Disallowance Operate Against Erring Employer Assessee When Employees' Contribution To EPF/ESI Not Made Within Due Date: Kerala High Court

The Kerala High Court has held that the disallowance operates against erring employer assessee when employees' contribution to EPF/ESI not made within the due date.The bench of Justice A.K.Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that where the employees' contribution to EPF/ESI was not made over by the employer to the statutory authorities within the due date prescribed for making those payments under the respective statutes, the disallowance under Section 36(1)(va) would operate against the erring employer assessee.The appellant/assessee is engaged in the business of providing infrastructure maintenance of more than 7000 telecom tower sites in the States of Kerala, Karnataka, and Tamil Nadu. During the assessment year 2013-2014, it filed a return of income declaring a total income. The return was selected for scrutiny and a notice under Section 143(2) of the Income Tax Act was issued on 05.09.2014. A notice under Section 142(1) read with Section 129 of the Income Tax Act was also served on the assessee. The assessment proceedings culminated in order by which the Assessing Officer made two disallowances, namely under Section 40(a)(ia) and under Section 36(1)(va).The disallowance under Section 40(a)(ia) was essentially on the ground that the assessee, who was obliged to deduct tax at source under Section 194C of the Income Tax Act on payments made to the contractor, did not do so. Hence the disallowance under Section 40(a)(ia) in relation to the amounts paid to such contractors would operate. The case of the assessee, on the other hand, was that by virtue of provisions of Section 194C(6) of the Income Tax Act, there was an exemption from deduction of tax at source, in respect of payments made to the account of a contractor during the course of business of plying, hiring or leasing goods carriage, where such contractor owned 10 or less goods carriages at any time during the previous year, and furnished a declaration to that effect along with his permanent account number, to the person paying or crediting such sum. While the appellant assessee had furnished the declarations from the contractors to whom it had made payments, the assessing authority appears to have brushed aside the declarations on the specious finding that the payments made by the assessee were to agents of transport contractors, and therefore, the exemption under Section 194C(6) did not apply.In the appeal preferred by the appellant against the assessment order on this issue, the First Appellate Authority accepted the plea of the appellant and deleted the disallowance made by the Assessing Officer. In a appeal carried by the department before the Tribunal, however, the Appellate Tribunal found that the Assessing Officer was justified in making the disallowance since there was a doubt with regard to whether or not the payments made by the appellant assessee were to contractors, who were engaged in the business of plying, hiring or leasing of goods carriages. The Tribunal remanded the matter to the assessing authority for a fresh consideration of the issue based on the declarations/contracts to be produced by the assessee.The assessee contended that the assessing authority had no case that the declarations that were required for claiming exemption in terms of Section 194C(6) had not been produced before it in support of the claim for exemption. The assessing authority had merely stated, for no apparent reason, that the payments made by the appellant assessee were only to agents of transporting contractors. It was the arbitrary decision of the assessing authority that was set aside by the First Appellate Authority, and hence the Appellate Tribunal ought not to have remanded the matter to the assessing authority.The department contended that there is nothing to show that the appellant assessee had produced copies of the contracts with the transport contractors or furnished the declaration required in terms of Section 194C(6) before the assessing authority, and hence there was no necessity to interfere with the order of the Tribunal, which merely remanded the matter to the assessing authority for verification of the documents.The court held that the Tribunal did not errored in remanding the matter to AO, to verify the agreements entered between Contractors and assessee, when the statute prescribes furnishing of only PAN of Transport contractors for claiming deduction.The court noted that the assessing authority had found that the appellant assessee had occasioned a delay in making the payment of the employees' contribution to statutory dues under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees' State Insurance Act, 1948 to the authorities concerned and it was under those circumstances that the disallowance was made of the said payments made by the appellant assessee. The court upheld the finding of the Tribunal in relation to the disallowance under Section 36(1)(va).Counsel For...

Disallowance Operate Against Erring Employer Assessee When Employees' Contribution To EPF/ESI Not Made Within Due Date: Kerala High Court

Mariya Paliwala

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