2024 (7) TMI 1640 - HC - Income Tax

TDS u/s 194C - disallowance u/s 40(a)(ia) - HELD THAT - The disallowance by the assessing authority at first instance was not for the reason that the declarations were not produced as required under Section 194C(6). The disallowance was on a specious finding that the payments made by the appellant assessee were not to transport contractors but to their agents. While we are at a loss to understand the basis on which the assessing authority arrived at such a finding even if the assessing authority did entertain a doubt in that regard he ought to have considered the declarations that were produced before him (the production of which was never denied by him) and given reasons as to why those declarations could not be accepted on their face value. In the absence of such a finding by the assessing authority his finding that the payments were made only to agents had to be seen as wholly without any basis and against the documents made available before him. To that extent we find that the First Appellate Authority who had perused the declarations and found them to be genuine arrived at a correct decision by deleting the disallwance made by the assessing authority under Section 40(a)(ia). Tribunal was not justified in remanding the matter to the assessing authority for a fresh adjudication on this issue. Disallowance u/s 36(1)(va) - Tribunal placed reliance on the decision of this Court in Merchem Ltd 2015 (9) TMI 560 - KERALA HIGH COURT as followed in Alliaz Corhill Information Services (P) Ltd 2023 (12) TMI 1419 - KERALA HIGH COURT to find that in circumstances where the employees contribution to EPF/ESI was not made over by the employer to the statutory authorities within the due date prescribed for making those payments under the respective statutes the disallowance under Section 36(1)(va) would operate against the erring employer assessee. It accordingly proceeded to hold that in the instant case also the disallowance made by the assessing authority had to be restored. We see no reason to interfere with the finding of the Tribunal in relation to the disallowance under Section 36(1)(va) since as already noticed it is based on the judgments of this Court referred above that settle the issue. (1) Did not the Appellate Tribunal err in law in restoring the addition deleted by the CIT(A) mechanically without ascertaining whether payments were made within due date or not and without entering a finding as to whether Sec. 36(1)(va) is applicable or not on the facts and circumstances of the case? - Decided against assessee. (2) Did not the Tribunal err in not having given weight to the Apex Courts ruling dismissing the SLP filed against the judgment whereby High Court of Rajasthan held that employees contribution if paid within due date of filing of Return of Income u/s. 139(1) are allowable? - Decided against assessee. (3) Did not the Tribunal err in not holding that the non obstante clause of Sec. 43B make it mandatory to allow deduction of actual payments made to Employees Contribution as per the provisions contained in that section? - Decided against assessee. (4) Should not the Appellate Tribunal have held that Sub Section (6) of Section 194C is squarely applicable to the sums paid to Transport Contractors? - Decided against revenue. (5) Did not the Appellate Tribunal err in law in not finding that Sec. 40(a)(ia) is not applicable to assessee s payments made to Transport Contractors? - Decided against revenue. (6) Did not the Tribunal err in remanding the matter to AO to verify the agreements entered between Contractors and assessee when the statute prescribes furnishing of only PAN of Transport contractors for claiming deduction?- Decided against revenue. (7) Did not the Tribunal err in not holding that Sec. 40(a)(ia) is applicable only to amounts outstanding as payable as on 31.03.2013? - Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment considered the following core legal questions:

(a) Whether the disallowance made under Section 40(a)(ia) of the Income Tax Act was justified, specifically concerning payments made to transport contractors without deduction of tax at source, and the applicability of the exemption under Section 194C(6) in respect of such payments.

(b) Whether the remand of the issue relating to Section 40(a)(ia) by the Appellate Tribunal to the Assessing Officer for fresh adjudication was appropriate.

(c) Whether the disallowance under Section 36(1)(va) of the Income Tax Act was valid on account of delay in payment of employees' contribution under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees' State Insurance Act, 1948.

(d) Whether the payments of employees' contribution made belatedly but within the due date for filing the return of income under Section 139(1) are eligible for deduction under Section 36(1)(va).

(e) The applicability and interpretation of the non-obstante clause in Section 43B of the Income Tax Act regarding the timing of deduction for employees' contributions.

(f) The legal correctness of the Appellate Tribunal's reliance on precedent decisions concerning the timing and conditions for allowing deductions under Section 36(1)(va).

(g) The correctness of the Tribunal's approach in remanding the matter to verify contracts when the statute requires only furnishing of PAN and declarations for claiming exemption under Section 194C(6).

(h) The applicability of Section 40(a)(ia) only to amounts outstanding as on the last day of the previous year (31.03.2013 in the instant case).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance under Section 40(a)(ia) relating to payments to transport contractors and applicability of Section 194C(6)

The legal framework involves Section 40(a)(ia), which mandates disallowance of expenditure where tax is required to be deducted at source but is not deducted, and Section 194C(6), which exempts deduction of tax at source on payments made to transport contractors owning ten or fewer goods carriages, subject to furnishing of a declaration and PAN.

The Assessing Officer disallowed expenses under Section 40(a)(ia) on the ground that the appellant did not deduct tax at source on payments to contractors. However, the appellant contended that it had obtained declarations under Section 194C(6) from contractors, entitling it to exemption from deduction of tax at source.

The Assessing Officer rejected the exemption, holding that payments were made to agents of transport contractors, not the contractors themselves, thus disallowance was justified. The First Appellate Authority, after examining the declarations, accepted the appellant's plea and deleted the disallowance.

The Tribunal, however, doubted whether payments were made to contractors engaged in transport business and remanded the matter for fresh consideration.

The Court analyzed that the Assessing Officer had not challenged the production of declarations, nor given reasons for rejecting them, merely making an arbitrary finding that payments were to agents without basis. The First Appellate Authority's acceptance of declarations was correct, and the Tribunal's remand was unnecessary.

The Court emphasized that if the Assessing Officer had doubts, he should have considered the declarations and given reasons for rejecting them. Since he did not, his disallowance was without basis.

Thus, the Court concluded that the exemption under Section 194C(6) applied, and disallowance under Section 40(a)(ia) was not justified in this case.

Issue 2: Validity of remand by the Appellate Tribunal to Assessing Officer for fresh adjudication on Section 40(a)(ia) issue

The Tribunal remanded the matter for fresh consideration on whether payments were made to transport contractors and the validity of declarations.

The Court held that since the Assessing Officer had not disputed the production of declarations and had not given reasons for rejecting them, the remand was unwarranted. The First Appellate Authority had already examined and accepted the declarations.

The Court found the remand to be unnecessary and set it aside.

Issue 3: Disallowance under Section 36(1)(va) on account of delay in payment of employees' contribution

Section 36(1)(va) disallows deduction of employees' contribution to provident fund and insurance schemes if not paid within the prescribed time.

The Assessing Officer disallowed the deduction on the ground of delay in payment to statutory authorities.

The First Appellate Authority relied on a Rajasthan High Court decision holding that if payments are made within the due date for filing the return of income under Section 139(1), deduction should be allowed despite delay.

The Tribunal, however, relied on Kerala High Court decisions which held that delay beyond the statutory due date prescribed under the welfare statutes attracts disallowance under Section 36(1)(va), regardless of payment within the return filing date.

The Court noted that the Tribunal's reliance on binding Kerala High Court precedents was appropriate and declined to interfere with the disallowance.

Issue 4: Applicability of non-obstante clause in Section 43B to employees' contribution deductions

Section 43B contains a non-obstante clause mandating that certain deductions are allowable only on actual payment.

The appellant argued that this clause mandates allowance of deduction on actual payment made, irrespective of delay.

The Court found that the statutory provisions and judicial precedents support the view that deduction under Section 36(1)(va) is conditional upon payment within the prescribed statutory time, not merely actual payment at any time.

Therefore, the non-obstante clause does not override the timing requirements under the welfare statutes.

Issue 5: Applicability of Section 40(a)(ia) only to amounts outstanding as on 31.03.2013

The appellant contended that Section 40(a)(ia) applies only to amounts outstanding as on the last day of the previous year and not to payments made during the year.

The Court agreed with this interpretation, holding that disallowance under Section 40(a)(ia) is restricted to amounts remaining unpaid as of the end of the financial year.

Issue 6: Whether the Tribunal erred in remanding the matter to verify agreements between contractors and assessee when statute requires only furnishing of PAN and declaration

The appellant argued that the statute under Section 194C(6) requires only furnishing of PAN and declaration from contractors, and the Tribunal erred in remanding the matter to verify contracts.

The Court concurred, observing that the statutory requirement is limited to furnishing PAN and declaration, and the Tribunal's direction for verifying contracts was unnecessary.

3. SIGNIFICANT HOLDINGS

The Court held:

"The disallowance by the assessing authority at first instance was not for the reason that the declarations were not produced as required under Section 194C(6). The disallowance was on a specious finding that the payments made by the appellant assessee were not to transport contractors but to their agents... In the absence of such a finding by the assessing authority, his finding that the payments were made only to agents had to be seen as wholly without any basis, and against the documents made available before him."

This established the principle that an assessing authority must base disallowance on cogent reasons and cannot arbitrarily disregard statutory declarations without examination.

On the issue of delay in payment of employees' contribution, the Court affirmed the principle that disallowance under Section 36(1)(va) arises if payment is not made within the prescribed statutory due dates, regardless of payment within the return filing date, consistent with binding High Court precedents.

Further, the Court clarified that Section 40(a)(ia) applies only to amounts outstanding as on the last day of the previous year, and the statutory requirement for exemption under Section 194C(6) is satisfied by furnishing PAN and declaration, not by production of contracts.

Ultimately, the Court answered the appellant's questions of law by allowing the appeal on issues related to Section 40(a)(ia) and Section 194C(6), and dismissing it on issues related to Section 36(1)(va) and timing of payments under welfare statutes.