SARIKA VIKRAM WARPE,PUNE vs. INCOME-TAX OFFICER WARD 7(3), , PUNE

Therefore, it is prayed to direct the learned A.O. to delete the impugned disallowance of Rs.14,80,652/-. The learned CIT(A) erred in not deciding upon the 2nd 2. ground of appeal relating to whether the impugned adjustment to the returned income is a permitted adjustment u/s 143(1)(a). Rs.3,84,970/- Therefore, considering the fact that the impugned disallowance is a debatable adjustment, since the same has been deleted by the jurisdictional High Court, in the cases citied in the written submissions, it is prayed to hold the same to be beyond the permitted adjustments allowed u/s 143(1)(a) and accordingly direct the learned A.O. to delete the disallowance.”

3. This is an appeal filed by the assessee i.e. Sixsigma Medicare and Research Ltd., against the order under section 250 of the Income Tax Act, passed by ld.CIT(A) [NFAC] dated 27.09.2021 for the A.Y. 2019-20, emanating from the order of Assistant Director of Income Tax(CPC), Bangalore under section 143(1) of the Act.

Tax Act. The said return was processed under section 143(1) of the Act. The Assistant Director of Income Tax(CPC) i.e. the Assessing Officer(AO) has made disallowance under section 143(1) of Rs.14,80,652/-. The description given in the order under section 143(1) for the said disallowance is as under: “Any sum received from employees as contribution to any provident fund or superannuation fund or any fund set up under ESI Act or any other fund for the welfare of employees to the extent not credited to the employees account on or before the due date [36(1)(va)].”

Thus, the AO had made disallowance based on the Audit Report & Return filed by the assessee, in which, the Assessee, itself, had mentioned the “dates of deposit of employee’s contribution” & “statutory dates for deposit”. Thus, the “delay” is an admitted fact by the assessee.

5. It is also observed that the AO had given an opportunity to the assessee vide communication dated 06.12.2019 send to the email id of the assessee.

6. Aggrieved by the said addition, the assessee filed appeal before the ld.CIT(A)[NFAC]. The ld.CIT(A) upheld the disallowance treating the amendment made to section 36 by Finance Act, 2021 as clarificatory in nature. The ld.CIT(A) dismissed the appeal of the assessee. for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

7. Aggrieved by the same, the assessee filed appeal before this Tribunal.

8. The ld.AR i.e. Shri Pramod Shingte made elaborate argument. He also filed written submissions: “52. 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 wav of deduction authorized bv the statute) as income - it is the character of the amount that is important, i.e.. not income earned. Thus, amounts retained bv the employer from out of the employee’s income bv wav 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 for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

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.

(emphasis supplied) On perusal of these findings, it is evident that Hon’ble Supreme court has in clear terms held that any amount which is received by assessee from his employees under the circumstances as specified in section 2(24)(x), becomes his income and if it is not paid before due date then it remains as income of the appellant.”

9. Mr.J.G.Pendse the ld.AR for Tirupathi Industrial Services Pvt. Ltd. submitted that at the time of the disallowance, there was decision of the Hon’ble Bombay High Court in favour of the assessee, therefore, the AO and ld.CIT(A) were duty bound to follow the decision of Hon’ble Bombay High Court which held that if assessee deposits the Employees Contribution towards ESI/PF before due date of filing of return of income mentioned under section 139(1), then assessee is eligible for deduction under section 36(1)(va) of the Act. The ld.Counsel Mr.Pendse submitted that Hon’ble Supreme Court’s decision in the case of Checkmate Services (P) Ltd., is a subsequent decision and it was not available when AO and ld.CIT(A) passed the order, therefore, the AO and ld.CIT(A) failed to follow the order of Hon’ble Bombay High court in the case of Gadge Patil Transport.

9. Advocate Deepa Khare also submitted her arguments, mainly covering the same issues which has been dealt by Mr.Shingte and Pendse. for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

Services (P) Ltd.,. The issue of delayed payment of employee’s contribution of Provident Fund and ESIC has been decided by Hon’ble SC in the case of Checkmate Services (P.) Ltd. Vs. Commissioner of Income-tax-1 vide order dated October 12, 2022 as under : Quote, “ 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. ” Unquote.

Corporation (ESIC) etc. (hereinafter called `the relevant funds’) was not credited to the employees’ accounts on or before the due date as prescribed under the respective Acts. Thereafter, the assessee applied for rectification but without any success. No succor was provided in the first appeal. Aggrieved thereby, the assessee has come up in appeal before the Tribunal against the confirmation of disallowance. It is an admitted position that the facts and circumstances of all other cases, except two, which have been separately deliberated upon, are similar.

4. Before proceeding further, it would be apposite to take note of the relevant statutory provision in this regard. Section 2(24) provides that `income’ includes: `(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees’. Thus, contribution by employees to the relevant funds becomes income of the employer. Instantly, there is no dispute as to the taxability of such income in the hands of the assessee. Once such an amount becomes income of the employer-assessee, then section 36(1)(va) for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

comes into play for providing the deduction. This provision provides that: `(va) 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.’. The term `due date’ for the purposes of this clause has been defined in Explanation 1 to this provision 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.’ Thus, it is axiomatic that deposit of the employees’ share of the relevant funds before the due date under the respective Acts is sine qua non for claiming the deduction. Au Contraire, if the contribution of the employees to the relevant funds is not deposited by the employer before the due date under the respective etc., then the deduction u/s.36(1)(va) is lost notwithstanding the fact that the share of the employees had already crystallized as income of the employer u/s.2(24)(x) of the Act.

for the deduction only on actual payment basis, has been relaxed by the proviso so as to enable the deduction even if the payment is made before the due date of furnishing the return u/s 139(1) of the Act for that year. The claim of the assessee is that the deduction becomes available in the light of section 36(1)(va) read with section 43B on depositing the employees’ share in the relevant funds before the due date u/s 139(1) of the Act. This position was earlier accepted by some of the Hon’ble High Courts holding that the deduction is allowed even if the assessee deposits the employees’ share in the relevant funds before the date of filing of return u/s.139(1) of the Act. This was on the analogy of treating the employee’s share as having the same character as that of the employer’s share, becoming deductible u/s 36(1)(iv) read in the hue of section 43B(b). Recently, the Hon’ble Supreme Court in Checkmate Services P. Ltd. & Ors. VS. CIT & Ors. (2022) 448 ITR 518 (SC) has threadbare considered this issue and drawn a distinction between the parameters for allowing deduction of employer’s share and employees’ share in the relevant funds. It has been held that the contribution by the employees to the relevant funds is the employer’s income u/s.2(24)(x), but the deduction for the same can be allowed only if such amount is deposited in the employee’s account in the relevant fund before the date stipulated under the respective Acts. The hitherto view taken by some of the Hon’ble High Courts in allowing deduction even where the amount was deposited in the employee’s account before the time allowed u/s.139(1), ergo, got overturned. The net effect of this Apex Court judgment is that the deduction u/s.36(1)(va) can be allowed only if the employees’ share in the relevant funds is deposited by the employer before the due date stipulated in respective Acts and further that the due date u/s.139(1) of the Act is alien for this purpose.

the instant batch of appeals involves the disallowance made u/s.143(1) of the Act. It was argued that no prima facie adjustment can be made in the Intimation issued u/s 143(1) of the Act unless a case is covered within the specific four corners of the provision. It was stressed that the action of the AO in making the extant disallowance does not fall in any of the clauses of section 143(1).

‘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:— (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; (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’

`Explanation.—For the purposes of this sub-section,— for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

(a) "an incorrect claim apparent from any information in the return" shall mean a claim, on the basis of an entry, in the return,— (i) of an item, which is inconsistent with another entry of the same or some other item in such return; (ii) in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or (iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;’

10. Now we turn to clause (iv) of section 143(1)(a) which provides 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’. The words “or increase in income” in the above provision were inserted by the Finance Act, 2021 w.e.f. 01-04-2021. As such, this part of the provision cannot be considered for application during the years under consideration, which are anterior to the amendment. We are left with ascertaining if the disallowance made u/s 36(1)(va) in the for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

Intimation under section 143(1)(a) can be construed as a `disallowance of expenditure indicated in the audit report not taken into account in computing the total income in the return’. Point 20(b) of the audit report in Form 3CA has columns – Serial number; Nature of fund; Sum received from employees; Due date for payment; The actual amount paid; and The actual date of payment to the concerned authorities. A copy of audit report in one of the cases under consideration, namely, S.M. Auto Stamping Pvt. Ltd. (ITA No.521/PUN/2022) has been placed on record. Point 20(b) of the audit report gives the `Sum received from employees’ at Rs.21,800/-. `Due date for payment’ has been reported as 15-07-2017 and `The actual date of payment to the concerned authorities’ has been given as 20-07-2017. Similar is the position regarding other items disallowed u/s.36(1)(va) having `The actual date of payment’ after the `Due date for payment’. Thus, it is manifest that the audit report clearly points out that as against the due date of payment of the employees’ share in the relevant fund on 15.7.2017 for deduction u/s 36(1)(va), the actual payment is delayed and deposited on 20.7.2017. The legislature, for the disallowance under sub-clause (iv) of section 143(1)(a), has used the expression `indicated in the audit report’. The word `indicated’ is wider in amplitude than the word `reported’, which envelopes both the direct and indirect reporting. Even if there is some indication of disallowance in the audit report, which is short of direct reporting of the disallowance, the case gets covered within the purview of the provision warranting the disallowance. However, the indication must be clear and not vague. If the indication in the audit report gives a clear picture of the violation of a provision, there can be no escape from disallowance. Turning to the facts of the case, it is clear from the mandate of section 36(1)(va) that the employees’ share in the relevant funds must be deposited before the due date under the respective Acts. If the audit report mentions the due date of payment and also the actual date of payment with specific reference in column no. 20(b) having heading: `Details of contributions received from employees for various funds as referred to in section 36(1)(va)’, it is an apparent indication of the disallowance of expenditure u/s 36(1)(va) in the audit report in a case where the actual date of payment is beyond the due date. Though for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals) the audit report clearly indicated that there was a delay in the deposit of the employees’ share in the relevant funds, which was in contravention of the prescription of u/s.36(1)(va), the assessee chose not to offer the disallowance in computing the total income in the return, which rightly called for the disallowance in terms of section 143(1)(a) of the Act.

with the remarks that :`Amounts debited to the profit and loss account, to the extent disallowance under section 36 due to non-fulfillment of conditions specified in relevant clauses’. Thus, it is evident that it is a case of `disallowance of expenditure’ and not `increase of income’. Further, the entire challenge by the assessee throughout has been to the disallowance of expenditure made by the AO. It set up a case before the authorities below, including the ld. CIT(A), taking shelter of section 43B of the Act by arguing that the disallowance cannot be made because such payment was made before the due date u/s.139(1) of the Act. As such, the contention of adjustment u/s 143(1)(a)(iv) due to `increase in income’ is jettisoned.

12. Another argument point was put forth on behalf of the assessee that the assessee did not claim any deduction in the Profit and loss account of the amount under consideration and hence no disallowance should have been made. This argument is again bereft of force. The assessee claimed deduction for salary on gross basis, inclusive of the employees’ share to the relevant funds. To put it simply, if gross salary is of Rs.100, out of which a sum of Rs.10 has been deducted as contribution to relevant fund, then the debit of Rs.100 in the Profit and loss account means deduction has been claimed for Rs.10 as well. Ex consequenti, if deduction of Rs.10 is not allowed u/s 36(1)(va) for late deposit of the amount before the due date under the respective Act, it would mean that the claim of Rs.10 included in Rs.100 is not allowed deduction.

13. The ld. AR referred to section 5 of the Payment of Wages Act, 1936, to contend that deduction made from an employee’s salary for the month of October should suffer disallowance only if it is not paid by 15th December. This argument was premised on the language of section 5, which says that the wages of every person employed upon or in any railway, factory or industrial or other establishment upon or in which less than one thousand persons are employed, shall be paid before expiry of the seventh day, after the last day of the wage-period in respect of for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals)

which the wages are payable. It was contended that salary for the month of October, 2022 will be paid before the 7th of November, which will result into income of the employer only at the time of payment, making the due date of payment into relevant fund as on or before 15th December and not 15th November.

15. In view of the foregoing discussion, we are satisfied that the ld.CIT(A) was justified in sustaining the adjustment u/s 143(1)(a) by means of disallowance made in these cases for late deposit of employees’ share to the relevant funds beyond the date prescribed under the respective Acts.

and the facts of this appeal under consideration are almost identical to the facts in ITA No.322/PUN/2022. Therefore, our decision in for A.Y. 2019-20 & ‘20 Others’ Sixsigma Medicare and Research Ltd., & Others (21 Appeals) for A.Y.2019-20 will apply mutatis- mutandis to these appeals mentioned above i.e. from Sl.No.2 to 21. Accordingly, grounds of appeal raised by the assessees from Sl.No.2 to 21 are dismissed.