Section 37– Expenses on account of provident fund contribution of employees employed through the sub-contractor of the assessee-contractor are allowable if the same are incurred as per the conditions of contract entered into by the assessee-contractor and rendering of services by labourers of sub-contractors for the purposes of business of assessee was not doubted.

1.      
 [2017] 82 taxmann.com 292 (Pune- Trib.)

Ratilal
Bhagwandas Construction Co. (P.)
Ltd. vs. ITO

ITA No.:
1698 (Pune) of 2014

A.Y.:
2009-10, Date of Order: 31^st May, 2017

FACTS

The assessee-company was engaged in the
business of industrial concern. It filed its return of income declaring a total
income of Rs. 4,82,49,120. In the course of assessment proceedings, the
Assessing Officer (AO) on perusing the `Office and Administration Expenses
Account’, noticed that assessee had debited Rs. 20,78,557 on account of
provident fund for employees of the contractors of the assessee company. He
noticed that this amount of Rs. 20,78,557 comprised of Rs. 9,73,953 being
employees’ contribution to PF and Rs. 11,04,624 being employers’ contribution.

The AO asked the assessee to justify this
claim of Rs. 20,78,557. The assessee submitted that under the agreement entered
into by the assessee with its various clients, the assessee is liable for
provident fund expenditure. It also submitted that many of the sub-contractors
do not have PF registration and hence, the assessee has paid their PF
contribution and therefore the same is claimed as an expenditure. The AO
considering the fact that in respect of assessee’s own employees, assessee has
contributed only employers’ contribution and had deducted the portion of
employees’ contribution from their wages / salaries, but in respect of
employees of the sub-contractors which were engaged by the assessee, no such deduction
was made from the wages / salaries of the concerned employees. The AO
disallowed Rs. 9,73,953 (being employees contribution to PF in respect of
employees of sub-contractor).

Aggrieved, the assessee preferred an appeal
to the CIT(A) who apart from upholding the order of the AO also enhanced the
disallowance by directing the AO to disallow further Rs. 11,04,124 being
employer’s contribution pertaining to contractor’s employees.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

 HELD

The Tribunal observed that under the terms
of the contract entered into by the assessee with its customers, it is the
responsibility of the assessee to comply with the requirements of the Employees
Provident Fund Act. Under the contract, it was the duty of the assessee to
cover all employees (including that of sub-contractor) under the Provident Fund
Act.

The Tribunal held that a perusal of sections
of Employees Provident Fund & Miscellaneous Provisions Act, 1952 and
Employees Provident Fund Scheme 1952 together with the clauses of the agreement
that the assessee had entered into with his clients show that the assessee is
responsible for the deduction of provident fund dues of the employees,
including those employed through sub-contractor and its deposit with the
appropriate authorities. It observed that in the present case, the rendering of
services by the labourers of the sub-contractors for the purpose of business of
the assessee has not been doubted by the revenue. It observed that statutorily,
the assessee could have recovered the Provident Fund dues from the
subcontractors, but when the assessee is not in a position to recover the
amounts paid as provident fund contribution for the respective contract
labourers, or considering the business exigencies when the assessee bears the
expense on account of Provident Fund contribution, then whether in such a
situation the expense can be disallowed? It held that the same cannot be
disallowed as an expenditure, more so when the rendering of services by the
subcontractors for the business of the assessee is not in doubt and in such a
situation, the expenditure can be allowed u/s. 37(1) of the Act.

Section 37(1) does not curtail or prevent an
assessee from incurring an expenditure which he feels and wants to incur for
the purpose of business. Expenditure incurred may be direct or may even
indirectly benefit the business in the form of increased turnover, better
profit, growth, etc. The AO cannot question the reasonableness by
putting himself in the arm-chair of the businessman and assume status or
character of the assessee and that it is for the assessee to decide whether the
expenses should be incurred in the course of his business or not. Courts have
also held that if the expenditure is incurred for the purposes of the business,
incidental benefit to some other person would not take the expenditure outside
the scope of section 37(1) of the Act.

It observed that it is a settled law that
the commercial expediency of a businessman’s decision to incur a particular
expenditure cannot be tested on the touchstone of strict legal liability to
incur such expenditure.

The Tribunal held that the disallowance of
employees contribution of PF (as made by the AO) and that of employers
contribution of PF (as enhanced by CIT(A)) was uncalled for. The appeal filed
by the assessee was allowed.

The Tribunal allowed the appeal filed by the
assessee.