ITAT Ahmedabad on Disallowance of PF/ESI, Interest on Borrowings and Duty Drawback: Corrtech Energy Limited Vs DCIT

Background and Case Overview

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) delivered its decision in the case of Corrtech Energy Limited Vs DCIT for Assessment Year 2018-19, where multiple additions made by the Assessing Officer (AO) were contested. The appeal arose from an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, under Section 250 of the Income Tax Act 1961.

The assessee, a company engaged in:

  • Manufacturing of engineering products,
  • Execution of turnkey gas pipeline projects,
  • Providing cathodic protection systems, and
  • Rendering related engineering services in India and abroad,

filed its return of income on 18.09.2018, declaring a total income of Rs.3,01,68,800. The case was selected for scrutiny through CASS and assessment was completed under Section 143(3) read with Section 143(3A) and Section 143(3B) vide order dated 30.03.2021.

The AO determined the total income at Rs.4,37,51,703, after making total additions of Rs.1,35,82,903, comprising:

  1. Disallowance under Section 36(1)(va) – Rs.9,23,776
  2. Disallowance under Section 37 (interest on delayed TDS payment) – Rs.1,88,738
  3. Disallowance of proportionate interest under Section 37(1) – Rs.98,63,435
  4. Addition of duty drawback – Rs.26,06,954

The first appellate authority, i.e., the Ld. CIT(A), NFAC, dismissed the assessee’s appeal ex parte on account of non-appearance. This led the assessee to approach the ITAT challenging the action of both the AO and the CIT(A).

Grounds Raised Before the Tribunal

The assessee challenged the appellate order broadly on the following grounds:

  1. The order of the Ld. CIT(A) was alleged to be ex parte and in breach of principles of natural justice.
  2. Confirmation of disallowance of employees’ contribution to PF and ESI of Rs.9,23,776 under Section 36(1)(va).
  3. Confirmation of disallowance of Rs.1,88,738 under Section 37 towards interest on late deposit of TDS.
  4. Sustaining disallowance of proportionate interest of Rs.98,63,432 under Section 37(1) by presuming that borrowed funds were deployed for interest-free loans and advances.
  5. Addition of Rs.26,06,954 towards duty drawback income.
  6. Passing of orders by the lower authorities without proper appreciation of facts and ignoring submissions filed by the assessee, which was alleged to violate natural justice.

The ITAT examined each of the substantive additions, with particular focus on employees’ PF/ESI contributions, interest on alleged diversion of borrowed funds, and duty drawback.

Disallowance of Employees’ Contribution to PF & ESI under Section 36(1)(va)

AO’s Observation

Based on the tax audit report, the AO found that the employees’ share of contributions towards PF and ESI, which fall within the ambit of Section 2(24)(x) read with Section 36(1)(va), had been deposited after the due dates prescribed under the respective welfare enactments.

Consequently, the AO held that such delayed deposits were not allowable as deduction under Section 36(1)(va) and disallowed a sum of Rs.9,23,776.

Assessee’s Position Before ITAT

At the hearing before the Tribunal, the Ld. Authorised Representative (AR) candidly accepted that: