by ld. Commissioner of Income Tax (Appeals) from the written submissions of the assessee and finding of Commissioner of Income Tax (Appeals) on this issue read as under:

I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 6 ITO vs. Hitech Export

"A.O. had disallowed various expenses under section 40(a)(ia) of the income Tax Act. Which are as below:

Amount of Reason Assessee's Contention Disallowance Rs. 4,30,223 On account of TDS Assessee deposited the deducted not same amount before the deposited within due date of filing of its due date return of income. In the recent judgment given by Hon'ble ITAT Ahmedabad B bench that recent amendment made by Finance Act in section 40(a)(ia) is in the nature of remedial and designed to eliminate unintended consequence which may cause undue hardship to the taxpayers it has to be treated as retrospective w.e.f. April 2005 in the case of Kanubhai Ramjibhai Vs Income Tax Officer (2011) 49 DTR (Ahd Trib) 70

Rs. 4,94, 204 On account of TDS As per provision of the not deducted on section this transaction is Computer Rent u/s not covered under this 1941 section

Rs. 98,652 On account of TDS Bills of Fees and not deducted on reimbursement expenses Audit Fees u/s 194J are separately and this transaction is not liable for TDS

Rs. 7,43,053 On account of IDS The nature of transactions not deducted on is for work contract, not for Consulting Fees u/s any technical and I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 7 ITO vs. Hitech Export

194J professional in nature and the same transaction is covered u/s 194C, not under 194J. Further there is no payment in aggregate exceed of Rs. 50000 and hence the same is not liable for TDS. Further no individual bills are in excess of Rs. 20000.

Rs. 40,96, 419 On account of TDS TDS is not liable on the not deducted on bandwidth/ Lease line Bandwidth Charges Charges as the same u/s 194J transaction not covered u/s 194 J, according to the Hon'ble Madras High Court in the case of Skycell Communication Ltd. V DCIT (2001) 119 Taxman 496

Rs. 56,500/- On account of TDS The nature of transactions not deducted on is for work contract, not for Training Expenses any technical and u/s 194J professional in nature and the same transaction is covered u/s 194C, not under 194J. Further there is no payment in aggregate exceed of Rs. 50000 and hence the same is not liable for TDS. Further no individual bills are in excess of Rs. 20000..

Rs. 59,19,051/- Total

x x x x x x I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 8 ITO vs. Hitech Export

3.3 I have considered the facts of the case, assessment order and

appellant's submission. It is not in dispute that the disallowance is in respect of appellant's unit eligible for deduction under section 10 B. Since by disallowing expenses on account of non-deduction of TDS or not depositing TDS to government account in time, assessing officer only increased business profit. Such increased business profit is eligible for deduction under section 10 B, appellant is eligible for deduction under section 10 B for addition of expenses disallowed under section 40(a) (ia) of IT Act. Accordingly the disallowance of expense on account of default under TDs provisions will not affect appellant's taxable income. In view of this, the applicability of TDS provisions and disallowance under section 40 (a) (ia) is not discussed here.

However the addition on account of delayed payment of employee's contribution to PF/ESI is not made in business head. This addition is made under section 2 (24) (x) of IT Act. Expense in respect of this would have been allowable under section 36 (1) (va) of IT Act if appellant made the payment of PF/ESI in time. Since the payment was not made in time, it is taxed as income; however no expense is allowable in respect of this. Therefore non-allowance of expense will not result in increased business profit. Accordingly appellant will not be entitled for increased deduction on account of this disallowance under section 10 B."

11. After going the above finding of Commissioner of Income Tax (Appeals), we do not find any error in it, because once the expenses which are to be disallowed with the aid of section 40(a)(ia) then it will enhance the taxable income of the assesse which will fall in the eligible profit for exemption u/s. 10B.

12. As far as deletion of disallowance of Rs. 1,43,000/- is concerned, Ld. Commissioner of Income Tax (Appeals) has rightly appreciated the fact that the donation given to flood victim was collected from the employees' salaries. A specific deduction was made from the salary and after collecting that amount it was given as a donation. The assessee has not claimed any deduction as such from its business profit, the amount I.T.A Nos. 1506 & 1815 /Ahd/2011 A.Y. 2007-08 Page No 9 ITO vs. Hitech Export

collected from the employees' salaries does not involve element of income in the hands of assessee because the assessee has only acted as a facilitator between the amounts collected vis-à-vis remitted to the flood victims. Therefore, ld. Commissioner of Income Tax (Appeals) has rightly deleted the disallowance. We do not find any error in the order of ld. Commissioner of Income Tax (Appeals). Accordingly, we dismissed the appeal of the revenue.

13. In the result, both the appeals are dismissed.

Order pronounced in the open court on 19-06-2015

Sd/- Sd/-

(N. S. SAINI) (RAJPAL YADAV) ACCOUNTNAT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 19/06/2015 ak

आदेश क त ल प अ े षत / Copy of Order Forwarded to:-

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file.

By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद