INDIYAA DISTRIBUTION NETWORK LLP,INDORE vs. DEPUTY COMMISSIONER OF INCOME TAX-1(1), INDORE, INDORE

This appeal by the assessee is directed against the order dated 23rd February, 2023, of Ld. CIT(A, NFAC, Delhi, for the assessment year 2018- 19.

The assessee has raised following grounds of appeal :-

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 retained 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 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.

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 Indiyaa Distribution Network LLP, Indore vs. DCIT,1(1), Indore 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. 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.”

The assessee has also raised an objection against the validity of the assessment order on the ground that the AO has not issued a draft order mandatory as per the e-Assessment Scheme, 2019. The Ld. Authorized Representative of the assessee has submitted that the assessment order was passed by the AO after the case of the assessee was selected for complete scrutiny in e-Assessment Scheme 2019. However, the AO has not issued the draft assessment order as well as the show cause notice to the assessee before finalizing the assessment. Thus, the Ld. Authorized Representative of the assessee has submitted that the impugned order passed by the AO is invalid and liable to be quashed, when it is not in the conformity of the e- Assessment Scheme, 2019. The Ld. Authorized Representative of the assessee has submitted that the CBDT vide notification dated 1st November, 2019, has notified the procedure for completion of Faceless Assessment and as per sub clause (xiv) and (xvi) of the Clause 2 of the said Notification, the AO is required to issue a draft assessment order and an opportunity is required to be given to the assessee in case any variation prejudicial to the interests of the assessee is proposed in the draft assessment order by serving a notice calling upon him to show cause as to why the proposed variation should not be made. Thus, the Ld. Authorized Representative of the assessee has submitted that when the AO has made a variation to the returned income of the assessee and the disallowance made was prejudicial to the interests of the assessee, then the AO ought to have issued a draft assessment order alongwith show cause notice to the assessee as to why the proposed addition should not be made in its case, therefore, making the Indiyaa Distribution Network LLP, Indore vs. DCIT,1(1), Indore addition directly without any show cause notice to the assessee and without giving any opportunity to explain its case, the order passed by the AO would become bad in law and liable to be quashed. The Ld. Authorized Representative of the assessee has relied upon the decision of Hon'ble Bombay High Court in the case of Chander Arjan Das Manwani vs. NFAC and Others, 283 Taxman 380 (Bom).

On the other hand, the Ld. Departmental Representative has submitted that when the AO has made no variation in the returned income ,but assessed the income as it was assessed by the CPC while processing the return u/s 143(1), then there was no requirement of issuing any show cause notice to the assessee. He has referred to e-Assessment Scheme 2019 and submitted that only in case the AO has proposed any addition or variation, which is prejudicial to the interests of the assessee, a show cause notice is required to be given to the assessee before passing final assessment order. He has further submitted that the Ld. CIT(A) has dismissed this ground of appeal as the assessee did not press the same and, therefore, the assessee cannot agitate this issue before the Tribunal.

We have considered the rival submissions as well as relevant material placed on record. There is no dispute that as per the e-Assessment Scheme, 2019, notified by the CBDT by Notification dated 1st November, 2019, the scrutiny is undertaken by National e-Assessment Centre by issuing a notice u/s 143(2) of the Act specifying the issues of selection of the case for scrutiny assessment. After receiving the response from the assessee to the notice u/s 143(2), the case shall be assigned by the National e-Assessment Indiyaa Distribution Network LLP, Indore vs. DCIT,1(1), Indore Centre to specific assessment unit in any one regional e-Assessment Centre through an automatic allocation system. Thus, under the e-Assessment Scheme, no direct correspondence is done between the assessment Unit or the regional assessment Centre and the assessee, but all the correspondences are made through National e-Assessment Centre.

Since this is a very serious objection raised by the assessee which ought to have been decided by the Ld. CIT(A), instead of dismissing on the ground of general in nature and not pressed. The Ld. CIT(A) ought to have decided this issue by considering the fact regarding issuance of draft assessment and procedure as per e-Assessment Scheme, 2019. The assessee is seeking quashing of the assessment order being invalid on the strength of judgement of Hon'ble Mumbai High Court in the case of Chander Arjan Das vs. NFAC and Others, (supra). However, it is pertinent to note that the said decision of Hon'ble Bombay High Court has been set- aside by the Hon'ble Supreme Court reported in 293 Taxman 296 ( S.C.) in the case of National Faceless Assessment Centre vs. Mantra Industries Limited in para 2 to 7, as under :- “2. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court of Judicature at Bombay in Chander Arjandas Manwani v. National Faceless Assessment Centre [2021] 130 taxmann.com 445/283 Taxman 380/[2022] 442 ITR 197, by which the High Court has allowed the said writ petition and has quashed the Assessment Order, the Revenue has preferred the present appeal.

From the impugned judgment and order passed by the High Court, it appears that while quashing and setting aside the Assessment Order, the High Court has heavily relied upon the CBDT Circular dated 13-8-2020 issued under section 119 of the Income-tax Act, 1961 (for short "the Act"), more particularly, para 3 of the said CBDT Circular which reads as under:- "3. Any assessment order which is not in conformity with Para-2 above, shall be treated as non-est and shall be deemed to have never been passed."

Accordingly, following the judgement of Hon'ble Supreme Court, this issue is remanded to the record of the AO to pass a fresh assessment order after following due process in accordance with law.

In the result, the appeal of the assessee is partly allowed for statistical purposes.