1. This appeal by the assessee is directed against the order of the CIT(Appeals) on various grounds which are as under: 1. That eh authorities below has erred on facts and under the law in disallowance of interest of Rs. 3,15,760/- (correct figure is Rs. 3,17,760/-) paid to the P.N.Bank on amount borrowed for the purpose of renovation addition to plant & machinery thereby treating it as capital expenditure.
2. That the authorities below has erred on facts and under the law in maintaining the disallowance of Rs. 78,353/- being charges/damages for late payment of provident fund debited under the head earlier year expenses claimed at Rs. 9,93,878/-.
3. That the authorities below has erred on facts and under the law in maintaining disallowance of Rs. 50,000/- out of general expenses claimed at Rs. 3,47,233/-without pin pointing any item of inadmissible in nature.
4. That the authorities below has erred on facts and under the law in maintaining addition/disallowance of Rs. 17,73,490/- representing the payment of P.F. & E.S.I. Under Section 43B of I.T. Act on account of payment alleged to have been made late.
5. That the authorities below has erred on facts and under the law to appreciate that under the relevant laws of P.P. & E.S.I. liability to deduct the P.P. & E.S.I. arises at the time of payment of salary and the deposit thereof alongwith employers contributions have to be made within 15 days of the next following month with a grace period of 5 days and consequently the addition/disallowance of Rs. 17,73,490 - being the payment of P.F. & E.S.I., alleged to have been made late is arbitrary unjust and illegal and at any rate-very excessive.
6. That the authorities below has erred on facts and under the law in maintaining disallowance of Rs. 50,000/- out of sales promotion and entertainment expenses claimed at Rs. 2,57,854/-.
2. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.
3. Apropos ground No. 1 it is noticed that the assessee has borrowed huge funds from Punjab and National Bank for substantial renovation, replacement as well as addition to plant and machinery while raising out the same to Dhampur Sugar Mills Ltd. The assessee has claimed the interest of Rs. 3,17,560/- paid to the Bank on this borrowed fund as revenue expenditure but the same was disallowed by the A.O. on the ground that while expenses on plant and machinery were of capital nature and hence the interest is also of capital expenditure. The assessee preferred an appeal before the CIT (Appeals) but did not find favour with him.
4. Now the assessee has preferred an appeal before the Tribunal with the submission that deduction of interest is to be allowed as per Section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter called the Act) according to which deduction of the amount of interest paid in respect of capital borrowed for the purpose of business is to be allowed. The learned counsel for the assessee further placed reliance on the following judgments :CIT v. Tarai Development Corporation 5. The learned DR. on the other hand, has placed reliance upon the orders of the authorities below.
6. Having given a thoughtful consideration to the rival submissions on the impugned issue and from perusal of the aforesaid judgments, we are of the view that the interest on borrowed funds is to be allowed as a revenue expenditure irrespective of fact that the funds were borrowed for the installation of plant and machinery or for any other business purpose. We, therefore, set aside the order of the CIT(Appeals) and direct the A.O. to allow the deduction of interest paid on the borrowed funds.
7. Ground No. 2 relates to the disallowance of charges paid for late payment of P.F. and on this issue we find that the assessee had paid a sum of Rs. 78.353/- in Ghee Unit on account of damages charged by P.F.Department for the late payment of P.F. dues for which recovery certificate was issued and the assessee claimed deduction of the same on the ground that it was of compensatory nature and if should be allowed. Being not convinced with the explanation of the assessee, the A.O. treated this payment as penalty for infraction of law and disallowed the claim of deduction of the same against which an appeal was filed before the CIT (Appeals) but the assessee did not find favour with him.
8. Now the assessee preferred appeal before the Tribunal with the submission that damages paid for late payment of P.F. comprise both penalties as well as compensatory payments and hence it will be for the authority to determine this compensatory portion and allow the same. In support of this contention, he relied on the following judgments:Prakash Cotton Mill (P) Ltd. v. CIT The learned DR, on the other hand, has placed reliance upon the orders of the lower authorities.
9. Having considered the rival submissions and from the careful perusal of the orders of the lower authorities and the judgments of the Apex Court as well as of the High Courts, we are of the view that before determining the nature of payment, one has to find out whether it was of penal nature and made for infraction of law or it was only of a compensatory nature. If it is not clear and it is felt that the payment is comprised both the elements i.e. penal as well as compensatory nature then the authority should bifurcate these expenditure and allow an expenditure which was treated to be of compensatory nature. In the case of Swadeshi Cotton Mills Co. Ltd. (supra) their lordships of the Apex Court categorically held that if the amount of damages for delayed payment of contribution Under Section 14B of the Employees Provident Fund Act, 1952 comprises both the elements of penal levy as well as compensatory payment, it will be for the authority under the Act to decide with reference to the provisions of the Employees Provident Act, 1952 and the reasons given in the order imposing and quantifying the damages to determine what proportion should be treated as penal and what proportion as compensatory and that entire sum can neither be considered as mere penalty nor as mere interest. Therefore the question was required to be reexamined in accordance with the principles laid down by the Andhra Pradesh High Court in CIT v. Hyderabad Allwin Metal Works Ltd. which has been approved by the Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT 201 ITR 684. On a careful perusal of this entire judgment, we find that the impugned issue is squarely covered by this judgment of the apex Court. We, therefore, following the same, restore the matter to the file of the A.O. to determine what portion of this claim is compensatory in the light of aforesaid judgment and to allow deduction of the same.
10. Ground No. 3 relates to disallowance of Rs. 50,000/- out of general expenses. On a perusal of the record, we find that the A.O. has made the disallowance of Rs. 65,000/- out of general expenses claimed at Rs. 3,47,233/-without pointing out any item of inadmissible nature. The above disallowance was reduced to Rs. 50,000/- by the CIT(Appeals) and granted relief of Rs. 15,000/-.
11. On a careful perusal of the orders of the lower authorities we do not find any specific reason for which this disallowance was made.
Since it was an adhoc disallowance without any basis, we do not find any force therein. We, therefore, delete this addition made on account of this adhoc disallowance.
12. Ground Nos. 4 and 5 which are main grounds in this appeal relate to a disallowance of Rs. 17,73,490/- representing the payment of P.F. and E.S.I. Under Section 43B of the IT Act on account of payment made much after the due date. From the details of these payments of P.F. and E.S.I. it was noticed by the A.O. that the payments were not made before the due date prescribed in respective enactments. He accordingly disallowed the same by invoking the provisions of Section 43B of the Act against which the assessee preferred an appeal before the CIT(Appeals) with the submission that due date of 15 days should be counted from the end of the month in which the wages are actually paid and not from the end of the month to which they relate. Even if the payment is made before the filing of return it should be treated as made within the time. Being not convinced with the explanation of the assessee, the CIT(Appeals) has confirmed the disallowance after having observed that the P.F. contribution should be paid within the due date under Provident Fund Act and as per its provisions the P.F.contribution for a month should be paid within 15 days from the end of the month to which relate.
13. Aggrieved, the assessee has preferred an appeal before the Tribunal and raised its two fold arguments. First of all it was argued that the period of 15 days should be commenced from the last day of the month in which the payment is made and not from the month for which it becomes due. If the period starts from the end of the month in which the payment is made, all payments are found to be made before the due date as they were made within the period of 15 days from the end of the month in which salary was paid. In support of this proposition, the learned counsel for the assessee has invited our attention to Section 38 of Employees Provident Scheme, 1952 according to which the employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee's contribution from his wages which together with his own contribution as well as an administrative charge of such percentage of the pay for time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the central Government may fix, he shall, within 15 days of the close of every month, pay the same to the fund by separate bank draft or cheques on account of contribution and administrative charges.
The employer is required to add his own contribution equal to the contribution of the employees and to pay the total amount within 15 days of the close of the every month, meaning thereby the employer has make his own contribution at the time of payment of the salary when contribution of the employee was deducted. It means the relevant month is only the month in which the salaries were disbursed amongst the employees and not the month for which it becomes due. In these circumstances, all payments were made in time and cannot be disallowed.
14. The other arguments raised by the learned counsel for the assessee is with regard to the amendment in Section 43B by Finance Act, 2003 through which the second proviso which lay down the period in which the P.F. and E.S.I. are to be deposited before the due date has been omitted with effect from 1-4-2004. Since the appellate proceedings are continuation of the assessment proceedings and once this proviso is omitted from the statute, no disallowance can be made by invoking this proviso and the payments if made before the due date of filing of the return, it should allowed Under Section 43B of the Act. Though this proviso is omitted with effect from 1-4-2004 but it should be read with retrospective effect being of curative nature and in the light of judgment of the Apex Court in the case of Allied Motors v. CIT 224 ITR 677 in which their lordships have held the insertion of first proviso to Section 43B with retrospective effect though it was introduced with effect from 1-4-88. The learned counsel for the assessee further placed reliance upon the judgment of the Apex Court in the case of General Finance Co. and Anr. v. CIT 257 ITR 338 and that of Madhya Pradesh High Court in the case of Harikishan v. Union of India 217 ITR 582 in which their lordships have categorically held that once Section 276D is omitted from the statute with effect from April 1, 1989 criminal proceedings launched earlier for an offence committed before the omission of Section 276D cannot continue thereafter. The learned counsel for the assessee further placed reliance upon the orders of the Tribunal in the case of DCIT v. Daipur Distillery Co. Ltd. 74 TTJ 193 and Prem Cable. P. Ltd. v. ACIT 56 ITD 382 in which it has been held that even if the payments are made before the due date of the filing of the return, it should be allowed.
15. The learned DR. on the other hand, has emphatically argued that the relevant month must be the month for which salary becomes due irrespective of fact when it was being paid to the employees by the employer. In support of this contention, he has relied upon the judgment of Madras High Court in the case of CIT v. Madrass Ratiators and Pressings Ltd. 264 ITR 620 in which their lordships have categorically held that the only reasonable conclusion is that the employer has to remit both the contributions to the provident fund within 15 days from the close of the month for which the employees earned their salary, i.e. salary payable. It is clear that it is the responsibility of the employer to make payment of the contribution at the first instance irrespective of the fact whether the wages are paid in time or not. Since this judgment is a solitary judgment on the impugned issue, it should be respectfully followed by the Tribunal.
16. In respect of the second limb of the argument of the assessee the learned DR contended that there was no ambiguity in the provisions of Section 43B of the act and by introducing the second proviso the legislature has fixed the time limit in which the payments envisaged in 43B(b) are to be made before the due date as defined in explanation below Clause (va) of Sub-section (1) of Section 36. This proviso is quite unambiguous and do not cast any doubt or shadow of any other provisions of this Section. Moreover, this proviso was also introduced to avoid any sort of confusion with respect to the period under which P.F., E.S.I. and the other funds for the welfare of the employees are required to be deposited under their respective Act. By introducing this proviso, it was made clear that the payments of these dues should be made before the due date prescribed under the respective Act.
Whereas the first proviso was introduced to remove an anomaly with respect to the payment of certain dues which becomes payable at the end of the last quarter ending on 31st of March. Since the first proviso was of curative nature as introduced to remove anomaly, the Apex Court in the case of Allied Motors have held it to be with retrospective effect. But this is not the position with respect to the second proviso. By omitting the second proviso no anomaly was removed. By omitting the second proviso with effect from 1-4-2004 the legislature has extended the time limit for deposit the dues envisaged in 43B(b) of the Act. As such, it cannot be said to have been introduced with retrospective effect. With respect to other judgments it was contended by the learned DR that these judgments relate to the criminal prosecution and as such it cannot be applied to the present case.
17. Having heard the rival submissions and from a careful perusal of the orders of the lower authorities and judgments referred to by the parties, we find that the first limb of argument of the assessee that the relevant month would be the month in which the salary was paid was duly dealt with by the Hon'ble Madras High Court in the case of CIT v.Madras Radiators and Pressings Ltd. (supra) in which their lordships have categorically held that a combined reading of Clause (va) of Sub-section (1) of Section 36 and Section 43B of the IT Act makes it clear that if the assessee employer credited any sum received by him from any of his employees covered by Section 2(24)(x) of the Act in the relevant fund on or before the due date, that is the date by which the assessee (employer) is required to credit the employee's contribution to the employee's account in the relevant fund under any Act Rules.
Order or notification issued thereunder, he would be entitled to deduct the said amount in computing his business income. But Section 43B controls the allowability of deduction of payment specified in Clause (a) to (d) thereof and provides certain conditions subject to which alone the deductions could be made. Section 43B read with the proviso thereto provided that there should be actual payment and further the actual payment should have been made within the clue date as prescribed under the Act. If the payments are not made within the due elate there is contravention of the provisions of the Provident Fund Act. Under the Income-tax Act, 1961, the defaulting assessees are not entitled to the benefit of deduction, which are otherwise allowable to them under the Scheme of the Provisions of the Act. This is to ensure that the beneficial legislations are complied with strictly. Para 30 of the scheme under the Provident Act imposes an obligation on the employer to remit both the shares of contributions in the first instance and para 32 empowers the employer to recover the employees' contributions from the wages of the employee. As per para 38 of the scheme, the employer is required to remit both the contributions together with administrative charges thereon with in 15 days of the close of every month. The only reasonable conclusion is that the employer has to remit both the contributions to the provident fund within 15 days from the close of the month for which the employees earned their salary, i.e.
salary payable. It is clear that it is the responsibility of the employer to make payment of the contributions at the first instance irrespective of the fact whether the wages are paid in time or not.
18. During the course of hearing, the learned counsel for the assessee could not place any judgment of any High Court contrary to these findings of the Madras High Court. He has simply relied upon some of the orders of the Tribunal. Since the judgment of the Madras High Court is a solitary judgment on this issue, we are supposed to adjudicate the impugned issue following the ratio laid down by the Madras High Court.
We, therefore, hold that period of remittance for the P.F. E.S.I. shall be the 15 days from the close of the month for which salary becomes due. If all these payments are examined due in the light of these propositions, we would find that these are made even after the grace period. As such, they were rightly disallowed by the A.O.19. So far as the second limb of argument that the second proviso is omitted with effect from 1-4-2004 by the Finance Act, 2003 is concerned, we are of the view that only those amendments will have a retrospective effect if they are brought to the statute to remove any sort of anomalies in the provisions or to make the provision more clear. We have also examined the landmark judgment of the Apex Court in the case of Allied Motors (supra) in which their lordships have held the introduction of first proviso with retrospective effect. But for holding so, they have elaborated the reasons and these reasons are not applicable in the present case. For the sake of brevity, we extract the findings of the apex Court as under: "Section 43B of the Income-tax Act, 1961, was inserted with effect from April, 1, 1984, to discourage taxpayers who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident fund, etc., for long periods of time, but claimed deductions in that regard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year. After the insertion of Section 43B, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year in which the sum was actually paid and not in the year in which the assessee incurred the liability to pay that tax. However, an assessee who had collected sales tax in the last quarter of the accounting year and deposited it in the treasury within the statutory period falling in the next accounting year, was not entitled to claim any deduction for it. This was not intended by Section 43B. To obviate this kind of unexpected outcome of Section 43B, the first proviso makes it clear that the section will not apply in relation to any sum which is actually paid by the assessee in the next accounting year, if it is paid on or before the due date for furnishing the return of income in respect of the previous year, in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with the return.
However, "any sum payable" in Clause (a) of Section 43B was open to the interpretation that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Explanation 2 was, therefore, added by the Finance Act, 1989, with retrospective effect from April 1, 1984, for the purpose of removing any ambiguity about the term "any sum payable" under Clause (a) of Section 43B. Section 43B(a), the first proviso to Section 43B and Explanation 2 have to be read together as giving effect to the true intention of Section 43B. Explanation 2 being retrospective, the first proviso has also to be so construed. Without the first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of Section 43B. The proviso supplies an obvious omission. But for this proviso the ambit of Section 43B becomes unduly wide bringing within its scope those payments which were not intended to be prohibited from the category of permissible deductions. The first provisos to Section 43B, therefore, has to be treated as retrospective." 20. The situation of the present case is not akin to that of Allied Motors P. Ltd. inasmuch as the second proviso was introduced to remove the confusion or the anomalies with regard to the period in which the P.F., E.S.I. and the other funds for the welfare of the employees are to be deposited. According to the first proviso, the period of deposits was increased upto the date of filing of the return which is in direct conflict with the periods of deposit prescribed under different Acts i.e. Provident Fund and E.S.I. and other schemes. Therefore, to remove this confusion, this second proviso was introduced and according to this proviso the payments are to be made before the due date prescribed under respective Act. Through this proviso, it has been made clear in so many words that no deduction shall in respect of any sum referred to in Clause (b) be allowed unless such sum has actually been paid in cash or by issue of cheques or drafts or by any other mode on or before the due date as defined in the Explanation below Clause (va) of Sub-section (1) of Section 36. The due date defined in explanation is a due date of the respective Act. By introduction of this proviso, no ambiguity or confusion was created in the interpretation of any provision of Section 43B of the Act. By lifting the barrier on the period of payment, the legislature has intended to give more time to the assessees for the deposition of P.F., E.S.I. and other funds welfare to the employees with effect from 1-4-2004. Had if been the intention of the legislature that this benefit should be given to all those employers or the assessees who arc under litigation on the subject they could have said that the proviso is omitted with immediate effect. But the legislature is very careful in omitting the second proviso and its omittance is introduced by the Finance Act, 2003 with effect from 1-4-2004, meaning thereby after 1-4-2004 the assessee can make the deposits of the P.F.and E.S.I. and other funds welfare to the employees up to the due date of the filing of the return because the correspondence omittance is also done in first proviso with effect from 1-4-2004. It means, the revised period of payment is only applicable to the assessees after 1-4-2004 and not prior to that.
21. We have also carefully examined the other judgments in which the prosecution launched prior to the omittance of Section 276D was dropped. But we do not find any assistance from these judgments in favour of the assessees in the present situation, because in the instant case the legislature has fixed the different periods for making the payment of dues at different point of time. Prior to 1-4-2004 the period for deposit of P.P., E.S.I. and dues beneficial to the employees is only upto the due date as defined in the respective Act whereas after 1-4-2004 this period is upto the due date of the filing of the return. We, therefore, of the view that the omittence of this second proviso from the statute with effect from 1-4-2004 does not exonerate the assessee from the default committed in making the payment of dues prior to the amendment. We, therefore, hold that the impugned payments of P.F. and E.S.I. were not made within the due date or even the grace period. As such, the revenue was justified in disallowing the same.
Accordingly, the order of the CIT(Appeals) is hereby confirmed on this count.
22. Apropos ground No. 6. we find that the A.O. made adhoc disallowance of Rs. 59,464/- out of sales promotion expenses which was restricted to Rs. 50,000/- by the CIT(Appeals) on estimate basis without assigning any reasons. Since the adhoc disallowance is not permissible under the law, we find no force therein. We, therefore, delete the addition.
23. In the result, the appeal of the assessee is partly allowed for statistical purposes.