The case began with the assessee, Stewart Holl (India) Ltd, appealing against the Commissioner of Income Tax (Appeals) order that confirmed the entire disallowance of Rs. 2,51,10,171/- pertaining to late deposit of employees’ share towards Provident Fund contribution. The assessee contended that the income should be computed after making the disallowance, in accordance with Rule 8(1) of the Income Tax Rules, 1962. This rule states that the income from the business of tea growing and manufacturing is computed as 40% of total income determined under the Act.
The case ascended to ITAT Kolkata, which after hearing the contentions and examining the case material, upheld the assessee’s argument. The Tribunal ordered that the income should first be computed after making the disallowance, and only 40% of the resultant income should be treated as taxable income, as per Rule 8(1) of the Income Tax Rules, 1962.
Conclusion: The ITAT’s ruling sets a significant precedent, affirming that the income computation must occur post disallowance and only 40% of the resultant income is to be treated as taxable. The decision provides clarity in income tax computation, particularly for businesses in the tea growing and manufacturing sector. With this order, the Tribunal has undoubtedly left an indelible mark on the landscape of tax litigation in India.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The assessee is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 06.08.2021 passed under section 250 of the Income Tax Act, 1961 for A.Y. 2019-20.
2. At the outset, we notice that the assessee has filed an additional ground of appeal vide letter dated 2nd January, 2023 raising the issue that despite the disallowance of Rs.2,51,10,171/- on account of late deposit of employees’ share towards Provident Fund contribution after the due date under the respective Act, the income has to be computed pursuant to Rule 8(1) of the Income Tax Rules, 1962 and thus the income of the assessee needs to be computed from the business of tea growing and manufacturing equal to 40% of total income determined in accordance with the Act and taxed accordingly.
3. The additional ground raised by the assessee reads as under:-
“That on the facts and in the circumstances of the case, and in law, the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as the ld. CIT(A)) erred in confirming the entire disallowance of Rs.2,51,10,171/- being the deposit of ‘employees share towards Provident Fund contribution after the due date within the meaning of Explanation 1 of section 36(1)(va) of the Income Tax Act, 1961 (the Act) to the business loss as per return without considering application of rule of 8(1) of the Income Tax Rules, 1962 (the Rules) made for computing income from business of tea growing and manufacturing companies and followed by the appellant as the effective disallowance would be forty percent of Rs.2,51,10,171/- i.e. Rs. 100,44,068/-“.
4. The facts in brief are that the ld. Assessing Officer, CPC vide intimation under section 143(1) of the Act dated 17.09.2020 disallowed a sum of Rs.2,51,10,171/- on account of late payment of employees’ contribution to Provident Fund, which was deposited beyond the due date as stipulated under the relevant Act.
5. The ld. CIT(Appeals) dismissed the appeal of the assessee by holding that the employees’ contribution to EPF has to be deposited within the time as stipulated under the relevant Act and not within the time allowed under section 139(1) of the Act. The assessee has challenged the said order of ld. CIT(Appeals) before the Tribunal. In the meantime, the Hon’ble Apex Court has decided the issue against the assessee in the case of Checkmate Services Pvt. Limited –vs.- CIT (2022) 143 com 178 (SC). Now the assessee has raised an additional ground before the Tribunal praying that despite the disallowance of Rs.2,51,10,171/-, the income has to be determined in accordance with the relevant provisions of the Act and Rule 8(1) of the Income Tax Rules, 1962 and assessed accordingly.
6. After hearing the rival contentions, perused the relevant material available on record and the issue raised by the assessee by way of an additional ground, we observe that no further verification of facts is required on this issue as all the facts are available on record, and, therefore, we are inclined to admit the additional ground, which is in accordance with the ratio laid down by the Hon’ble Apex Court in the case of Jute Corporation of India Limited –vs.- CIT reported in (1991) 187 ITR 668 (SC) and National Thermal Power Company Limited –vs.- CIT reported in (1998) 229 ITR 383 (SC). We have perused the Rule 8(1) of the Income Tax Rules, 1962, which deals with the manner of computing the income from cultivation and manufacturing of tea. Sub-Rule (1) provides that “where the income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax”. Having considered the above Rule, we find merit in the contention of the assessee that the income of the assessee should be computed first after making the disallowance of Rs.2,51,10,171/- and whatever is the resultant income only 40% of that income has to be treated as taxable income in terms of Rule 8(1) of the Income Tax Rules, 1962. Since the issue requires no examination and verification of records, we are, therefore, restoring the issue to the file of ld. Assessing Officer to examine the same to compute the income in terms of our observations as stated above by following the Rule 8(1) of the Income Tax Rules. In other words, the ld. Assessing Officer is directed to compute the income after making disallowance in respect of EPF late deposit by the assessee and then recompute the taxable income by applying Rule 8(1) of the Income Tax Rules, 1962.
7. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 19th May, 2023.