No deduction towards Employee’s Share of PF/ESIC if not paid within the due date

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No deduction towards Employee’s Share of PF/ESIC if not paid within the due date

 

Query 1]

My father-in-law purchased an open plot in 1990 for Rs. 6,000 and constructed a ground floor with 2 Rooms, kitchen. He made a gift deed of this property in his daughter’s name in 1997, gift deed property value declared Rs. 1 lakh. Our marriage was in Dec 1999. With rent received she constructed first and second floors. Now the property is fetching Rs. 60 lakhs in 2022. I have following queries:

  1. What is the amount of LTCG in this transaction?
  2. What are the various ways to save capital gain:-
  3. She is a housewife; if she wants to keep the entire sale precedes how much tax to pay?
  4. If not investing in a plot/house/flat immediately, how to save capital gains like investing in REC/NHAI bonds. Within what time limit this amount should be invested in these bonds. How much amount can be invested in these bonds? Where and how to get these bonds? On maturity of these bonds, the principal amount would be tax free? Whether a separate account should be opened for this? Please guide. [venkat.2804@rediffmail.com]

Opinion:

  1. The cost of construction & expenses incurred prior to 01.04.2001 & the value of Rs. 1 Lakh is not at all relevant for computation of the capital gain tax liability. The capital gain would be required to be computed by taking the fair market value (FMV) as on 01.04.2001. Further, the expenses incurred after 2001 can be claimed as deduction while computing the capital gain on this transaction. She would be entitled to get the benefit of indexation also in respect of FMV and expenses incurred subsequently. In absence of all the required details, the amount of Long Term Capital Gain (LTCG) could not be worked out.
    If the taxpayers don’t have any other income or other income is below the basic exemption limit then the amount of basic exemption limit (or unused basic exemption limit) can be reduced from the amount of LTCG and only the balance amount would be subject to LTCG Tax @ 20.80%
  2. Any LTCG arising from sale of a house property can be saved by claiming an exemption U/s 54 or U/s 54EC.
  3. Exemption u/s 54:
    To avail exemption, taxpayers have to invest the amount of LTCG towards purchase/construction of another house property within prescribed time frame. The prescribed time periods are as under:
    a] For purchase:

    One year before or two years after the date of sale.
    b] For Constructions: 
    Three years from the date of sale.
  4. Exemption u/s 54EC:
    For exemption u/s 54EC, taxpayers have to invest the amount of LTCG within a period of 6 months from the date of transfer in specified bonds issued by Rural Electrification Corporation Ltd (REC), Power Finance Corporation Ltd (PFC) or Indian Railway Finance Corporation Ltd. [The benefit of exemption U/s 54EC for National Highway Authority of India or NHAI bonds has been discontinued w.e.f. 09.09.2022]. There is a ceiling of Rs. 50 Lakh for exemption under section 54EC & these bonds have a lock-in-period of 5 years. The bonds are available online at the portal of the IRFC, PFC & REC. Interest receivable from these bonds is taxable. However, the principal amount receivable at the time of maturity would be totally tax free. There is no need to open a separate account under Capital Gain Account Scheme (CGAS) for claiming an exemption U/s 54EC.

 

Query 2]

In one case, for the AY 2020-21, u/s 143(1) (a) disallowance is being made for amounts paid for EPF/ESIC. Annexure showing full details of employer contribution, employee contribution amounts, dates of payments etc is forming part of the balance sheet.  Rectification request also failed and order u/s 154 passed disallowing the EPF/ESIC amounts. Also, bonus paid to employees is wrongly mentioned in audit report 3CD column 20(a) as being a sum which was otherwise payable to him as profit or dividends.  This was also pointed out in the rectification application but to no avail.  Kindly suggest what can be done in this case. Please suggest. [aka********7@gmail.com]

Opinion:

  1. The issue with regard to disallowance of the employee’s share of the PF/ESIC payment was controversial as few High Courts have held the same as an allowable expenditure if the amount is paid within the due date of filing the income tax return. However, the Apex Court in the case of checkmate services Pvt Ltd Vs. CIT vide its judgement dated 12/10/2022 has finally settled the issue in favour of the income tax department by holding that the employee’s share of the PF/ESIC payment would be allowable as deduction only if it is paid within the due date as prescribed under the relevant Labour Act.
  2. Every return filed by the taxpayers is instantly processed by the income tax department U/s 143(1) and the intimation of processing is issued which is titled as “Intimation U/s 143(1)(a)”. This is technically not an assessment but a mere processing of ITR by the department. This processing has to be carried out within 9 months from the end of the financial year in which return is filed. It is normally done without calling for any information/documents from the taxpayers. Here, the idea is just to process the return with few general adjustments which may be as under:
    (i)  any arithmetical error in the return;
    (ii)  an incorrect claim, if such incorrect claim is apparent from any information in the return;
    (iii) disallowance of loss claimed
    (iv)  disallowance of expenditure/deduction or increase in income indicated in the audit report
    (vi) addition of income appearing in Form 26AS
  3. It may be noted that the clause (iv) to section 143(1)(a) empowers the department to carry out the adjustment with regard to the reporting in the tax audit report. As such, the adjustment towards Employee’s share of the PF/ESIC by the CPC is correct and cannot be challenged.

The issue being controversial, rectification U/s 154 is not possible. The only possible option would be to prefer an appeal with the CIT (Appeal).

  1. The auditor has erroneously reported the bonus paid to employees in the audit report in 3CD column 20(a) as being “Sum which was otherwise payable to him as profit or dividends”.  As a result, the return was processed by disallowing the sum. Since the amount is wrongly mentioned by the auditor in column 20(a), the audit report may be revised and thereafter the rectification application under section 154 can be filed.

 

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Regards,
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
Central Avenue Road
Nagpur-440008.

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