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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ : NEW DELHI
PER SHAMIM YAHYA, ACCOUNTANT MEMBER :
This appeal by the assessee is directed against the order of the National Faceless Appeal Centre (NFAC), Delhi dated 27.08.2021 for the Assessment Year 2018-19. 2. The grounds of appeal
raised by the assessee read as under :- “The Ld. CIT (A) (NFAC) without appreciating the correct facts of the case is not justified in law and facts and circumstances of the case in confirming the powers of DCIT (CPC) in making the adjustment on the debatable issue.”
3. Brief facts of the case are that assessee has filed his return of income declaring the income of Rs.1,25,46,392/-. The return was 16.10.2019 by making an addition of Rs.37,651/- under section 36(1)(va) of the Income-tax Act, 1961 (for short 'the Act') on account to late deposit of employees contribution of provident fund. Assessee filed an application under section 154 to reprocess the return of income, but CPC has rejected the rectification application vide order under section 154 dated 10.08.2020.
Upon assessee’s appeal, ld. CIT (A) elaborately noted submissions of the assessee. However, he was not convinced with the same and rejected the assessee’s plea by observing as under :-
“6.2.1 The scope of adjustments that can be made in course of processing of return u/s 143(1) has been widened through the Finance Act 2016 w.e.f. AY 2017-18. The rationale for the same as explained in the Memorandum to Finance Bill 2016, was to expeditiously remove the mismatch between the return and the information available with the Department, by expanding the scope of adjustments that can be made at the time of processing of returns under sub-section (1) of section 143. It was proposed that such adjustments can be made based on the data available 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. The clear inferences from the above are:
(a) The legislative intent was to enable validation of the information in the return with the help of data made available to the Department separately through audit report, 26AS statements etc.
(b) To enable tackling mismatched information expeditiously, i.e. at the earliest stage of processing of the return by the Department u/s 143(1), without postponing the same to a scrutiny assessment u/s 143(3).
6.2.2. Prior to the above expansion the adjustments could be made on account of (i) any arithmetical error in the return; or (ii) an income claim, if such incorrect claim is apparent form any information in the return. The sub-clauses (iii) to (vi) introduced to sec. 143 (1) (a) through amendment are also in the nature of measures to disallow incorrect claims made in the return with specific reference to information which are independent of the return but available with the Department. Therefore the items specified in sub-clauses (i) to (vi) are not mutually exclusive, rather they have to be interpreted conjointly the dominant objective being to compute the total income/loss in the return accurately by eliminating incorrect claims.
6.2.3. Sub-clause (iv) introduced to Sec. 143(1 )(a) through Finance Act 2016 provides for adjustments to be made on the basis of disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return. To appreciate the import of the above it is necessary to bear in mind that the manner of computation of income under various heads of income and allowance/disallowance of expenditure etc. therefrom are provided in various provisions of the Income tax Act. The audit report u/s 44AB on the other hand is a report submitted by the auditors after examination of the books of accounts maintained by the assessee. The function of audit report is not to compute the income/loss of the assessee after classifying the heads of income and the allowances/ disallowances therefrom. On the other hand it can be viewed as a transaction statement/checklist in which various transactions undertaken by the assessee are reported which can be correlated to and fall within the gamut of specific claim of allowances / disallowances enshrined in the Income tax Act. The transaction reporting in the audit report serves the purpose of indicating compliance or other-wise with the provisions of the Act. Therefore if any breach of a provision can be inferred from the transactional report, the same would qualify for appropriate adjustment in terms of 143(1 )(a)(iv).
6.2.4. Audit report form 3CD at item 20(b) requires the auditors to specify the details of contribution received from employees for various funds as referred to in section 36(1)(va). Such details include the sum received from employees, the due date for payment, the actual date of payment, and actual amount paid ./2021 etc. from which compliance with the provisions of Section 36(1 )(va) can be inferred. Non-compliance to the provisions of this section as can be inferred from the details provided by the audit report therefore will squarely fall within the ambit of adjustment as spelt out at 143(1)(a)(iv).
6.2.5. Various judicial decisions cited by appellant are distinguishable as they were examining the scope of the word 'Prima facie' adjustment as was contained in the section 143(1) prior to its amendment through Finance Act, 2001.
6.2.6. In the light of the above, the plea of the appellant that the subject adjustment is not within the scope of Sec. 143(1)(a) is dismissed and the addition on this score made by the Assessing Officer is sustained.”
Against the above order, assessee is in appeal before us. We have heard both the parties and perused the records.
Ld. Counsel of the assessee was confronted with the decision of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (2022) 143 taxmann.com 178 wherein it has been held that employee contribution of provident fund and ESI paid beyond due date as specified under the relevant Act then the same has to be added back in the income of the assessee.
Ld. Counsel of the assessee gave following written submissions :-
“The above referred appeal is filed before your honour disputing the powers of ld assessing officer (DCIT CPC) u/s 143(1) of the Income Tax Act, 1961 for making the adjustment/addition while processing of return of income on the disputed issue.
The ld CIT(A) has decided the issue against the appellant assessee on the merits of the case ignoring the various decisions of Hon'ble jurisdictional Delhi High Court and Hon'ble
Hon'ble Supreme Court in the recent decision dated 12/10/2022 in case of Checkmate Services Pvt Ltd [2022] 143 taxmann.com 178, has held if employee contribution of provident fund and ESI is paid beyond due date specified under the relevant Act then same has to be added back in the income of the assessee.
In this connection it is submitted before your honour that appellant case is not the case of assessment but only processing of return of income u/s 143(1) of the Income Tax Act. It has been held by various court of law that on debatable issue no adjustment can be made u/s 143(1 )of the Income Tax Act. At the point of time of processing of return of income, other decisions of Hon'ble Supreme Court and jurisdictional Delhi High Court in favour of the assessee as relied upon before the CIT (A) was available and therefore subsequent decision of Hon'ble Supreme Court does not empowered the Id assessing officer to make the adjustment u/s 143(1) of the Income Tax Act. Further as it has been held by Hon'ble ITAT Mumbai Bench in case of Kalpesh Synthetics (p.) Ltd v. DCIT (CPC), Bangaluru [2022] 137 taxmann.com 475 (Mumbai- Trib) that solely on the basis of observation of auditor in tax audit report, no disallowance of expenditure can be made u/s 143(1 )(a)(iv).
This is further submitted before your honour that now question will also arise that due date under the relevant Act will be reckoned from which date i.e. from the end of the month for which salary was due or from the end of the month of the date on which salary was actually been paid and contribution of provident fund was actually been deducted from the salary of the employees. Assessee can be said to be custodian of the employee contribution from the date on which employee contribution was actually been deducted.
In this connection "due date" for payment of Provident Fund contributions, clause (1) of Paragraph 38 of Employees' Provident Fund Scheme, 1952 is relevant. It reads as follows:-
./2021 "The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee's contribution from his wages which together with his own contribution as well as an administrative charge of such percentage [of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix], he shall within fifteen days of the close of every month pay the same to the Fund by separate Bank drafts or cheques on account of contributions and administrative charge."
This is further submitted before your honour that term month has not been defined in the scheme as It has been held in:- (a) Fluid Air (India) Ltd. Vs. D.C.I.T. (1997) 63 ITD 182 (Mumbai) and (b) Madras Radiators & Pressings Ltd. Vs. D.C.I.T. (1996) 59 ITD 515 (Mad.)/ (1996) 56 TTJ (Mad.) 662 that the term "month" has not been defined in the Scheme, there is ambiguity regarding interpretation of the words "fifteen days from the close of month" appearing in Paragraph 38 of Employees' Provident Fund Scheme as to whether it should be reckoned from the month in which such contributions are received by the assessee from its employees or from the month in respect of which such contributions are received by the assessee in cases where wages are paid in subsequent month(s), and this ambiguity should be resolved in favour of assessee, i.e. fifteen days are to be reckoned from close of the month in which employees contributions are recovered i.e. the month of payment of wages. The view that payment month is relevant for considering due date for payment of Provident Fund contribution is also supported by Calcutta Tribunal 'E' Bench's decision dated 28-5- 2001 rendered in the case of Kanoi Paper & Industries Ltd,. Calcutta Vs. ACIT, Co. Circle 7(2), Calcutta [ITA No.1260(Cal) of 1996], an unreported decision till the date of this write-up, which held in para 6 of its order as follows:-
"Clause 38 of the Employees' Provident Fund Scheme, 1952, fixes the time limit for making payment in respect of contribution to the provident fund to be 15 days from the close ./2021 of the month concerned. However, the issue here is whether the "month" should be considered to be the month to which the wages relates or the month in which the actual disbursement of the wages is made. We are of the considered opinion that the expression "month" should mean here the month during which the wages/ salary is actually disbursed irrespective of the month to which the same relates. Thus, the scheme of the Govt. in this regard is that once a deduction is made in respect of the employees' contribution to the provident fund from the salary/ wages of the employee or the employer also makes his contribution, factually at the time of disbursement of the salary the payment in respect of such contribution should be made forth with. If for some reason or other the payment of salary for a particular month be held up for considerable period of time it cannot be said that the employer would be liable to make payments in respect of the "employer's" as well as "employees" contribution in respect of wages for such period within a period of 15 days from the close of the month to which the wages relates. On the other hand, in our view, most appropriate interpretation would be that the employer' would be at liberty to make payment of the contribution concerned within 15 days (subject however to the further grace period) from the end of the month during which the disbursement of the salary is actually made and the contribution of the provident fund are, thus, generated."
In view of above submissions, this is further submitted before your honour that it has also been held by Hon'ble Supreme Court in case of 'CIT West Bengal-I, Vegetable Products Ltd (88 ITR 192) that where two views is possible then one favorable to assessee has to be adopted. In view of above submissions, your honour will kindly appreciate If ld assessing officer intended to make the disallowance, he might have selected the case under scrutiny/limited scrutiny, but he is not empowered to make the adjustment u/s 143(1 )(a)(iv) for the reason that issue is still debatable. Accordingly it is prayed to allow the appeal of the appellant assessee and oblige.
Hope your honour will find the above submission in order. Should your honour require any other information/explanation we shall be pleased to furnish the same.”
Per contra, ld. DR for the Revenue submitted that all debate etc. has been settled by Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra). After elaborate analysis, Hon’ble Supreme Court had held that if employee contribution of provident fund and ESI is paid beyond due date as specified under the relevant Act then the same should be added back in the income of the assessee.
Upon careful consideration, we find that the thrust of ld. Counsel of the assessee is that since the issue is debatable Revenue should not have made the adjustment u/s 143 (1) of the Act. However, ld. CIT (A) has already given a finding that there has been amendment in the concerned section and the matter being debatable is no longer there and adjustment has to be done as per the parameters laid down in section 143 (1) of the Act. In this regard, we may gainfully refer to section 143 (1) which reads 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; ./2021 (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; (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;
(v) disallowance of deduction claimed under [section 10AA or under any of the provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes", 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”
So, the aforesaid adjustment done by the CPC falls under the limb of section 143(1)(iv) of the Act which calls for 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. Now, we may gainfully refer to Hon’ble Apex Court’s conclusion in the case of Checkmate Services Pvt. Ltd. (supra) as under :-
“51. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd; Commissioner of Income-Tax and another v. Sabari Enterprises; Commissioner of Income Tax v. Pamwi Tissues Ltd; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration ./2021 in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act.
When Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions – especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These ./2021 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 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 ./2021 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.”
11. A reading of the aforesaid judgment makes it amply clear that Hon’ble Apex Court has expounded that the employees’ contribution retains its character as 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. Elaborating upon the same, further Hon’ble Apex Court had held that 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 form the employees’ income and held in trust by the case of Checkmate Services Pvt. Ltd. (supra). The ld. Counsel of the assessee’s thrust that the issue is debatable is not at all sustainable inasmuch as it is not relevant as per the extant provision of law contained in section 143 (1). Moreover, the Hon’ble Supreme Court decision is law of the land and clarifies the matter from the very beginning itself. In this view of the matter, in our considered view, there is no infirmity in the order of ld. CIT (A). Hence, we uphold the same.
In the result, the appeal of the assessee stands dismissed. Order pronounced in the open court on this 30th day of November, 2022.