SUGANDH,MORADABAD vs. ITD, CPC, BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “SMC” BENCH: NEW DELHI

(THROUGH VIDEO CONFERENCING)

BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER

ITA No.1259/Del/2021 [Assessment Year : 2018-19] Sugandh, vs ITD, Jawahar Market, G.M.D.Road, CPC, Moradabad, Uttar Pradesh-244001. Bengaluru. PAN-AAEFS7109J APPELLANT RESPONDENT Appellant by None Respondent by Sh. Om Prakash, Sr.DR Date of Hearing 30.12.2021 Date of Pronouncement 30.12.2021

ORDER PER KUL BHARAT, JM : This appeal filed by the assessee for the assessment year 2018-19 is

directed against the order of National Faceless Appeal Centre (“NFAC”), Delhi

dated 27.07.2021. No one appeared on behalf of the assessee at the time of

hearing.

assessee against the order dated 16.10.2019 passed by CPC, Banglore u/s

143(1) of the Income Tax Act, 1961 (“the Act”) for Assessment Year 2018-19

raising a demand of Rs.1,25,049/-. During the processing of return of income,

CPC, Banglore made disallowance of Rs.3,19,823/- u/s 36(1)(va) being the late

payments made towards ESI and PF subscriptions by the assessee and

determined total income at Rs.40,62,934/-.

confirmed the addition.

appeal are squarely covered in favour of the assessee. He placed reliance on the

decisions of Hon’ble Delhi High Court rendered in the case of PCIT vs Pro

Interactive Service (India) Pvt.Ltd. in ITA No.983/2018 [Del.] order dated

10.09.2018 and in the case of CIT vs AIMIL Ltd. 321 ITR 508 and stated that

that these binding precedents have been followed by the various Benches of

the Tribunal.

submitted that law is clear in this respect and he relied upon the decision of

Ld.CIT(A). He further relied upon the decision of Hon’ble Delhi High Court in

the case of CIT vs Bharat Hotels Ltd. [2019] 103 Taxmann.com 295 (Delhi) Page | 2

wherein the Hon’ble High Court has decided the issue in favour of the Revenue

by observing as under:-

“Having regard to the specific provisions of the Employees‟ 8. Provident Funds Act and ESI Act as well as the concerned notifications which granted a grace period of 5 days (which appears to have been late withdrawn recently on 08.01.2016), we are of the opinion that the ITAT‟s decision in this case was not correct. The assessee undoubtedly was entitled to claim the benefit and properly treat such amounts as having been duly deposited, which were in fact deposited within the period prescribed (i.e. 15 + 5 days in the case of EPF and 21 days + any other grace period in terms of the extent notification). As far as the amounts employees‟ constituting deductions from salaries towards their contributions, which were made beyond such stipulated period, obviously the assessee was not entitled to claim the deduction from its returns.”

record and gone through the orders of the authorities below. Ld.CIT(A) has

decided the issue by observing as under:-

19,823/- on account of late payments of employees contributions to the Provident Fund and fund set up under ESI Act. 4.3 The order is u/s.143(1). Section 143(1) says "the return shall be processed". Thus the order is regarding processing for return. The processing of return is based on facts mentioned in the return of income and audit report. In this case, the disallowance is based on the facts and figures mentioned in the audit report. The assessing officer has merely disallowed what has been mentioned in audit report. Therefore, there is no mistake in the order. 4.4 It is an undisputed fact that the payments of employee's contribution, towards Provident Fund and ESI fund, amounting to Rs.3,19,823/- were made after the dates prescribed in the concerned statutes. 4.5 In order to decide the allowability of the deductions claimed by the appellant on account of payments of employees contribution towards Provident Fund which were made after the dates prescribed by concerned statutes, it would be pertinent to understand various provisions of the Act which deal with this issue. Clause (24) of section 2 of the Income Tax Act, 1961 (The Act) provides an inclusive definition of the income. Sub-clause (x) to the said clause provides that 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 his clause, "due date to mean the date by which the assessee is required Page | 4

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 there-under 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 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. 4.6 Section 36(1 )(va) and section 43B(b) operate in different fields, i.e., former takes care of employee's contribution and later the employer's contribution. Therefore, an assessee is entitled to get benefit of deduction under section 43B(b) as provided under the proviso thereto only with regard to portion of amount paid by the employer to contributory fund. So far as the employee's contribution is concerned, the assessee is entitled to get deduction of amounts as provided under section 36(1)(va) only if amounts so received from the employee is credited in specified account within due date as provided under relevant statute. This view was upheld by Hon'ble Kerala High Court in the case of CIT v. Merchem Ltd. [2015] 61 taxmann.com 119. This view also finds support from various other High Courts judgements such as Unifac Management Services (India) (P.) Ltd. v. Dy. CIT [2018] 100 taxmann.com 244/[2019] 260 Taxman 60/[2018] 409 ITR 225 (Mad.), CIT v. Gujarat State Road Transport Corpn. [2014] 41 taxmann.com 100/366 ITR 170/223 Taxman 398 (Guj.), CIT v. Merchem Ltd. [2015] 61 taxmann.com 119/235 Taxman 291/378 ITR 443 (Ker.), 8.S. Patel v. Dy. CIT [2010] 326 ITR 457/[2008] 171 Taxman 304 (MP),

Popular Vehicles & Services Pvt Ltd v. CIT [2018] 96 taxmann.com 13/257 Taxman 120/406 ITR (Ker). 4.7 Despite section 43B of the Act covers only employer's contribution and does not cover employees' contribution, many courts have applied the provision of section 43B on employees' contribution as well and allowed the deduction to employer even if the employees' contribution is deposited by the due date of filing Income Tax Return (ITR) as mentioned under section 139(1). 4.8 Amendment: The Finance Bill 2021 has introduced explanations to the provisions of section 36(1 )(va) and section 43B of the Act in order to bring in clarity and certainty on the issue. 4.9 Section 36(1 )(va) of the Act has been amended by inserting another explanation 2 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. The said explanation is reproduced below: Explanation 2.: For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied (emphasis supplied) for the purposes of determining the "due date" under this clause 4.10 Section 43B of the Act has been amended 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. The said explanation is reproduced below: Explanation5.: For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied (emphasis supplied) to a sum received by the assessee Page | 6

from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies. 4.11 The rationale of these amendments has been explained by the Memorandum to the Finance Bill, 2021 as below: "There is a distinction between employer 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 employee's contribution towards welfare funds. Employee's contribution is employee own money and 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 contributions (emphasis supplied)." 4.12 If we read the newly inserted explanations along with the Memorandum to the Finance Bill, it is very clear that the intention of the legislature in bringing these amendments is to clarify it's position in respect of concerned provisions right from the date on which the said Clause (va) of sub-section (1) of Section 36 of the Act was inserted to the Act vide Finance Act 1987. The wording used in both the newly explanations that, the provisions of section 43B and Section 36(1)(va), shall be deemed never to have been applied', also clearly indicates that the intention of the amendments is to provide clarity with a retrospective effect. The insertion of the said explanations by way of amendments is thus clarificatory and curative in nature.

4.13 In view of the above discussion, it is evident that the provisions of the Act have been made more clear as per which the employees' contribution to specified fund will not be allowed as deduction if there is delay in deposit even by a single day as per the due dates mentioned in the respective legislation. It is also evident that the amended provisions are intended to have retrospective operation. Thus, the decision of the AO to disallow the deductions claimed by the appellant on account of payments of employee's contribution towards Provident Fund and ESI fund amounting to Rs.3,19,823/- which were made after the dates prescribed in the concerned statutes, was as per the law. 4.14 It would be pertinent to refer to the memorandum to finance bill 2008 as well as finance bill 2016 by which the sub-sec.(iv) was inserted in Sec. 143(1)(a) of the Act. 4.15 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 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. Page | 8

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 Page | 9

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 1st April, 2008. 4.16 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 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. 4.17 It is clearly evident from the memorandum to the finance bill 2008 as well as 2016 that the adjustments u/s. 143(1) of the Act were to be made on the basis of the comparison of the data available in the return of income Page | 10

as well as in the Audit Report and other sources. It is also clear that the scope of the adjustments to be made u/s143(1)(a) of the Act was expanded by introducing the subsection (iv) by way of amendment in the finance bill of 2016. The word "Indicated" used in the sub-Sec.(iv) of Sec. 143(1 )(a) of the Act has to be read along with the relevant clauses in the memorandum which are indicative of the intent of the legislature. Thus, there is no need for any computation by the tax auditor for any disallowance in order to enable the AO to invoke the provisions of Sec. 143(1 )(a)(iv) of the Act. The data provided in the audit report showing the payments made after the due date is sufficient to indicate that the deductions in respects of such payments are eligible for disallowance u/s. 143(1 )(a)(iv) of the Act. Moreover, the provisions of Section 143(1 )(a)(iv) of the Act are amended by the finance bill of 2021. New explanations have been inserted with retrospective effect as discussed in the later paragraphs of this order. In view of the latest amendments, which are clarificatory, curative and retrospective in nature, the adjustment made is prima-facie in nature. In view of the above, the arguments made by the appellant are not tenable. 4.18 In view of the above discussion, the addition of Rs.3, 19,823/- to the total income is confirmed and the ground numbers 1&2 are dismissed. 4.19 Case law relied by appellant:- Appellant has relied on various case laws. However, non of the case law has discussed the amendment. All the case laws are prior to amendment. Hence, they are distinguishable. Hence they are not applicable. 4.20 (i) Ground Number 3: there is no illegality in the order passed by Dy. Commissioner of Income Tax. The order is as per section 143(1). (ii) Ground Number 4: Income tax Act, as specifically provided for disallowance u/s. 36(1 )(va). Therefore, when there is specific provision needs to be applied. The said amount is not allowable business expenditure for the reasons elaborately discussed in earlier paragraphs. Therefore, ground No.4 is dismissed. (iii) Ground Number 5 as discussed as earlier paragraphs.” Page | 11

issue is covered by the judgement of Hon’ble Delhi High Court rendered in the

case of AIMIL Ltd. (supra) wherein it has been held:-

Hon’ble Delhi High Court rendered in the case of PCIT vs Pro Interactive Service

(India) Pvt.Ltd. in ITA No.983/2018 [Del.] order dated 10.09.2018 held as

under:-

“In view of the judgement of the Division Bench of Delhi High Court in Commissioner of Income Tax versus AIMIL Limited, (2010) 321 ITR 508 (Del.) the issue is covered against the Revenue and, therefore, no substantial question of law arises for consideration in this appeal. The legislative intent was/is to ensure that the amount paid is allowed as an expenditure only when payment is actually made. We do not think that the legislative intent and objective is to treat belated payment of Employee’s Provident Fund (EPD) and Employee’s State Insurance Scheme (ESI) as deemed income of the employer under section 2(23)(x) of the Act.”

Therefore, respectfully following the ratio laid down by the Hon’ble

Jurisdictional High Court in the above-mentioned binding precedents, I hereby

direct the Assessing Officer to delete the disallowance. Thus, grounds raised by

the assessee are allowed.

Order pronounced in the open Court on 30th December, 2021.

Sd/-

(KUL BHARAT) JUDICIAL MEMBER

*Amit Kumar*