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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI MAHAVIR SINGH, HON’BLE & SHRI MANJUNATHA.G, HON’BLE
आदेश / O R D E R
PER MANJUNATHA.G, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order of the
Commissioner of Income Tax (Appeals), Income Tax Department, National
Faceless Appeal Centre (NFAC), Delhi, dated 06.03.2023, and pertains to
assessment year 2018-19.
The assessee has raised the following grounds of appeal:
For that the order of Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the appellant and at any rate is opposed to the principles of equity, natural justice and fair play.
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For that the Commissioner of Income Tax (Appeals) failed to appreciate that the intimation u/s.143(1) passed by the Assistant Director of Income Tax, Centralized Processing Center, Bengaluru (ADIT, CPC) is without jurisdiction.
For that the Commissioner of Income Tax (Appeals) without affording an opportunity of being heard erred in dismissing the appeal as infructuous.
For that the Commissioner of Income Tax (Appeals) erred in dismissing the appeal as infructuous and non-existent merely because assessment u/s.143(3) of the Act was completed for the impugned assessment year.
For that the Commissioner of Income Tax (Appeals) failed to appreciate that the principle of doctrine of merger would not apply to the facts and circumstances of the instant case.
For that the Commissioner of Income Tax (Appeals) failed to appreciate that the intimation passed u/s. 143(1) is bad in law.
For that without prejudice to the above grounds, the Commissioner of Income Tax (Appeals) failed to appreciate that the issue of allowability of employee’s contribution to PF & ESI within the due date of filing return of income is a debatable one and the disallowance on that ground cannot be made while processing return of income u/s.143(1).
For these grounds raised and such other grounds that may be raised, may be altered, amended or modified, with the leave of the Hon'ble Bench before or during the hearing of the appeal, it is most humbly prayed that the Hon'ble Tribunal may be pleased to:
a) Direct the Commissioner of Income Tax (Appeals) to hear the appeal on merits and / or
b) Delete the disallowance of Rs.2,02,67,165/- u/s.36(1)(va) and / or
c) Pass such other orders as the Hon'ble Tribunal may deem fit.
The brief facts of the case are that the assessee is a company
engaged in the business of civil contract. The assessee has filed its return
of income for AY 2018-19 on 26.09.2018 declaring total loss of
Rs.24,14,02,912/-. The return of income filed by the assessee has been
processed and intimation u/s.143(1) of the Income Tax Act, 1961 (in short
“the Act") dated 05.02.2020, has been issued determining the total loss of
Rs.22,11,35,747/- by making disallowance of Rs.2,02,67,165/- towards
employees’ contribution to PF & ESI u/s.36(1)(va) r.w.s.43B of the Act.
The assessee carried the matter in appeal before the First Appellate
Authority, and the Ld.CIT(A) for the reasons stated in his appellate order
dated 06.03.2023, rejected the arguments of the assessee and sustained
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the additions made towards disallowance of employees’ contribution to PF
& ESI u/s.36(1)(va) r.w.s.43B of the Act. Aggrieved by the order of the
Ld.CIT(A), the assessee is in appeal before us.
The Ld.Counsel for the assessee, submitted that the issue is covered
against the assessee by the decision of the Hon’ble Supreme Court in the
case of Checkmate Services P. Ltd. v. CIT (Civil Appeal No.2833 of 2016
dated 12.10.2022). However, referring to the findings of the Ld.CIT(A) in
Para No.1.6 of order dated 06.03.2023 submits that the facts recorded by
the Ld.CIT(A) in their order is altogether different which is evident from the
fact that the Ld.CIT(A) refers to AY 2017-18 whereas the issue involved in
the present appeal is AY 2018-19. Therefore, he submits that de hors the
findings of the Ld.CIT(A), the issue may be decided in accordance with
decision of the Hon’ble Supreme Court in the case of Checkmate Services
P. Ltd. v. CIT (Civil Appeal No.2833 of 2016 dated 12.10.2022).
The Ld.DR, Mr.P.Sajit Kumar, JCIT, supporting the order of the AO,
submitted that the issue is squarely covered in favour of the Revenue in
the case of Checkmate Services P. Ltd. v. CIT (supra), and thus, appeal
filed by the assessee should be dismissed.
We have heard both the parties, perused the materials available on
record and gone through orders of the authorities below. The Hon’ble
Supreme Court in the case of Checkmate Services P. Ltd. v. CIT (Civil
Appeal No.2833 of 2016 dated 12.10.2022), has considered the issue of
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disallowance of employees’ contribution to PF & ESI beyond due date
specified under respective Acts, but within due date prescribed u/s.139(1)
of the Act, and after considering relevant provisions of the Act, held that
belated payment of employees’ contribution to PF & ESI cannot be allowed
as deduction in terms of provisions of Sec.36(1)(va) r.w.s.43B of the Act.
The ITAT Chennai Benches in the case of Sree Gokulam Chit and Finacne
Co. P. Ltd., in ITA No.765/Chny/2022 dated 21.12.2022, had considered
an identical issue and by following the decision of the Hon’ble Supreme
Court in the case of Checkmate Services P. Ltd. v. CIT (Civil Appeal No.2833
of 2016 dated 12.10.2022) held as under:
We have heard rival contentions and gone through facts and circumstances of the case. The admitted facts are that as per audit report filed by assessee along with the return of income in Form No.3CA, the assessee has filed complete details of the dates of payments of PF & ESI. Admittedly, the assessee has remitted delayed payment of employees contributions of PF & ESI beyond the due date as prescribed under the PF & ESI Act but before the date of filing of return of income. The details are as under:- Employees Provident Fund
No. of Employees Due date Actual date Month Place days contribution for payment of payment delay Apr-19 HO 3,919 15-May-19 17-Sep-19 125 May-19 HO 3,228 15-Jun-19 18-Sep-19 95 Jun-19 HO 5,640 15-Jul-19 18-Sep-19 65 Jun-19 HO 6,186 15-Jul-19 12-Sep-20 425 Jun-19 HO 6,630 15-Jul-19 16-Oct-19 93 Jun-19 HO 6,012 15-Jul-19 16-Aug-19 32 Jun-19 HO 24,097 15-Jul-19 19-Jul-19 4 Jun-19 HO 77,103 15-Jul-19 17-Jul-19 2 Jun-19 KOLLAM 4,134 15-Jul-19 19-Jul-19 4 Jun-19 KOLLAM 2,814 15-Jul-19 13-Sep-19 60 Jun-19 KOLLAM 1,380 15-Jul-19 16-Oct-19 93 Jul-19 HO 10,026 15-Aug-19 15-Sep-20 397 Jul-19 HO 6,630 15-Aug-19 16-Oct-19 62 Jul-19 HO 2,836 15-Aug-19 18-Sep-19 34
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Jul-19 HO 662 15-Aug-19 19-Oct-19 65 Jul-19 KOLLAM 1,380 15-Aug-19 13-Sep-19 29 Jul-19 KOLLAM 1,380 15-Aug-19 16-Oct-19 62 Aug-19 HO 697 15-Sep-19 11-Oct-19 26 Aug-19 HO 6,630 15-Sep-19 16-Oct-19 31 Aug-19 HO 697 15-Sep-19 19-Oct-19 34 Aug-19 HO 10,026 15-Sep-19 29-Sep-20 380 Sep-19 HO 1,086 15-Oct-19 13-Jan-20 90 Sep-19 KOLLAM 1,380 15-Oct-19 16-Oct-19 1 Oct-19 HO 332 15-Nov-19 13-Jan-20 59 Oct-19 HO 3,775 15-Nov-19 29-Sep-20 319 Nov-19 HO 1,134 15-Dec-19 13-Jan-20 29 Nov-19 HO 2,700 15-Dec-19 29-Sep-20 289 Dec-19 HO 3,775 15-Jan-20 30-Sep-20 259 Jan-20 HO 8,289 15-Feb-20 30-Sep-20 228 Feb-20 HO 3,960 15-Mar-20 30-Sep-20 199 Mar-20 HO 887 15-May-20 05-Oct-20 143 2,09,425 Employees State Insurance
No. of Employees Due date Actual date Month Place days contribution for payment of payment delay Aug-19 HO 94 15-Sep-19 19-Sep-19 4 Aug-19 HO 366 15-Sep-19 20-Sep-19 5 Dec-19 HO 758 15-Jan-20 16-Jan-20 1 Dec-19 HO 2,190 15-Jan-20 21-Jan-20 6 Total 2,12,833
This is extracted from the audit report as filed by assessee along with return of income and particularly clause No.20(b). The details are completely provided by assessee. 8. Now, the question arises whether in view of the provisions of section 143(1)(a) of the Act, while processing the return of income filed by the assessee, the total income or loss shall be computed after making the following adjustments as described u/s. 143(1)(a) (ii) of the Act i.e., an incorrect claim, if such incorrect claim is apparent from any information in the return or not. The Memorandum of Finance Bill, 2008 as well as Finance Bill, 2016 explaining the provisions of section 143(1)(a)(ii) of the Act will explain the situation and the relevant memorandum of Finance Bill, 2008 and Finance Bill, 2016 are being reproduced as it is:- Memorandum to Finance Bill, 2008 Correction of arithmetical mistakes and adjustment of incorrect claim under section 143(1) through Centralised 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
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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 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. With an objective to reduce such revenue loss, it is proposed to amend section 143(1) of the Income-tax Act. It is proposed to provide that the total income of an assessee shall be computed under section 143(1) after making the following adjustments to the total income in the return:-
(a) any arithmetical error in the return; or
(b) an incorrect claim, if such incorrect claim is apparent from any information in the return. Further it is proposed to clarify the meaning of the term "an incorrect claim apparent from any information in the return".
This term shall mean such claim on the basis of an entry, in the return,-
(a) of an item, which is inconsistent with another entry of the same or some other item in such return;
(b) in respect of which, information required to be furnished to substantiate such entry, has not been furnished under this Act; or
(c) 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.
Further, these adjustments will be made only in the course of computerized processing without any human interface. In other words, the software will be designed to detect arithmetical inaccuracies and internal inconsistencies and make appropriate adjustments in the computation of the total income. (emphasis supplied). For this purpose the Department is in the process of establishing a system for Centralized Processing of Returns. To facilitate this. it is also proposed that-
(a) the Board may formulate a scheme with a view to expeditiously determine the tax payable by, or refund due to, the assessee,
(b) the Central Government may issue a notification in the Official Gazette, directing that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such restrictions, modifications and adaptations as may be specified in the notification. However, such direction shall not be issued after 31st March 2009;
(c) every notification shall be laid before each House of Parliament as soon as such notification is issued. Along with the notification, the scheme referred above is also required to be laid before each House of Parliament. Similar amendment has also been proposed in section 115WE of the Income-tax Act, relating to fringe benefits.
These amendments will take effect from lst April, 2008.
Memorandum to Finance Bill 2016
Legislative framework to enable and expand the scope of electronic processing of information
In order to expeditiously remove the mismatch between the return and the information available with the Department, it is proposed to expand the scope of adjustments (emphasis supplied) 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
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with the Department in the form of audit report filed by the assessee, returns of earlier years of the assessee, 26AS statement, Form 16, and Form 16A. (emphasis supplied) 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.
These amendments will take effect from the 1st day of June, 2016.
From the above Memorandum to Finance Bill, 2008 & 2016 explaining the provisions of section 143(1)(a)(ii) specifies the incorrect claim particularly if such incorrect claim is apparent from any information in the return of income and that can be any information as such as the audit report or some other information as provided by assessee in the return of income. In this context, it is pertinent to mention that earlier only prima-facie arithmetic adjustments can be made but in view of the amendment provisions by the Finance Act, 2008 w.e.f. 01.04.2008, the amended provisions empowers adjustments to be made interalia on the basis of remarks indicated in the return of income or incorrect claim apparent from any information in the return of income. Post amendment w.e.f. 01.04.2008, the scope of adjustment u/s.143(1) of the Act has widened and enlarged. It provides that total income shall be computed after making adjustments inter-alia on account of incorrect claim, if such incorrect claim is apparent from any information in the return of income. In the present case before us, the adjustment u/s.143(1)(a) has been made on the basis of information contained in the tax audit report with respect to the belated payments of employees contribution of EPF and ESI paid beyond the due dates as prescribed under the respective Act and these various funds are referred in section 36(1)(va) of the Act. The information gives the details of due date of payment, actual date of payment to the concerned authorities and these payments have been made beyond the due dates specified in the respective acts i.e., Provident Fund Act & ESI Act, which attracted the provisions of section 36(1)(va) r.w.s. 2(24)(x) of the Act leading to disallowance of this sum to the extent not paid on or before the due date stipulated in the respective PF Act and ESI Act.
Coming to another angle that this issue has been settled by the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., supra and what will be the impact of law laid down by Hon’ble Supreme Court and this has been explained by Hon’ble High Court of Madras in the case of South Industrial Corporation Ltd., (2002) 258 ITR 481, wherein it is held as “When a statutory provisions is interpreted by the apex court in a manner different from the interpretation made in the earlier decisions by a Smaller Bench, the order which does not conform to the law laid down by the Larger Bench in the later decision which decision would constitute the law of the land and is to be regarded as the law as it always was, unless declared by the court itself to be prospective in operation, would clearly suffer from a mistake which would be apparent from the record. The rectification under section 154(1) on the ground that the order sought to be rectified is not in conformity with the law declared by the apex court is required to be upheld”. It means that there is no ambiguity of law after Hon’ble Supreme Court judgement. Even it cannot be said that this is a debatable issue because Hon’ble Supreme Court has interpreted the law and is to be regarded as law as it always was unless declared by the court itself to be prospective in operation.
Coming to judgment of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., supra, wherein the Hon’ble Supreme Court has considered the aspect of deemed income in regard to money held by assessee as a custodian on account of employees contribution of ESI and PF payments and that is also held not be an expenditure. The Hon’ble Supreme Court considered that the money held by employer of employees contribution to ESI and PF as custodian is deemed income in view of provisions of section 36(1)(va) as well as section 2(24)(x) of the Act. The Hon’ble Supreme Court held as under:-
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
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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 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 view of the above discussion carried out in view of the amended provisions of the Act by the Finance Act, 2008 w.e.f. 01.04.2008 and subsequently by Finance Act, 2016 w.e.f. 01.06.2016, the legal position is very clear that while processing return of income u/s.143(1)(a)(ii) of the Act, an incorrect claim, if such incorrect claim is apparent from any information in the return of income is to be disallowed and such adjustment is to be made on the total income or loss to the assessee. We find not infirmity in the order of CIT(A) and that of the CPC and hence, the same are confirmed. This issue of assessee’s appeal is dismissed.
In this view of the matter and by following the decision of the Hon’ble
Supreme Court in the case of Checkmate Services P. Ltd. v. CIT (Civil
Appeal No.2833 of 2016 dated 12.10.2022), and further, by following the
consistent decision of ITAT Chennai Benches in the case of Sree Gokulam
ITA No.487/Chny/2023 :: 9 :: Chit and Finance Co. P. Ltd., we are of the considered view that belated payment of employees’ contribution to PF & ESI cannot be allowed as deduction in terms of provisions of Sec.36(1)(va) r.w.s.43B of the Act, and thus, we reject the arguments of the assessee and upheld the disallowance of employees’ contribution to PF & ESI.
In the result, appeal filed by the assessee is dismissed.
Order pronounced on the 02nd day of August, 2023, in Chennai.
Sd/- Sd/- (महावीर िसंह) (मंजूनाथा.जी) (MANJUNATHA.G) (MAHAVIR SINGH) उपा�� /VICE PRESIDENT लेखा सद)/ACCOUNTANT MEMBER चे$ई/Chennai, िदनांक/Dated: 02nd August, 2023. TLN आदेश की �ितिलिप अ*ेिषत/Copy to: 1. अपीलाथ� / Appellant 3. आयकर आयु+ / CIT 5. गाड� फाईल / GF 2. ��थ� / Respondent 4. िवभागीय �ितिनिध / DR