Rule 87 Inapplicable for PF Disallowance, Remanded for 43B

Rule 87 Inapplicable for PF Disallowance, Remanded for 43B Verification; Ad-hoc Expenses Disallowance Upheld

Issue

Rule 87 & PF Disallowance: Whether the Assessing Officer was justified in invoking Rule 87 to disallow employer’s Provident Fund (PF) contributions exceeding 27% of salaries, and whether actual payment under Section 43B required verification.
Ad-hoc Expense Disallowance: Whether a 10% ad-hoc disallowance on travelling expenses, staff welfare expenses, and performance bonus is sustainable when supporting vouchers are incomplete and self-made.

Facts

PF Contribution & Rule 87: For AY 2017-18, the Assessing Officer (AO) noted that the assessee debited PF contributions exceeding 27% of allowable salaries/wages and disallowed the excess by applying Rule 87 of the Income-tax Rules.
Lack of Payment Proof: The assessee did not produce records during assessment proceedings demonstrating actual payment of the PF contributions before the due date of filing the return under Section 43B.
Unverifiable Expense Claims: The assessee, a partnership firm engaged in labour supply contracts, claimed deductions for travelling expenses, staff welfare expenses, and performance bonuses.
Incomplete Vouchers: The AO found that complete bills/vouchers were not produced and several vouchers were self-made and unverifiable. Consequently, the AO made a 10% ad-hoc disallowance on these expenditure heads.
Assessee’s Defense: The assessee argued that Rule 87 was misapplied and that ad-hoc disallowances without pinpointing specific defects are impermissible, though it admitted that complete vouchers were not produced.

Decision

PF Disallowance under Rule 87 Invalid: Rule 87 prescribes limits solely for superannuation funds, not recognized PF; invoking Rule 87 to disallow excess PF contribution is legally unsustainable.
Remand for Section 43B Compliance: Since employer’s PF contribution is allowable subject to actual payment under Section 43B, the matter is remanded to the AO for the limited purpose of verifying whether actual deposit occurred before the return due date.
10% Ad-hoc Expense Disallowance Upheld: In the absence of complete supporting evidence and given the presence of self-made, unverifiable vouchers, the 10% disallowance made by the AO is reasonable and affirmed in favor of the Revenue.

Key Takeaways

Misapplication of Rule 87: Rule 87 cannot be used by tax authorities to cap recognized Provident Fund contributions, as its statutory limits apply specifically to superannuation funds.
Section 43B Mandatory Compliance: Even if a PF deduction is otherwise valid, statutory allowability remains strictly contingent on proof of actual payment before the due date for filing returns.
Evidentiary Burden for Expenses: Taxpayers bear the burden of producing third-party verifiable vouchers; reliance on incomplete or self-made documentation justifies reasonable ad-hoc disallowances by the Assessing Officer.

IN THE ITAT HYDERABAD BENCH ‘SMC’

G. Narayana and Brothers

Income-tax Officer

VIJAY PAL RAO, Vice President

IT Appeal No. 59 (HYD) of 2026
[Assessment year 2017-18]

SEPTEMBER 10, 2026

Satish Kumar, CA for the Appellant. Laxmi Kanth, Sr. AR for the Respondent.

ORDER

1. This appeal by the Assessee is directed against the Order dated 28.08.2025 the learned ADDL/JCIT(A)-3, Delhi for the assessment year 2017-2018.

2. There is a delay of 70 days in filing the present appeal before the Tribunal. The assessee has filed a petition for condonation of delay which is supported by the detailed affidavit of the assessee explaining the cause of delay. The learned Authorised Representative of the Assessee has submitted that the assessee is a partnership firm engaged in the business of supply of labour contract mainly undertaking housekeeping, cleaning and maintenance including contractual work for Indian Railways at Ramagundam fertilizer city. After receiving the impugned order of the learned CIT(A), the assessee immediately intended to take necessary steps to prefer the appeal before the Tribunal. However, during the relevant period the Managing Partner of the assessee who is solely responsible for looking after the taxation, finance and legal matters was suffering from serious health issues. The learned Authorised Representative of the Assessee thus submitted that due to his ill-health and under medical care he was unable to attend day-to-day business affairs including coordination with the Tax Consultant for filing the appeal before the Tribunal. He has referred to the medical certificate and submitted that the Managing Partner was advised rest by the Doctor and therefore, the assessee firm was entirely dependent upon the Managing Partner could not take timely steps for filing the present appeal. Immediately upon improvement of his health condition the assessee took proper action and filed the present appeal. Thus, he has pleaded that the delay of 70 days in filing the present appeal may be condoned and appeal be admitted for hearing. In support of his contention, he has relied upon the Judgment of Hon’ble Supreme Court in the case of Union of India v. Kamalapat Juggilal & Co. AIR 1966 SC 796.

3. On the other hand, the learned DR has objected to the condonation of delay and submitted that the assessee has not explained any reasonable cause, much less sufficient cause. He submitted that the medical problem of the alleged pain in lower back region cannot be a reason for not filing the appeal within the period of limitation.

4. I have considered the rival submissions and carefully perused the reasons explained by the assessee in the affidavit. The assessee has also filed medical certificate wherein the Doctor has recorded the medical problem of the assessee as “pain in lower back region/Lumbar spondylosis” triggering numbness sensation. Accordingly, by considering the reasons and medical condition of the assessee, the delay of 70 days in filing the present appeal before the Tribunal is condoned and appeal of the assessee is admitted for hearing and adjudication.

5. The Assessee has raised the following grounds of appeal:

“The order passed by the learned Commissioner of Income-tax (Appeals), NFAC, New Delhi., u/s 250 is erroneous in law, contrary to facts, passed without proper consideration of submissions, and in violation of principles of natural justice; hence the same is liable to be quashed.

Provident Fund Disallowance Rs.15,11,963/-: The learned CIT(A) erred in confirming the disallowance of Rs.15,11,963/-towards contribution to Provident Fund by wrongly applying Rule 87 of the Income-tax Rules, ignoring the nature of business and statutory obligations under labour laws.

The authorities below failed to appreciate that actual payment of PF contribution to a recognized provident fund was not disputed and therefore no disallowance was warranted.

The learned CIT(A) erred in holding that Provident Fund contribution relating to labour wages is not allowable, without appreciating that the Appellant is a labour contractor, and PF contribution was made in compliance with statutory requirements. The disallowance is arbitrary, unjustified and based on presumptions without bringing any contrary material on record.

Ad-hoc Disallowance of Expenses Rs.93,331/- The learned CIT(A) erred in confirming the ad-hoc disallowance of 10% of travelling expenses, staff welfare expenses and performance bonus amounting to Rs.93,331/- failed to point out any specific defect or non-genuine expenditure, and hence ad-hoc disallowance is bad in law.

The learned CIT (A) erred in dismissing the appeal without proper appreciation of submissions and evidences filed, thereby violating principles of natural justice. The learned CIT (A) erred in dismissing the appeal without granting any opportunity of hearing, thereby violating principles of natural justice.

The learned CIT (A) failed to exercise discretion judiciously and treated the condonation application in a highly technical manner, contrary to the spirit of faceless appellate mechanism and judicial precedents requiring liberal condonation.

The learned CIT (A) failed to appreciate that refusing condonation has the effect of depriving the appellant of statutory appellate remedies, causing irreparable prejudice. The learned CIT (A) erred in confirming levy of interest u/s 234B, which is consequential and liable to be deleted if the additions are deleted.

On the facts and circumstance of the case, issue of Notice U/s 143(3) of Income Tax Act’ 1961 is bad in law and without Jurisdiction. On the facts and circumstance of the case, the Assessment order passed is not as per the Provisions of Section 144B (xvi) of the Income Tax Act’ 1961.

10.

On the facts and circumstance of the case, the Assessing Officer has without providing an opportunity of being heard had treated an amount of Rs.16,05,294/- as disallowance is bad in law.

11.

On the facts and circumstances without giving opportunity of being heard CIT (A) dismissed the appeal and confirmed the AO assessment which was made, without verifying the facts and passed order u/s 143(3) r.w.s 144B and determined income as Rs.21,46,204/- and tax liability as Rs.5,64,264/- u/s 156 of Income Tax Act’1961, by applying the various provisions of Income Tax Act’ 1961. Initiated penalty proceedings u/s 274 rws 270A Income Tax Act’1961 treating the same as unexplained money.”

6. Ground no.1 is general in nature and does not require any specific adjudication.

7. Ground nos.2 to 4 are regarding disallowance of Rs.15,11,963/- towards contribution to PF Fund under Rule 87 of I. T. Rules, 1962.

8. During the course of assessment proceedings, the Assessing Officer issued notice u/sec.142(1) of the Income Tax Act [in short “the Act”], 1961 requiring the assessee to explain the details of contribution made to the PF and salary paid along with documentary evidence. In response, the assessee filed letter along with copies of ITR, P & L A/c, balance sheet and Form-3CB and Form-26AS as well as statement of PF paid and statement of payment made to the Employees State Insurance Corporation. The assessee has also filed copy of the agreement entered into with Indian Railways. The Assessing Officer noted from the P & L A/c that the assessee has debited an amount of Rs.52,57,551/-towards PF which is more than 27% of the allowable on salaries/wages paid to workers. Considering the provisions of Rule 87 of IT Rules, 1962, the Assessing Officer has made disallowance to the extent of Rs.15,11,963/- being excess of 27% as provided under Rule 87 of IT Rules, 1962. The assessee challenged the action of the Assessing Officer before the learned CIT(A) but could not succeed.

9. Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that the assessee is engaged in providing labour supply contract and the provisions of Rule 87 does not apply to the PF. The learned Authorised Representative of the Assessee has submitted that Rule 67 to 81 are applicable in respect of the recognized PF and therefore, Rule 87 which is applicable on the approved superannuation fund cannot be invoked in respect of the contribution to PF. Thus, the learned Authorised Representative of the Assessee has submitted that when the contribution was made by the assessee in the PF where no ceiling is laid down as per Rules 67 to 81 then, the ceiling of the contribution to the approved superannuation fund under Rule 87 cannot be applied in respect of the contribution to PF. Only for computation of 27% ceiling on the superannuation fund the employer’s contribution to PF has to be reduced from the superannuation ceiling. Therefore, that reference of PF under Rule 87 is mean only for computation of the 27% limit in superannuation fund and not for contribution to PF. The learned Authorised Representative of the Assessee has thus submitted that the employer’s contribution to recognized PF is part of the salary being perquisite as per sec.17(2) of the Act and as per Rule-6 read with Part-A of 4^th Schedule the portion of the annual accreditation consisting of contribution made by the employer in excess of 12% of the salary of the employer shall be deemed to have been received by the employee in that previous year and shall be included in his total income. Thus, the learned Authorised Representative of the Assessee has submitted that disallowance made by the Assessing Officer is not sustainable in law and liable to be deleted.

10. On the other hand, the learned DR has submitted that the claim of the assessee for contribution to PF is not allowable until it is actually paid. The assessee has not filed any evidence to show that the amount claimed by the assessee is actually paid in the PF account of the employees. He has relied upon the Orders of the authorities below.

11. We have considered the rival submissions as well as relevant material on record. The Assessing Officer has made the disallowance of employer’s contribution to PF in Para no.5 of the assessment order as under:

“5. Based on the profit and loss account, it is seen that the assessee debited an amount of Rs. 52,57,551/- towards Provident Fund i,e. in excess of 27% of allowable for the workers on the salaries / wages paid to them. The rule 87 of the I.T.Rules is as under:

Ordinary annual contributions.

87. The ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed [twenty-seven] per cent of his salary for each year as reduced by the employer’s contribution, if any, to any provident fund (whether recognised or not) in respect of the same employee for that year.

On verification of P & L account of the assessee, it is noticed that the assessee’s contribution along with employee’s contribution towards provident fund shall not exceed Rs.37,45,587/- [i.e., 27% of Rs.1,38,72,548/- (i.e. staff salaries of Rs.6,00,000/- and Rs.1,32,72,548/- towards labour wages)]. The assessee claimed that they have paid RPF to the daily labour wages also. In order to examine the complete details of salaries and wages paid to the workers, the assessee was asked to submit the details of salaries and wages paid to the employees or workers along with various components like Basic Pay and DA of the employees or workers to whom the assessee paid salaries and wages. However, there is no response from the assessee and it is observed that the assessee is not eligible for claiming expenditure towards daily wages. Thus, the excess claim of expenditure towards contribution of provident fund of Rs.15,11,963/-(i.e., Rs. 52,57,551/- less Rs.37,45,587/-) is disallowed and added to the assessed income of the assessee. (Addition: Rs.15,11,963/-).”

12. Thus, the Assessing Officer has invoked the provisions of Rule-87 for making the disallowance of excess amount of contribution over and above 27% of the salary paid to the employees. It is pertinent to note that Rule-87 prescribed the limit of the contribution only in the superannuation fund and not for recognized PF. A reference of PF is made in Rule-87 only for the purpose of computing 27% of the salary as reduced by the employer’s contribution to the PF. Therefore, invoking Rule-87 by the Assessing Officer for disallowing the excess amount of contribution to PF is not as per the provisions of the Act and Rule. In fact, the employer’s contribution to recognized PF is part of the salary u/sec.17 of the Act and particularly, it is considered as perquisite under sub-sec.(2) of sec.17 of the Act. Clause-(vii) of sec.17(2) is relevant and quoted as under:

Sec.17(2)(vii)

“(2) perquisite” includes—

(vii) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees;”

12.1. Sub-clause (vii) has been substituted by the subclause (vii) and (viia) vide Finance Act, 2020 as under:

(vii) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer—

(a) in a recognised provident fund;

(b) in the scheme referred to in sub-section (1) of section 80CCD; and

to the extent it exceeds seven lakh and fifty thousand rupees in a previous year;

(viia) the annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme referred to in sub-clause (vii) to the extent it relates to the contribution referred to in the said sub-clause which is included in total income under the said sub-clause in any previous year computed in such manner as may be prescribed; and

13. Further, the employer’s contribution over and above 12% of the salary is considered as salary received by the employee for the year as per Rule-6 Part-A of 4^th schedule and therefore, the contribution made by the employer towards the recognized PF over and above 12% is taxable in the hand of the employee as ‘salary’. Hence, the disallowance made by the Assessing Officer under Rule-87 is not sustainable. However, employer’s contribution to PF is allowable subject to the provisions of sec.43B of the Act. The assessee has not produced before me any record to show that he has actually paid this amount to the PF account of the employees during the year and before the due date of filing the return of income. Accordingly, the matter is remanded for limited purpose of verification at the end of the Assessing Officer as to whether the assessee has actually paid the said amount to the PF account of the employees as per sec.43B of the Act or not? Ground nos.2 to 4 of the assessee are allowed for statistical purposes.

14. Ground nos.5 to 8 are regarding adhoc disallowance of 10% of the travelling expenses, staff welfare expenses and performance bonus.

15. During the assessment proceedings, the Assessing Officer asked the assessee to produce the books of account and bills/vouchers. The Managing Partner of the assessee appeared and manually produced books, vouchers in respect of the expenses debited to the Income and Expenditure A/c. On verification of the record, the Assessing Officer found that bills and vouchers for expenditure debited to P & L A/c towards travelling expenses, staff welfare and performance bonus are not produced and some of the vouchers appear to be self-made and unverifiable in nature. Accordingly, the Assessing Officer has made disallowance of 10% of the expenses towards travelling expenses, staff welfare expenses and performance bonus amounting to Rs.93,331/-. On appeal, the learned CIT(A) has sustained the addition made by the Assessing Officer.

16. Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that the Assessing Officer has made adhoc disallowance which is not permissible under law.

17. On the other hand, the learned DR has submitted that the assessee has not produced the supporting bills and vouchers and therefore, the Assessing Officer has reasonably made the disallowance of 10%.

18. I have considered the rival submissions as well as relevant material on record. The assessee has not disputed that he has not produced complete vouchers in respect of the travelling expenses, staff welfare and performance bonus and some of the vouchers produced were only self-made. The claim of deduction towards expenditure incurred by the assessee is allowable when the expenditure is laid out wholly and exclusively for the purpose of business of the assessee. To prove the expenses wholly and exclusively for the purpose of business of the assessee, the supporting evidence is required to be produced. In the absence of supporting evidence, the disallowance made by the Assessing Officer @ 10% in the facts and circumstances of the case, is found to be reasonable. Accordingly, I do not find any reason to interfere with the Orders of the authorities below qua this issue. Ground nos.5 to 8 are dismissed.

19. The remaining grounds are consequential in nature and therefore, do not require any specific adjudication.

20. In the result, appeal of the assessee is partly allowed for statistical purposes.