ABHAY SHRIVASTVA,FARIDABAD vs. DCIT, CPC, BENGALURUR

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

(THROUGH VIDEO CONFERENCING)

BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER

ITA No.1289/Del/2021 [Assessment Year : 2018-19] Abhay Shrivastva, vs DCIT, 501, Sears Vth Floor, Sector-86, CPC, Faridabad, Haryana-121007. Bengaluru. PAN-BGJPS08499B APPELLANT RESPONDENT Appellant by Sh. Gurjit Singh, CA Respondent by Sh. Om Prakash, Sr.DR Date of Hearing 28.12.2021 Date of Pronouncement 28.12.2021

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

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

Delhi dated 28.07.2021.

filed by the assessee on 27.09.2018 declaring total income of Rs.21,38,020/- in

the status of “individual” in Form No.ITR 3. Intimation u/s 143(1) of the

Income Tax Act, 1961 dated 29.04.2019 was issued by CPC, Banglore,

computing total income at Rs.24,38,350/-. CPC made a disallowance of

Rs.3,00,324/- on account of late payment of ESI and PF u/s 36(1)(va) of the

Act.

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 Page | 2

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)

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ESI Act as well as the concerned notifications which granted a grace period of 5 days (which appears to have been late withdrawn recently on 08.01.2016), we are of the opinion that the ITAT‟s decision in this case was not correct.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:-

4.2. Decision on Ground of appeal No.1 to 4 4.2.1. “I have carefully gone through the submission of the Appellant. I have also gone through the records and facts of the case and the case

laws cited by the appellant. As seen from the details furnished by the appellant the CPC has computed the income from business from the details entered by the appellant. System(CPC) has duly flagged in the computerised processing and disallowed u/s.143(1 )(a)(iv) of the Act on the basis of the variance between Tax Audit Report and ITR. Therefore, the adjustments carried out were well within the ambit of the provisions of section 143(1 )(a)(iv). 4.2.2. On the legal issues and the contention of the appellant that such disallowance of late payment of ESI/PF u/s.36(1 )(va) is not permissible and that it ought to have been allowed on payment basis u/s.43B at par with employers' contribution to PF/ESI in view of the judicial pronouncements relied on, the issue is decided as follows after a careful consideration of the facts of the case and the position of law on the issue. 4.2.3 Employee Provident Fund and Miscellaneous Provisions Act,1952 was promulgated to provide for the institution of provident funds, pension fund and deposit-linked insurance fund for employees in factories and other establishments. The fund includes monetary contributions from both employer and employee, calculated in the prescribed manner under the relevant Act. As per Employees' Provident Fund Scheme, 1952, the contribution towards provident fund has to be made within fifteen days of close of every month. 4.2.4 The employer is under statutory obligation to deduct the employees' contribution from the salary/wages etc. payable to an employee and this deduction is to be made every month and deposited on or before 15th of the succeeding month in the specified fund, irrespective of whether the salary, wages etc. have been actually paid or not. Therefore, the amount deducted from the employees is held in a fiduciary capacity by the employer and has to be deposited within the prescribed due date under the respective welfare fund schemes. Therefore, it is first treated as income in the hands of the employer in computing his profits and gains of

business and profession under Income Tax Act and is allowed as a business deduction only if it has been paid within prescribed due date. 4.2.5 The employer's contribution, on the other hand, is a statutory obligation on the part of the employer to contribute from his own funds to the retirement corpus of the employees and is therefore in the nature of a direct business expenditure per se. Thus, by very nature, these two components, i.e., the employees' contribution and employer's contribution stand on totally different footings and hence covered under different provisions of the Income Tax Act, 1961. 4.2.6 Under the Income Tax Act, 1961, 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. Actor any other fund for the welfare of such employees is first treated as "Income" in the hands of the assessee-employer as per sub-clause (x) of Clause (24) of section 2. The employees' contribution which is so treated as "income" of the Employer u/s.2(24)(x), is allowed as a "Deduction" under section 36 of the Income Tax Act. 1961 while computing the income under the head 'Profits and gains of business or profession' only if it has been deposited by the Employer within the due dates prescribed under the relevant Acts or Funds. Thus, the provisions regarding the deduction towards employees' contribution of PF/ESI in the hands of the employer u/s.36 are very clear. When it is specifically covered under section 36(1 )(va), it cannot be considered under any other provisions of the Act including section 37 or section 43B, as evident from the following. 4.2.7 As far as the Employer's own contribution is concerned, though it is a business expenditure, its allowability for the purposes of computing taxable income is subject to certain rigours of actual payment. Since the purpose of this statutory obligation cast on the employer is to provide for a corpus fund on retirement of the employees, mere creation of that liability and providing for it by way of book entries is not enough and its actual payment is essential. It is towards this objective that the employer's Page | 5

contribution is brought under the ambit of section 43B which allows certain deductions only on actual payment basis only. 4.2.8 The provisions of section 43B have undergone changes from time to time and were subject of judicial interpretations as well. Section 43B was inserted by Finance Act, 1983, with effect from 1-4-1984, whose sole object was to disallow deductions claimed merely by making a book entry based on mercantile system of accounting and allow deduction on payment under Cash Basis. This was in the form of a rigour on the assessee as an employer and not as a concession or beneficial or benevolent provision. 4.2.9 Vide Finance Act 1987, first proviso to Section 43B was inserted, whereby the conditions for allowing payment of items referred to in clause (a), i.e., if tax, duty, cess or fee referred in clause were relaxed and these sums were allowed as deduction for the same accounting year if paid after the closing of accounting year but before due date of filling of Return of Income under the Income Tax Act, 1961. However, the relaxations of first proviso did not apply to employer's contribution to labour welfare funds such as PF/ESI etc referred to in clause (b) of 438. The reason was that employer should not sit on collected contribution of employees and deprive the workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to welfare funds. Thus, though the employer's contribution in clause (b) was included in section 438 alongside those items like tax, duty, cess or fee as referred to in clause (a) thereof, there were more stringent conditions for allowing the employer's contribution as compared to those items covered in clause (a). 4.2.10 This differential treatment of employer's contribution vis a vis tax, duty, cess or fee referred to in section 438 was further made abundantly clear vide Finance Act 1988, by the insertion of second proviso to Section 438. It put the onus on the employer to pay his contribution on or before the due dates specified under the respective welfare funds, as evident from the unambiguous language of second proviso to Section 438. Later on, Page | 6

the second proviso was further amended vide Finance Act 1989 which did not relax the rigours of employer's obligation under section 438 but only provided for the time taken for realisation of payment of PF/ESI by modes other than cash. 4.2.11 Thus, while tax, duty, cess, fee etc., coming under clause (a) of section 438 were allowed in the same accounting year if paid on or before the due date for filing of return u/s.139(1) as per First Proviso, Employers' contribution to the employee welfare funds like PF/ESI etc coming under clause (b) were allowed only if paid within the prescribed due date under respective welfare fund schemes as per Second Proviso of section 438 till 2003. 4.2.12 In Finance Act. 2003, amendments were made do away with this differentiation between tax, duty, cess and fee under clause (a) of section 438 and contributions to various Employee's Welfare Funds under clause (b). The due date for payment of employer's contribution was also now linked with due date for filing of return of income u/s.139(1) of Income Tax Act, at par with other payments mentioned in clause (a) of section 438. 4.2.13 The question as to whether this amendment brought about by Finance Act, 2003 to the first and second proviso of section 438 is prospective or retrospective came up for consideration before the Supreme Court in the case of CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306/185 Taxman 416. Having considered the legislative intent and purpose, the Supreme Court held that amendment as enacted by Finance act 2003 led to equating tax, duty, cess, and fee with contributions to welfare funds and that that though the amendments were with effect from 1st April 2004, they were retrospective in nature and would operate from 1st April 1988. 4.2.14 Thus, it was clear that all these changes in due dates for payments were brought about by these amendments only in connection with the employer's contribution as covered u/s. 438(b) and was given retrospective

benefit by virtue of the decision of the Supreme Court in the case of Alom Extrusions Ltd cited supra. 4.2.15 However, due dates for payment of employee's contribution covered u/s.36(1)(va) and its inclusion as income in the hands of the employer under section 2(24)(x) remained unchanged since the beginning and it never came up for consideration of the Supreme Court in the case of Alom Extrusions Ltd. 4.2.16 This legal distinction between the two contributions was further reiterated by Circular No. 22/2015 dated 17th December 2015, wherein it was clarified that no disallowance shall be made for employer's share of contribution referred to in clause (b) of section 438 which is deposited before 'due date' of filling of return of Income u/s.139( 1) of the Income Tax Act, 1961. It was also categorically clarified therein that this Circular does not apply to claim of deduction relating to employee's contribution to welfare funds which are governed by section 36(1)(va) of the IT Act. 4.2.17 The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee's contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer's claim for deduction permanently forever u/s.36(1)(va). On the other hand, delay in payment of employer's contribution is visited with deferment of deduction on payment basis u/s.438 and is therefore not lost totally. This legal distinction between employees' contribution and employer's contribution under the Act was duly recognised by the Courts also. 4.2.18. The same view has been expressed by the Andhra Pradesh High Court in Hitech (India) (P) Ltd. v. Union of India (1997) 227 ITR 446 (AP), when the constitutional validity of section 438 and section 36( 1 )(va) of the Income Tax Act was challenged. This decision was referred to by the High Court of Madras, in the case of Commissioner of Income-tax v. Madras Radiators & Pressings Ltd, [2003] 129 Taxman 709 (MAD.) in Tax Case No. 218 Of 1999 Reference No. 214 Of 1999 dated December 31, 2002, while Page | 8

answering the various aspects that are relevant to the issue. It was clearly held that the payment of wages on 7th day of succeeding month would not in any way alter initial responsibility of employer for making payment of contributions which he is statutorily authorised to recover from employees' salary, whether salary is paid in time or not. It was further held that employer has to remit contribution to provident fund within 15 days from close of month for which employees earned their salary and since assessee did not remit monthly contribution towards provident fund within due date, deduction could not be allowed under section 36(1)(va) on ground that payment was made during previous year. 4.2.19 Detailed reference to the genesis of this debate as discussed in these judgements would help in putting the issues in right perspective and help in understanding the legislative intent and interpretation of law. 4.2.20. In the case of Commissioner of Income Tax 11 Vs Gujarat State Road Transport Corporation [2014J 41 taxmann.com 100/ 366 ITR 1701223 the Gujarat High Court had considered the decision in the case of Alom Extrusions Ltd rendered by the Supreme Court in detail and the difference between employees' contribution and employers' contribution and held that tribunal had erred in deleting disallowances being employees' contribution to PF Account / ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees' accounts in the relevant funds on or before the due date as per the explanation to section 36(1 )(va) of the Act. This view was affirmed by Kerala High Court in the case of CIT v. Merchem Ltd. [2015J 61 taxmann.com 119, The High Court of Kerala in the case of Popular Vehicles & Services (P.) Ltd. v. Commissioner of Income- tax, Ernakulam [2018J 96 taxmann.com 13 (Kerala) has dealt with in detail as to how employee's contribution which is regulated by clause (x) of section 2(24) and sub- clause (va) of section 36(1) would not be affected by section 43B, in particular the effect of non-obstante clause. In the most recent of the decisions, Madras High Court in Unifac Management Services (India) (P.)

Ltd. vs DC IT in 409 ITR 225 held that the scope of section 43B and section 36(1 )(va) are different and thus, there is no question of reading both provisions together to consider as to whether the assessee is entitled to deduction in respect of the sum belatedly paid towards such contribution, 4.2.21 Despite this clear legal position that 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 of filing Income Tax Return (ITR) as mentioned under section 139(1). It is in this backdrop that vide Finance Bill 2021, the Government further proposed to amend the law to bring certainty in the issue by adding another Explanation to section 36(1)(va) clarifying that provision of section 43B does not apply and deemed to never have been applied for the purpose of determining the 'due date" under this clause; and amend Section 43B, 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 2(24)(x) applies. 4.2.22.The rational of the amendment was 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 Page | 10

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 measure of penalizing employers who mis-utilize employee's contributions. 4.2.23 The Finance Bill 2021 has since been passed by the Parliament and granted assent by the Hon'ble President, and duly notified. Now, the amendments to the relevant sections as per The Finance, 2021 (No.13 of 2021) reads as under: "9. Amendment of section 36. In section 36 of the Income-tax Act, in sub-section (1), in clause (va), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:-- 'Explanation 2.--For the removal of doubts, it is hereby clarified that the provisions of section 438 shall not apply and shall be deemed never to have been applied for the purposes of determining the "due date" under this clause;'. 11. Amendment of section 43B. In section 438 of the Income-tax Act, after Explanation 4, the following Explanation shall be inserted, namely:- "Explanation 5.--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 to a sum received by the assessee from. any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies. ". 4.2.24 From the above amendment, it is evident that the law is, and has always been very clear i.e., employees' contribution to specified fund will not be allowed as deduction u/s.36(1)(va) if there is delay in deposit even by a single day as per the due dates mentioned in the respective legislation. It is also clear that the amendments are only declaratory/clarificatory in nature and are therefore applicable with Page | 11

retrospective effect by necessary intendment of deeming nature expressly stated therein. 4.2.25 In CIT vs. J. H. Gotla 1985 AIR 1698,1985 SCR Supl. (2) 711, the rule of interpretation is laid down. Speaking for the Supreme Court, Sabyasachi Mukharji J observed that where the plain literal interpretation of a statutory provision produced a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The learned judge further observed that in case the literal construction leads to injustice, an equitable construction should be adopted. 4.2.26 In JK Spinning & Wvg. Mills Ltd. v. UOI [1988 SCR (1) 700J it was held by the Supreme Court that Explanatory and clarificatory amendments in law, which are applicable retrospective, are permissible. "There is no impairment of an existing right or obligation, the legal principle that emerges is that the function of a declaratory or explanatory Act is to supply an obvious omission or to clear up doubts as to meaning of the previous Act and such an Act comes into effect from the date of passing of the previous Act. " 4.2.27 The object of an amending and validating Act is to remove and rectify the defect in phraseology or lacuna of other nature and also to validate the proceedings. including realisation of tax which have taken place in pursuance of the earlier enactment which has been found by the Court to be vitiated by an infirmity. Such an amending and validating Act in the very nature of things has a retrospective operation. Its aim is to effectuate and carry out the object for which the earlier principal Act had been enacted. 4.2.28.In the case of CIT vs Archean Granites Private ltd. (Madras High Court) vide judgement/Order dated 13/07/2020 in Tax Case Appeal No.478 of 2014 High Court held that, a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso Page | 12

which supplies an obvious omission in the Section, is required to be read into the Section to give the retrospective in operation so that a reasonable interpretation can be given to the Section as a whole. 4.2.29 From the above judicial decisions and also the unambiguous wording of the now amended provisions of section 36(1) and 43B, it is clear that the employee's contribution can be allowed as a deduction only if it had been paid within the prescribed due dates under the relevant welfare funds and this position of law is and has always been the case and the clarifications brought about by the amendment clearly apply retrospectively. The case laws relied on by the appellant which were rendered prior to the clarificatory amendments, therefore are not applicable to the present case. 4.2.30 It is therefore, held that the disallowance made by AO on account of appellant's failure to pay the employee's contribution of PF/ESI within the prescribed due dates as per section 36(1)(va) is strictly in accordance with law. The order is therefore, confirmed fully. Appellant's Ground on the issue fails.” 9. I find merit in the contention of Ld. Counsel for the assessee that the

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 28th December, 2021.

Sd/-

(KUL BHARAT) JUDICIAL MEMBER

*Amit Kumar* Page | 14