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2006 (1) TMI 171 - AT - Income TaxDisallowance of Prior-period expenses - Non-furnishing/producing of the bills - legal expenses - whether the learned CIT(A) was justified in confirming the disallowance of legal expenses by invoking s. 40(a)(i) paid to an international UK based firm to appear before the International Court of law on account of dispute? - employee's contribution on account of delayed payments - Applicability of sec 43B - TDS u/s 195. HELD THAT:- The assessee placed its reliance on the decision of the Tribunal in the case of P.K. Overseas [2004 (6) TMI 249 - ITAT CHANDIGARH-A] wherein the expenditure pertaining to earlier year, was allowed as deduction in the subsequent year. A perusal of the aforesaid decision brings out the fact that in that case, there was dispute regarding the amount of brokerage which was settled in the year in which such expenses were booked although the same pertained to the sales made in the earlier years and the reason for this was that the claim of brokerage was finally settled only in that year. However, in the present case, there is no dispute regarding the assessee's liability towards all these expenses. Thus, the case law, relied upon by the assessee, hardly extends any help to the cause of the assessee. Thus, as far as the various expenses are concerned, the assessee's case is not justified and is not in accordance with law. Accordingly, the findings of the Revenue authorities with respect to disallowance of expenditures are upheld. Disallowance of purchase of goods - 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. 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 supplier. Technically speaking, if the goods are not accepted due to quality problems, transaction of purchase is, as such, not complete as per the provisions of the Sale of Goods Act and the assessee cannot be denied of its due merely because the invoices pertained to the earlier accounting periods. Having stated so, however, we find that the assessee has not placed proper evidences on record to prove the fact of replacements in lieu of defective goods. Therefore, we deem it fit and proper to restore this issue to the file of the AO for verification of the supporting evidences, to be submitted by the assessee, in this regard, and, after affording adequate opportunity of hearing to the assessee, allow deduction of purchases in respect of these goods. Similarly, in case of goods at sl. No. (d) above, the assessee has not placed material on record and, therefore, this issue is also restored back to the file of the AO to be disposed of in terms of our direction for goods as mentioned in respect of goods at sl. Nos. (a) and (b). Thus, this ground of the assessee stands partly allowed. Legal/consultation fees expenses - We are of the view that there is no conflict in the provisions of s. 195 and s. 40(a)(i) of the Act because the purpose of s. 195 is to ensure deduction of tax at source on payments to non-resident which are chargeable under the provisions of this Act and s. 40(a)(i) also states the same principle in a sense that disallowance of deduction in respect of any sum which is chargeable under this Act and where the tax has not been deducted at source. Thus, the basic condition is charge ability of the sum paid to the non-resident under the provisions of the IT Act, 1961. Although the said circular directly deals with the export commission but it essentially confirms the view that requirement of deduction at source u/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. Thus, 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 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. Employer's contribution as well as the employee's contribution - Admittedly, there is a delay in deposit of both the employer's and employees' contributions towards PF and ESIC although the same have been deposited before the due date of filing of return of income. With regard to the delay in deposit of the employer's contribution there are catena of decisions wherein, amendment to s. 43B by way of deletion of second proviso to s. 43B and amendment to first proviso w.e.f. 1st April, 2004 has been declared of curative nature and hence applicable retrospectively, 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. Accordingly, we allow this ground of the assessee. 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 u/s. 36(1)(va) and s. 2(24)(x) of the IT Act, 1961. Assuming a situation, for the sake of argument, that if it is held that the assessee may get deduction if the amount is deposited before the due date of filing of return of income, it would enable the employer to deposit the employees' contribution towards PF and ESIC deducted in the month of April, 2005, by 31st October, 2006, which is too long a period to be given to the employers because if any adverse business situation emerges in the intervening period, which results in non-deposit of the employees' contributions, the employees would be made to suffer without any default on their part. Further, such a long period would also tempt the employers to utilise the money for their business, which would be manifestly against the objectives of the provisions. The principle of equitable construction is based on principle of equity. As far as the concept of equity is concerned, it must be applied in favour of the weaker party. In this case, the employer is weaker than the State and the employee is weaker than the employer. Therefore, even on the principle of equity, the interests of the employees should be taken care of, particularly in a country like ours where social equality is a matter of grave concern for each individual. Thus, both in law and in equity, we are of the considered opinion that the provisions of s. 43B being not applicable in respect of the employees' contribution towards PF and ESIC, the orders of the Revenue authorities in this regard are justified and, accordingly, we uphold the same. Thus, this ground of the assessee stands partly allowed. In the result, the appeal, filed by the assessee is partly allowed.
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