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Income Tax Appellate Tribunal, MUMBAI BENCH “E”,MUMBAI
Before: SHRI AMIT SHUKLA & MS. PADMAVATHY S.
O R D E R Per Bench: These appeals filed by the Revenue are against the separate orders of the Commissioners of Income-tax, National Faceless Appeal Centre, Delhi [in short, ‘the CIT(A)’] both dated 26/05/2022 for assessment year 2018-19 & for assessment year 2019-20.
2 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation 2. Since the issue contended in these appeals are identical, is considered as a lead case and the facts pertaining to A.Y. 2018-19 are recorded here. The facts are that the assessee filed its return of income for A.Y. 2018-19 on 11/10/2018. The return was processed under section 143(1) and vide intimation dated 08/02/2020, the CPC, Bangalore has disallowed the contribution to employees’ provident fund and ESI under section 36(1)(va) to the tune of Rs.4,05,35,133/-. Aggrieved, the assessee filed an appeal before the CIT(A). The assessee submitted before the CIT(A) that the disallowance cannot be made under section 143(1) when the issue in which there are two views possible. The assessee also submitted that the contributions were paid into the government accounts before the due dates for filing the returns of income and, therefore, no disallowance is warranted and in this regard relied on various decisions of the jurisdictional High Court. The CIT(A), after considering the submissions of the assessee held that – ―9.2 Ground of appeal no. 2 relates to issuing of intimation u/s 143(1) by CPC Bangalore without jurisdiction. The plea that the intimation issued by CPC Bangalore u/s 143(1) of the Income Tax, 1961 is erroneous without jurisdiction is rejected as the law stipulates that, as per Section 143(1 )(a)(iv), where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142 then such return shall be processed and the total income or loss shall be computed after making the adjustments for disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return. 9.3 The provisions of section 143(1) of The Income-tax Act, 1961 are reproduced below and read as under: 143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely: - (a) the total income or loss shall be computed after making the following adjustments, namely: -
3 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation '(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, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139; (iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return; (v) disallowance of deduction ..............; or (vi) addition of income appearing in Form 26AS........... Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode: Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made: [Provided also that…………………….. Explanation.—For the purposes of this sub-section,— (a) "an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an entry, in the return,— (i) of an item, which is inconsistent with another entry of the same or some other item in such return; ; (ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or j (iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction; 9.4 It is pertinent to look back over the various amendments made to Section 143(1) over a period of time to understand the spirit behind the issue. In this reference, in the Memorandum to the Finance Bill 2008, it was explained that: Correction of arithmetical mistakes and adjustment of incorrect claim under section 143(1) through Centralized Processing of Returns. Generally, tax administrations across countries adopt a two-stage procedure of assessment as part of risk management strategy. In the first stage, all tax returns are processed to correct arithmetical mistakes, internal inconsistency, tax calculation and verification of tax payment. At this stage, no verification of the income is undertaken. In the second stage, a certain percentage of the tax returns are selected for scrutiny/audit on the basis of the probability of detecting tax evasion. At this stage, the tax administration is concerned with the verification of the income. In India, the scheme of summary
4 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation assessment being in force since the 1st day of June. 1999 does not contain any provision allowing for prima facie adjustment. The scope of the present scheme is limited only to checking as to whether taxes have been correctly paid on the income returned. Under the existing provisions of section 143(1), there is no provision for correcting arithmetical mistakes or internal inconsistencies. This leads to avoidable revenue loss. These adjustments were intended to be carried out only in the course of computerized processing without any human interface. In other words, the software was designed to detect arithmetical inaccuracies and internal inconsistencies and make appropriate adjustments in the computation of the total income. Subsequently, in the Memorandum to the Finance Bill 2016, it was explained that: Clause (a) of sub-section (1) of section 143 provides that, a return filed is to be processed and total income or loss is to be computed after making the adjustments on account of any arithmetical error in the return or on account of an incorrect datm. if such incorrect claim is apparent from any information in the return. In c'ir- ': expeditiously remove the mismatch between the return and the information available with the Department, it is proposed to expand the scope of adjustments that can be made at the time of processing of returns under sub-section (1) of section 143. It is proposed that such adjustments can be made based on the data available with the Department in the form of audit report filed by the assessee, returns of earlier of the assessee, 26AS statement, Form 16, and Form 16A. However, before making any such adjustments, in the interest of natural justice, an intimation shall be given to the assessee either in writing or through electronic mode requiring him to respond to such adjustments. The response received, if any, will be duly considered before making any adjustment. However, if no response is received within thirty days of issue of such intimation, the processing shall be carried out incorporating the adjustments. 9.5 It is important to highlight that Clause 20(b) of Form 3CD, the Tax Audit Report, specifically requires the tax auditor to report sums coming under section 2(24)(x), with their due dates and actual date of payment of such sums to the concerned authorities under section 36(1 )(va) of the Act. The significance attached to the due dates and the actual dates of payment in respect of employee's contributions in the Tax Audit Report is different from the employer's contribution which is dealt with under clause 21 of 3CD report. Para 20(b) of the Tax audit report (Form 3CD) requires the auditors to provide details of contributions received from employees for various funds as referred to in section 36(1 )(va), in the manner below:
5 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation S.No Nature of fund Sum received Due date (as Actual Date of payment to received from from per PF/ESI the concerned Authorities employees Employees Act)
9.6 Thus, it can be seen that Section 143(1 )(a)(iv) (inserted by Finance Act, 2016) provides that disallowance of expenditure can be made as indicated in the audit report. It is also noted that the various judicial pronouncements, that have held that no such prima-facie adjustment can be made u/s 143(1)(a) are with respect to the adjustments being made under section 143(1)(a), prior to the amendment/insertion of section 143(1)(a)(iv) by Finance Act. 2016. In view of the above amendment made in the Act, and explanations provided in the Memorandum to the Finance : be concluded that the action of AO, CPC for making disallowance on account of late deposit of employee contribution to EPF and ESI, as indicated in the para the audit report is not without jurisdiction. Therefore, ground of appeal rejected.‖
3. However on merits, the CIT(A) held that the contributions paid before the due date for filing the return of income cannot be disallowed and deleted the addition by placing reliance on the decisions of the Hon’ble High Court and Tribunals. Aggrieved, the revenue preferred appeal before the Tribunal. The co- ordinate bench, vide order dated 10/08/2022 (ITA No.1836/Mum/2022 upheld the order of the CIT(A) by placing reliance on the decision in the case of Kalpesh Synthetics Pvt Ltd vs DCIT (2022) 137 taxmann.com 475 (Mum).
4. In view of the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt Ltd in Civil Appeal No.2833 of 2016 passed on 12/10/2022, the revenue moved a miscellaneous application, praying before the Tribunal to recall the order dated 10/08/2022. The Tribunal vide order dated 19/07/2023 (M.A. No.217/Mum/2023), recalled the order restoring the appeal for fresh hearing. Thus, the appeals are before us for hearing.
5. The Ld.AR made a detailed written submission raising the following contentions with regard to impugned disallowance –
6 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation No addition can be made in the Intimation u/s 143(1) on the basis of tax audit report for AY 2019-20
The Ld.AR submitted that the aforesaid addition was made by the CPC by relying upon the Tax Audit Report wherein the tax auditor has reported the payment details of PF/ ESIC in the prescribed format. However, the said reporting schedule of PF/ ESIC is not in the nature of disallowances to be reported but mere information provided in the report. The CPC has made adjustments on account of arithmetical error, incorrect claim and disallowance of expenditure under section 143(l)(a). Further it was submitted that in the case of the assessee , intimation order was passed u/s 143(l)(a), increasing the income. Section 143(1)(a) provides that addition to the total income can be made by CPC on the basis of disallowances in the Tax Audit Report. In this regard, it was submitted that the Tax Auditor in the tax audit report has merely disclosed the information as required and no disallowance has been indicated by him. The Ld.AR, therefore, submitted that thus the CPC has overstepped its jurisdiction and has made an addition without having the authority to do so.
The amendment made u/s 143(1) of the Act, w.r.t increase in income is prospective in nature and shall not apply in our case.
In this regard, it was contended that section 2(24)(x) deals with an increase in income, is fortified by the Supreme Court, relevant part of paragraph 35 of the Hon'ble Supreme Court in case of Checkmate Services P. Ltd. V Commissioner of Income Tax -1[(2022) 448 ITR 518 (SC)] has been reproduced below : "22.2. In addition, contribution of the employees to the various funds which are deducted by the employer from the salaries and wages of the employees will be taxed as income within brackets insertion of new [clause (x) in clause (24) of Section 2] of the employer, if such contribution is not credited by the employer in the account of the employee in the relevant fund by the due date Wliere such income is not chargeable to tax under the head "profits and gains of business or profession" it will be assessed under the head "income from other sources. " On a perusal of the above paragraph, it is clear, that the employers deduction towards employees various funds will be taxed as an increase in income by virtue of Section 2(24)(x) of the ITA. Further the deduction u/s 36(1)(va) of the ITA was available in lieu of the income increased above. Therefore if the 7 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation deduction u/s 36(l)(va) of the ITA is disallowed, it would cause an increase in income of the assesse. Section 143(l)(a)(iv) is reproduced below : "143. (1) Where a return has been made under section 139, or in response to a notice under subsection (1) of section 142, such return shall be processed in the following manner, namely: — (a) the total income or loss shall be computed after making the following adjustments, namely: - (iv) disallowance of expenditure [or increase in income] indicated in the audit report but not taken into account in computing the total income in the return" Section 143(l)(a)(iv) of the ITA was amended w.e.f 1.04.2021 to provide for addition based on an increase in income, hence it is prospective in nature. In our case, as explained above there has been an increase in income and the addition could not be made by the CPC at v the time of issue of intimation order u/s 143(1) of the ITA. Without Prejudice, the matter of delayed payment u/s 36(1)(va) of the Act was a debatable point of law at the time of issue of intimation u/s 143(1) of the Act so no prima facie adjustment can be made in the intimation order.
The Ld.AR also submitted that the law at the time of issue of intimation u/s 143(1) of the Act, was debatable, wherein various high courts had ruled that if payment as specified u/s 36(1)(va) of the Act was made after the due date specified in the statutory provisions but before the due date of filing of return u/s 139(1) of the Act the payments so made are deductible in the computation of Business Income. He submitted, Certain High Courts had taken a contrary view and stated that the payment should be made before the due date specified in the statutory provisions. Hence the issue above was debatable and in such a case, prima facie adjustment ought not to have been carried out by the assessing officer. He submitted, In the case of CIT Vs. GVK Industries Ltd. ([2023] 147 taxmann.com 281) the Hon'ble Telangana High court had an opportunity to discuss this very same issue, the relevant paragraphs are reproduced below. :
"16. CIT(A) noted that the decision of this Court in Godavari Fertilizers and Chemicals Ltd. (supra) on which heavy reliance is placed by the revenue was 8 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation appealed against before the Supreme Court and the appeal was pending. CIT (A) held that the issue was highly debatable on which two opinions were clearly possible and on such a highly debatable issue, prima facie adjustment ought not to have been carried out by the assessing officer. Taking the view that interest payments sought to be set off against interest receipts having the same origin namely borrowed funds, CIT (A) set aside the prima facie adjustment made by the assessing officer.
In further appeal before the Tribunal, Tribunal held that order passed by the CIT(A) was a well-reasoned one which did not warrant interference in further appeal. Tribunal further noted that decision of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (7 supra) was not available at the time of making prima facie adjustment by the assessing officer.
As already noted above, Supreme Court had pronounced the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) on 8-7-1997 whereas the intimation was issued by the Assessing Officer much earlier on 27-3-1996" The Ld.AR, thus submitted, in the case of the assessee as well, there are similar facts, i.e. adjustment u/s 143(1) was made on 12.05.2020 whereas the decision of the Hon'ble Supreme Court was pronounced on 12.10.2022 hence the CPC has made an addition on a debatable issue. In view of the above judgement, assessing officer CPC, in provisions of section 143(1) (a) of ITA prima facie adjustment cannot carried out in the instant stage.
The Ld.DR, on the other hand, submitted that the decision of the Hon’ble Supreme Court is the law of the land, and therefore, the issue under consideration is squarely covered by the decision of the Hon’ble Supreme Court and, therefore, prayed that the order of the CIT(A) be reversed.
We heard the parties and perused the material on record. With regard to contention of the assessee that adjustment made by way of addition is beyond the scope of section 143(1)(a) of the Act meaning thereby addition/adjustment could not have been made by the CPC by taking refuge of the provisions of section 143(1)(a) of the Act we notice that Pune Bench of Tribunal in the case of Cemetile Industries vs.
9 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation ITO in and others dated 23.11.2022, has considered the similar issue issue and held that – 6.. …………………………………………………………………………………………… …………………………………………………………………………………………… ……………………………………………………………………It was argued that no prima facie adjustment can be made in the Intimation issued u/s 143(1) of the Act unless a case is covered within the specific four corners of the provision. It was stressed that the action of the AO in making the extant disallowance does not fall in any of the clauses of section 143(1).
7. We fully agree with the proposition bolstered by the ld. AR that adjustment to the total income or loss can be made only in the terms indicated specifically u/s.143(1) of the Act. Now, we proceed to examine if the case falls under any of the clauses. The rival parties are consensus ad idem that the case can be considered as falling either under clause (ii) or (iv) of section 143(1). For ready reference, we are extracting the relevant provision as under: ‗143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:— (a) the total income or loss shall be computed after making the following adjustments, namely:— (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; (iv) disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return‘ 8. Sub-section (1) of section 143 states that a return shall be processed to compute total income by making six types of `adjustments‘ as set out in sub- clauses (i) to (vi). As noted supra, we are concerned only with the examination of two sub-clauses, viz., (ii) and (iv). Sub-clause (ii) talks of ‗an incorrect claim, if such incorrect claim is apparent from any information in the return‖. The expression ―an incorrect claim apparent from any information in the return‖ has not been generally used in the provision. Rather, it has been specifically defined in Explanation (a) to section 143(1) as under: `Explanation.—For the purposes of this sub-section,— (a) "an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an entry, in the return,— (i) of an item, which is inconsistent with another entry of the same or some other item in such return; (ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or (iii) in respect of a deduction, where such 10 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;‘ 9. Clause (i) of Explanation (a) refers to a situation in which there is a claim of income or expenditure at two places in the return of income and there is inconsistency in them. For example, if deduction is claimed under a specific section for a sum of Rs.100/- in the Profit and loss account accompanying the return, but in the computation of income, the amount has been taken as Rs.110/-, leading to inconsistency, requiring an adjustment. Clause (ii) of Explanation (a) covers a situation in which claim is made, say, for a deduction u/s.80IA for which audit report is required to be furnished, but such report has not been furnished along with the return. Clause (iii) contemplates a situation in which deduction exceeds specified statutory limit. For example, section 24(a) provides for a standard deduction for a sum equal to 30% of the National Housing Bank vs. ADIT 9 annual value, but the assessee has claimed deduction at 40%. These situations warrant an adjustment. It is obvious that none of the three clauses of Explanation (a), defining an incorrect claim apparent from any information in the return, gets magnetized to the facts of the present case.
10. Now we turn to clause (iv) of section 143(1)(a) which provides for `disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return‘. The words ―or increase in income‖ in the above provision were inserted by the Finance Act, 2021 w.e.f. 01- 04-2021. As such, this part of the provision cannot be considered for application during the years under consideration, which are anterior to the amendment. We are left with ascertaining if the disallowance made u/s 36(1)(va) in the Intimation under section 143(1)(a) can be construed as a `disallowance of expenditure indicated in the audit report not taken into account in computing the total income in the return‘. Point 20(b) of the audit report in Form 3CA has columns – Serial number; Nature of fund; Sum received from employees; Due date for payment; The actual amount paid; and The actual date of payment to the concerned authorities. A copy of audit report in one of the cases under consideration, namely, S.M. Auto Stamping Pvt. Ltd. (ITA No.521/PUN/2022) has been placed on record. Point 20(b) of the audit report gives the `Sum received from employees‘ at Rs.21,800/-. `Due date for payment‘ has been reported as 15-07- 2017 and `The actual date of payment to the concerned authorities‘ has been given as 20-07-2017. Similar is the position regarding other items disallowed u/s.36(1)(va) having `The actual date of payment‘ after the `Due date for payment‘. Thus, it is manifest that the audit report clearly points out that as against the due date of payment of the employees‘ share in the relevant fund 11 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation on 15.7.2017 for deduction u/s 36(1)(va), the actual payment is delayed and deposited on 20.7.2017. The legislature, for the disallowance under sub- clause (iv) of section 143(1)(a), has used the expression `indicated in the audit report‘. The word `indicated‘ is wider in amplitude than the word `reported‘, which envelopes both the direct and indirect reporting. Even if there is some indication of disallowance in the audit report, which is short of direct reporting of the disallowance, the case gets covered within the purview of the provision warranting the disallowance. However, the indication must be clear and not vague. If the indication in the audit report gives a clear picture of the violation of a provision, there can be no escape from disallowance. Turning to the facts of the case, it is clear from the mandate of section 36(1)(va) that the employees‘ share in the relevant funds must be deposited before the due date under the respective Acts. If the audit report mentions the due date of payment and also the actual date of payment with specific reference in column no. 20(b) having heading: `Details of contributions received from employees for various funds as referred to in section 36(1)(va)‘, it is an apparent indication of the disallowance of expenditure u/s 36(1)(va) in the audit report in a case where the actual date of payment is beyond the due date. Though the audit report clearly indicated that there was a delay in the deposit of the employees‘ share in the relevant funds, which was in contravention of the prescription of u/s.36(1)(va), the assessee chose not to offer the disallowance in computing the total income in the return, which rightly called for the disallowance in terms of section 143(1)(a) of the Act.
11. The ld. AR vehemently argued that it was a case of ―increase in income‖ which has been enshrined in clause (iv) of section 143(1)(a) w.e.f. 01-04-2021 and hence cannot be take note of for the year under consideration. In our considered opinion, the contention is ill-founded. We have noted above that clause (iv) of section 143(1)(a) talks of two different limbs, namely, `disallowance of expenditure‘ and `increase in income‘ by means of indication in the audit report. Both the limbs are independent of each other. The indication in the audit report for `Increase of income‘ should be qua some item of income and not increase of income because of the `disallowance of expenditure‘. Every disallowance of expenditure leads to increase of income. If the contention of the ld. AR is taken to a logical conclusion, then the second expression `or increase in income‘ inserted by the Finance Act, 2021 would be rendered a redundant piece of legislation. It is trite interpretation has to be given to the statutory provisions in such a manner that no part of the Act is rendered nugatory. Distinction in the scope of the two aspects can be understood with the help of the present context only. We have noted that point no. 20(b) of the audit report, dealing with section 36(1)(va), has columns, inter alia, (i) `Sum received from employees‘; (ii) `Due date for payment‘; and 12 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation (iii) `The actual date of payment to the concerned authorities‘. The column (i) having details of the amounts received from employees indicates about the `increase in income‘ as per sub-clause (iv) of section 143(1)(a) if the assessee does not take this sum in computing total income. The columns (ii) and (iii) having details of due date for payment and the actual date of payment indicate about `disallowance of expenditure‘ if the assessee does not make suo motu disallowance in computing total income. Right now, there is no case of `increase in income‘ because the AO did not make adjustment for non-offering of income of the `Sums received from employees‘, but made the adjustment for `disallowance of expenditure‘ with the remarks that :`Amounts debited to the profit and loss account, to the extent disallowance under section 36 due to non-fulfillment of conditions specified in relevant clauses‘. Thus, it is evident that it is a case of `disallowance of expenditure‘ and not `increase of income‘. Further, the entire challenge by the assessee throughout has been to the disallowance of expenditure made by the AO. It set up a case before the authorities below, including the ld. CIT(A), taking shelter of section 43B of the Act by arguing that the disallowance cannot be made because such payment was made before the due date u/s.139(1) of the Act. As such, the contention of adjustment u/s 143(1)(a)(iv) due to `increase in income‘ is jettisoned.
12. Another argument point was put forth on behalf of the assessee that the assessee did not claim any deduction in the Profit and loss account of the amount under consideration and hence no disallowance should have been made. This argument is again bereft of force. The assessee claimed deduction for salary on gross basis, inclusive of the employees‘ share to the relevant funds. To put it simply, if gross salary is of Rs.100, out of which a sum of Rs.10 has been deducted as contribution to relevant fund, then the debit of Rs.100 in the Profit and loss account means deduction has been claimed for Rs.10 as well. Ex consequenti, if deduction of Rs.10 is not allowed u/s 36(1)(va) for late deposit of the amount before the due date under the respective Act, it would mean that the claim of Rs.10 included in Rs.100 is not allowed deduction.
The ld. AR referred to section 5 of the Payment of Wages Act, 1936, to contend that deduction made from an employee‘s salary for the month of October should suffer disallowance only if it is not paid by 15th December. This argument was premised on the language of section 5, which says that the wages of every person employed upon or in any railway, factory or industrial or other National Housing Bank vs. ADIT 12 establishment upon or in which less than one thousand persons are employed, shall be paid before expiry of the seventh day, after the last day of the wage- period in respect of which the wages are payable. It was contended that salary 13 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation for the month of October, 2022 will be paid before the 7th of November, which will result into income of the employer only at the time of payment, making the due date of payment into relevant fund as on or before 15th December and not 15th November.
There is no merit in the contention of linking the date of deposit of the employees‘ share in the relevant funds with the date of payment of wages. Section 5 of the Payment of Wages Act simply deals with the ‗Time of payment of wages‘. It does not stipulate any time limit for deposit of the employees share in the relevant funds. For that purpose, the relevant Acts give a window for depositing the contribution within 15 days of the last month's salary. Thus, contribution to the relevant fund towards the salary for the month of October- ending should be deposited before 15th November.
In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was justified in sustaining the adjustment u/s 143(1)(a) by means of disallowance made in these cases for late deposit of employees‘ share to the relevant funds beyond the date prescribed under the respective Acts.
Respectfully following the judgment of Hon’ble Bench of the Tribunal in Cemetile Industries (supra), the said contention raised by the Assessee to the effect that addition involved is beyond the scope of section 143(1)(a) of the Act is untenable, hence the same is rejected.
On merits it is noticed that in assessee's case the Employees’ contributions for Provident Fund and ESI has been deposited after the due date, as prescribed in the respective statutes, which resulted into making the disallowance/addition of Rs.4,05,35,133/- u/s 36(1) (va) read with section 2(24)(x) of the Act. The Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (2022) 448 ITR 518 (SC) has laid down the dictum that payment towards Employees’ contribution on account of PF/ESIC made after the due dates, as prescribed under the relevant statutes, is not allowable as deduction under section 36(1)(va) of the Act, by concluding as under:
14 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation
―52. When Parliament introduced section 43B, what was on the statute book, was only employer's contribution (Section 34(1)(iv)). At that point in time, there was no question of employee's contribution being considered as part of the employer's earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting section 36(1)(va) and simultaneously inserting the second proviso of section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions - especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee's income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of "income" amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time - by way of contribution of the employees' share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers' contribution (Section 36(1)(iv)) and employees' contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, section 43B covers all deductions that are permissible as expenditures, or outgoings forming part of the assessees' liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.
15 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation 53. The distinction between an employer's contribution which is its primary liability under law - in terms of section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers' income, and the later retains its character as an income (albeit deemed), by virtue of section 2(24)(x) - unless the conditions spelt by Explanation to section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts - the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees' income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under section 43B.
In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non- obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction.
16 ITAs 1836 & 1837/Mum/2022 Maharashtra State Security Corporation 55. In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed.
Respectfully following the decision rendered by Hon’ble Supreme Court in case of Checkmate Services P. Ltd. vs. CIT (supra), we are of the considered view since the assessee has failed to comply with the condition precedent for depositing the employees contribution on account of PF & ESI before the due date prescribed under the Act, the assessee is not entitled for any deduction. So impugned order passed by the Ld. CIT(A) allowing the claim of the assessee on merits is not tenable and liable to be quashed. Accordingly the appeal of the revenue is allowed.
The facts for AY 2019-20 are identical to AY 2018-19 and hence our decision on the impugned issued rendered for AY 2018-19 is mutatis mutandis applicable to AY 2019-20 also. Accordingly the appeal of the revenue is allowed
In result, the appeals of the revenue for AY 2018-19 and 2019-20 are allowed. Order pronounced in the open court on 19/10/2023