Government Contractor Faced Income Tax Addition Over Rs. 33.86 Lakh Pre-GST VAT Payment; ITAT Allows Deduction

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) partly allowed the appeal of Ram Dayal Bansal (Proprietor, Bansal Associates) for AY 2018-19, holding that Works Contract Tax (WCT) paid under the erstwhile Delhi VAT Composition Scheme and irrecoverable VAT refund claims were allowable deductions, while sustaining the disallowance of delayed employees’ PF and ESI contributions.

The assessee, a civil contractor executing government works, filed his return declaring income of Rs.1.70 crore. The case was selected for limited scrutiny on the issue of contract receipts. During assessment, the Assessing Officer disallowed Rs.44.90 lakh claimed as sales tax/VAT expenditure and Rs.97,915 towards employees’ contribution to PF and ESI deposited after the due dates prescribed under the respective welfare laws.

Before the Tribunal, the assessee explained that Rs.33.85 lakh represented Works Contract Tax paid at 3% under the Delhi VAT Composition Scheme on contracts executed between April and June 2017, before GST came into force. Since the composition tax was payable by the contractor and not collected from the contractee, it was claimed as a business expenditure. The balance Rs.11.04 lakh represented VAT refund claims and input tax credits from earlier years that became irrecoverable after the transition to GST and were consequently written off.

The Tribunal noted that the Revenue had not disputed either the actual payment of WCT or its business nexus. It observed that the tax was a statutory levy incurred wholly and exclusively for business purposes and therefore qualified for deduction under Section 37(1) of the Income-tax Act.

With respect to the VAT refund claims, the Tribunal accepted the assessee’s contention that the amounts had become irrecoverable after the GST regime replaced the VAT framework. Relying on the Supreme Court’s decision in T.R.F. Ltd., the Tribunal held that once a debt is written off as irrecoverable in the books, it is not necessary to independently establish actual irrecoverability. Accordingly, the write-off of Rs.11.04 lakh was allowed as a deduction.

On the issue of delayed PF and ESI deposits, however, the Tribunal rejected the assessee’s reliance on earlier decisions such as CIT v. AIMIL Ltd. and held that the legal position now stands governed by the Supreme Court ruling in Checkmate Services Pvt. Ltd.. It further held that the benefit introduced by Section 29(1)(e) of the Income-tax Act, 2025 through the Finance Act, 2026 operates prospectively from 1 April 2026 and cannot be applied to AY 2018-19.

The Tribunal also rejected the assessee’s argument that the due date for depositing employees’ PF and ESI contributions should be counted from the month in which salaries were actually disbursed rather than the month to which the salaries related. It held that such an interpretation would defeat the employee welfare objective underlying the PF and ESI laws.

Thus, the Tribunal deleted the disallowance of Rs.44.90 lakh relating to WCT and VAT refund write-offs but upheld the disallowance of Rs.97,915 towards delayed employees’ PF and ESI contributions. The appeal was therefore partly allowed.

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