TECHNOBLAST MINING CORPORATION, RAIGARH,RAIGARH vs. PRINCIPAL COMMISSIONER OF INCOME TAX, RAIPUR-1, RAIPUR

CIT Vs. Gabriel India Ltd. (1993) Bombay High Court.

CIT Vs. T.Naraina Pai of Karnataka High Court.

Hon'ble Bench of Jurisdictional ITAT, Raipur in its decision dtd.29.05.2023, in the case of DCIT, Bhilai Vs. N.R.VVires Pvt. Ltd. & 38 other cases has allowed all the respective miscellaneous applications filed by the department u/s. 254(2) of the Act. It is held that since no such rider is found in the judgment of the Hon'ble Apex Court in the case of Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax-I (supra), which means 1 that the same would have a retrospective application.

In the case of Guardian India Operations Pvt. Ltd., Chennai Vs. PCIT-1, Chennai VITA No.842/CHNY/2024; A.Y. 2017-18; Dt.07.08.20241, Hon'ble ITAT, Chennai has held that "respectfully following the judicial precedents relied upon in the case of Checkmate Services (P). Ltd. Vs CIT and Electrical India Vs ADIT [2023] 147 taxmaqn.com 470, we also held that the decision of the Hon'ble Supreme Court would relate back to the date of consequential amendment brought in by Legislatures in respective provisions of the Act and it was presumed that the legal position was always since inception and the employee's contributions was always subject to rigours of section 36(1)(va) of the Act. Case laws relied upon by the assessee on merit of the issue has already been considered by the Hon'ble Supreme Court in the case of Checkmate Services (P). Ltd. Vs CIT itself. Therefore, we are of the considered opinion that order of AO dated 21.04.2021 passed u/s 143(3) r.w. section 1448 of the Act is erroneous and prejudicial to the interest of revenue. Hence, we find no infirmity in the impugned order of Id.PCIT revising the order of AO dated 21.04.2021 passed u/s 143(3) r.w. section 1448 of the Act."

In the case of Checkmate Services Pvt. Ltd.vs The Addl. Cit, Range-1 Baroda on 31 January, 2023 it is held that "It is, therefore clear that the law under section 36(1)(va) of the Act in the light of the Explanation-1 as declared by the Hon'ble Apex Court in the case of Checkmate Services Pvt. Ltd. (supra), shall be taken to have effect from the enactment of the provision by way of Finance Act, 1987 with effect from 01/04/1988. No other inference is possible."

In the case of O.S. Motors Pvt. Ltd. vs Principal Commissioner of Income Tax, Jodhpur [ITA No.54/Jodh/2022; A.Y. 2017-18; Dt.16.01.2023], Hon'ble ITAT, Jodhpur has held that "regarding PF & ESI contributions under Section 36(1)(v), the ITAT agreed with the PCIT that the AO had not made any inquiry into the timing of payments, thereby preventing a clear establishment of the AO's stance. Consequently, the PCIT was justified in setting aside the AO's order on this matter."

Thus, it can be stated that this is a case of A.O not conducting proper and correct enquiries. It is not out of place to mentioned that the Explanation-2 introduces in Section 263 w.e.f. 01.06.2015 provides that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if in the opinion of the Principal Commissioner: (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board u/s 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. With the insertion of this explanation, the decisions, which hold that PCIT should carry out enquiries, if AO failed to carry out enquiries to show as to how the Order passed by the AO is erroneous, are no longer applicable. Further, it is not out of place to mention that the honorable Supreme Court in the cases of Taradevi Agarwal Vs CIT (1972) 88 ITR 373(SC) and in the case of Rampyari Devi Saraogi Vs CIT (1968) 67 ITR 84 (SC) have already held that failure to conduct enquiries on part of AO constitutes assessment order to be erroneous and prejudicial to the interest of Revenue.

Considering the above legal provisions of the Act and the factual position of this case as emanating from the assessment order and case records as well as the judicial precedents as discussed above, I am of the considered opinion that the assessment order is erroneous in so far as it is prejudicial to the interests of revenue in view of Section 263 of the Income tax Act. Thus, the assessment order is held to be erroneous in so far as it is prejudicial to the interests of revenue. The said assessment order is hereby set-aside to the file of the AO with a direction to pass a fresh assessment order in a speaking manner after making all necessary enquiries required and after providing due and adequate opportunity of being heard to the assessee and after considering all the submissions, etc. made and counter-reply submitted by the assessee in a fair and judicious manner.”

The Ld. Pr. CIT observed that the assessee company had belatedly deposited their employee’s contribution towards EPF considering the due dates under the relevant Acts and regulations. The Pr. CIT relied on the decision of the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (2022) 448 ITR 518 (SC) and thereafter, found that the A.O had not conducted any enquiry with regard to this issue which had made the assessment as erroneous in so far it was prejudicial to the interest of the revenue. Accordingly, the assessment order was set-aside to the file of the A.O with a direction to pass a fresh assessment order in a speaking manner while complying with the principles of natural justice. We find that the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (supra) on the aforesaid issue held and observed as follows:

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 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.

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.”

That admittedly when the facts are that the employee’s contribution towards EPF were deposited beyond the due date as prescribed within the relevant statutes itself, in such scenario, the contributions towards employee’s in possession of the employer is considered as deemed income in the hands of the employer.

The Ld. Counsel for the assessee failed to demonstrate whether the A.O had conducted any enquiry in this regard. That on a careful perusal of the assessment order itself shows that there has not been, in fact, any enquiry conducted by the A.O with regard to the delayed payment of employee’s share of contribution to EPF. Considering the entire facts and circumstances, we do not find any infirmity with the findings of the Ld. Pr. CIT which is upheld.

In the result, appeal of the assessee is dismissed. Order pronounced in the open court on 27th day of June, 2025.