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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 Padmavathy S (AM): This appeal is against the order of the Commissioner of Income-tax, National Faceless Appeal Centre, Delhi [in short, ‘CIT(A)’] dated 29/12/2021 for A.Y. 2018-19.
The assessee filed a return of income for the assessment year 2018-19 declaring a total income of Rs.78,11,180/-. The return was processed by CPC and 2 ITA 204/Mum/2022 Diwyesh Mahendra Dave a notice under section 143(1) proposing to make an addition on account of delay in remittance of employees’ contribution to ESI / PF under section 36(1)(va) of the Act. The assessee submitted a reply stating that since the employees’ contribution was paid before the due date of filing the return of income, the same shall be allowed under section 43B of the I.T Act, 1961 (in short, ‘the Act’). The assessment was completed under section 143(1)(a) wherein the addition of Rs.24,75,805/- on account of delay in employee contribution towards ESI/PF was made. Aggrieved, assessee filed appeal before the CIT(A), who upheld the disallowance. Aggrieved by the order of the CIT(A), assessee preferred appeal before the Tribunal. The Tribunal, vide order dated 25/05/2022 deleted the disallowance by relying on the decision of the co-ordinate bench in the case of Kalpesh Synthetics Pvt Ltd vs DCIT in dated 27th April,2022.
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. The Tribunal vide order dated 05/07/2023 has recalled the order passed on 25/05/2022 and directed the registry to fix the appeal for fresh hearing. Accordingly, this appeal has again come up for hearing.
None appeared on behalf of the assessee. In the circumstances, we heard the Ld.DR, who relied on the orders of authorities below.
We heard the Ld DR and perused the materials on record. 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 3 ITA 204/Mum/2022 Diwyesh Mahendra Dave statutes, is not allowable as deduction under section 36(1)(va) of the Act, by concluding as under:
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.
4 ITA 204/Mum/2022 Diwyesh Mahendra Dave
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