M/S. BANGALORE PHARMACEUTICAL AND RESEARCH LABORATORY PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1)(2), BANGALORE

Per Laxmi Prasad Sahu, Accountant Member This appeal is filed by the assessee against the DIN & Order No.ITBA/NFAC/S/250/2023-24/1052798830(1) dated 12.05.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC] for the AY 2018-19.

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Rs.54,90,669. The return was processed by CPC and intimation u/.s 143(1) was issued on 04.10.2019 determining returned loss at Rs.64,20,173 (Rs.3,13,183 lesser than returned loss) on account of disallowance of Rs.3,13,183 u/s. 36(1)(va) for delayed deposit of employees contribution to Provident Fund (PF) and ESI. The assessee filed rectification application which was disposed of vide order dated 14.02.2020 where the current year loss was redetermined at Rs.64,20,173 and interest u/s. 244A was computed at Rs.3,56,889 against Rs.5,21,607 in the intimation u/s. 143(1). The assessee filed another i.e., second rectification application which was disposed by CPC by order dated 07.03.2020 wherein current loss continued to be the same at Rs.64,20,173 and interest u/s. 244A at Rs.3,56,889. A third rectification application was filed by the assessee on 22.6.2020 which was rejected by the CPC vide order dated 14.07.2020.

“1. The learned CIT-A erred in holding that the CPC has the power to make adjustments u/s. 143(1)(a) despite the limitations under Rule 8 of the Central Processing of Returns Scheme, 2011.and the inability of the CPC to process the rectification petition.

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“7. Without prejudice to the above, as regards making adjustment without complying the conditions of Section 143(1):

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7.1. The Learned Commissioner (Appeals) is not justified in upholding the action of Central Processing Centre in making adjustment under Section 143(1), without complying with the conditions therein in as much as the Central Processing Centre has made the impugned adjustment without considering the reply furnished by the Appellant objecting the impugned adjustment. 7.2. The Learned Commissioner (Appeals) is not justified in upholding the action of Central Processing Centre in perversely stating that the Appellant did not reply to the proposition notice, when in fact Appellant had filed reply objecting the impugned adjustment. 7.3. The lower authorities have failed to appreciate that merely issuing notice and calling for response does not comply with the principles of natural justice. 7.4. Without prejudice to the above, the lower authorities have failed to appreciate that there is a violation of second proviso to section 143(1)(a) for the reason that CPC being an inanimate body cannot address the grievance of the appellants. 8. Without prejudice to the above, as regards the due date specified under Section 36(1)(va) 8.1. The Learned Commissioner (Appeals) is not justified in upholding the action of Central Processing Centre in making adjustment under Section 143(1), of Rs. 3,13,183 on the ground that there was delayed remittance of the employee’s contributions to the Employees Provident fund or Employees Insurance Fund when no due dates are specified in the respective Acts or Rules or Standing Orders for the credit to the employees’ account in those funds. 8.2. Without prejudice to the above the Learned Commissioner (Appeals) is not justified in upholding the action of Central Processing Centre in making adjustment under Section 143(1)(a) in disallowing Rs. 2,95,391 being the employees’ contribution to the Employees Provident Fund when the same have been remitted within April 30th, the due date under Rule 43 of the Employees’ Provident Fund for furnishing contribution cards to enable credit

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of the monthly payments made to the fund to the individual employees’ accounts in the fund. 8.3. Without prejudice to the above the Learned Commissioner (Appeals) is not justified in upholding the action of Central Processing Centre in making adjustment under Section 143(1) in disallowing Rs. 17,792 being the employees’ contribution to the Employees Insurance Fund when the employees do not have accounts in the fund earning interest and the amounts have been otherwise remitted before the due date of submission of half yearly returns under Rule 26 of the Employees State Insurance Scheme. 9. Without prejudice to the above, as regards non- applicability of sub-Clause (iv) to Section 143(1)(a): 9.1. The Learned Commissioner (Appeals) is not justified in upholding the invocation of sub-Clause (iv) to Section 143(1)(a), when conditions of said Clause are not satisfied. 9.2. The lower authorities have failed to appreciate that the instant case is a case of ‘deduction’ not being in the nature of ‘expenditure’ and therefore, section 143(1)(a)(iv) cannot be invoked. 9.3. The lower authorities have failed to appreciate that there is no indication of disallowance of expenditure in the audit report, and in the absence thereof, sub-Clause (iv) to Section 143(1)(a) would not apply. 10. Without prejudice to the above, as regards non- applicability of amendments to Section 143(1)(a)(iv) made by Finance Act, 2021 w.e.f. 01.04.2021 to the impugned AY 2018-19: 10.1. Without prejudice to the above, disallowance cannot be made by invoking Clause (iv) to Section 143(1)(a) as amended by Finance Act, 2021 w.e.f. 01.04.2021, which inserted the phrase “or increase in income”, though it is not even the case of the department that the said phrase is applicable to the case of the Appellant.

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10.2. Without prejudice to the above, the impugned sum cannot be treated as ‘increase in income’ as the effect of denial of deduction under section 36(1)(va) is only to reiterate the sum already regarded as income under section 2(24)(x). 10.3. Without prejudice to the above, amendments to section 143(1)(a) by Finance Act’ 2021 are not applicable to assessment years prior to AY 2021-22. 10.4. Without prejudice to the above, amended sub-Clause (iv) to section 143(1)(a) is applicable only to those returns of income which have been filed on or after 01.04.2021. 10.5. The law prevailing as on the date filing of return of income has to be applied and therefore sub-Clause (iv) to section 143(1)(a) as amended by Finance Act’ 2021 cannot be invoked. 11. Without prejudice to the above, as regards non- applicability of Clause (ii) to Section 143(1)(a): 11.1. Sub-Clause (ii) to Section 143(1)(a) does not apply, though it is not even the case of the department that sub-clause (ii) is applicable to the case of the Appellant. 11.2. The pre-conditions for application of sub-Clause (ii) to Section 143(1)(a) are not existing in the instant case in as much as there is no incorrect claim made in return, which is apparent from any information in the return. 12. Without prejudice to the above, as regards non- applicability of Section 143(1)(a) when the issue is debatable: 12.1. The Learned Commissioner (Appeals) is not justified in upholding the action of making adjustment under Section 143(1)(a) with respect to the issue which is debatable. 12.2. The Learned Commissioner (Appeals) has failed to appreciate that though the decision in Checkmate Services (P.) Ltd. v. CIT [2022] 448 ITR 518 (SC) operated retrospectively, it did not remove the debate or ambiguity or doubt that existed at the time adjustment under section 143(1) was carried out.

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12.3. Without prejudice to the above, the Learned Commissioner (Appeals) has failed to appreciate that the decision in Checkmate Services [supra] dealt only with the allowance/disallowance of employee’s contribution to PF & ESI remitted beyond the due date under Section 36(1)(va), the “due date” i.e. the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the Employees’ Provident fund or Employees Insurance Funds are debatable matters. 12.4. Without prejudice to the above, the Learned Commissioner (Appeals) has failed to appreciate that the decision in Checkmate Services [supra] did not deal whether the aforesaid allowance/disallowance can be made in the intimation under Section 143(1)(a). 12.5. The Learned Commissioner (Appeals) has failed to appreciate that subsequent to the decision of Checkmate Service (supra), even the issue as to whether the subject addition can be made under Section 143(1)(a)(ii) or under Section 143(1)(a)(iv) is still debatable. 13. Without prejudice to the above, disallowance cannot be made by invoking Explanation 2 to Section 36(1)(va) r.w. Explanation 5 to Section 43B inserted by Finance Act, 2021 prospectively w.e.f. 01.04.2021, much before issuing the impugned intimation. 14. The Learned Commissioner (Appeals) is not justified in not following decisions of various Benches of ITAT, wherein in identical facts and circumstances, the similar addition made in intimation under section 143(1) was deleted even post decision in Checkmate Services [supra].”

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“SYNOPSIS OF THE ORAL AND WRITTEN SUBMISSIONS Ground No 3 Additional Grounds No 8.1..8.2 and 8.3 ( See detailed submission in paragraphs 7 and 8 of the paperbook ( pages 106 to 124 and Annexures 8 and 9) 1. Section 36(1)(va) obliges an employer to credit the employees accounts, with the employees' contribution on or before the "due date" mentioned under the respective acts for such credit. Date of remittance of the employees' contributions to the Fund on or before the due date for remittance is not the criteria for deduction u/s 36(1)va).. As it is now understood to be their own money, it has to be paid into their accounts in the fund on or before the due date for credit to their account under the said enactment. 2. There is no such "due date" mentioned either under the EPF Act or ESI Act. In the case of ESI the employee does not have an account in the fund to which his contribution could be credited. Hence prima facie the provision is not workable. 3. However, the Appellant submits that a proper understanding of the obligations and the due date for credit under the EPF Act and ESI Act would indicate that the Appellant has effectively credited the employees' contributions to the accounts of the respective employees in the Funds on or before the due date as referred to in Section 36(1)(va). As it has met his obligations as an employer under Section 36(1)(va,)in terms of

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the Supreme Court judgement in Checkmate Services (P) Ltd it is entitled to the full deduction available under Section 36(1)(va). Ground No 1 .5 and 6 ( See detailed submission in paragraph 1 of the paperbook ( pages 1 to 9 and Annexures 1,2,3 and 4 and Annexures-10 to 17) 4.a) The return now processed is an incomplete return, permitted to be filed under Section 139D without all the documents required to accompany the returns so that it is not held as defective u/s. 139 (9). b) No adjustment should be made on such incomplete return, as Section 143(1) refers to the processing of the return filed under Section 139 and such a return can only be a complete return with all the documents required to accompany the return. Parliament never envisaged any adjustment to be made on the processing of an incomplete return filed under Section 139D). 5. CPC got jurisdiction to process returns only vide the notification under Section 143(1A). 6. A perusal of Section 143(1) shows that there is no role in making adjustment assigned to/ conferred on an Assessing Officer in processing of returns under Section 143(1). Hence there is no Assessing. Officer as defined under Section 2(7A) read with Section 120(1) who could be stated to have jurisdiction over processing of a return to whom the return could be transmitted for further processing if it could not be processed at CPC. Accordingly, it can be reasonably concluded that this incomplete return was not processed under Section 143(1) by the Respondent but by the Central Processing Centre which is headed by a Commissioner. The Respondent has only communicated the result of the processing. 7. The Central Processing Centre is not empowered under the scheme notified under section 143 (1A) to make any adjustment to the returned income u/s. 143 (1)(a) (i) to (vi). It can only determine the tax payable or refund due after credit of TCS,TDS per data uploaded by deductors and tax payment challans

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reported through authorised banks. Hence the adjustment made is beyond the powers of CPC. b) This is 'further confirmed by the order under u/s. 154 under appeal that CPC is unable to process the rectification request filed . c) However, learned CIT(A) has not dealt with rule 8 of the Scheme in her order. 8. a) Under Section 154 only the Income Tax Authority which passed the order could rectify the said order. However, CPC when informed through rectification petition u/s 154 that its action was against the judgement of the jurisdictional High Court transferred the matter to the jurisdictional A.O. b) When fresh application under Section 154 was filed with a letter to CPC it passed the order u/s154 which is now under appeal and directed appellant to approach jurisdictional A.O. for relief. b) CPC erred in holding that as it had transferred the rectification rights to the jurisdictional A.O. it could not rectify the appellants rectification petition and hence could dismiss appellants rectification. c) As per Rule 9 of the Scheme notified u/s. 143 (1A) CPC cannot transfer a rectification petition to another authority. This has not been dealt with by the learned CIT(A) in her order. d) CPC cannot also without transfer of the rectification petition, transfer the rectification rights to the jurisdictional AO and direct the applicant to approach the jurisdictional AO. e) It is pertinent to mention that no further action has been taken by the jurisdictional AO to act upon the rectification petition though rectification rights and petition stated to have been transferred to him by CPC. This is evidenced by Annexure-10). Additional Ground No 7 ( Paragraph 2 of the written submissions. Pages 9 to 16 Intimation u/s 143(1) and Annexures 5 and 6)

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applied in the processing of return prior to that date as held by all Tribunals before the order in Checkmate. The order in Checkmate does not change the situation. 12. a) CPC erred in making additions in contravention of Board Circular No.1814 dated 4-4-1989 not to make additions even if the Department does not accept certain judgements/orders against it. b) As per present Section 263 Orders made in contravention of any order, direction or instructions issued by the Board may be held to be erroneous and prejudicial to the interests of Revenue. Additional Ground No.11 ( Paragraph 5, Pages 63 to 73, Annexures 5 and 6 and Intimation u/s 143(1)) 13. The addition has been made under Section 143(a)(ii) and not Section 143(a)(iv). The submissions made indicate that the disallowance could not be made based on any information within the return. Ground No 4 and Additional Ground No 12( Paragraph 6, Pages 73 to 105) 14. The learned CIT-A erred in holding that at the time of processing of the return, the matter was not debatable so far as the Department was concerned. Ground No 2 ( See paragraph 3.10 to 3.13 pages 56 to 58) 15. The matter is not debatable insofar as the assessees in the State of Karnataka are concerned as the Supreme Court Judgement in Raghuvir Synthetics Ltd (394 ITR 1(SC) held that in matter of proceedings u/s. 143(1) jurisdictional High Court decision has to be followed and the jurisdictional High Court decisions were in favour of appellant at the time of processing the return and which led to the transfer of the rectification rights to the jurisdictional AO.

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Additional Ground No 14 Paragraph 10 ( pages 134 to 137) 16. Lastly, if the above are not acceptable, in view of divergence in opinion even after Checkmate, the matter should be referred to a Special Bench. Cases in favour of appellant: P. R. Packaging Service vs ACIT 199 ITD 724 (Mum) Paris Elysees India Pvt Ltd ITA No. 357/JPR/2022 Jaipur Satpal Singh Sandhu ITA No. 4//RPR/2023 `SMC' Raipur Sanjay Kumar [2023] 152 taxmann.com 594 (Delhi - Trib.).”

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welfare legislation like PF Act, ESI Act etc. failing which the same would be treated as income in the hands of the employer u/s.2(24)(x).

“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

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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 book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure. 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. 54. 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

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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. 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.” 11. In view of the above decision of the Hon’ble Supreme Court, we hold that the employees contribution to PF and ESI should be remitted before the due date as per explanation to section 36(1)(va) i.e., on or

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before the due date under the relevant employee welfare legislation like PF Act, ESI Act etc., for the same to be otherwise allowable u/s.43B. Further we also rely on the decisions of the coordinate Bench in the case of Creative Textiles P. Ltd. in ITA No.409/Mum/2022 dated 31.05.2023 and in the case of Mindcrest (India) Pvt. Ltd in ITA No.1430/Mum/2021 dated 14.7.2023. We therefore see no reason to interfere with the order of the CIT(Appeals). The grounds taken by the assessee on this issue are dismissed.

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4[(2) The employer shall forward to the Commissioner within twenty-five days of the close of the month, a monthly abstract in such form as the Commissioner may specify showing the aggregate amount of recoveries made from the wages of all the Members and the aggregate amount contributed by the employer in respect of all such Members for the month : Provided that an employer shall send a Nil return, if no such recoveries have been made from the employees : Provided further that in the case of any such employee who has become a Member of the Pension Fund under the Employees’ Pension Scheme, 1995, the aforesaid Form shall also contain such particulars as are necessary to comply with the requirements of that Scheme.] 5[(3) The employer shall send to the Commissioner within one month of the close of the period of currency, a consolidated Annual Contribution Statement in Form 6A, showing the total amount of recoveries made during the period of currency from the wages of each Member and the total amount contributed by the employer in respect of each such Member for the said period. The employer shall maintain on his record duplicate copies of the aforesaid monthly abstract and consolidated annual contribution statement for production at the time of inspection by the Inspector.]

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24.05.2022) held that the issue whether the amendment made by Finance Act, 2021 was retrospective or prospective was debatable and controversial and consequently, the adjustment was beyond the scope of Sec.143(1). Further the bench did not specifically examine the applicability of clauses (ii) and (iv) of Sec.143(1)(a) in that decision. The subsequent decision of the bench in 360 Realtors LLP vs. ADIT (ITA No.303/Del/2022 dated 26.09.2022) is substantially on same lines. All these case laws have been rendered before the recent decision of Hon’ble Supreme Court which has settled the law since its inception. Therefore, all these case laws do not render any assistance to the case of the assessee .

“If you consider that any part of the intimation/order requires amendment, you may request the same as per section 154 of the Income Tax Act, 1961 by filing an online application for rectification.” 17. According to the above note, the assessee may file online rectification application. Thereafter after passing order u/s. 154 the assessee should have filed appeal u/.s 246A of the Act. But in this case, the assessee has filed rectification application repeatedly with the CPC which was not the correct procedure. Therefore, the CPC has rightly rejected the rectification request of the assessee stating that

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rectification request cannot be considered at CPC and to contact the jurisdictional AO for the same. Hence these grounds are dismissed.

Pronounced in the open court on this 09th day of November, 2023.

Sd/- Sd/-

( GEORGE GEORGE K. ) (LAXMI PRASAD SAHU ) VICE PRESIDENT ACCOUNTANT MEMBER

Bangalore, Dated, the 09th November, 2023. /Desai S Murthy / Copy to:

Assistant Registrar ITAT, Bangalore.