Case Law Details
1. During the course of assessment proceedings and on perusing the “office and administration expenses” account, Assessing Officer noticed that assessee had debited Rs. 20,78,557/- on account of “provident fund contractors”. Assessing Officer on further verification noticed that the aforesaid amount comprised of Rs. 9,73,953/- being employees contribution to provident fund and Rs. 11,04,624/- being the employers contribution in respect of laborers employed through sub contractors. Assessee was asked to justify it claim to which assessee interalia submitted that the assessee is engaged in the business of industrial construction and that the assessee gets its job work done through various subcontractors. As per the agreement entered into by the Assessee with its various clients, the assessee is liable for provident fund expenditure. It was further submitted that many of the sub contractors do not have Provident Fund registration and hence the assessee has paid their provident fund contribution and therefore the same is claimed as an expenditure. The submissions of the Assessee was not found acceptable to the Assessing Officer in view of the fact that in respect of assessee’s own employees, Assessee had contributed only employers contribution and had deducted the portion of employees contribution from their wages/ salaries but in respect of employees of the sub contractors which were engaged by the assessee, no such deduction was made from the wages/ salaries of the concerned employees. He was therefore of the view that the amount of Rs. 9,73,953/- (being the employees contribution of sub contractors) cannot be considered to be contractual obligation of the assessee and the same, according to the Assessing Officer, was therefore not allowable. He, accordingly, disallowed the claim of expenditure of Rs. 9,73,953/-. Aggrieved by the order of Assessing Officer, Assessee carried the matter before Ld CIT(A) who apart from upholding the order of Assessing Officer also enhanced the dis allowance by directing the Assessing Officer to disallow the employer’s contribution pertaining to contractors (Rs. 11,04,124/-). The relevant observation to ld. CIT (A) is as under:
“7. I have carefully considered the facts of the case as well as of the appellant. The main contention of the appellant is that as per terms of agreement the appellant was responsible for provident fund payments in respect of work done for the respective companies and since sub contractors were not having PF registration the onus fell upon the appellant to discharge this liability. The argument of the appellant is difficult to be accepted as nothing prevented the appellant to debit the account of sub-contractors on account of such payments in case these sub-contractors were not having PF registration members. I also find that observation of the Assessing Officer is quite correct regarding non contractual nature of such payment as it was basically duty of the subcontractors to collect the same from respective employees and make the payment either directly or through the appellant but never the less the same cannot be claimed expenditure of the appellant company.
8. The appellant’s reliance on the decision of Hon’ble Bombay High Court’s order in the case of CIT Vs. Sales Magnesite Pvt. Ltd. 214 ITR 1, for allow ability of the same on the grounds of commercial expediency is also misplaced as the appellant has not been able to prove that the payment was made out of commercial expediency. Therefore, I do not find any merit in the submissions of the appellant and dis allowance of Rs. 9,73,953/- being employees contribution of contractors is upheld.
9. During the course of appellate proceedings, it was noticed that while the Assessing Officer disallowed employees contribution pertaining to sub-contractors amounting to Rs. 9,73,953/-, no such dis allowance was made on account of employee’s contribution pertaining to contractors amounting to Rs. 11,04,624/- even though both the amounts stood on the same footing. Accordingly, during the course of hearing on 04.07.2014, Shri Nikhil Pathak, Advocate and learned counsel of the appellant was informed that notice u/s. 251(2) of Income-tax Act is required to be issued in this case. The case was adjourned to 22.07.2014. Simultaneously, notice u/s.251(2) of Income-tax Act was issued on 04.07.2014 itself which reads as under:
11. I have carefully considered the facts of the case as well as reply of the appellant. In this case, it is seen that the reply of the appellant is on similar lines as in the case of employees’ contribution. Since, both the amounts i.e. employees contribution and employer’s contribution stand on the same footing, the Assessing Officer is directed to further disallow amount of Rs. 11,04,624/- being employers contribution, which is neither a contractual liability of the appellant nor commercial expenditure of the appellant as held in the case of employees’ contribution in the above paras. Thus, ground No.2 along with its sub-grounds are dismissed subject to enhancement of Rs. 11,04,124/- on account of employer’s contribution of the contractors.”
2. Aggrieved b the order of Ld CIT(A), Assessee is now before us.
3. Before us, Ld. Authorized Representative reiterated the submissions made before Assessing Officer and CIT(A) and further submitted that during the year Assessee had carried out construction of buildings etc for various companies by engaging laborers of subcontractors who are petty contractors. As per the contract entered into by the Assessee with the client companies, the Assessee had undertaken to ensure that the provisions of labor laws including the Provident Fund (PF) Act would be complied with by the Assessee in respect of the labors employed by the Assessee and by sub contractors. He further submitted that many of the subcontractors were not registered under the PF Act and that it was not possible for the assessee to ensure that the sub contractors would deposit the PF. He therefore submitted that to fulfill the obligation cast upon it, Assessee had undertaken the obligation which was an extra cost for carrying on its business. He pointed to the sample agreement entered into by the assessee with one of the clients (Kansai Nerolac Paints Ltd) which is placed at page 12-22 of the paper book. In support of his stand that it is the Assessee as the principal employer who is liable to make the payment of contribution of provident fund, he pointed to the section 30 of the Employees Provident Funds Scheme, 1952 and section 8A of the Employers Provident Fund (Miscellaneous) Provision Act, 1952. He further submitted that the expenditure was incurred during the course of business out of commercial expediency and therefore even on that ground it was allowable. He therefore submitted that the entire expenditure (including the enhancement made by Ld.CIT(A) needs to be set aside and the expenditure be allowed. The Ld DR on the other hand vehemently supported the order of AO and CIT(A).
4. We have heard the rival submissions and perused the material on record. The issue in the present case is with reference to dis allowance of provident fund contribution made on behalf of the sub contractors and that which was claimed as expenditure. It is an undisputed fact that Assessee is engaged in construction business and that for completing the work undertaken by it, Assessee employs the laborers supplied by sub contractors. Assessee has placed in the paper book the copy of the conditions of contract it had entered into with Kansai Nerolac Paints Ltd for its proposed paint manufacturing facility. As per the conditions of contract, responsibility has been cast upon the contractor (i.e. Assessee) by Kansai Nerolac Paints Ltd to comply with the requirements of Employees Provident Fund Act. The relevant clause of the agreement reads as under:
“7.4 EMPLOYEES PROVIDENT FUND ACT, 1952 AND SCHEME:
7.4.1 CONTRACTOR agrees to cover all the employees engaged by him or through sub contractors under the employees provident fund scheme and shall submit necessary records to the OWNER in proof of compliance.
7.4.2 CONTRACTOR further agrees to defend, indemnify and hold the OWNER harmless from any liability of penalty which may be imposed by the Central, State or Local authority by reason of any asserted violation by CONTRACTOR or his subcontractor of the provisions of the Employees Provident Fund Act and the Scheme
there under.”
5. The perusal of the aforesaid clause shows that it was the duty of the Assessee to cover all the employees (including that of sub-contractor) under the Provident Fund Act. We further find that section 8A of the Employees Provident Fund & Miscellaneous Provisions Act 1952, which is with reference to recovery of money by employers and contractors reads as under:
“8A. Recovery of moneys by employers and contractors.
(1) The amount of contribution that is to say, the employer’s contribution as well as the employee’s contribution in pursuance of any Scheme and the employer’s contribution in pursuance of the Insurance Scheme and any charges for meeting the cost of administering the Fund paid or payable by an employer in respect of an employee employed by or through a contractor may be recovered by such employer from the contractor, either by deduction from any amount payable to the contractor under any contract or as a debt payable by the contractor.
(2) A contractor from whom the amounts mentioned in sub-section 1 may be recovered in respect of any employee employed by or through him, may recover from such employee the employee’s contribution under any Scheme by deduction from the basic wages, dearness allowance and retaining allowance if any payable to such employee.
(3) Notwithstanding any contract to the contrary, no contractor shall be entitled to deduct the employer’s contribution or the charges referred to in sub-section 1 from the basic wages, dearness allowance, and retaining allowance if any payable to an employee employed by or through him or otherwise to recover such contribution or charges from such employee.
Explanation. – In this section, the expressions ‘dearness allowance’ and ‘retaining allowance’ shall have the same meanings as in section 6.”
6. Section 30 under chapter-V of the Employees Provident Funds Scheme 1952, reads under:
“30. Payment of contributions:
(1) The employer shall, in the first instance, pay both the contribution payable by himself (in this Scheme referred to as the employer’s contribution) and also, on behalf of the member employed by him directly or by or through a contractor, the contribution payable by such member (in this Scheme referred to as the member’s contribution).
(2) In respect of employees employed by or through a contractor, the contractor shall recover the contribution payable by such employee (in this Scheme referred to as the member’s contribution) and shall pay to the principal employer the amount of member’s contribution so deducted together with an equal amount of contribution (in this Scheme referred to as the employer’s contribution) and also administrative charges.
(3) It shall be the responsibility of the principal employer to pay both the contribution payable by himself in respect of the employees directly employed by him and also in respect of the employees employed by or through a contractor and also administrative charges.”
7. The perusal of the aforesaid sections of the Employees Provident Fund & Miscellaneous Provisions Act 1952 and Employees Provident Fund Scheme 1952 together with the clauses of the agreement that the Assessee had entered into with his clients shows that Assessee is responsible for the deduction of provident fund dues of the employees including those employed through subcontractor and its deposit with the appropriate authorities. In the present case, the rendering of services by the labors of sub-contractors for the purpose of business of the Assessee has not been doubted by Revenue. Further, statutorily the Assessee could have recovered the Provident Fund dues from the sub- contractors but when the Assessee is not in a position to recover the amounts paid as provident fund contribution for the respective contract laborers, or considering the business exigencies when the Assessee bears the expenses on account of Provident Fund contribution, then whether in such a situation the expenses can be disallowed? We are of the view that the same cannot be disallowed as an expenditure more so when the rendering of services by the subcontractors for the business of the assessee is not in doubt & in such a situation the expenditure can be allowed u/s 37(1) of the Act.
8. For an amount to be treated as an admissible expenditure under section 37(1) the necessary conditions that are required to be satisfied are first the expenditure must be revenue expenditure and not in the nature of capital expenditure; second, it must be laid out or expended wholly and exclusively for the purpose of the business or profession carried on by the assessee; third, it must not be of the nature described in Sections 30 to 36; fourth, expenditure should not be personal expenditure of the assessee; fifth, expenditure should have been incurred in the previous year; and finally, expenditure should not have been incurred for the purpose which is an offence or which is prohibited by law (Explanation to Section 37 (1 )).
9. Section 37(1) does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred may be direct or may even indirectly benefit the business in form of increased turnover, better profit, growth etc. Various courts have held that when as long as the expenditure incurred is “wholly and exclusively” for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure. The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee and that it is for the assessee to decide whether the expenses should be incurred in the course of his business or profession or not. Courts have also held that if the expenditure is incurred for the purposes of the business, incidental benefit to some other person would not take the expenditure outside the scope of Section 37(1) of the Act. Further, it is settled law that the commercial expediency of a businessman’s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure.
10. Considering the totality of the aforesaid facts, we are of the view that in the present case, the dis allowance of employees contribution of Provident Fund (as made by AO) & that of employers contribution of Provident Fund (as enhanced by CIT (A)] was uncalled for and therefore set aside. Thus the grounds of Assessee are allowed.
