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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
Per Laxmi Prasad Sahu, Accountant Member
This appeal is filed by the assessee against the order dated 23.04.2024 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the AY 2017-18 on the following grounds:-
“1. The learned CIT(A) erred in passing the order in the manner he did. 2. The learned CIT (A) ought to have appreciate that the amount of Employee's share to ESI an PF was paid within the due date as per EPF an ESI act. Hence disallowance as made is bad in law.
3. The learned CIT(A) ought to have appreciate that as per clause 38 of Employees provident fun scheme 1952, payment of contribution of employees share should be made within 15 day from the end of the month during which disbursement of salary was made .
Without prejudice, the impugned additions are excessively arbitrary and unreasonable and liable to be deleted in full.
For these and such other grounds that may be urged at the time of hearing the appellant pray that the appeal may be allowed.” 2. Briefly stated the facts of the case are that the assessee is an individual engaged in the contract business of garbage cleaning for Mysore City Corporation and MUDA. The assessee filed return of income declaring income of Rs.56,23,730. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. During the assessment proceedings, the AO noted that the assessee has claimed amount of Rs.1,91,50,842 towards EPF paid and debited in the P&L account, out of which certain amounts were paid after the due date as contemplated by PF Scheme, the details are as under:-
Month EPF—Employees Due date of Date of payment Share (Rs.) payment May, 2016 5,50,778/- 15.06.2016 27.06.2016 August, 2016 5,49,473/- 15.09.2016 28.09.2016 8,64,285/- 15.10.2016 19.10.2016 September, 2016 October, 2016 8,78,881/- 15.11.2016 29.11.2016 8,75,509/- 15.12.2016 17.12.2016 November, 2016 8,58,306/- 15.01.2017 25.01.2017 December, 2016 February, 2017 8,94,933/- 15.03.2017 24.03.2017 March, 2017 8,79,079/- 15.04.2017 27.04.2017 63,51,244/- Total
Further, the assessee has claimed an amount of Rs.49,11,683 towards ESIC and some of the amounts were paid after the due date as under:-
Month Due date of Date of payment ESIC collected payment (Rs.) May, 2016 80,628/- 15.06.2016 27.06.2016 June, 2016 81,666/- 15.07.2016 19.07.2016 July, 2016 83,755/- 15.08.2016 20.09.2016 August, 2016 80,462/- 15.09.2016 28.09.2016 1,26,466/- 15.10.2016 20.10.2016 September, 2016 October, 2016 1,35,429/- 15.11.2016 29.11.2016 1,34,905/- 15.12.2016 21.12.2016 November, 2016 1,30,906/- 15.01.2017 25.01.2017 December, 2016 February, 2017 1,31,511/- 15.03.2017 27.03.2017 March, 2017 1,28,1991- 15.04.2017 27.04.2017 11,13,927/- Total
4. Accordingly a proposal for disallowance of the amount u/s 36(1)(va) was sent and the assessee relying on certain judgments filed objections as under:-
“It is submitted, that although i did not deposit the contribution, within the stipulated time, as contemplated by the paragraph-30 of the PF scheme or before the due date under the provisions of the PF Scheme/Act, I deposited the contribution to the PF/ESI fund well before the due date contemplated under the section 139(1) of the Act. It is further submitted, that it is clear that the word "Contribution" used in Clause (b) of section 43-8 of the Income Tax Act, means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub section (1) of the IT
Act is made on or before the due date for furnishing the return of income under sub section (1) of section 139 of the IT Act is made, the employer is entitled for deduction.” 5. However, the AO after considering the assessee’s submissions made the disallowance towards delayed deposits to EPF & ESI and added back the amount to the total income. Aggrieved from the above order, the assessee filed appeal before the First Appellate Authority (FAA).
The ld. FAA after discussing the issue in detail and relying on the Hon’ble Apex Court judgment in the case of Checkmate Services P. Ltd. v. CIT in Civil Appeal No.2833/2016 dated 12.11.2022 dismissed the appeal of the assessee.
The ld. AR reiterated the submissions made before the lower authorities and submitted that the due date for payment to EPF and ESI should be considered from the date of payment of salary. The assessee is engaged in manpower supply and totally dependent upon payments received from the contractee. If the contractee makes late payment, accordingly assessee has paid salary. The contractee did not pay the actual amount at the end of each month so that assessee would be able to pay salary as well as statutory dues within time. She also submitted that during the course of assessment proceedings, the complete challans for payments to ESI & EPF were not submitted. Therefore she requested that the matter may be remanded back to the AO for examination in the light of the judgments in the case of Manikandan Vazhukkapara Kumaran in dated 29.11.2023, Sri Elavarthy Ramana Reddy in dated 14.12.2023 and C.S. Manjunath in dated 12.6.2024.
On the other hand, the ld. DR relied on the order of lower authorities and submitted that the AO has made detailed analysis which is clear from para 2 & 3 of the assessment order regarding the employee share, due date of payment and actual date of payment. He submitted that this issue is settled by the Hon’ble Apex Court judgment in the case of Checkmate Services P. Ltd. (supra) to which the ld. FAA has referred.
9. After considering the above submissions by both sides, we are compelled to analyze the provisions of Provident Fund Act relied by the ld. A.R. The similar issue has been decided in of the coordinate bench of the Tribunal in which it has been observed in para No. 09 to 12 as under:-
“The Section 38 of the Employees Provident Fund Act reads as under: “Section 38 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, becomes relevant. Sub-section (1) thereof reads as under: The employer shall, before paying the member his wages in respect of any period or part of period for which contributions are payable, deduct the employee's contribution from his wages which together with his own contribution as well as an administrative charge of such percentage [of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee, as the Central Government may fix. He shall within fifteen days of the close of every month pay the same to the fund "electronic through internet banking of the State Bank of India or any other Nationalized Bank authorized for collection" on account of contributions and administrative charge]: "Provided that the Central Provident Fund Commissioner may for reasons to be recorded in writing, allow any employer or class of employer to deposit the contributions by any other mode other than internet banking"
10. The above provision requires an employer to deduct the employees’ contribution before paying the employee his wages and further requires to deposit such contribution withheld by the employer along with employer’s own contribution to the relevant fund held by the Government. It is further requires that the employer shall within 15 days of the close of every month pay the same to such fund along with administrative charges. It is thus, clear that after deducting the employees’ contribution towards the fund the same has to be deposited with the Government within 15 days of the close of every month. In our opinion, reference to 15 days of the close of every month has to be in relation to the month during which the payment of wages is to be made and the corresponding liability to deduct employees’ contribution to such fund immediately arises. Further, the expression “within 15 days of the close of every month”, therefore, must be interpreted as having reference to the close of the month for which the wages are required to be paid with corresponding date to deduct employees’ contribution and to deposit the same with the relevant fund.
On perusal of section 38 of the Employees Provident Fund & Miscellaneous Provisions Act, 1952, the phrase used in respect of the wages that an employer is supposed to pay to an employee for any period or part of period, are represented as, contributions that are “payable”. This means, the legislature is very clear in its intent that the employer is supposed to deduct the contributions in respect of the funds at the end of the month when the employee is eligible to receive his or her wages and the employer is cast upon with the duty to pay the necessary dues. The section 38 therefore, envisages that, at the end of every month when the employer is due to make the payment to such employees, the necessary contributions have to be deducted and deposit within 15 days of such deductions. With such an understanding, the argument advanced by the ld. A.R. cannot be appreciated that, in a case the salary or wages are paid in a subsequent month, the liability to deposit the employees’ contribution to the fund gets deferred by another month. 12.The dictum laid down by Hon’ble Supreme Court in case of Checkmate Services Pvt. Ltd. Cited (supra) is that section 38 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 makes it obligatory for the employer before paying and employee the wages or salary to deduct the employees’ contribution. Thus, to analyze in the form of an example assuming a circumstance that the employer does not make payment of salary/wages to the employees for 2 to 3 consecutive months. This does not mean that the employer gets the benefit of depositing the employees’ contribution of such months for which the salary was not paid on time to such employees will get shifted. That would render the entire provision otios and is not the intention of the legislature also.”
10. During the course of hearing, it was brought to notice of both the parties that the ITAT Jodhpur Bench in the case of Tarun Construction Co. v. ITO reported in [2023] 157 taxmann.com 727 (Jodh) has discussed the issue in detail which is as under:-
“5. We have given a thoughtful consideration to rival submissions and perused materials on record. We have also applied our mind to various decisions cited before us.
6. In so far as factual aspect of the issue is concerned, there is no dispute between the parties that the employees' contribution to PF and ESI were not deposited within the due date prescribed under the PF and ESI Acts in terms of Explanation-1 to section 36(1)(va) of the Act. The said provision makes it clear that if employees' contribution to PF and ESI is not paid within due date provided under the respective statutes, it has to be treated as income of the concerned assessee under section 2(24)(x) of the Act. In accordance with the statutory provision, the departmental authorities have made the disallowances.
7. The assessee has contested the disallowance broadly on the following grounds:
♦ In the tax audit report, the auditor has only mentioned the details of contribution received from employees for various funds and has not indicated these disallowances expressly so as to attract adjustment under section 143(1)(a)(iv) of the Act. ♦ The disallowances made are beyond the scope and ambit of adjustment provided under section 143(1)(a) while processing the returns of income. ♦ At the time of filing of returns of income by the assessee for the respective assessment years, the law prevailing on the said date allowed the assessee to claim deduction of employees' contribution to PF and ESI, if deposited on or before due date of filing of income-tax return. In that scenario, the CPC could not have made adjustment under section 143(1)(a)(iv) of the Act. ♦ Amendment to section 36(1)(va) introducing Explanation-2, which clarifies that the provisions of section 43B shall not apply for the purpose of determining the due date, vis a vis, section 36(1)(va), will apply prospectively. ♦ Without prejudice, even if it is not allowable under section 36(1)(va), alternatively, it has to be allowed under section 37 of the Act in the year of actual payment.
8. In our considered opinion, none of these submissions of the assessee are acceptable for the reasons to be discussed by us in ensuing paragraphs.
Section 36 is a deduction provision under the Act. A reading of section 36(1)(va) makes it clear that in respect of any sum received by an assessee from his employees, to which section 2(24)(x) applies, the assessee can get deduction only if such sum is credited to the employees' accounts in the relevant fund or funds on or before due date. Explanation-1 to section 36(1)(va) clarifies the meaning of expression "due date" by stating that it means the date, by which the assessee is required as an employer to credit employees' contribution to the employees' account in the relevant funds under any Act, Rule or Order or Notification issued thereunder. Section 2(24)(x) provides that 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 the Employees State Insurance Act, or any other fund for the welfare of such employees, has to be treated as income of the assessee. It is relevant to observe, both section 36(1)(va) and section 2(24)(x) co-exist in the statute w.e.f. 1-4-1988.
Thus, from the very inception of the provisions in the statute, the intention of the legislature, as could be gathered from the language used in the provisions, is quite clear that unless employees' contribution to certain funds such as PF or ESI are not remitted to the accounts of the concerned employees within the due date provided under the relevant Acts and Rules, such contribution has to be treated as the income of the assessee in terms of section 2(24)(x) of the Act. Thus, to that extent, there is no ambiguity in the statutory provisions. While interpreting the true meaning and import of the provisions contained under section 36(1)(va) and 2(24)(x) of the Act, the Hon'ble Supreme Court in the case of Checkmate Services (P.) Ltd. (supra) has held as under : "32. The scheme of the provisions relating to deductions, such as Sections 32 - 37, on the other hand, deal primarily with business, commercial or professional expenditure, under various heads (including depreciation). Each of these deductions, has its contours, depending upon the expressions used, and the conditions that are to be met. It is therefore necessary to bear in mind that specific enumeration of deductions, dependent upon fulfilment of particular conditions, would qualify as allowable deductions: failure by the assessee to comply with those conditions, would render the claim vulnerable to rejection. In this scheme the deduction made by employers to approved provident fund schemes, is the subject matter of Section 36 (iv). It is noteworthy, that this provision was part of the original IT Act; it has largely remained unaltered. On the other hand, Section 36(1)(va) was specifically inserted by the Finance Act, 1987, w.e.f. 1-04-1988. Through the same amendment, by Section 3(b), Section 2(24) - which defines various kinds of "income" - inserted clause (x). This is a significant amendment, because Parliament intended that amounts not earned by the assessee, but received by it, - whether in the form of deductions, or otherwise, as receipts, were to be treated as income. The inclusion of a class of receipt, i.e., amounts received (or deducted from the employees) were to be part of the employer/assessee's income. Since these amounts were not receipts that belonged to the assessee, but were held by it, as trustees, as it were, Section 36(1)(va) was inserted specifically to ensure that if these receipts were deposited in the EPF/ESI accounts of the employees concerned, they could be treated as deductions.
Section 36(1)(va) was hedged with the condition that the amounts/receipts had to be deposited by the employer, with the EPF/ESI, on or before the due date. The last expression "due date" was dealt with in the explanation as the date by which such amounts had to be credited by the employer, in the concerned enactments such as EPF/ESI Acts. Importantly, such a condition (i.e., depositing the amount on or before the due date) has not been enacted in relation to the employer's contribution (i.e., Section 36(1)(iv)).
The significance of this is that Parliament treated contributions under section 36(1)(va) differently from those under section 36(1)(iv). The latter (hereinafter, "employers' contribution") is described as "sum paid by the assessee as an employer by way of contribution towards a recognized provident fund". However, the phraseology of Section 36(1)(va) differs from Section 36(1)(iv). It enacts that "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 essential character of an employees' contribution, i.e., that it is part of the employees' income, held in trust by the employer is underlined by the condition that it has to be deposited on or before the due date.
It is therefore, manifest that the definition of contribution in Section 2 (c) is used in entirely different senses, in the relevant deduction clauses. The differentiation is also evident from the fact that each of these contributions is separately dealt with in different clauses of Section 36 (1). All these establish that Parliament, while introducing Section 36(1)(va) along with Section 2(24)(x), was aware of the distinction between the two types of contributions. There was a statutory classification, under the IT Act, between the two.
It is instructive in this context to note that the Finance Act, 1987, introduced to Section 2(24), the definition clause (x), with effect from 1 April 1988; it also brought in Section 36(1)(va). The memorandum explaining these provisions, in the Finance Bill, 1987, presented to the Parliament, is extracted below: "Measures of penalising employers mis-utilising contributions to the provident fund or any funds set up under the provisions of the Employees State Insurance Act, 1948, or any other fund for the welfare of employees."
12.1 The existing provisions provide for a deduction in respect of any payment by way of contribution to the provident fund or a superannuation fund or any other fund for welfare of employees in the year in which the liabilities are actually discharged (Section 43B). The effect of the amendment brought about by the Finance act, is that no deduction will be allowed in the assessment of the employer, unless such contribution is paid into the fund on or before the due date. "Due date" means the date by which an employer is required to credit the contribution to the employees account in the relevant fund or under the relevant provisions of any law or term of the contract of service or otherwise. (Explanation to Section 36 (1) of the Finance Act) 12.2 In addition, contribution of the employees to the various funds which are deducted by the employer from the salaries and wages of the employees will be taxed as income within brackets insertion of new [clause (x) in clause (24) of Section 2] of the employer, if such contribution is not credited by the employer in the account of the employee in the relevant fund by the due date. Where such income is not chargeable to tax under the head "profits and gains of business or profession" it will be assessed under the head "income from other sources."
There is no doubt that in Alom Extrusions, this court did consider the impact of deletion of second proviso to Section 43B, which mandated that unless the amount of employers' contribution was deposited with the authorities, the deduction otherwise permissible in law, would not be available. This court was of the opinion that the omission was curative, and that as long as the employer deposited the dues, before filing the return of income tax, the deduction was available.
A reading of the judgment in Alom Extrusions, would reveal that this court, did not consider Sections 2(24)(x) and 36(1)(va). Furthermore, the separate provisions in Section 36(1) for employers' contribution and employees' contribution, too went unnoticed. The court observed inter alia, that: "15. …It is important to note once again that, by Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about an uniformity in tax, duty, cess and fee on the one hand vis-a- vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act,
2003, is retrospective in operation. Moreover, the judgement in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that Finance Act, 2003 will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted]. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that Finance Act, 2003, 2003, to the above extent, operated prospectively. Take an example - in the present case, the respondents have deposited the contributions with the R.P.F.C. after 31st March [end of accounting year] but before filing of the Returns under the Income-tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under section 43B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right upto 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction under section 43B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003".
** ** ** 48. One of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with. Eagle Flask Industries Ltd v. Commissioner of Central Exercise 2004 Supp (4) SCR 35. This rule is in line with the general principle that taxing statutes are to be construed strictly, and that there is no room for equitable considerations.
That deductions are to be granted only when the conditions which govern them are strictly complied with. This has been laid down in State of Jharkhand v. Ambay Cements as follows: "23…. In our view, the provisions of exemption clause should be strictly construed and if the condition under which the exemption was granted stood changed on account of any subsequent event the exemption would not operate.
In our view, an exception or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in the industrial policy and the exemption notifications.
In our view, the failure to comply with the requirements renders the writ petition filed by the respondent liable to be dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule.
Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to severe consequences, such requirement would be mandatory. It is the cardinal rule of interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, non-compliance with the same must result in cancelling the concession made in favour of the grantee, the respondent herein."
** ** ** 53. 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.
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." 11. The aforesaid observations of Hon'ble Supreme Court would leave no room for doubt or ambiguity regarding the real intent and purport of section 36(1)(va) read with section 2(24)(x) of the Act. Thus, as per the clear language of the aforesaid provisions, unless employees' contribution to PF and ESI are deposited within the due date prescribed under the PF and ESI Acts, not only the assessee would get no deduction under section 36(1)(va), but the amount in question has to be treated as assessee's income under section 2(24)(x) of the Act. To that extent, the issue stands squarely settled by the ratio laid down by Hon'ble Supreme Court in case of Checkmate Services (P.) Ltd. (supra).” 11. Respectfully following the above judgment of the ITAT Jodhpur Bench in the case of Tarun construction Co. noted supra, we hold that the disallowance made by the lower authorities are justified. We also find from Form 3CD that the tax auditor has not reported the mistake pointed out by the revenue authorities in sl. No.20(b) of Form 3CD. The case law relied by the ld. counsel will not support the case of the assessee. Since during the course of hearing the ld. AR submitted that some of the challans for payment could not be produced, therefore for the limited purpose of verification, we send back the issue to the AO and decide the issue as per law. The assessee is directed to produce the necessary challans for proof of payments in the light of section 36(1)(va) of the Act. Needless to mention that the assessee may be given reasonable opportunity of hearing and assessee is directed not to seek unnecessary adjournments.
In the result, the appeal by the assessee is allowed for statistical purposes.
Pronounced in the open court on this 22nd day of October, 2024.