Case Law Details
Corrtech Energy Limited Vs DCIT (ITAT Ahmedabad)
Delayed PF and ESI Deposits Remain Disallowable Due to Supreme Court Precedent; ITAT Restores Duty Drawback Addition for Fresh Verification Due to Incomplete Facts; Interest Disallowance Cannot Be Based on Assumptions of Fund Diversion: ITAT Ahmedabad.
The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, partly allowed the appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), for Assessment Year 2018-19. The assessee, engaged in manufacturing engineering goods, executing turnkey gas pipeline projects, providing cathodic protection systems, and other engineering services in domestic and international markets, had filed its return declaring total income of Rs.3,01,68,800. Following scrutiny assessment under Sections 143(3), 143(3A), and 143(3B) of the Income-tax Act, the Assessing Officer determined the total income at Rs.4,37,51,703 after making additions aggregating to Rs.1,35,82,903. These additions comprised disallowance of employees’ contribution to PF and ESI of Rs.9,23,776 under Section 36(1)(va), disallowance of interest on delayed payment of TDS amounting to Rs.1,88,738 under Section 37, disallowance of proportionate interest expenditure of Rs.98,63,435 under Section 37(1), and addition of duty drawback income of Rs.26,06,954.
The assessee’s appeal before the CIT(A) was dismissed ex parte due to non-appearance, leading to the present appeal before the Tribunal.
With regard to the disallowance of employees’ contribution to PF and ESI, the Assessing Officer had noted from the tax audit report that the contributions were deposited beyond the due dates prescribed under the respective statutes. Before the Tribunal, the assessee fairly conceded that the deposits had indeed been made after the statutory due dates. The Tribunal observed that the issue stood concluded by the Supreme Court’s decision in Checkmate Services Pvt. Ltd. v. CIT [(2022) 448 ITR 518 (SC)], wherein it was held that employees’ contributions deposited beyond the due dates prescribed under the relevant Acts are not allowable as deductions, even if paid before the due date for filing the income tax return. Following the Supreme Court’s ruling, the Tribunal upheld the disallowance of Rs.9,23,776 and dismissed this ground of appeal.
In relation to the disallowance of Rs.1,88,738 towards interest on delayed payment of TDS, the assessee’s authorised representative submitted that the ground was not being pressed due to the relatively small amount involved. Accepting the submission, the Tribunal dismissed this ground as not pressed.
The Tribunal then examined the disallowance of proportionate interest expenditure amounting to Rs.98,63,435. The Assessing Officer had observed that the assessee had advanced interest-free loans and advances of Rs.6,99,53,438 while simultaneously incurring interest expenditure on borrowed funds. On that basis, proportionate interest was disallowed by applying an interest rate of 14.10%. Before the Tribunal, the assessee contended that it possessed sufficient own funds and that the advances had been extended in the ordinary course of business. It was further argued that no direct nexus had been established between the borrowed funds and the interest-free advances. The Departmental Representative relied on the findings of the lower authorities.
After considering the submissions and examining the material on record, the Tribunal noted that the Assessing Officer had merely presumed diversion of borrowed funds without establishing any direct connection between the borrowings and the interest-free advances. The Tribunal observed that it is a settled legal principle that where an assessee has sufficient interest-free funds available, a presumption arises that the advances or investments have been made from such funds. Since the Assessing Officer had failed to bring any material on record demonstrating that borrowed funds had actually been diverted for non-business purposes, the Tribunal held that the disallowance could not be sustained. Consequently, the addition of Rs.98,63,435 was deleted, and this ground of appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the assessee against the order dated 25.03.2025 passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as Id. CIT (A)’ in short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short) for Assessment Year 2018-19.
2. The assessee has raised following grounds of appeal:-
“1. The Ld. CIT(A) has erred in law and on facts of the case in passing an ex-parte order resulting in violation of principles of natural justice.
2. The Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making a disallowance of Rs.9,23,776/- u/s 36(1)(va) of the Act for late deposit of employees’ contribution towards PF & ESL
3. The Ld. CIT (A) has erred in law and on facts in confirming the action of Ld. AO in making a disallowance of Rs.1,88,738/- u/s 37 of the Act of interest on late payment of TDS.
4. Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in disallowing proportionate interest expense at 14.1% u/s 37(1) of the Act amounting to Rs.98,63,432/- on borrowings of Rs.9,80,90,138/- allegedly being utilized for advancing interest free loans and advances of Rs.6,99,53,468/-.
5. The Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an addition towards duty drawback of Rs.26,06,954/-.
6. The Ld. CIT(A) and Ld. AO has passed the order without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. Their action is in clear breach of law and principles of natural justice and therefore deserves to be quashed.”
3. The brief facts of the case are that the assessee-company is engaged in the business of manufacturing engineering goods, executing turnkey projects of gas pipelines, providing cathodic protection systems and other engineering services in domestic and international markets. The assessee filed its return of income on 18.09.2018 declaring total income of Rs.3,01,68,800/-. The case was selected for scrutiny through CASS and statutory notices were issued. Thereafter, the assessment was completed u/s 143(3) r.w.s. 143(3A) and 143(3B) of the Act vide order dated 30.03.2021 determining total income at Rs.4,37,51,703/- after making additions aggregating to Rs.1,35,82,903/-. The additions made by the Assessing Officer were as under:
i. Disallowance u/s 36(1)(va) – Rs.9,23,776/-
ii. Disallowance u/s 37 – Rs.1,88,738/-
iii. Disallowance of proportionate interest u/s 37(1) – Rs.98,63,435/-
iv. Addition of duty drawback income – Rs.26,06,954/-
4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A). However, the Ld. CIT(A) dismissed the appeal ex-parte on account of non-appearance of the assessee.
5. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal by raising the aforesaid grounds.
Ground No. 2 – Disallowance u/s 36(1)(va)
6. This ground relates to the disallowance of employees’ contribution to PF & ESI amounting to Rs.9,23,776/- for delayed deposit. The Assessing Officer noted from the tax audit report that employees’ contributions towards PF and ESI were deposited beyond the due dates prescribed under the respective Acts. Accordingly, the same was disallowed u/s 36(1)(va) r.w.s. 2(24)(x) of the Act.
6.1 Before us, the Ld. AR fairly conceded that the employees’ contribution was deposited beyond the due dates prescribed under the respective statutes.
6.2 We find that the issue is now settled by the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT (2022) 448 ITR 518 (SC) wherein it has been held that employees’ contribution to PF/ESI deposited beyond the due date prescribed under the relevant Act is not allowable as deduction even if deposited before the due date of filing of return. Respectfully following the above decision of the Hon’ble Supreme Court, we find no infirmity in the order of the Ld. CIT(A). Accordingly, Ground No.2 of the assessee is dismissed.
Ground No. 3 – Interest on late payment of TDS
7. This ground relates to the disallowance of Rs.1,88,738/- being interest on delayed payment of TDS.
7.1 At the time of hearing, the Ld. AR submitted that this ground is not pressed owing to smallness of the amount. In view of the above submission, Ground No.3 is dismissed as not pressed.
Ground No. 4 – Disallowance of proportionate interest
8. This ground relates to disallowance of proportionate interest amounting to Rs.98,63,435/-.
8.1 The Assessing Officer observed that the assessee had advanced interest-free loans and advances amounting to Rs.6,99,53,438/- while it had borrowed funds on which interest was paid. Accordingly, the Assessing Officer disallowed proportionate interest by applying the rate of 14.10%.
8.2 Before us, the Ld. AR submitted that the assessee had sufficient own funds and the advances were given in the course of business. It was further submitted that the Assessing Officer had not established any direct nexus between the borrowed funds and the interest-free advances.
8.3 The Ld. DR, on the other hand, relied on the orders of the lower authorities.
8.4 We have considered the rival submissions and perused the material available on record on this issue. We note that the Assessing Officer has merely presumed that the borrowed funds were utilized for advancing interest-free loans without establishing any direct nexus between the borrowings and such advances. It is a settled principle of law that where the assessee possesses sufficient interest-free funds, a presumption arises that the investments or advances are made out of such interest-free funds. In the present case, the Assessing Officer has not brought any material on record to demonstrate that the borrowed funds were actually diverted for non-business purposes. In absence of any such nexus, the disallowance made by the Assessing Officer cannot be sustained. Accordingly, the addition of Rs.98,63,435/- is deleted and Ground No.4 of the assessee is allowed.
Ground No. S – Addition of Duty Drawback
9. This ground relates to addition of Rs.26,06,954/- on account of duty drawback. The Assessing Officer observed that the assessee had not offered the duty drawback amount assessed by the Customs Authority as income and therefore added the same to the total income.
9.1 Before us, the Ld. AR submitted that the relevant details of duty drawback could not be properly placed before the lower authorities and requested that the matter may be restored to the Assessing Officer for fresh verification. The Ld. DR did not object to the request of the assessee.
9.2 Considering the facts and circumstances of the case and in the interest of justice, we deem it appropriate to restore this issue to the file of the Assessing Officer for fresh examination after giving adequate opportunity of hearing to the assessee. Accordingly, Ground No.5 is allowed for statistical purposes.
10. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 29.04.2026
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