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Income Tax Appellate Tribunal, ‘A’ BENCH, PUNE
Before: SHRI INTURI RAMA RAO & SHRI PARTHA SARATHI CHAUDHURY
ORDER PER BENCH This appeal preferred by the assessee emanates from the order of the National Faceless Appeal Centre (NFAC), Delhi, dated 13-09-2021 for A.Y. 2017-18 as per the following grounds of appeal.
1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in confirming addition of Rs. 14,83,912/- under the head Profit and Gains from Business and Profession without appreciating the fact that though the payment of Employee's Provident Fund and Employee State Insurance Contribution was made after the due date specified under relevant act but was made before the due date of filing of return of income under section 139(1) of the Act and hence no disallowance is warranted under section 36(1 )(va) r.w.s 43B of the Act. The appellant hereby prays that the disallowance of Rs. 14,83,912/- may please be deleted.
2. On the facts and in the circumstances of the case and in law, , the learned Commissioner of Income Tax (Appeals) has erred in confirming the addition made by the learned assessing officer of Rs. 14,83,912/- under the head Profit and Gains from Business or Profession without appreciating the fact that the explanation 2 to the section 36(1 )(va) of the Act was inserted by Finance Act, 2021 w.e.f 01/04/2021 and hence not applicable to the Assessment year 2017- 18. The appellant hereby prays that the disallowance of Rs. 14,83,912/- may please be deleted. 3. The appellant hereby reserves the right to add, alter, amend or delete any ground/s of appeal.” 2. Admittedly, this appeal is time-barred by 27days. By virtue of judgment of the Hon'ble Supreme Court in Cognizance for Extension of 2 ITA 96 of 2022 Lokmangal Mauli Industries A.Y. 2017-18 Limitation, In re 438 ITR 296 (SC) read with judgment in Cognizance for Extension of Limitation, In re 432 ITRM206 (SC) dated 08-03-2021 and 421 ITR 314, the said delay filing the appeal is condoned and the appeal is admitted for disposal on merits
3. The only issue involved in this appeal is the disallowance of employees‟ contribution to Provident Fund as well as ESIC. It is the case of the assessee that as per various decisions of Pune Tribunal it has been held that if the employees‟ contribution to provident fund is paid before the due date of filing of return of income, then it is deductible as per provisions of section 43B of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) and the amendment made by the Finance Act, 2021 inserting Explanation 2 to section 43B is applicable prospectively i.e. from A.Y. 2021-22. Admittedly, in the present case before us, the payment of impugned employee‟s‟ contribution to provident fund was before the due date of filing of return of income u/s 139(1) of the Act.
4. In the recent past, it has been held by various Benches of the ITAT that if the assessee has not deposited employees‟ contribution of E.P.F, ESI, etc. within due date prescribed under the respective statutes but paid before due date of filing the return of income under the provisions of section 139(1) of the Act, in such case, the A.O was directed to delete additions made under section 36(1)(va) of the Act from the hands of the assessee. Pune Tribunal have passed orders in favour of the assessees relying on Hon'ble Jurisdictional High Court in the case of CIT Vs. Ghatge Patil Transports Ltd. 368 ITR 769 (Bom) which followed the decision of Hon'ble Himachal Pradesh High Court in the case of CIT Vs. Nipso Polyfabrics Ltd. (2013) 350 ITR 327 (HP). In the legal jurisprudence interpreting the provisions of sec. 30(1)(va) and section 43B of the Act, there has been a division of opinion on the issue where the Hon'ble
3 ITA 96 of 2022 Lokmangal Mauli Industries A.Y. 2017-18 High Courts of Bombay, Himachal Pradesh, Calcutta, Gauhati and Delhi have interpreted the provisions beneficial to the assessee while the Hon'ble High Courts of Kerala and Gujarat have interpreted the provisions in favour of the Revenue. These difference of views were noticed by the Hon'ble Supreme Court because of which it had allowed Special Leave to Appeal in a group of matters taking the lead case in the matter of Checkmate Services P. Ltd. Vs. CIT-1 (Civil Appeal No. 2833 of 2016 and others). In all these appeals, the common question involved is with respect to the interpretation of section 36(1)(va) and section 43B of the Act and whether the appellant-assessees were entitled to deduction of amounts deposited by them towards employees‟ contribution in terms of EPF Act, EPF Scheme, ESI Act, ESI Regulations or any other provident fund or superannuation funds. In the year under consideration, the A.O has ruled that the appellant-assessee has belatedly deposited the employees‟ contribution towards the EPF and ESI considering the due date under the relevant Acts and Regulations. Secondly, the A.O ruled by virtue of section 30(1)(va) read with section 2(24)(x) of the Act that such amounts received by the appellant-assessee constitute “income”. Those amounts could not have been allowed as deduction u/s 36(1)(va) of the Act when the payment was made beyond the relevant due date under the respective Statutes. In other words, as per the A.O as such amounts were paid beyond the due date as prescribed under the respective Acts the right to claim such amounts as allowable deduction while computing the income was lost for ever. The assessee‟s plea was unsuccessful before the I.T.A.T. and ultimately the Hon'ble Gujarat High Court also rejected the plea of the assessee. As noticed earlier, on this issue since there was a division of opinion amongst various Hon'ble High Courts, therefore, Hon'ble Supreme Court granted Special Leave
4 ITA 96 of 2022 Lokmangal Mauli Industries A.Y. 2017-18 to Appeal in all these cases. It was observed and held by the Hon'ble Supreme Court as follows:
“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 Sangh 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 in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling n Alom Extrusions. As noticed previously, Alom Extrusions 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 retain 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 assessee‟s 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 5 ITA 96 of 2022 Lokmangal Mauli Industries A.Y. 2017-18 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 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.”
In the aforesaid judgment, the Hon'ble Supreme Court has analysed the legal essence of the welfare legislations such as ESI, EPF, etc. which are primarily for the benefit of the employees. The employees‟ hard earned money are contributed to these funds whereby their contributions are given to the employers to be deposited as per these enactments. When the money is given by the employees, the employer is holding that money on behalf of the employees in the manner of good faith and trust. They are not part of the employers‟ income, nor are they heads of deduction per se in the form of statutory pay out. In fact, they are others income, money, only deemed to be income with the object of ensuring that they are paid within the due date specified in that particular statute. Therefore, they have to be deposited in terms of such welfare enactment. It is open to deposit in terms of those
6 ITA 96 of 2022 Lokmangal Mauli Industries A.Y. 2017-18 statutes on or before the due date as mandated by such concerned law that the amount which is otherwise retained and is deemed income in the hands of the employer is therefore, treated as a deduction. Essentially the condition precedent for deduction is that therefore, such amounts which are held in trust for the employees should be deposited by the employer on or before the due date as prescribed under the relevant Statutes. The Hon'ble Supreme Court further held that if this approach and reasoning is adopted then the non- obstante clause u/s 43B or anything contained in that provision would never absolve the assessee-employer from its liability to deposit employees‟ contribution on or before the due date as mentioned in the respective enactments as a condition for deduction. In view thereof, the Hon'ble Apex Court upheld the findings of Hon'ble Gujarat High Court and also stated that the decisions of other Hon'ble High Courts holding to the contrary do not lay down the correct proposition of law.
Reverting to the facts of the present case, it is an admitted fact that the payment of employees‟ contribution to the provident fund was made before the due date of filing of return of income u/s 139(1) of the Act but beyond the due date as provided in the respective Statutes.
Respectfully following the judgment of Hon'ble Supreme Court (supra) we hold that the assessee-employer was duty bound to deposit the employees‟ contribution to provident fund within the due date as mentioned in the respective Statutes. Since this was not done the assessee is not entitled for deduction u/s 36(1)(va) read with section 43B of the Act and the said amount has to be construed as deemed income of the assessee and added to his total income. We do not find therefore, any infirmity with the findings of the Revenue authorities and the appeal of the assessee is dismissed.
7 ITA 96 of 2022 Lokmangal Mauli Industries A.Y. 2017-18
In the result, appeal filed by the assessee stands dismissed.
Order pronounced in the open Court on this 21st November 2022.