PF Allowable U/s 43B

The assessee paid the employees’ contribution to PF and ESIC after the grace period but before the due date for filing the return. The AO disallowed the payment u/s 36(1) (va) and held that s. 43B had no application. This was confirmed by the CIT (A). On appeal, HELD deciding in favour of the assessee:

In Alom Extrusion Ltd 319 ITR 306 the Supreme Court held that the omission of the second proviso to s. 43B by the Finance Act 2003 operated retrospectively w.e.f. 1.4.1988. The Court held that the contribution payable by the employer to the P.F/Superannuation Fund or any other Fund of welfare of the employees was allowable if paid before the due date of filing the return. Consequently, the issue is covered in favour of the assessee and the deduction is allowable u/s 43B.

Note: The same view has been taken in CIT vs. AIMIL Limited (Delhi High Court) and Radhakrishna Foodland vs. ACIT (Mum). For the law on payments within grace period see WMI Cranes (Bombay HC).

Source: Pik Pen Pvt Ltd vs. ITO (ITAT Mumbai)

VIEW FULL CASE LAW BELOW:-

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH “C”: MUMBAI

BEFORE SHRI P.M. JAGTAP (AM) AND

SHRI R.S. PADVEKAR (JM)

ITA No. 68471Mum12008

(Asstt. Year: 2005-06)

M/s Pik Pen Private Limited ~ Appellant

7, Parsian Building, V.P. Road,

Andheri (West),

Mumbai – 400 058

PAN : AABCP05/2A

V/s.

Income Tax Officer 8(2)(4), Aaykar Bhavan, M.K. Marg Churchgate,

Mumbai – 400 020 ~ Respondent

Appellant by : Shri. K. Shivram

Respondent by : Smt. Chandra Ramakrishnan (DR)

:ORDER:

PER R.S. PAD VEKAR. J.M

1. The assessee has filed this appeal challenging the respective impugned orders of the Ld CIT(A)- VIII, Mumbai dated /6./0.2008 for the A.Y. 2005- 06.

2. The first issue is in respect of the disallowance of depreciation of Rs.64,47,656/-on the Trade Marks.

3. We have heard the parties. The assessee company is in the business of writing instruments and part thereof. The assessee was incorporated on 3/./2./998 with the object of taking over the business of M/S. Veekay Industries, a partnership firm as a going concern along with all the assets and liabilities. The business of M/S. Veekay Industries was succeeded by the assessee company on /.2.99 and all the assets and liabilities were acquired by  Pik Pen Pvt. Ltd., the present assessee. The partners of the firm were allotted shares in the company towards the consideration ofthe business. The assessee filed the return of income for the A.Y. 2005-06 which was selected for scrutiny and the assessment was framed u/s. /43(3) of the I.T. Act. It was noticed by the A.O that the assessee had claimed the depreciation of Rs. 64,47,656/- at 25% of the WDV of Rs. 2,50,90,625/- on Trade Mark. The A.O disallowed the claim of the depreciation made by the A.O on the Trade Mark entirely. On appeal, the Ld CIT(A) confirmed the disallowance. The Ld Counsel for the assessee submitted that the Ld CIT(A) has merely followed the earlier order. The ld Counsel also referred to page No. /07, //3 of the Paper Book where the copy of theTribunal order in assessee’s own case for the A.Y. /999-00 to 2004-05 are placed and submitted that this issue is a recurring issue. Hence, the same may be restored. We have also heard the Ld D.R. On rival submission, we find that M/s. Balaji Films Pvt. Ltd. had assigned atrade mark for a token amount of Rs. /00/- and registered the same as ‘Pik’. The said trade mark was taken over by erstwhile M/s. Veekay Industries from whom the assessee company has taken over the business. Before the transfer of the business along with the assets and liability M/s. Veekay Industries valued the brand in their books, filed the return under the Income Tax Act for A.Y. /999-2000. The assessee company claimed the depreciation on the re-valued amount of trade mark , but the A.O disallowed the same on the reason that M/s. Balaji Pens Pvt. Ltd. (the assignor) had voluntarily agreed as on the date of assignment dt. /.4.92 to M/s. Veekay Industries ( assignees) along with the actual of the saidtrade mark ‘Pik’ which was registered for the token consideration of Rs. /00/-. The issue appears to be in respect of Explanation-3 to Section 43(/) and the same issue was before the Tribunal in assessee’s own case for the A.Y. /999-2000, 2004-05 being ITA No. 22/8/Mum/2006, ITA No. 7484/Mum/2005, ITA No. 6026/Mum/2004, ITA No. 22/9/Mum/2006 and ITA No. /658 & /659/Mum/2007. On the perusal of the order of theTribunal, we find that the Tribunal has set aside the issue to the file of the CIT(A) for fresh adjudication for the verification of the fact as to whether prior approval of the Joint CIT was obtained or not as per Explanation-3 to Sec. 43(/). As this is the recurring issue and consistently arising in the preceding years, we consider it fit this year also to restorethe issue to the file of the Ld CIT(A) for fresh  adjudication in the light of the direction given in the preceding years i.e. A.Y. /999-00 to 2004-05. Accordingly, Ground No. / is allowed for statistical purposes.

4. The next issue is disallowance of Rs. 39,200/-.

5. We have heard the parties. From the record, the facts reveal as under ~

The assessee has debited the donation of Rs. 39,200/- to the Profit & Loss Account . The A.O was of the opinion that the same was not allowable. The assessee contended that the company is labour intensive and manufacturingwriting instruments. The assessee’s unit is based in Gujarat and to carry on the business smoothly by maintaining harmonious relations has given donations on various occasions to encourage the workers as well as the local people on the occasion like Navaratri etc., The assessee contended that the same expenditure is allowable u/s. 37(/). The A.O did not agree to the explanation of the assessee and made the disallowance. The assessee carriedthe issue before the Ld CIT(A) but without success.

6. The only argument of the Ld Counsel is that the expenditure was incurred for maintaining the healthy relations with the worker and peoples in the locality but at the same time, nothing is disputed before us that the said were the donations. Admittedly, the donations are not allowable expenditure. Moreover, nothing is placed before us to show that there was any clause or term in the settlement, if any arrived at between the assessee company and their workers that the assessee would have to pay the donations on such occasions and then only it can be said that for maintaining the industrial relations, the assessee had given donations. Nothing is placed before us to support the contention of the assessee. In our opinion, no interference is called for and we accordingly confirm the disallowance and dismiss the Ground No. 3 & 4.

7. The next issue is regarding the bad debts/balance written off of Rs. 2,96,/36/- by treating it as a capital loss.

8. We have heard the parties. The assessee has debited to the Profit & Loss A/C. an amount of Rs. 2,96,/35/- on account of bad debts/balance written off. The assessee explained that the said amount represented the amount advanced to Balaji Pens Pvt. Ltd., for machinery and as the machinery was not supplied, and hence, the un-recovered amount was written of treating the same as an expenditure for the purpose of business u/s. 39(/) of the Act. The A.O rejected the claim of the assessee on the reason that the amount was paid for purchase of the machinery and therefore, any loss incurred on a/c of same is a capital loss. The Ld CIT(A) confirmed the disallowance made by the A.O. on this issue. The Ld Counsel relied on the decision of the Hon’ble High Court of Rajasthan in the case of CIT v/s. Anjanikumar Co. Ltd., 259 ITR //4 ( Raj.). He alternatively pleaded that if the loss is not allowed as an business expenditure, then the A.O. may be directed to allow the carry forward of loss as per provisions of law. We have heard the Ld D.R. The facts are not in dispute that the advances were made for purchase of machinery but as the machinery was not supplied, and hence the assessee written off the said advances treating the same as a revenue expenditure u/s. 37(/).

9. In the case of Anjalikumar Co. Ltd. (supra), the appellant had written off the advances made to the agriculturists for purchase of the agricultural land and the land was to be acquired to set up a factory but ultimately that was not materialized and the agriculturists to whom the advance was given also refused to give the amount. On the above facts, their Lordships held that the same has to be treated as a revenue expenditure. We, accordingly, following the principles laid down in the case of Anjanikumar Co. Ltd. (supra) allow the ground taken by the assessee and delete the addition of Rs. 2,96,/35/- treating the same as a revenue expenditure u/s. 37(/) of the Act as admittedly, no capital asset came into existence.

10. The next issue is disallowance of Employees Contribution to PF and ESIC of Rs. 43,72//-. The short controversy before us is in respect of the payment of the Employees Contribution to P.F./E.S.I.C beyond the Grace period which was relating to the month of February. The Ld Counsel relied on the decision of the Hon’ble Supreme Court in the case of CIT v/s. Alom Extrusion Ltd., 3/9 ITR 306. The A.O made the disallowance u/s. 36(/)(va) as he was of the opinion that the Employees Contribution to PF/ESIC even if made before filing of the return of income is not covered u/s. 43B of the I.T. Act. In the case of Alom Extrusion Ltd.(supra), the issue before their Lordship was whether the omission of second proviso to Section 43B of the I.T. Act /96/ by the Finance Act 2003 operated w.e.f. /.2.2004 or whether it operated retrospectively w.e.f. /.4./988. In the said case also, the issue was concerning the contribution payable by the employer to the P.F/Superannuation Fund or any other Fund of welfare of the employees. In our opinion, now the issue stands covered in favour of the Assessee by the decision of Hon’ble Supreme Court in the case of Alom Extrusion Ltd. (supra). We, therefore, allow the ground taken by the assessee and delete the addition.

11. In the result, assessee’s appeal is partly allowed for the statistical purposes.

Order pronounced in the open court on 28th day of January , 2010

Sd/- Sd/-

(P.M. JAGTAP) (R.S. PADVEKAR)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, on this 28th day of January , 2010