Brief of the Case: In the cited case, ITAT held that (i) International recruitment service operations conducted from STPI, Noida are held to be eligible for benefit of deduction u/s 10A. (ii) The deduction of payment of employees’ contribution towards provident fund and ESI cannot be disallowed under section 43B, if paid before the due date of filing the Income Tax return.
Facts of the Case: The assessee was engaged in the business of development and maintenance of Computer Software and IT enabled services and was a 100% export oriented unit under STPI, Bangalore. For A.Y. 2010-11, the return was filed on 24.09.2010 declaring an income of Rs.1,31,790/-. The assessment was taken up for scrutiny by issuance of notice u/s 143 (2) of the IT Act and scrutiny assessment u/s 143(3) was completed vide order dated 24.05.2012 assessing total income at Rs.66,60,310/-. The Assessing Officer (i) reduced the claim of deduction u/s 10B by Rs.63,75,900/- (ii) added a sum of Rs.1,52,619/- u/s 2(24)(x) read with section 36(i)(va) of the Act.
On aggrieved, the assessee preferred an appeal before CIT(A) being the first appellate authority, who allowed the appeal on both the issues.
The Revenue questioned the correctness of the order of the CIT (Appeals) before the ITAT.
Grounds for appeal before ITAT:
(i) whether the CIT (A) erred in deleting the disallowance of Rs.63,75,900/- u/s 10B without appreciating the fact that assessee is not eligible for deduction on entire receipts?
(ii) whether the CIT (A) erred in deleting the disallowance of Rs.1,52,619/- made by the A.O on account of delay in payment of employees’ contribution to EPF/ESI as per the provision of Section 36(1)(va) read with 2(24)(x)?
Contention of the revenue: Revenue contended that
(i) the assessee was simply a recruitment agent involved in rendering services of an employment consultant. The extent of computers and IT enabled tools were just not enough to earn assessee the tag of being involved in IT enabled business so as to make it eligible for a special incentive, as envisaged u/s 10A. However, the benefit u/s 10A was not envisaged for such kind of middleman activity. The intention of the legislature for grant of special benefit u/s 10A granting Tax Holiday for a period of 10 years, pre-empted the fact that assessee would put in place a comprehensive infrastructure which would enable that assessee to earn foreign exchange on a consistent basis for a long period of time and also further the reputation of the country in the field of Information Technology Enables Services (ITES). Such a Tax Holiday cannot be extended to any other assessee whose commitment to the line of business is rather shallow and may not reflect its intention to continue in the field beyond the period of Tax Holiday. Hence, the business of the assessee cannot be held to be offering IT enables services, so as to make it eligible for exemption u/s 10A.
Contention of the Assessee: Assessee submitted that
(i) for the assessment year 2007-08, the ITAT had allowed the claim of the assessee u/s 10B in full and included in the export turnover, the receipt from international recruitment service. (ii) the PF and ESI contribution amount was paid before the due date for filing of return of income and hence, deduction is to be allowed.
Held by CIT (A):
(i) as per Section 10A Explanation 2 clause (b), any customize electronic data is qualified for treatment as a computer software on whose export deduction would be admissible to an assessee and this sub-clause further classify that any other service if notified by the Board then those services would also qualify for treatment as computer software. Hence, CIT (A) allowed the ground of the assessee and directed the AO to recompute the deduction u/s 10B.
(ii) CIT (A) relied on the judgement of High Court in case of CIT vs. AIMIL Limited, wherein it was held that assessee can get the benefit of PF and ESI contribution before filing the return. Hence, the disallowance made by AO was deleted.
Held by ITAT: ITAT observed that
(i) the issue is already decided in favour of the assessee by the Tribunal in assessee’s own case for assessment year 2007-08 and the same was followed by the CIT (A) in assessment year 2009-10. Hence, ITAT upheld the order of the CIT(A) by rejecting the claim of Revenue.
(ii) the issue is covered in favour of the assessee by the judgment of Hon’ble jurisdictional High Court in the case of CIT vs. AIMIL Limited, wherein it was has held that “As soon as employees’ contribution towards PF or ESI is received by the assessee by way of deduction or otherwise from the salary/wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows therefrom that If the assessee does not deposit this contribution with PF/ESI authorities, it will be taxed as Income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of s. 36(1)(va). Sec. 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from Income insofar as employees’ contribution is concerned. Deletion of the second proviso has been treated as retrospective in nature and would not apply at all. The case is to be governed with the application of the first proviso. If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Acts permit the employer to make the deposit with some delays, subject to the aforesaid sequences. Insofar as the IT Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed.”
In view of the aforesaid decision, ITAT held that the deduction of payment of employees’ contribution towards provident fund and ESI cannot be disallowed under section 43B, if paid before the due date of filing the return. The appeal of the revenue was thus dismissed.