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Facts
The assessee, engaged in manpower supply, filed her income tax return for AY 2020-21. While processing under section 143(1), the CPC disallowed Rs. 4,92,56,413/- related to employees' share of PF/ESI contributions, alleging deposits were made beyond statutory due dates. The CIT(A) upheld this disallowance, citing amendments by Finance Act, 2021 and the Supreme Court's decision in Checkmate Services Pvt. Ltd., which stated that such contributions are deductible only if deposited within prescribed due dates.
Held
The Tribunal observed that the exact dates of deposit and whether any portion was paid within statutory deadlines were not verified by the Assessing Officer or the CIT(A). Without expressing an opinion on the merits, the Tribunal restored the matter to the Assessing Officer for factual verification, directing them to re-examine the issue with documentary evidence and allow deductions for payments made within due dates.
Key Issues
Whether the disallowance of delayed employees' share of PF/ESI contributions under section 143(1) is valid, considering the retrospectivity of Finance Act, 2021 amendments, and whether such payments fall within the scope of processing under section 143(1) if made before the income tax return filing due date.
Sections Cited
143(1), 36(1)(va), 2(24)(x), 43B, 139(1)
AI-generated summary — verify with the full judgment below
Order PER KRINWANT SAHAY, A.M: This is an appeal filed by the Assessee against the order of the Ld. CIT, Appeal Addl/JCIT(A)-6, Chennai dt. 30/10/2024 pertaining to Assessment Year 2020-21. 2. In the present appeal Assessee has raised the following grounds:
1. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.
2. That the order of the Ld. Commissioner of Income Tax (Appeals). NFAC is erroneous, arbitrary, opposed to law and facts of the case and is, thus, untenable.
3. That the Ld. Commissioner of Income tax(Appeals) has dismissed the appeal of the relying upon the amendment made in 3 the Act by The Finance Act 2021 assuming it to be retrospective and as such the order passed is illegal, arbitrary and unjustified.
4. That the Ld. Commissioner of Income (Appeals) has erred in law as well as on facts in upholding the disallowance of the expenditure of Rs. 4,92,56,413/- claimed on account of deposit in EPF/ESI as employees share while processing of return under section 143(1) which is arbitrary and unjustified.
5. That the Ld. Commissioner of Income Tax (Appeals) has erred in upholding disallowance in as much as it is a debatable issue whether the delayed payment towards employees share in EPF/ESI is deductible or not which is beyond the scope of processing under section 143(1) and as such the disallowance made is illegal, unjustified and arbitrary.
3. Briefly, the facts of the case are that the assessee is engaged in the business of manpower supply carried on through the proprietary concern M/s Secure Guard Security & Manpower Services. The assessee filed her return of income on 18.12.2020 declaring total income of Rs. 2,24,36,140/-. In the said return, she claimed deduction with respect to employees’ share of contributions towards Provident Fund and Employees’ State Insurance, collected by her concern and deposited into the applicable statutory funds. The CPC, Bengaluru, while processing the return under section 143(1), disallowed an amount of Rs. 4,92,56,413/- on the ground that the employees’ contributions were deposited beyond the due dates prescribed under the respective welfare legislations, and accordingly enhanced the returned income and raised a consequential demand after cancelling the originally determined refund.
4. Against the order of the AO the assessee went in appeal before the CIT(A) and submitted that in the intimation under section 143(1), the Assessing Officer noticed, based on the particulars reported in Form 3CD, that the employees’ share of PF/ESI contributions had been deposited after the statutory due dates prescribed under the respective Acts. Applying the provisions of section 36(1)(va) read with section 2(24)(x), the CPC held that belated deposits of employees’ contributions could not be allowed as deduction. It was further observed that the matter was not capable of debatable interpretation under section 143(1) and the disallowance was accordingly made without making enquiry into whether such payments were deposited before the due date of filing the return.
4.1 The CIT(A), after considering the submissions of the assessee and examining the statutory provisions, observed that the assessee had herself accepted that the contributions were deposited after the prescribed due dates. The CIT(A) placed reliance on the amendments introduced by the Finance Act, 2021 to sections 36(1)(va) and 43B, clarifying that the benefit of section 43B is not available in respect of employees’ contributions. The CIT(A) further held that the law stood settled by the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. v. CIT, wherein it was categorically laid down that employees’ contributions are allowable as deduction only when deposited within the due dates prescribed under the respective labour laws and that payment before filing the return under section 139(1) does not grant relief. Applying the above ratio, the CIT(A) upheld the disallowance of Rs. 4,92,56,413/- and dismissed the appeal filed by the assessee.
Against the order of the Ld. CIT(A) the assessee preferred in appeal before the Tribunal.
During the course of hearing athe learned AR submitted that the order of the CIT(A) is wholly erroneous and unsustainable, as it proceeds on an incorrect assumption that the amendment brought by the Finance Act, 2021 to section 36(1)(va) operates retrospectively, whereas the assessee submits that the provision is prospective and therefore cannot govern the assessment year in appeal. It was contended that, prior to the amendment, the allowability of delayed employees’ contribution paid before the return-filing due date was a well recognised position supported by judicial precedent, making the issue debatable in law; hence, the CPC had no authority to make such an adjustment within the limited scope of section 143(1). The AR further argued that the CIT(A) erred in mechanically endorsing the disallowance without adjudicating the core legal grounds, and without appreciating that the adjustment violated principles of natural justice. It was therefore prayed that the disallowance be deleted in toto and the appeal allowed, or in the alternative, the matter be restored to the Assessing Officer to reconsider the issue in accordance with law after proper opportunity of being heard.
Per contra, the Ld. DR relied on the order of Ld. CIT(A).
We have carefully considered the submissions and perused the material available on record. It is not disputed that the issue pertains solely to the allowability of employees’ contributions to PF/ESI aggregating to Rs. 4,92,56,413/-. It is also an admitted position that the payments were deposited into the respective funds, though the assessee asserts that such deposits were made on receipt of payments from clients and, in many cases, prior to the due date for filing the return of income under section 139(1). The Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. has indeed settled the legal proposition that employees’ contributions are deductible only when deposited within due dates prescribed under the respective Acts and that section 43B does not relax the requirement. However, the factual determination of the exact dates of deposit and whether any portion of the impugned contributions was nevertheless deposited within statutory deadlines has not been verified either by the Assessing Officer while issuing intimation under section 143(1) or by the CIT(A).
9.1 In these circumstances, and without expressing any opinion on the merits of disallowance, we are of the considered view that the issue requires factual verification. We, therefore, deem it appropriate to restore the matter to the file of the Assessing Officer with the direction to verify, on the basis of documentary evidence to be furnished by the assessee, the exact dates of deposit of employees’ share contributions and allow deduction to the extent any contributions are found to have been paid within the due dates mandated under the respective welfare legislations. The assessee shall be afforded reasonable opportunity of being heard and to place all relevant records to substantiate her claim.
In the result, the appeal of the assessee is treated as allowed for statistical purposes.