Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: DR. MANISH BORAD, HON’BLE & SHRI SONJOY SARMA, HON’BLE
IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH “A” KOLKATA BEFORE DR. MANISH BORAD, HON’BLE ACCOUNTANT MEMBER AND SHRI SONJOY SARMA, HON’BLE JUDICIAL MEMBER ITA No. 500/KOL/2023 Assessment Year: 2018-19 Ortem Suppliers Pvt. Ltd. PCIT - 2, Kolkata P-141, Kalindi Housing Estate, Vs. Kalindi Vatika, 4D, Block-B, Lake Town, Kolkata-700089. PAN: AABCO 2390 R (Appellant) (Respondent) Present for: Appellant by : None Respondent by : Shri S. Datta, CIT, DR Date of Hearing : 05.07.2023 Date of Pronouncement : 07.07.2023 O R D E R PER SONJOY SARMA, JM: This appeal of the assessee for the Assessment Year 2018-19 is directed against the order of ld. PCIT, Kolkata-2 dated 21.03.2023 framed u/s 263 of the Income-tax Act, 1961. The assessee has raised following grounds of appeal: “1. That the order of the Ld. PCIT is contrary to law and the facts of the appellant case. 2. That on the facts and in the circumstances of the case the Ld. PCIT erred in holding that order passed u/s 143(3) dated 08-02- 2021 is prejudicial to the interests of the revenue. 3. That on the facts and in the circumstances of the case the Ld. PCIT erred in disallowing employee contribution of Rs. 1,53,300/- and employer contribution of Rs. 1,44,998/- made towards Provident Fund (PF) and Employee State Insurance Corporation (ESIC). 4. That on the facts and in the circumstances of the case the Ld. PCIT erred in not considering the fact that both employee and employer contribution aggregating Rs. 2,98,298/- was made before the due date of filing Income Tax Return.
2 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
That on the facts and in the circumstances of the case the Ld. PCIT made disallowance without appreciating the fact that Explanation 1 to Sec. 36(1) (va) was introduced vide Finance Act, 2021 applicable w.e.f. AY 2021-22 and the instant case of the appellant pertains to AY 2018-19. 6. That on the facts and in the circumstances of the case the Ld. PCIT grossly erred in not appreciating the fact that the appellant duly made payment of the contribution in terms of the law prevalent in the relevant assessment year. 7. That on the facts and in the circumstances of the case the Ld. PCIT and without prejudice to the above, amendment by Finance Act, 2021 was made for employee contribution. Accordingly, employer contribution of Rs. 1,44,998/- made in terms of provision of Sec. 43B should be allowed to the appellant. 8. That the appellant craves leave to add, alter, or modify the ground of appeal any time before or at the time of hearing of the appeal.” 2. At the time of hearing none appeared on behalf of the assessee. On perusal of the record, it shows that opportunity have been given to the assessee. However, the assessee did not appear before this Tribunal. As per record, it is also reflected that notice was sent through RPAD but same was returned as unserved. Under these circumstances, we have no option left except to proceed to adjudication of the assessee raised in this appeal with the assistance of the ld. departmental representative. On perusal of the above mentioned grounds of appeal, we find that the assessee has challenged the validity of jurisdiction invoked by the ld. PCIT u/s 263 of the I.T. Act by holding that the order of the ld. AO dated 08.02.2021 passed u/s 143(3) of the Act as erroneous and prejudicial to the interest of revenue. During the course of hearing, the ld. departmental representative vehemently argued supporting the order passed by the ld. PCIT.
3 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
We have heard the ld. departmental representative and also gone through the record placed before us. We notice that ld. PCIT issued show cause notice u/s 263 of the Act pointing out the following issues and alleging them to have remained to be examined and enquired by ld. AO which are incorporated in para 2.1 of the impugned order which reads as under: “2.1. On examination of the assessment records, Books of accounts and Tax Audit Report (SI.No. 20(b) of Form 3CD) for the year ended 31-03-2018, it is observed that the assessee has received an amount of Rs. 2,98,298/- (Provident Fund Rs.2,76,812/- + E.S.I. Rs. 21,486/-) towards contribution to Provident Fund and E.S.I. from its employees but the same was not deposited before the appropríate authority within the "Due Date" as per the provisions of "Provident Fund Act and ESI Act". Therefore, the total amount of Rs. 2,98,298/- was required to be disallowed u/s. 36(1 )(va) of the I.T. Act. Omission on the part of Assessing Officer to do so resulted in underassessment of income of Rs. 2,98,298/-. Therefore, the assessment order dated 08-02-2021, prima facie, appears to be erroneous insofar as it is prejudicial to the interest of revenue.
During the course of revisionary proceeding, the assessee made general statement without furnishing necessary details so as to why the issue raised in the show cause notice has been examined by the AO. The relevant portion of the same is reproduced herein below: "Your honour, the assessee company had claimed the deduction on account of delayed deposit of Employees' Contributions to ESI to PF relying on the above judgements.
Your honour, the fact that these figures has been duly intimated by the Tax Auditor in Tax Audit Report. In all probability deductions on account of ESI and PF claimed by the assessee company was allowed by the National e-Assessment Centre, Delhi relying on the decision of Hon 'ble Supreme Court in the case of CIT V. Alom Extrusions Ltd. [2009] 185 Taxman 416/319 ITR 306 and various other decisions cited above. Thus, the order w/s. 143(3) passed by the National e-Assessment Centre, Delhi for the concerned
4 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
assessment year cannot be said to be erroneous on the basis of the prevailing law of the land.
Now, the amendment in the Budget 2021 has been brought in from 01-04-2021 and is effective from assessment year 2021-22 onward. The present assessment year being 2018-19 the new amendment is not effective in the assessment year under consideration. In this regard, we would like to draw your attention to the amended provisions and the same is as follows:
"Clause (24) of section 2 of the Act provides on inclusive definition of the income, Sub-clause (x) to the said clause provide thal income to include any sum received by the assessee from his employees as contribution to any provident fund or Superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees.
Section 36 of the Act pertains to the other deductions, Sub-section (1) of the said section provides for various deductions allowed while computing the income under the head Profits and gains of business or profession"
Clause (va) of the said sub-section provides for deduction of any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date. Explanation to the said clause provides that, for the purposes of this clause, "due date" to mean the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.
Section 43B specifies the list of deductions that are admissible under the Act only upon their actual payment. Employer's contribution is covered in clause (b) of section 43B. According to it, if any sum towards employer's contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date for furnishing the return of the income under sub-section (1) of section 139, assessee would be entitled to
5 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
deduction under section 43B and such deduction would be admissible for the accounting year. This provision does not cover employee contribution referred to in clause (va) of sub-section (1) of section 36 of the Act.
Though section 43B of the Act covers only employer's contribution and does not cover employee contribution, some courts have applied the provision of section 43B on employee contribution as well. There is a distinction between employer 40 contribution and employee's contribution towards welfare fund. It may be noted that employee's contribution towards welfare funds is a mechanism to ensure the compliance by the employers of the labour welfare laws. Hence, it needs to be stressed that the employer's contribution towards welfare funds such as ESI and PF needs to be clearly distinguished from the employer deposits this contribution on behalf of the employee in fiduciary capacity. By late deposit of employee contribution, the employers get unjustly enriched by keeping the money belonging to the employees. Clause (va) of sub-section (1) of section 36 of the Act was inserted to the Act vide Finance Act 1987 as a measures of penalizing employers who mis-utilize employee's contribution.
Accordingly, in order to provide certainly, it is proposed to – (i) amended clause (va) of sub-section (1) of section 36 of the Act inserting another explanation to the said clause to clarify that the provision of section 43B does not apply and deemed to never have been applied for the purposes of determining the - due date / under this clause; and
(ii) amend section 43B of the Act by inserting Explanation 5 to the said section to clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of sub- clause (x) of clause (24) of section 2 applies.
These amendments will take effect from 1s April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.
Your honour in view of this amended provision also the assessment order passed by the National e-assessment centre cannot be said to be erroneous.
6 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
Your honour, although in the budget it was proposed that the said amendment will be applicable from 01-04-2021 and apply for the assessment year 2021-22 and onwards but it was held by the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Lid. Vs. Commissioner of Income Tax - 1 Civil Appeal No. 2833 of 2016 that in the opinion of the court, the reasoning in the impugned judgement that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by its or deducted by it from the employer'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 provisions of Section 43B which is to ensure timely payment before the returns are fled, of certain liabilties which are to be borne by the assessee is the form of tax, interest payment and other statutory liability. In the case these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessee are given some leeway in that as long as deposits are made beyond the due date, but before the date of Filing of 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 employee's 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 payout. They are others income monies, only deemed to be income, with the object of ensuring that they are paid within due date specified in the particular law. They have to be deposited in terms of such welfare enactments. t 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 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-obstacle 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.
Your honour, in this case the order for the A.Y. 2018-19 was passed on 08-02-2021 and the judgement of the Supreme Court disallowing the payment made to ESI and PF was passed on 13-10-2022. Your honour, thus it is clear that the decision of Hon’ble Supreme Court in
7 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
the case of Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax- 1 Civil Appeal No. 2833 of 2016 was not available with National e-Assessment Centre at the time of passing of the order in the present case. Thus, the order passed on that date cannot be said to be erroneous based on this decision of the Apex Court as this was not part of the record at the time of passing of the assessment order.”
Thereafter the ld. PCIT after considering the submission of the assessee held that the assessment order dated 08.02.2021 is erroneous and prejudicial to the interest of revenue by observing as under: “4. Submission of the assessee and facts of the case have been carefully perused. It is observed that the discrepancy, as observed by the undersigned, has not been objected by the assessee itself as the same is apparent from record. The Assessing Officer has squarely committed an error by not disallowing the amount of Rs. 2,98,298/- on account of non-payment of PF and ESI within due date as per the respective laws. It was a clear case of omission on the part of the Assessing Officer. The failure on the part of the assessing officer rendered the assessment order to be erroneous. The erroneous order of the Assessing Officer has caused prejudice to the revenue by the amount equal to Rs. 2,98,298/-. As regard to case laws, upon which reliance has been placed by the assessee, content of these cases does not squarely fit in the instant case in the light of the recent judicial pronouncements and the amended provisions of Section 36(1)(va).
The Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax -1 (Civil Appeal No. 2833 of 2016 dated 12-10-2022) had laid to rest to this issue. The Hon'ble Supreme Court in its order had stated as under : "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, ie., not income earned. Thus, amounts retained by the employer from out of the employee's income by way
8 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
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 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
9 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
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 Section43B 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. 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."
Thus, the Hon'ble Supreme Court had very clearly laid down that it is an essential condition for seeking deduction u/s. 36(1)(va) that the employees contribution with regard to P.F. & E.S.I. should be deposited on or before the due date prescribed under the said Acts and not the due date of ITR. If such a deposit is not made within the due date, then the assessee would not be entitled to claim expenses u/s. 36(1)(va). In view of this, the plea of the appellant is not accepted.
10 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
Therefore as held in the case of Ranbaxy Laboratories Ltd. vs. CIT (DHC), not taking recourse there to and passing the order amounted to making assessment without conducting proper inquiry and investigation as enjoyed by which was also warranted in the facts of the case at hand would make such assessment erroneous and prejudicial to the interest of revenue in the light of law laid down by the Apex Court in Malabar Industrial Co. Ltd.
Hon'ble Delhi High Court in the case of GEE VEE Enterprise vs. Addl.CIT reported in 99 ITR 375, 386 (Del) has held that the CIT may consider the order of the Assessing Officer to be erroneous not only if it contain some apparent error or reasoning or of law or of fact on the face of it but also because the Assessing Officer has failed to make enquiries which are called for in the circumstances of the case and it is an order which simply accepted what the assessee has stated in his return of income on the said issue. It is not necessary for the CIT to make further enquiries before cancelling the assessment order. The Commission car regard the order erroneous on the ground that the Assessing Officer should have made further enquiries.
Hon'ble Karnataka High Court in the case of Thalibai F. Jain vs. ITO 101 ITRI 6 (Karn) has held that where no enquiries made by the Assessing Officer on the relevant issue, assessment must be held to be prejudicial to the interest of revenue and what is prejudicial to the interest of the revenue must be held to be erroneous though the converse may not always be true.
Hon'ble Supreme Court in the case of Malabar Industrial Co. Pvt. Ltd. Vs. CIT reported in (2000) ITR 83, 87-88 (SC) affirming the Hon'ble Kerala High Court decision (198 ITR 611) has held that the phrase "Prejudicial to the interests of Revenue" is of wide import and is not confined to only loss of taxes. If the A.O. has accepted the claim of the assessee without any enquiries then such assessment order passed by the A.O. was held to be erroneous.
In this regard, it is mentioned that mere non enquiry would also render a particular order passed by lower authority as erroneous and prejudicial to the interests of Revenue. This position has been clearly confirmed by Hon'ble Supreme Court in the case of Rampyari Devi Saraogi vs. CIT [1968] 67 ITR 84 & Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). The reasoning for this proposition has
11 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
been explained by Hon'ble Delhi High Court in the case of Gee Vee Enterprise v. Addl. CIT [1975] 99 ITR 375 in the following para :- "It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the around that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of civil court. The statement made in the pleading proved by the minimum amount of be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which come before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not be made and not because there is anything order if all the facts stated therein are assumed to be correct."
In this context, it may be mentioned here that in the case of Commissioner of Income tax, Central-I, Kolkata vs. Maithan International, it was held by Calcutta High Court (2015] 56 taxmann.com 283 (Calcutta) that "It is not the law that the Assessing Officer occupying the position of an investigator and adjudicator can discharge his function by perfunctory or inadequate investigation. Such a course is bound to result in erroneous and prejudicial order. Where the relevant enquiry was not undertaken, as in the Case, the order is erroneous and prejudicial too and therefore, revisable. Investigation should always be faithful and fruitful. Unless all fruitful areas or enquiry are pursued the enquiry cannot be said to have been faithfully conducted."
Further to this it is a matter of fact that there is no appeal right available to the Revenue from the order of assessment passed by Assessing Officer and i.e. why revisionary powers have been given
12 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
to the Commissioner and such power were held to be of wide amplitude by the Hon'ble Supreme Court in the case of CIT V. Shree Manjunathesware Packing Products & Camphor Works [1998] 231 ITR 53/96 Taxman 1. Therefore, normally when Assessing Officer has not made any enquiry on a particular issue, then such order in view of the above detailed discussion has to be construed as erroneous and prejudicial to the interests of revenue and, therefore, the impugned assessment order is erroneous and prejudicial to the interests of revenue as Assessing Officer has failed to make any enquiry.
In view of the observation made in above Para, having regard to the facts and circumstances of the case and in accordance with the amendment made in Section 263 of the Act with effect from 01.06.2015, I hold that the impugned assessment order dated: 08.02.2021 passed by NeAC. Delhi. u/s 143(3) of the Act is erroneous insofar as it is prejudicial to the interests of the revenue. I, therefore, set aside the said assessment order for A.Y, 2018-19 dated:08.02.2021 passed u/s 143(3) of the Act to the file of the Assessing Officer. The Assessing Officer is to consider the submission of the assessee and verify the same from its books of account and to reframe the assessment afresh after providing the assessee opportunity of being heard.”
We after perusal of the above findings of the ld. PCIT and also considering the judicial precedent referred therein, we find that there is no discussion on the alleged issue referred to the show cause notice in the assessment order. All the alleged facts indicated in the impugned order that the issue raised by the ld. PCIT in show cause notice giving rise to revisionary proceeding has not been properly examined by the ld. AO and same needs to be examined as per direction given by the ld. PCIT in the impugned order. We, therefore, find no reason to interfere in the findings of the ld. PCIT given in the impugned order passed u/s 263 of the Act. Accordingly, all the grounds raised by the assessee are dismissed and revisionary proceeding u/s 263 of the Act is held to be valid
13 ITA No.500/KOL/2023 Ortem Suppliers Pvt. Ltd. A.Y. 2018-19
and we hold that the ld. PCIT has rightly invoked the jurisdiction and carried out revisionary proceeding u/s 263 of the Act.
In the result, the appeal of the assessee stands dismissed. 7. Order pronounced in the open court on 07.07.2023
Sd/- Sd/- [Sd/- (MANISH BORAD) (SONJOY SARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Kolkata, Dated: 07.07.2023 Biswajit Copy to: 1. The Appellant: Ortem Suppliers Pvt. Ltd. 2. The Respondent: PCIT- 2, Kolkata. 3. The CIT, 4. The CIT (A) 5. The DR
//True Copy// [ By Order
Assistant Registrar ITAT, Kolkata Benches, Kolkata