G Narayana and Brothers Vs ITO (ITAT Hyderabad)
The Hyderabad Bench of the ITAT has held that Rule 87 of the Income-tax Rules prescribes a ceiling for an approved superannuation fund and cannot be invoked to disallow contribution made to a recognised provident fund. The reference to provident fund in Rule 87 is only for computing the available ceiling for superannuation-fund contribution.
However, the Tribunal clarified that the employer’s contribution to provident fund would remain deductible only if the actual-payment condition u/s 43B was satisfied. The issue was therefore restored to the AO for this limited verification.
The assessee, G. Narayana and Brothers, was a partnership firm engaged in labour-supply contracts, principally involving housekeeping, cleaning, maintenance and other contractual work for the Indian Railways at Ramagundam Fertilizer City.
Its appeal for AY 2017-18 was filed before the Tribunal with a delay of 70 days. The assessee explained that its managing partner, who alone handled its taxation, financial and legal matters, was suffering from lumbar spondylosis and numbness arising from severe lower-back pain. He had been advised rest and was unable to coordinate with the tax consultant.
The explanation was supported by a medical certificate. Upon improvement of the managing partner’s health, the firm took steps to file the appeal. Considering the medical evidence, the Tribunal accepted that sufficient cause existed and condoned the delay.
On merits, the principal dispute concerned a disallowance of ₹15,11,963 relating to provident fund contribution.
The assessee had debited ₹52,57,551 towards PF in its profit & loss account. The AO noticed that the aggregate salary and labour wages amounted to ₹1,38,72,548. He applied a ceiling of 27% under Rule 87 and calculated an allegedly permissible contribution of ₹37,45,587. The excess of ₹15,11,963 was disallowed.
According to the AO, the assessee had not furnished complete details of salaries and wages showing the components of basic salary and dearness allowance. He therefore concluded that PF contribution exceeding 27% of the salary and wages was inadmissible.
The CIT(A) confirmed the disallowance.
Before the Tribunal, the assessee contended that the AO had applied the wrong provision. Rules 67 to 81 deal with recognised provident funds, whereas Rule 87 belongs to the statutory framework governing approved superannuation funds.
Rule 87 provides that the ordinary annual contribution by an employer to an approved superannuation fund in respect of an employee shall not exceed 27% of salary, as reduced by the employer’s contribution to any provident fund for the same employee. Thus, PF contribution is referred to only for calculating the residual ceiling available for contribution to the superannuation fund.
The rule does not prescribe that the employer’s provident-fund contribution itself must remain within 27% of salary. Therefore, it could not be used as a stand-alone provision to disallow PF expenditure.
The Tribunal accepted this interpretation. It held that the AO had invoked Rule 87 beyond its proper statutory field. The 27% restriction applies to contributions to an approved superannuation fund and not to contributions made to a recognised provident fund.
The Tribunal further noted that the tax treatment of an employer’s excessive contribution at the employee’s end was governed by the applicable provisions concerning perquisites and the Fourth Schedule. The fact that a contribution may be taxable as a perquisite in the employee’s hands does not justify disallowing it in the employer’s assessment by incorrectly applying Rule 87.
Accordingly, the disallowance could not be sustained on the reasoning adopted by the AO. Nevertheless, the Tribunal accepted the Department’s alternative concern that the assessee had not produced evidence establishing actual payment of the contribution.
Since deduction of the employer’s PF contribution is governed by the actual-payment requirement u/s 43B, the matter was restored to the AO for the limited purpose of verifying whether the amount had actually been deposited into the employees’ provident-fund accounts within the permissible statutory period. The PF grounds were allowed for statistical purposes.
A separate dispute concerned a disallowance of ₹93,331, representing 10% of travelling expenses, staff-welfare expenditure and performance bonus.
The assessee’s managing partner had produced books and certain vouchers during the assessment. However, complete supporting bills were not produced, and some vouchers were self-made and unverifiable. The Tribunal held that the assessee must establish that expenditure claimed u/s 37(1) was incurred wholly and exclusively for business purposes.
In the absence of adequate supporting evidence, the estimated disallowance of 10% was considered reasonable and was upheld.
Author’s Comments
The order demonstrates why a provision must be read within the statutory scheme to which it belongs. Rule 87 is captioned and structured as a rule concerning ordinary annual contributions to an approved superannuation fund. Its reference to PF does not transform it into a general ceiling on provident-fund contributions.
The AO effectively read the rule backwards. The employer’s PF contribution is deducted from the 27% ceiling to determine how much can additionally be contributed to the superannuation fund. It does not follow that every PF contribution exceeding 27% of aggregate wages becomes inadmissible.
However, success on Rule 87 does not automatically establish deductibility. The nature of the amount must first be identified—whether it is the employer’s contribution or employees’ contribution recovered from wages. The two are governed by different provisions and due-date principles. The present ruling proceeded on the footing that the disputed amount represented the employer’s contribution, attracting verification u/s 43B.
The assessee must now produce challans, employee-wise PF workings, Electronic Challan-cum-Returns and proof of deposit. Merely debiting the amount in the profit & loss account will not satisfy section 43B.
The decision on the ad hoc expenditure also offers a useful contrast. Ad hoc disallowances without identifying defects are generally vulnerable. Here, however, the AO found that complete bills were missing and several vouchers were self-made. The Tribunal therefore regarded a 10% estimate as reasonable.
The lesson is precise: the Department cannot make a disallowance under the wrong rule, but the assessee must still prove payment under the right provision.
Cases Discussed
- Union of India Vs M/s. Kamalapat Juggilal & Co. (Supreme Court) — Cited on condonation of delay and relied upon by the assessee.
- Vidya Shankar Jaiswal Vs. CIT/ITO (Supreme Court) — Cited for the principle that a liberal and justice-oriented approach should be adopted while considering applications for condonation of delay.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal by the Assessee is directed against the Order dated 28.08.2025 the learned ADDL/JCIT(A)-3, Delhi for the assessment year 2017-2018.
2. There is a delay of 70 days in filing the present appeal before the Tribunal. The assessee has filed a petition for condonation of delay which is supported by the detailed affidavit of the assessee explaining the cause of delay. The learned Authorised Representative of the Assessee has submitted that the assessee is a partnership firm engaged in the business of supply of labour contract mainly undertaking housekeeping, cleaning and maintenance including contractual work for Indian Railways at Ramagundam fertilizer city. After receiving the impugned order of the learned CIT(A), the assessee immediately intended to take necessary steps to prefer the appeal before the Tribunal. However, during the relevant period the Managing Partner of the assessee who is solely responsible for looking after the health issues. The learned Authorised Representative of the Assessee thus submitted that due to his ill-health and under medical care he was unable to attend day-to-day business affairs including coordination with the Tax Consultant for filing the appeal before the Tribunal. He has referred to the medical certificate and submitted that the Managing Partner was advised rest by the Doctor and therefore, the assessee firm was entirely dependent upon the Managing Partner could not take timely steps for filing the present appeal. Immediately upon improvement of his health condition the assessee took proper action and filed the present appeal. Thus, he has pleaded that the delay of 70 days in filing the present appeal may be condoned and appeal be admitted for hearing. In support of his contention, he has relied upon the Judgment of Hon’ble Supreme Court in the case of Union of India vs. M/s. Kamalapat Juggilal & Co. AIR 1966 SC 796.
3. On the other hand, the learned DR has objected to the condonation of delay and submitted that the assessee has not explained any reasonable cause, much less sufficient pain in lower back region cannot be a reason for not filing the appeal within the period of limitation.
4. I have considered the rival submissions and carefully perused the reasons explained by the assessee in the affidavit. The assessee has also filed medical certificate wherein the Doctor has recorded the medical problem of the assessee as “pain in lower back region/Lumbar spondylosis” triggering numbness sensation. Accordingly, by considering the reasons and medical condition of the assessee, the delay of 70 days in filing the present appeal before the Tribunal is condoned and appeal of the assessee is admitted for hearing and adjudication.
5. The Assessee has raised the following grounds of appeal:
1. “The order passed by the learned Commissioner of Income-tax (Appeals), NFAC, New Delhi., u/s 250 is erroneous in law, contrary to facts, passed without proper consideration of submissions, and in violation of principles of natural justice; hence the same is liable to be quashed.
2. Provident Fund Disallowance Rs.15,11,963/-: The learned CIT(A) erred in confirming the disallowance of Rs.15,11,963/-towards
contribution to Provident Fund by wrongly applying Rule 87 of the Income-tax Rules, ignoring the nature of business and statutory obligations under labour laws.
3. The authorities below failed to appreciate that actual payment of PF contribution to a recognized provident fund was not disputed and therefore no disallowance was warranted.
4. The learned CIT(A) erred in holding that Provident Fund contribution relating to labour wages is not allowable, without appreciating that the Appellant is a labour contractor, and PF contribution was made in compliance with statutory requirements. The disallowance is arbitrary, unjustified and based on presumptions without bringing any contrary material on record.
5. Ad-hoc Disallowance of Expenses Rs.93,331/- The learned CIT(A) erred in confirming the ad-hoc disallowance of 10% of travelling expenses, staff welfare expenses and performance bonus amounting to Rs.93,331/- failed to point out any specific defect or non-genuine expenditure, and hence ad-hoc disallowance is bad in law.
6. The learned CIT (A) erred in dismissing the appeal without proper appreciation of submissions and evidences filed, thereby violating principles of natural justice. The learned CIT (A) erred in dismissing the appeal without granting any opportunity of hearing, thereby violating principles of natural justice.
7. The learned CIT (A) failed to exercise discretion judiciously and treated the condonation application in a highly technical manner, contrary to the spirit of faceless appellate mechanism and judicial precedents requiring liberal condonation.
8. The learned CIT (A) failed to appreciate that refusing condonation has the effect of depriving the appellant of statutory appellate remedies, causing irreparable prejudice. The learned CIT(A) erred in confirming levy of interest u/s 234B, which is consequential and liable to be deleted if the additions are deleted.
9. On the facts and circumstance of the case, issue of Notice U/s 143(3) of Income Tax Act’ 1961 is bad in law and without Jurisdiction. On the facts and circumstance of the case, the Assessment order passed is not as per the Provisions of Section 144B (xvi) of the Income Tax Act’ 1961.
10. On the facts and circumstance of the case, the Assessing Officer has without providing an opportunity of being heard had treated an amount of Rs.16,05,294/- as disallowance is bad in law.
11. On the facts and circumstances without giving opportunity of being heard CIT (A) dismissed the appeal and confirmed the AO assessment which was made, without verifying the facts and passed order u/s 143(3) r.w.s 144B and determined income as Rs.21,46,204/- and tax liability as Rs.5,64,264/- u/s 156 of Income Tax Act’1961, by applying the various provisions of Income Tax Act’ 1961. Initiated penalty proceedings u/s 274 rws 270A Income Tax Act’1961 treating the same as unexplained money.”
6. Ground no.1 is general in nature and does not require any specific adjudication.
7. Ground nos.2 to 4 are regarding disallowance of Rs.15,11,963/- towards contribution to PF Fund under Rule 87 of I. T. Rules, 1962.
8. During the course of assessment proceedings, the Assessing Officer issued notice u/sec.142(1) of the Income Tax Act [in short “the Act”], 1961 requiring the assessee to explain the details of contribution made to the PF and salary paid along with documentary evidence. In response, the assessee filed letter along with copies of ITR, P & L A/c, balance sheet and Form-3CB and Form-26AS as well as statement of PF paid and statement of payment made to the Employees State Insurance Corporation. The assessee has also filed copy of the agreement entered into with Indian Railways. The Assessing Officer noted from the P & L A/c that the assessee has debited an amount of Rs.52,57,551/- towards PF which is more than 27% of the allowable on salaries/wages paid to workers. Considering the provisions of Rule 87 of IT Rules, 1962, the Assessing Officer has made disallowance to the extent of Rs.15,11,963/- being excess of 27% as provided under Rule 87 of IT Rules, 1962. The assessee challenged the action of the Assessing Officer before the learned CIT(A) but could not succeed.
9. Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that the assessee is engaged in providing labour supply contract and the provisions of Rule 87 does not apply to the PF. The learned Authorised Representative of the Assessee has submitted that Rule 67 to 81 are applicable in respect of the recognized PF and therefore, Rule 87 which is applicable on the approved superannuation fund cannot be invoked in respect of the contribution to PF. Thus, the learned Authorised Representative of the Assessee has submitted that when the contribution was made by the assessee in the PF where no ceiling is laid down as per Rules 67 to 81 then, the ceiling of the contribution to the approved superannuation fund under Rule 87 cannot be applied in respect of the contribution to PF. Only for computation of 27% ceiling on the superannuation fund the employer’s contribution to PF has to be reduced from the superannuation ceiling. Therefore, that reference of PF under Rule 87 is mean only for computation of the 27% limit in learned Authorised Representative of the Assessee has thus submitted that the employer’s contribution to recognized PF is part of the salary being perquisite as per sec.17(2) of the Act and as per Rule-6 read with Part-A of 4th Schedule the portion of the annual accreditation consisting of contribution made by the employer in excess of 12% of the salary of the employer shall be deemed to have been received by the employee in that previous year and shall be included in his total income. Thus, the learned Authorised Representative of the Assessee has submitted that disallowance made by the Assessing Officer is not sustainable in law and liable to be deleted.
10. On the other hand, the learned DR has submitted that the claim of the assessee for contribution to PF is not allowable until it is actually paid. The assessee has not filed any evidence to show that the amount claimed by the assessee is actually paid in the PF account of the employees. He has relied upon the Orders of the authorities below.
11. We have considered the rival submissions as well as relevant material on record. The Assessing Officer has made the disallowance of employer’s contribution to PF in Para no.5 of the assessment order as under:
“5. Based on the profit and loss account, it is seen that the assessee debited an amount of Rs. 52,57,551/- towards Provident Fund i,e. in excess of 27% of allowable for the workers on the salaries / wages paid to them. The rule 87 of the I.T.Rules is as under:
Ordinary annual contributions.
87. The ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed [twenty-seven] per cent of his salary for each year as reduced by the employer’s contribution, if any, to any provident fund (whether recognised or not) in respect of the same employee for that year.
On verification of P & L account of the assessee, it is noticed that the assessee’s contribution along with employee’s contribution towards provident fund shall not exceed Rs.37,45,587/- [i.e., 27% of Rs.1,38,72,548/- (i.e. staff salaries of Rs.6,00,000/- and Rs.1,32,72,548/- towards labour wages)]. The assessee claimed that they have paid RPF to the daily labour wages also. In order to examine the complete details of salaries and wages paid to the workers, the assessee was asked to submit the details of salaries and wages paid to the employees or workers along with various whom the assessee paid salaries and wages. However, there is no response from the assessee and it is observed that the assessee is not eligible for claiming expenditure towards daily wages. Thus, the excess claim of expenditure towards contribution of provident fund of Rs.15,11,963/-(i.e., Rs. 52,57,551/- less Rs.37,45,587/-) is disallowed and added to the assessed income of the assessee. (Addition: Rs.15,11,963/-).”
12. Thus, the Assessing Officer has invoked the provisions of Rule-87 for making the disallowance of excess amount of contribution over and above 27% of the salary paid to the employees. It is pertinent to note that Rule-87 prescribed the limit of the contribution only in the superannuation fund and not for recognized PF. A reference of PF is made in Rule-87 only for the purpose of computing 27% of the salary as reduced by the employer’s contribution to the PF. Therefore, invoking Rule-87 by the Assessing Officer for disallowing the excess amount of contribution to PF is not as per the provisions of the Act and Rule. In fact, the employer’s contribution to recognized PF is part of the salary u/sec.17 of the Act and particularly, it is considered as perquisite under sub-sec.(2) of sec.17 of the Act. Clause-
“Sec.17(2)(vii)
“(2) perquisite” includes—
(vii) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees;”
12.1. Sub-clause (vii) has been substituted by the sub- clause (vii) and (viia) vide Finance Act, 2020 as under:
(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer—
(a) in a recognised provident fund;
(b) in the scheme referred to in sub-section (1) of section 80CCD; and
(c) in an approved superannuation fund, to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;
(viia) the annual accretion by way of interest, dividend or any other amount of similar nature during the previous referred to in sub-clause
(vii) to the extent it relates to the contribution referred to in the said sub-clause which is included in total income under the said sub-clause in any previous year computed in such manner as may be prescribed; and
13. Further, the employer’s contribution over and above 12% of the salary is considered as salary received by the employee for the year as per Rule-6 Part-A of 4th schedule and therefore, the contribution made by the employer towards the recognized PF over and above 12% is taxable in the hand of the employee as ‘salary’. Hence, the disallowance made by the Assessing Officer under Rule-87 is not sustainable. However, employer’s contribution to PF is allowable subject to the provisions of sec.43B of the Act. The assessee has not produced before me any record to show that he has actually paid this amount to the PF account of the employees during the year and before the due date of filing the return of income. Accordingly, the matter is remanded for limited purpose of verification at the end of the Assessing Officer as to whether account of the employees as per sec.43B of the Act or not? Ground nos.2 to 4 of the assessee are allowed for statistical purposes.
14. Ground nos.5 to 8 are regarding adhoc disallowance of 10% of the travelling expenses, staff welfare expenses and performance bonus.
15. During the assessment proceedings, the Assessing Officer asked the assessee to produce the books of account and bills/vouchers. The Managing Partner of the assessee appeared and manually produced books, vouchers in respect of the expenses debited to the Income and Expenditure A/c. On verification of the record, the Assessing Officer found that bills and vouchers for expenditure debited to P & L A/c towards travelling expenses, staff welfare and performance bonus are not produced and some of the vouchers appear to be self-made and unverifiable in nature. Accordingly, the Assessing Officer has made disallowance of 10% of the expenses towards travelling expenses, staff welfare expenses appeal, the learned CIT(A) has sustained the addition made by the Assessing Officer.
16. Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that the Assessing Officer has made adhoc disallowance which is not permissible under law.
17. On the other hand, the learned DR has submitted that the assessee has not produced the supporting bills and vouchers and therefore, the Assessing Officer has reasonably made the disallowance of 10%.
18. I have considered the rival submissions as well as relevant material on record. The assessee has not disputed that he has not produced complete vouchers in respect of the travelling expenses, staff welfare and performance bonus and some of the vouchers produced were only self-made. The claim of deduction towards expenditure incurred by the assessee is allowable when the expenditure is laid out wholly and exclusively for the purpose of business of the assessee. To prove the expenses wholly and exclusively for the purpose required to be produced. In the absence of supporting evidence, the disallowance made by the Assessing Officer @ 10% in the facts and circumstances of the case, is found to be reasonable. Accordingly, I do not find any reason to interfere with the Orders of the authorities below qua this issue. Ground nos.5 to 8 are dismissed.
19. The remaining grounds are consequential in nature and therefore, do not require any specific adjudication.
20. In the result, appeal of the Assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 10.09.2026.
