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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Sanjay Arora & Dr. S. Seethalakshmi
O R D E R PER: Dr. S. Seethalakshmi, JM This is an appeal filed by the assessee against the order of the ld. CIT(A), National Faceless Appeal Centre, Delhi dated 25.08.2021 (hereinafter referred to “CIT(A)/NFAC”) for the assessment year 2018-19.
2. The assessee has raised the following grounds of appeal:-
2. The Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in adding the PF contribution amounting to Rs. 7,70,039/- by virtue 36(1)(va) of the Income Tax Act. This will be covered under the provisions of section 43B of the Income Tax Act..
3. The Commissioner of Income Tax (Appeals) has failed to appreciate the fact that, Section 43B is a non-obstante clause and would have overriding effect and application over the other provisions. Section 30 of EPF&MP Act is also pointed out to argue that whether it be the contribution of the employer or the employee, it is the liability of the employer and, hence, the employer's and employee's contribution cannot be treated differently insofar as the deductions permissible under Section 36 (1) (va)
4. The Commissioner of Income Tax (Appeals) has ignored the basic fact that penalty proceedings are separate and independent proceedings, thus, reliance placed by learned assessing officer solely on the order of assessment is wholly misconceived and misplaced in law and as such, the penalty order is liable to be quashed as such
5. The assessee were regular in paying various contribution to the funds such as ESI and PF. But during the financial year 2017-18, the PF payments were made mandatory by way of electronic payments system. But due to the technical issues on the website of PF, the payments gateway was not properly working at that, time. Hence in some months, the assessee couldn't make the payments on time. This was not any lapse from part of the assessee warranting to the addition by invoicing the provisions of section 36(1)(va) and section 2(24(x).
This issue was raised in a prominent newspapers at that time. The said newspaper cuttings has been attached herewith for your kind perusal and records.
The proposed disallowance U/s. 36(1)(va) is not applicable in this case. Because it was not a intentional action from the assessee side, but it was purely the technical issues of the PF website.”
3 Ayurgreen Ayurveda Hospitals Pvt. Ltd. 3. At the outset of hearing, none appeared on behalf of the assessee however, the Bench decided to proceed the matter on merit based on the materials available on record, concerning the issue in question.
4. Briefly the facts of the case are that the assessee is private limited company and filed its return of income for the A.Y. 2018-19 on 31.10.2018 declaring total income of Rs.10,22,425/- which was processed U/s 143(1) of the IT Act and in terms of intimation issued by CPC, it made disallowance of Rs. 7,70,039/- towards employee’s contribution towards ESI and PF. On appeal, the ld. CIT(A)/ NFAC has confirmed the disallowance made U/s 143(1) on account of assessee’s failure to pay the employee’s contribution of PF/ESI within the prescribed due dates as per Section 36(1)(va) of the Act.
5. In first appeal the Ld. CIT(A) has confirmed the action of the AO as to the disallowance of employees contribution towards PF/ESI amounting to Rs. 7,70,039/- in terms of Section 43B r.w.s. 36(1)(va) of the Act. Conclusively at page 6 in para 6, the ld. CIT(A) has given following narration:- 6. Decision: ESI/PF: The only issue in disallowance of belated employees contribution remitted before due date of filing return to the tune of Rs. 7,70,039/-. All the grounds of appeals are therefore summed up into one issue as mentioned. 6.1 The Finance Act 2021 has made the following amendments and have a bearing on the issue at hand. The relevant extract is reproduced for ready reference.
4 Ayurgreen Ayurveda Hospitals Pvt. Ltd. In section 36 of the Income-tax Act, in sub-section (1), in clause (va), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:- Explanation 2.-For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the "due date" under this clause;" In section 43B of the Income-tax Act, after Explanation 4, the following Explanation shall be inserted, namely- "Explanation 5-For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub clause (x) of clause (24) of section 2 applies.". 6.2 It can be noticed that there is a distinction between employer contribution and employee's contribution towards welfare fund. Based on the above amendment in Section 36 and 43B a dear message given by the Hon'ble Finance Minister that the Government does not wish to allow employers to use the money deducted from the salary of employees. Accordingly, amount of employee's contribution must get deposited within the dates specified under the respective Act to remain eligible for the deduction u/s 36. 6.3 Since the appellant has failed to deposit the impugned sum within the time limit stipulated under the PF Act, in the light of the amendment to Finance Act 2021, the AO's disallowance of the sum of Rs.7,70,039/- is hereby confirmed. This ground stands dismissed. 6.4 In the result the appeal is dismissed.”
6. Feeling dissatisfied from the above order of the ld. CIT(A) the assessee has preferred the present appeal before the Tribunal on the grounds as stated in para 2 above. In support of the various grounds so raised by the ld. AR of 5 Ayurgreen Ayurveda Hospitals Pvt. Ltd. the assessee reiterated the written submission made before the ld. CIT(A) and the same is reproduced herein below:- “We are a Private limited company filed its return on 31/10/2018 under P.A.N AAICA4294M. For the assessment year 2018-19 under appeal the central processing center CPC had not accepted the total income of Rs. 10,22,425/-declared by the us and enhanced to Rs. 17,92,464/- reasoning that, "Any sum received from the employees as contribution to any provident fund or superannuation fund or any fund set up under ESI Act or any other fund for the welfare of employees to the extend not credited to the employees account on or before the due date (36(1)(va)). Accordingly the total income declared by the as us was enhanced with an amount of RS. 7,70,039.00/- We were objected the proposal for said addition. But it was not accepted and intimation under section 143(1) of the income tax act 1961 has issued vide order dated 01/10/2019. That has communicated electronically on the 27/10/2019 and physically on 04.11.2019. Aggrieved on this order we were filed the appeal at the Commissioner of Income Tax Appeal, Kozhikode: Later the appeal was transferred to faceless appeals and the Commissioner of Income Tax Appeals, national faceless appeal center was also passed the order accepting the computation of the CPC (Central Processing Center) Accordingly we wish to submit that; 1. The order of the central processing center CPC is opposed to law and the facts and circumstances of the case.
2. That the central processing center CPC has grossly erred both in law and on facts in adding the PF contribution amounting to Rs. 7,70,039/- by virtue 36(1)(va) of the Income Tax Act. This will be covered under the provisions of section 43B of the Income Tax Act. Section 36(1)(va) Vs. Section 43-B If the assessee fails to deposit the PF, ESIC etc Contribution before the due dates as per the respective Acts. Effect of Section 43B on unpaid liability towards contributions to any provident fund or superannuation fund or any fund set up under the provisions of the 6 Ayurgreen Ayurveda Hospitals Pvt. Ltd. Employees' State Insurance Act, 1948, or any other fund for the welfare of such employees. PF, ESIC etc Contribution- Income u/s 2(24)(x) The definition of Income u/s 2(24)(x) includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948, or any other fund for the welfare of such employees. Deduction from Income of contribution to PF, ESCI etc u/s 36(1)(va). However a deduction from the amount of income received from employees as contributions to any provident fund ог superannuation fund etc. is provided u/s 36(1)(va). According to this section any sum received by the assessee from any of his employees to which the provisions of section 2(24)(x) will be allowed as deduction, 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. "Due date" here means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise. The due date under employee welfare funds is 15th day of the month following the month in respect of which the contribution was received. For example if the contribution was received for the month of April then the due date of payment will be 15th May. If payment is not made by the due date then the entire amount of contribution paid later than 15th of the next month shall not be deducted as expense 36(1)(va). However Certain deductions are allowed u/s 43B on actual payment such that the sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) are also allowed as deduction. Section 43B: Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or 7 Ayurgreen Ayurveda Hospitals Pvt. Ltd. (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, (c).. (d).. shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. Thus Section 43B is a non-obstante clause as it starts with the word "Notwithstanding" which clearly mean that the provisions of section 43B shall over ride even if, anything otherwise is contained in any other provision of Act 1961. In the light of the provisions of section 36(1)(va) and section 43B, let us analyze the allowability or otherwise of the above liabilities: Section 36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 (va) 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. Explanation.-For the purposes of this clause, "due date" means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise; Thus the due date for depositing the employees' contribution is 15th of the month next to the month for which the contribution was collected.
8 Ayurgreen Ayurveda Hospitals Pvt. Ltd. However u/s 43B(b) the due date for depositing the employer's contribution is the due date for filing of the return of income u/s 139(1), generally 30th September. Upto the introduction of Finance Bill 2003, the employers' contribution was also required to be deposited alongwith employees' contribution with the prescribed authorities by due dates under Welfare Acts to be eligible to claim deduction. The Finance Act 2003 deleted this provision such that employers' contribution could now be made u/s 43B(b) before the due date u/s 139(1) i.e. due date for filing of the return for getting the deduction. The Word Contributions has not been refined under the Income Tax Act. But as per the provisions The Employees' Provident Funds Scheme, 1952, section 29 & 30 it is provided that (1) The contribution payable by the employee under the Scheme, shall be equal to the contribution payable by the employer in respect of such employee; (2) The employer shall, in the first instance, pay both the contribution payable by himself (in this Scheme referred to as the employer's contribution) and also, on behalf of the member employed by him directly or by or through a contractor, the contribution payable by such member (in this Scheme referred to as the member's contribution). (3) The amount of a member's contribution paid by the employer or a contractor shall, notwithstanding the provisions in this scheme or any law for the time being in force or any contract to the contrary, be recoverable by means of deduction from the wages of the member and not otherwise. It therefore is clear that the employer has to in the first instance, pay both the contributions payable and thereafter recover the same by means of deduction from the wages of the member. If this is the case then the total contribution will be covered under the provision of section 43B(b) and therefore allowable as deduction on payment basis, if paid before the due date u/s 139(1). Accordingly we wish to inform you that, all payments were done before the due date under 139(1). The said date for the assessment year 2018/19 was 30/09/2018.”
7. On the other hand, the ld. DR supported the order of the ld. CIT(A).
9 Ayurgreen Ayurveda Hospitals Pvt. Ltd.
We have heard ld. DR and perused the materials available on record. In this case, it is noted that the AO disallowed an amount of Rs.7,70,039/- u/s 36(1)(va) of the Act on the ground that payments of employees contribution towards ESI and PF had not been made on or before the due date by the employer as per respective Acts which has been confirmed by the ld. CIT(A). It is not imperative to repeat the facts of the case and the case laws cited by both the parties. The Bench has observed that the recently the Hon’ble Supreme Court has opined in the case of Checkmate Services Pvt. Ltd. vs CIT-1, 143 Taxmann.com 178 (SC)/Civil Appeal No. 2833 of 2016 held that the provision of Section 43B of the Act shall not apply to employee’s contribution to PF/ESI and the due date specified u/s 36(1)(va) of the Act shall apply for determination of deductibility of employee’s contribution to PF/ESI. The relevant portion of the Judgement of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs CIT-1 (supra) is reproduced as under:-
‘’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 10 Ayurgreen Ayurveda Hospitals Pvt. Ltd. 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.
54. 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 11 ITA No. 565/Coch/2022 Ayurgreen Ayurveda Hospitals Pvt. Ltd. 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.’’ Similar issue has also been decided by the Hon’ble Supreme Court in the case of PCIT vs Strides Arcolab Ltd. vide its order dated 29-11-2022 (Civil Appeal No.9009 of 2021 [2023] 147 taxmann.com 202 SC)]. The relevant head note is reproduced as under:- Section 36(1)(va), read with section 2(24) and 43B of the Income Tax Act – Employee’s contributions (PF/ESI) – High Court by impugned order held that Tribunal was correct in deleting disallowance made under section 36(1)(va) being employee’s contribution to Provident Fund and ESI even though same were not deposited in respective fund within stipulated time – Apex Court in case of Checkmate Services (P) Ltd. vs CIT [2022] 143 taxmann.com 178/ [2023] 290 Taxman 19/[2022] 448 ITR 518/2022 SCC Online Sc 1423, held that non obstante clause under section 43B could not apply in case of employee’s contribution which were deducted from their income and was not part of assessee-employer’s income and, thus, said clause would not absolve assessee-employer from its liability to deposit employee’s contribution on or before due date as a condition for deduction. – Whether in view of the said judgement of Supreme Court, impugned order of High Court was to be set aside – Held , yes [Para 4) [In favour of Revenue] For the sake of convenience and brevity of the case, the order passed by the Supreme Court in the case of PCIT vs Strides Arcolab Ltd. (supra) is also reproduced as under:- ‘’1.Leave granted.
As per the Office record, Service is complete on the sole respondent but none has entered appearance on behalf of the Respondnet Assessee.
Mr. Balbir Sharma, learned Additional Solicitor General appearing for the appellant submits that the issue involved in this appeal is squarely answered in favour of the Revenue by a Three-Judge Bench of this Court vide judgement dated 12-10-2022 in Checkmate Services (P) Ltd. vs CIT [2022] 143 taxmann.com 178/[2023] 290 Taxman 19/[2022] 448 ITR 518/2022 SCC Online SC 1423
In view of the above, the impugned judgement dated 22-03-2019 passed by the High Court of Judicature at Bombay is set aside and the appeal is allowed in terms of the cited decision.’’ It may be mentioned that similar issue has also been decided by the ITAT Delhi Bench in favour of the Revenue in the case of Salveen Kaur Vs Income Tax Office vide its order darted 9th January 2023 (in IT Appeal Nos. 2197,2249, 2250 and 2293 (Delhi) of 2022 – A.Y. 2017-18 to 2019-20 [2023] 147 taxmann.co. 402 (Delhi-Trib) by observing as under:- ‘’4. The undisputed fact in the captioned appeals is that there was a delay in depositing the employees’ contribution and the contribution has been deposited beyond the date stipulated under the relevant Fund Act.
Though the quarrel is no more res integra, as it has been settled by the decision of the Hon'ble Supreme Court in the case of Checkmate Services Pvt Ltd 143 Taxmann.com 178. But, before us, the decision of the co-ordinate bench at Mumbai has been placed in the case of PR Packaging Service in and it has been seriously argued that the co-ordinate bench has considered the decision of the Hon'ble Supreme Court and yet decided the quarrel in favour of the assessee and against the Revenue. 6. Another argument taken before us is that the disallowance made by the CPC Bengaluru while processing the return u/s 143(1) of the Act is beyond the scope of provisions of section 143(1(a) of the Act and, therefore, cannot be sustained. 7. We have carefully perused the decision of the co-ordinate bench in the case of M/s P R Packaging Services [supra]. We find that the co-ordinate bench has not given any independent finding but has simply relied upon another decision of the co-ordinate bench in the case of Kalpesh Synthetics Pvt Ltd 195 ITD 142 wherein the co-ordinate bench has based its decision on the interpretation and binding decision of the Hon'ble Jurisdictional High Court. In the case of Kalpesh Synthetics Pvt Ltd [supra], the Tribunal has held that the CPC Bengaluru cannot override the binding decision of the Hon'ble Bombay High Court while making the impugned disallowance on account of delay in the deposit of employees’ contribution to PF/ESI.
13 Ayurgreen Ayurveda Hospitals Pvt. Ltd.
8. It would be apt to refer to the relevant part of the decision of the Tribunal in the case of Kalpesh Synthetics [supra] followed in P R Packaging Service [supra] wherein it has been held as under:- “8. When the law enacted by the legislature has been construed in a particular manner by the Hon’ble jurisdictional High Court, it cannot be open to anyone in the jurisdiction of that Hon’ble High Court to read any other manner than as read by the Hon'ble jurisdictional High Court. The views expressed by the tax auditor in such a situation, cannot be reason enough to disregard the binding views of the Hon'ble jurisdictional Court. To that extent, the provisions of section 143(1)(a)(iv) must be read down. What essentially follows is the adjustments under section 143(1)(a) in respect of” disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return” is to be read as, for example, subject to the rider “except in a situation in which the audit report has taken a stand contrary to the law laid down by Hon'ble Courts above”. That is where the quasi judicial exercise of dealing with the objections of the assessee against proposed adjustments under section 143(1), assumes critical importance in the processing of returns, also important to bear in mind the fact that what constitutes jurisdictional High Court will essentially depend upon the location of the jurisdictional Assessing Officer. While dealing with jurisdiction for the appeals, rule 11(1) of the Central Processing of Returns Scheme, 2011 states that “Where a return is processed at the Centre, the appeal proceedings relating to the processing of the return shall lie with Commissioner of Income Tax (Appeals) [CIT(A)] having jurisdiction over the jurisdictional Assessing Officer” Thensitus of the CPC or the Assessing Office CPC is thus irrelevant for the purpose of ascertaining the jurisdictional High Court. Therefore, in the present case, whether the CPC is within the jurisdiction of Hon'ble Bombay High Court or not, as for the regular Assessing Officer of the assessee and the assessee are located in the jurisdiction of Hon'ble Bombay High Court, the jurisdictional High Court, for all matters pertaining to the assessee, will be Hon'ble Bombay High Court. In our considered view, it cannot be open to the Assessing Officer CPC to take a view contrary to the view taken by the Hon'ble jurisdictional High Court- more so when his attention was specifically invited to binding judicial precedents in this regard. For this reason also, the inputs in question in the tax audit report cannot be reason enough to make the impugned disallowance. The assessee must succeed for this reason as well.”
With our utmost respect to the findings of the co-ordinate bench [supra], we are of the considered view that the co-ordinate bench has ignored the binding ratio decidendi of the Hon'ble Supreme Court in the case of Checkmate Services Pvt Ltd [supra]. It would be pertinent to refer to the most relevant observations of the Hon'ble Supreme Court on the impugned quarrel which read 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 14 Ayurgreen Ayurveda Hospitals Pvt. Ltd. conditions that are to be met. It is therefore necessary to bear in mind that specific enumeration of deductions, dependent upon fulfillment 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. 01-04-1988. 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.” XXXXXX 44. 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. 45. 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 16 Ayurgreen Ayurveda Hospitals Pvt. Ltd. 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”. XXXX 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 Vs. Commissioner of Central Exercise 2004Supp (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.
17 Ayurgreen Ayurveda Hospitals Pvt. Ltd.
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.” XXXX 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.”
In our understanding, the aforementioned binding observations of the Hon'ble Supreme Court cannot be brushed aside simply because the decision was rendered in the context where the assessment was framed u/s 143(3) and not u/s 143(1)(a) of the Act. In our considered opinion, the decision of the Hon'ble Supreme Court is in the context of allowability of deposit of PF/ESI after due date specified in the relevant Act.
The Hon'ble Supreme Court has categorically held that the employees’ contribution deposited after respective due date cannot be allowed as deduction, and, therefore, it would be incorrect to say that the decision of the Hon'ble Supreme Court is applicable only in the case of an assessment farmed u/s 143(3) of the Act. In our considered view, the ratio decidendi is equally applicable for the intimation framed u/s 143(1) of the Act.
Now coming to the challenge that the impugned adjustment is beyond the powers of the CPC Bengaluru u/s 143(1) of the Act is also not correct. In light of the aforementioned decision of the Hon'ble Supreme Court [supra], as mentioned elsewhere, it cannot be stated that the impugned adjustment u/s 143(1) of the Act is beyond the powers of the CPC, Bengaluru. 13. The provisions of section 143(1)(a) read as under:- “143(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of Section143, such return shall be processed in the following manner, namely;- (a) The total income or loss shall be computed after making the following adjustments, namely;- (i) Any arithmetical error in the return; (ii) An incorrect claim, if such incorrect claim is apparent from any information in the return; (iii) Disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139; (iv) Disallowance of expenditure [or increase in income]indicated in the audit report but not taken into account in computing the total income in the return; (v) Disallowance of deduction claimed under [section 10AA or under any of the provisions of Chapter VI-A under the heading “C.-Deductions in respect of certain income”, if] the return is furnished beyond the due date specified under sub- section (1) of section 139; or (vi) Addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return;”
13.1 A perusal of the afore-stated provisions show that at every stage in sub-section (1) of the Act, the return submitted by the assessee forms the foundation, with respect to which, if any of the inconsistencies referred to in various sub-clauses are found, appropriate adjustments are to be made. It is an open secret that hardly 3 to 5% of the returns are selected for scrutiny assessment, out of which, more than 50% are because of AIR Information under CASS and the Assessing Officer cannot go beyond the reasons for scrutiny selection and such 13.2 Meaning thereby, that exercise of power under sub-section (2) of section 143 of the Act leading to the passing of an order under sub-section (3) thereof, is to be undertaken where it is considered necessary or expedient to ensure that the assessee has not understated income or has not computed excessive loss, or has not under paid the tax in any manner.
If any narrow interpretation is given to the decisions of the Hon’ble Supreme Court in the case of Checkmate Services Pvt Ltd [supra], it would not only defeat the very purpose of the enactment of the provisions of section 143(1) of the Act but also defeat the very purpose of the Legislators and the decision of the Hon'ble Supreme Court would be made redundant because there would be discrimination and chaos, in as much as, those returns which are processed by the CPC would go free even if the employees’ contribution is deposited after the due date and in some cases the employer may not even deposit the employees’ contribution and those whose returns have been scrutinized and assessed u/s 143(3) of the Act would have to face the disallowance.
This can neither be the intention of the Legislators nor the decision of the Hon'ble Supreme Court has to be interpreted in such a way so as to create such discrimination amongst the tax payers. Such interpretation amounts to creation of class [tax payer] within the class [tax payer] meaning thereby that those tax payers who are assessed u/s 143(3) of the Act would have to face disallowance because of the delay in deposit of contribution and those tax payers who have been processed and intimated u/s 143(1) of the Act would go scot- free even if there is delay in deposit of contribution and even if they do not deposit the contribution.
We are of the considered view that the ratio decidendi of the Hon'ble Supreme Court is equally applicable to the intimation u/s 143(1) of the Act and, therefore, the decision of the co-ordinate bench relied upon by the assessee is distinguishable. Therefore, respectfully following the binding decision of the Hon'ble Supreme Court [supra], all the three appeals of the assessee are dismissed and that of the revenue is allowed.
In the result, all the three appeals of the assessee in 2250/DEL/2022 and 2197/DEL/2022 are dismissed whereas the appeal of the Revenue in ITA No. 2293/DEL/2022 is allowed.’’ 20 ITA No. 565/Coch/2022 Ayurgreen Ayurveda Hospitals Pvt. Ltd. In view of the above deliberations and the decision taken by the Hon’ble Supreme Court in the case of Checkmate Services (P) Ltd. vs CIT-1(supra), PCIT vs Strides Arcolab Ltd. and also the decision of ITAT Delhi Bench in the case of Savleen Kaur (supra), the Bench sustains the addition confirmed by the ld. CIT(A) and the appeal of the assessee is dismissed. In the result, the appeal of the assessee is dismissed.