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Income Tax Appellate Tribunal, SMC BENCH, MUMBAI
Per contra, the Ld. Departmental Representative placed reliance 7. upon the judgment of Hon’ble Supreme Court in the case of ITA No.2056 /Mum/2021 (Assessment Year 2018-19) (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) Checkmate Services Private Ltd. v. CIT-1:[2022] 448 ITR 518 (SC)[12-10-2022]. She submitted that the Hon’ble Supreme Court has held that where an assessee failed to deposit Employees' Contribution towards PF/ESI within due date prescribed in respective statutes, deduction under Section 36(1)(va) of the Act was not allowable. Therefore, correct adjustment/addition was made while processing return of income under Section 143(1) of the Act.
We have considered the submissions and perused the material 8. available on record. It is not in dispute that Appellant had deposited the Employees’ Contribution of PF/ESIC before the due date of filing of Return under Section 139(1) of the Act, though the same were deposited belatedly beyond the due date specified under the applicable statute. The Revenue had placed reliance on the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Private Ltd. (supra) wherein it has been held as under:
“44. There is no doubt that in Alom Extrusions, this court did consider the impact of deletion of second proviso to Section 43B, which mandated that unless the amount of employers' contribution was deposited with the authorities, the deduction otherwise permissible in law, would not be available. This court was of the opinion that the omission was curative, and that as long as the employer deposited the dues, before filing the return of income tax, the deduction was available.
A reading of the judgment in Alom Extrusions, would reveal that this court, did not consider sections 2(24)(x) and 36(1)(va). Furthermore, the separate provisions in section 36(1) for employers' contribution and employees' contribution, too went unnoticed. The court observed inter alia, that: "15. …It is important to note once again that, by Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about an uniformity in tax, duty, cess and fee on the one hand vis-a-vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act, 2003, is retrospective in ITA No.2056 /Mum/2021 (Assessment Year 2018-19) (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) operation. Moreover, the judgement in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that Finance Act, 2003 will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted]. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that Finance Act, 2003, 2003, to the above extent, operated prospectively. Take an example - in the present case, the respondents have deposited the contributions with the R.P.F.C. after 31st March [end of accounting year] but before filing of the Returns under the Income-tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under section 43B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right upto 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction under section 43B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003". 46 -50. xx xx 51. The analysis of the various judgments cited on behalf of the assessee i.e.,CIT v. Aimil Ltd. [2010] 188 Taxman 265/321 ITR 508 (Delhi); CIT v. Sabari Enterprises [2008] 298 ITR 141 (Kar.); CIT v. Pamwi Tissues Ltd. [2009] 313 ITR 137 (Bom.); CIT v. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. [2013] 35 taxmann.com 616/217 Taxman 64 (Mag.)/[2014] 366 ITR 163 and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated ITA No.2056 /Mum/2021 (Assessment Year 2018-19) (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act.
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 out-goings 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 ITA No.2056 /Mum/2021 (Assessment Year 2018-19) (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.
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 ITA No.2056 /Mum/2021 (Assessment Year 2018-19) (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) 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.
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.” (Emphasis Supplied)
On perusal of above, it is clear that the Hon’ble Supreme Court has 9. held that deduction for Employees’ Contribution to PF/ESI shall be allowed only if the deposit is made by the employer on or before the due date specified in the applicable statute in view of Section 2(24)(x) read with Section 36(1)(va) of the Act. The non-obstante clause under section 43B or anything contained in therein would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date specified in the applicable statute.
Further, the Hon’ble Supreme Court also clarified that in the case of 10. Alom Extrusions Ltd. (supra) the provisions contained in Sections 2(24)(x) and 36(1)(va) of the Act were not considered. Thus, there was no judgment by the Hon’ble Supreme Court wherein the issue related to allowability of deduction for Employees’ Contribution for Provident Fund and ESI deposited after the due date but before the expiry of times specified under Section 139(1) of the Act for filing return of income as per the provisions of Section 2(24)(x) read with Section 36(1)(va) and Section 43B of the Act stood decided in the favour of the Assessee as was contended by the Learned Authorised /Mum/2021 (Assessment Year 2018-19) ITA No.2057/Mum/2021 (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) Representative for Assessee. Further, it is admitted position that, though, there were favourable judgment on the issue by the Hon’ble jurisdictional High Court such as Ghatge Patil Transporters Ltd., (supra) there were also judgments to the contrary in the favour of Revenue by the other High Courts such as CIT Vs. Gujarat- State Road Transport Corporation: 366 ITR 170 (Guj). Since the issue was not settled, the judgment of the Hon’ble Telangana High Court in the case of GVK Industries Ltd. (supra) wherein there existed prior judgment of the Hon’ble Supreme Court judgment on the issue when the subsequent judgment was passed by the Hon’ble Supreme Court.
It is settled legal position that judicial decisions, as a general rule, 11. act retrospectively. The Hon’ble Supreme Court had in the case of Assistant Commissioner of Income Tax, Rajkot Vs. Saurashtra Kutch Stock Exchange Ltd.: 2008] 305 ITR 227 (SC) has observed as under: “42. In our judgment, it is also well-settled that a judicial decision acts retrospectively. According to Blackstonian theory, it is not the function of the Court to pronounce a 'new rule' but to maintain and expound the 'old one'. In other words, Judges do not make law, they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, it (the later decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. To put it differently, even where an earlier decision of the Court operated for quite sometime, the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood. 43. xx xx 44. It is no doubt true that after a historic decision in Golak Nath v. State of Punjab AIR 1967 SC 1643, this Court has accepted the doctrine of 'prospective overruling'. It is based on the philosophy: "The past cannot always be erased by a new judicial declaration". It may, however, be stated that this is an /Mum/2021 (Assessment Year 2018-19) ITA No.2057/Mum/2021 (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) exception to the general rule of the doctrine of precedent.” (Emphasis Supplied) In view of the above judgment of the Hon’ble Supreme Court in the 12. case of Saurashtra Kutch Stock Exchange Ltd (supra), the law laid down by the Hon’ble Supreme Court in the case of Checkmate Services Private Ltd. (supra) shall apply retrospectively.
The consequence of such retrospective application would be that Explanation 2 to Section 36(1)(va) of the Act and Explanation 5 to Section 43B of the Act, both, inserted by way of Finance Act, 2021 (with effect from 01/04/2021) would be regarded as clarificatory in nature. Therefore, Explanation 2 to Section 36(1)(va) of the Act providing that the provisions of Section 43B of the Act shall be deemed never to have been applied for the purpose of determining the ‘due date’ under Section 36(1)(va) of the Act as well as Explanation 5 to Section 43B of the Act providing that the provisions of Section 43B of the Act shall not apply and shall be deemed never to have been applied to a sum received by an Assessee from his employees to which provisions of Section 2(24)(x) of the Act would also apply retrospectively on account of being clarificatory in nature.
Further, the disclosure made by the tax auditor in audit report in 14. Form 3CD about the ‘Details of contributions received from employees for various funds as referred to in section 36(1)(va)’ would now become indicative of a disallowance as the mere fact that Employees’ Contribution to ESI/PF has been deposited after the expiry of due date as specified in the applicable statute would trigger disallowance under Section 36(1)(va) read with Section 2(24(x) of the Act for the reason that subsequent to judgment of /Mum/2021 (Assessment Year 2018-19) ITA No.2057/Mum/2021 (Assessment Year: 2019-20) ITA No. 147 & 91/Mum/2023 (Assessment Year: 2019-20) the Hon’ble Supreme Court in the case of Checkmate Services Private Ltd. (supra), there remains no scope for any other interpretation. Since fact reported by the tax audit report would now be considered indicative of disallowance, the provisions of Section 143(1)(a)(iv) of the Act would get attracted.
The net impact being that adjustment/disallowance made while 15. processing the return of income under Section 143(1) of the Act, which might have been regarded as beyond the scope of the provisions of Section 143(1)(a)(iv) of the Act as per law prevailing at the time of processing of the return, would, after the judgment in the case of Checkmate Services Private Ltd. (supra), be regarded as correct exercise of jurisdiction under Section 143(1)(a)(iv) of the Act based upon correct understanding of law as laid down by the Hon’ble Supreme Court. Thus, leading to ratification of the stand taken by the Revenue and collapse of the case set up by the Assessee. Accordingly, all the grounds raised in the appeals are dismissed.
In result, all the four appeals are dismissed. 16.
Order pronounced on 31.05.2023.