ITAT Cuttack Bench Allows Appeal: Disallows Excess PF and ESI Contributions, Upholds Legitimate Business Expenses

1. Introduction

In the case of Excellent Services vs. Income Tax Officer, Ward-5(1), Bhubaneswar, ITA No.257/CTK/2024, the Income Tax Appellate Tribunal (ITAT), Cuttack Bench, presided over by Hon'ble Shri George Mathan, addressed an appeal concerning disallowance of expenses related to Provident Fund (PF) and Employees' State Insurance (ESI) contributions. The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals), National Faceless Assessment Centre (CIT(A), NFAC), Delhi, dated February 27, 2024, for the assessment year 2018-19.

2. Legal Provisions

The primary legal provisions in question relate to the deductibility of business expenditures under the Income Tax Act, 1961, particularly under sections concerning employee benefits like PF and ESI. The law mandates that employers contribute a specified percentage of an employee's salary to PF and ESI. The deductibility of these contributions, as well as the timing of the deduction, is governed by specific provisions and judicial interpretations.

3. Facts of the Case

The appellant, Excellent Services, a company engaged in providing housekeeping services, had provided services to Jindal Steel and Power Limited at Angul. For the relevant assessment year, the assessee received Rs.1,50,37,697 as consideration for its services. The company incurred expenses on salaries and wages, totaling Rs.23,42,816, for employees stationed at the client site, categorized under "Client Management Service Expenses." In addition, the assessee paid PF and ESI contributions amounting to Rs.12,23,498.

During the assessment proceedings, the Assessing Officer (AO) disallowed Rs.8,28,920 on account of what was deemed "excess PF and ESI" contributions. This disallowance was based on the AO's computation of PF and ESI liability, which included only direct payments made by the assessee to its employees, excluding those categorized under "Client Management Service Expenses."

4. Issue

The primary issue before the ITAT was whether the disallowance of Rs.8,28,920 made by the AO, and confirmed by the CIT(A), was justified. Specifically, the dispute centered on whether the entire PF and ESI contributions made by the assessee, including those related to the employees at the client site, should be allowable as business expenses.

5. Observations by the Tribunal

The ITAT examined the evidence provided by the assessee, which included details of salary and wages, the PF and ESI contributions, and the breakdown of these expenses. The Tribunal noted that the total amount of Rs.12,23,498 represented PF and ESI contributions for the employees both at the client sites and the office premises. Moreover, the salary and wages for these employees amounted to Rs.23,42,816, with the total salary expense being Rs.38,04,216.

The Tribunal also observed that the assessee had furnished comprehensive details, including a list of employees, their Aadhaar numbers, payment modes, and the amounts of PF and ESI deposited. These details were acknowledged in the assessment order and were corroborated by the assessee's balance sheet and profit and loss account.

6. Judgment

Upon reviewing the submissions and the evidentiary record, the Tribunal concluded that the disallowance of Rs.8,28,920 was not justified. The ITAT held that the PF and ESI contributions were legitimate business expenses incurred for employees, and all requisite details had been duly provided and verified. Consequently, the Tribunal allowed the appeal, deleting the additions made by the AO and confirmed by the CIT(A).

7. Conclusion

This judgment underscores the importance of accurate and comprehensive documentation of business expenses, particularly those related to statutory contributions like PF and ESI. It affirms the principle that legitimate business expenses, if properly substantiated, are deductible under the Income Tax Act. The case also highlights the role of the ITAT in ensuring fair and just adjudication of tax disputes, providing a recourse for taxpayers against adverse decisions by tax authorities.

Article Compiled by:-

~ Mayank Garg

(LegalMantra.net Team)

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