NEPAL CHANDRA DEY,RANCHI vs. ASSITANT /DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, RANCHI, RANCHI

I.T.A. No.63/Ran/2022 Assessment Year: 2018-19 Nepal Chandra Dey

IN THE INCOME TAX APPELLATE TRIBUNAL “RANCHI BENCH, RANCHI VIRTUAL HEARING AT KOLKATA Before Shri Sanjay Garg, Judicial Member and Shri Rajesh Kumar, Accountant Member I.T.A. No.63/Ran/2022 Assessment Year: 2018-19 Nepal Chandra Dey.……....…...………………......................……...…..….. Appellant 58, Tatisilwai, Gandhi Nagar, Ranchi – 835103. [PAN: AGRPD0835D] vs. ACIT/DCIT, Circle-1, Ranchi.…..…..………..…….……….…………….. Respondent Appearances by: None appeared on behalf of the appellant. Shri Pranob Kumar Koley, Sr. DR, appeared on behalf of the Respondent. Date of concluding the hearing : March 02, 2023 Date of pronouncing the order : May 15, 2023 ORDER Per Sanjay Garg, Judicial Member: The present appeal has been preferred by the assessee against the order dated 15.06.2022 of the National Faceless Appeal Centre [hereinafter referred to as ‘CIT(A)’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).

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“1. Nepal Chandra Dey is a contractor supplying workers/Man force to business entities mainly Ms. Usha Martin Itd. 2. He had filed his ROI vide ACK no 333274471121018 dated 12.10.2018 disclosing a total income of 10,80,561.00 3. He received an intimation under 143(1)(a) from CPC Bangalore as to why the following sum of Rs. 678077.00 should not be disallowed keeping in view the provision where "Any sum received from employees as contribution to any provident fund or superannuation fund or any fund set up under ESI Act or any other fund for the welfare of employees to the extent not credited to the employees account on or before the due date [36(1)(va)]. 4. Reply was submitted citing relevant judgments, however CPC passed the order adding the same to the Income of the assessee thereby 2

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creating a total tax liability of Rs. 298812.00 against the assessed tax liability of 98151.00. 5. As a result of order under section 143(1) a net refund of Rs. 72257.00 was raised against the total refund of 272920.00 6. Appeal was preferred with CIT(A) through NFAC, citing the recent memorandum explaining the provision of Finance Bill, 2021 clearly states that the amendment to section 36(1)(va) is applicable from 1st April 2022, but the same was not taken into consideration and the appeal was rejected.” 5. A perusal of the above grounds of appeal and statement of facts would show that the only issue raised in this appeal is relating to the disallowance of employees’ contribution to PF/ESI u/s 36(1)(va) read with section 2(24)(x) of the Act.

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of expenditure if deposited after due date as prescribed by the relevant statutes irrespective of the fact that the same was deposited by the employer before the due date of filing of return of income u/s 139(1) of the Income Tax Act. The Hon’ble High Courts which ruled in favour of the assessee held that the provisions of section 43B(b) prescribing the due date as the last date for furnishing of return of income will not only apply to employers’ contribution towards ESI/PF of employee but also to the employees’ contribution which have been deducted by the employer and deposited by the employer as prescribed u/s 36(1)(va) of the Act. However, the Hon’ble Supreme Court in the case of ‘Checkmate Services Pvt. Ltd vs. CIT’ (supra) has held that by virtue of section 2(24)(x) of the Act, the amounts received or deducted by an employer u/s 36(1)(va), it retains its character as an income (albeit deemed) by virtue of section 2(24)(x), unless the condition stipulated 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. The Hon’ble Supreme Court held that 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 employee’s income and held in trust by the employer. The Hon’ble Supreme Court thus held that the conditions of section 43B prescribing the due date as the date of filing of return of income in case the employers’ contribution towards ESI/PF would not be applicable in case the employees’ contribution as provided u/s 36(1)(va) of the Act and that the due date in respect of deposit of employees’ contribution would be such as prescribed u/s 36(1)(va) of the Act.

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In view of the above stated legal position, the law declared by the Hon’ble Supreme Court will be retrospectively applicable and it will be treated that earlier decisions of different High Court favouring the assessee would be of no benefit of assessee at this stage as the said 5

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decisions of the High Courts are treated to be never existed or to say are wiped out by the aforesaid decision of the Hon’ble Supreme Court.

The assessee, herein, has not disputed the aforesaid legal position. However, at this stage, the contention as canvassed through written submissions is that the Assessing Officer could have disallowed the aforesaid employees’ contribution to ESI/PF being deposited after the due date under the relevant statute, only in an assessment carried out u/s 143(3) of the Act. That the Assessing Officer did not have any power or jurisdiction to disallow the aforesaid amount while processing the return u/s 143(1)(a) of the Act. The ld. Counsel for the assessee, in his written submissions, in this respect, has relied upon the recent decision of the Coordinate Mumbai Bench of the Tribunal in the case of ‘M/s P R Packaging Service vs. ACIT’ in ITA No.2376/Mum/2022 order dated 07.12.2022, wherein, the Coordinate Bench of the Tribunal has held that as per the provisions of section 143(1)(a)(iv) of the Act, the Assessing Officer while processing the return u/s 143(1) of the Act could have made the disallowance of expenditure if, the same was indicated in the audit report but not taken into account in computing the total income in the return. The Coordinate Bench of the Tribunal is of the view that the tax auditor in the audit report had merely mentioned the due date for remittance of provident fund as per the Provident Fund Act and the actual date of payment made by the assessee. That the tax audit had not contemplated to disallow the employees’ contribution to PF, wherever, it is remitted beyond the due date prescribed in the Provident Fund Act. That it was merely recording of facts and a mere statement made by the tax auditor in his tax audit. That the provisions of section 143(1)(a)(iv) of the Act would come into operation when the tax auditor 6

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had suggested for a disallowance of expenses or increase in income, but the same has not been carried out by the assessee while filing the return of income. The Coordinate Bench thus observed that the tax auditor in the said case had not said to disallow the employees’ contribution to PF, wherever, it is remitted beyond the due date under the respective Act. The Coordinate Mumbai Bench of the Tribunal in the case of M/s P R Packaging Service (supra), therefore, held that the said action of the ld. CPC, Bangalore/Assessing Officer in disallowing the employees’ contribution to PF while processing the return u/s 143(1) of the Act was against the provisions of the Act as it did not fall within the ambit of prima facie adjustment. The Coordinate Bench of the Tribunal to fortify its view has further relied upon the another decision of the Coordinate Mumbai Bench of the Tribunal in the case of ‘Kalpesh Synthetics Pvt. Ltd. vs. DCIT’ reported in 195 ITD 142(Mum). The relevant part of the order of the Coordinate Mumbai Bench in the case of M/s P R Packaging Service (supra), for the sake of ready reference, is reproduced as under:

“3. We have heard the rival submissions and perused the materials available on record. It is not in dispute that assessee had remitted the employees contribution to Provident Fund beyond the due date prescribed under the Provident Fund Act, but had duly remitted the same before the due date of filing the return of income under section 139(1) of the Act. This fact of remittance made by the assessee with delay had been reported by the Tax Auditor in the Tax Audit Report. The copy of the Tax Audit Report is placed on record by the Ld.AR before us together with its annexures. On perusal of the same, we find that the Tax Auditor had merely mentioned the due date for remittance of Provident Fund as per the Provident Fund Act and the actual date of payment made by the assessee. The Tax Auditor had not even contemplated to disallow the employees’ contribution to Provident Fund wherever it is remitted beyond the due date prescribed under the Provident Fund Act. Hence, it is merely recording of facts and a mere statement made by the Tax Auditor in his audit report. The Ld.CPC Bangalore had taken up this data from tax audit report and sought to disallow the same while processing the return under section 143(1) of 7

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the Act, apparently by applying the provisions of section 143(1)(a)(iv) of the Act. For the sake of convenience, the relevant provisions is reproduced hereunder:- “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:- (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.” 4. From the aforesaid provisions, it is very clear that the said clause (iv) would come into operation when the Tax Auditor had suggested for a disallowance of expense or increase in income, but the same had not been carried out by the assessee while filing the return of income. As stated supra, the tax auditor had not stated in the instant case to disallow Employees Contribution to Provident Fund wherever it is remitted beyond the due date under the respective Act. Hence, in our considered opinion, the said action of the Ld.CPC Bangalore in disallowing the employees’ contribution to Provident Fund while processing the return under section 143(1) of the Act is against the provisions of the Act as it would not fall within the ambit of prima facie adjustments. Our view is further fortified by the co-ordinate bench decision of this Tribunal in the case of Kalpesh Synthetics Pvt. Ltd vs. DCIT reported in 195 ITD 142 (Mum).” 8. At this stage, it will be relevant to reproduce the relevant provisions of section 143(1) of the Act which is 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:— (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; 8

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(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 claimed under sections 10AA, 80- IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or (vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return: 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:] ... 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 deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;”

A perusal of clause (iv) to section 143(1)(a) of the Act would show that it provides for disallowance of expenditure indicated in the audit report, but not taken into account in computing the total income in the return.

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“20.(b) Details of contributions received from employees for various funds as referred to in section 36(1)(va): Sl. No. Nature of Sum Due date The The actual fund received for actual date of from payment amount payment to employees paid the concerned authorities

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something; to show that something is possible or likely; mention - to mention something especially in an indirect way; point to - to make somebody notice somebody/something especially by pointing or moving your head; give information - to represent information without using words viz. The results are indicated in Table. Further, the word ‘indication’ has been explained as remark or sign that shows something happening or what somebody is thinking or feeling. Further the ‘indicative’ has been explained as showing or suggesting something.

We note that under clause 20B of the prescribed form, the auditor is supposed to furnish the information in respect of nature of fund, sum receipts from employee, due date for payment, the actual amount paid and the actual date of payment to the concerned authorities. This information is available to the CPC/Assessing Officer for processing

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the return of the assessee and this information itself indicates the allowance or disallowance which is required to be made while processing the return of the assessee. The auditor is not required in the prescribed form to specifically mention as to the what disallowance or to say as to what amount of disallowance is required to be made u/s 36(1)(va) of the Act, rather, the auditor is required to furnish the information and the said information is when correlated with the statutory provisions applicable, it may indicate for certain adjustment of disallowance which may be attracted in the case of the assessee.

The information in the return of income/audit report is also required to be uploaded on line. The said online information of return of income/audit report is automatically compared with the prefeeded data relating to statutory provisions/compliances etc. as provided u/s 143(1) of the Act, and wherever the return/audit report data suggests of non-compliance etc., the software automatically picks the said default and report accordingly. However, before making such disallowance as is indicative from the tax audit report, the proviso to section 143(1) provides that no such adjustment shall be made unless an intimation is given to the assessee of such adjustment either in writing or electronic mode and it has been further provided that the response received from the assessee, if any, shall be considered before the making any adjustment. Therefore, the adjustment u/s 143(1) of the Act may be made only after giving opportunity to the assessee to file response/objection to such adjustment and before making such adjustment such response/objection of the assessee is required to be considered by the Assessing Officer/CPC. Hence there is no violation of the principles of natural justice while making adjustments u/s 143(1) of the Act. 12

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u/s 36(1)(va) of the Act on account of late deposit of employees’ contribution to ESI/PF. The Coordinate Chennai Bench has observed that the purpose of the audit is to enable the revenue to make correct computation of assessee’s income. That a proper audit would, inter alia, ensure that the claims for deduction are correctly made. That the report is required to be furnished by the assessee along with return of income to enable revenue to make correct computation of income. That the reporting made therein could certainly be available to CPC to make the adjustment of defaults reported therein since the same would be apparent from information contained in the return. The relevant part of the order of the Coordinate Bench of the Tribunal in the case of M/s Electrical India (supra) is as under:

“We find that the provisions of Section 2(24) enumerate different components of income. The income as defined therein includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees. It is thus clear that as soon as the Employer receives any contribution from its employees towards provident fund or ESI by way of deduction or otherwise, then the same is treated as income of the assessee. If the assessee deposit the same as per the mandate of Sec. 36(1)(va), the deduction of the same is allowed to the assessee otherwise the right to claim the deduction is lost forever. In other words, the contribution is first treated as deemed income of the assessee and thereafter, the deduction of the same is allowed to the assessee if the conditions of Sec.36(1)(va) are met. The CPC, as is evident, has denied this deduction to the assessee since the assessee did not fulfil the mandate of Sec.36(1)(va). It could also be seen that this is not an increase in income but disallowance of expenditure, the adjustment of which is covered u/s 143(1)(a)(iv) which provide that the disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return could be made while processing the return of income. The amendment made w.e.f. 01.04.2021 by insertion of words 'increase in income' would have no impact on such disallowance since it is only a disallowance of expenditure and the revenue is very well entitled to make such an adjustment u/s 143(1)(a)(iv). 14

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be read as, for example, subject to the rider "except in a situation in which the audit report has taken a stand contrary to the law laid down by Hon'ble Courts above”.

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DCIT’ (supra), the issue is required to be decided in favour of the Revenue and against the assessee. In view of this, it is held that the Assessing Officer/CPC was justified in making the adjustment u/s 36(1)(va) of the Act for disallowance of expenditure on account of late deposit of employees’ contribution collected/deducted by the employer into the relevant fund i.e. PF/ESI fund.

Kolkata, the 15th May, 2023. Sd/- Sd/- [Rajesh Kumar] [Sanjay Garg] Accountant Member Judicial Member

Dated:15.05.2023. RS Copy of the order forwarded to: 1. Nepal Chandra Dey 2. ACIT/DCIT, Circle-1, Ranchi 3. CIT(A)- 4. CIT- , 5. CIT(DR),

//True copy// By order Assistant Registrar, Kolkata Benches