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PER VIJAY PAL RAO JUDICIAL MEMBER:
This appeal by the assessee is directed against the order dated 17.03.2022 of CIT (Appeals)National Faceless Appeal Centre (NFAC), Delhi for the assessment year 2018–19.
The assessee has raised following grounds of appeal:
(1) On the facts and circumstances of the case and in law, the learn it CIT (Appeals)National Faceless Appeal
Centre, Delhi has erred in confirming the disallowance of Rs.23,64, 533/-under section 36(1)(va) of the income tax act, 1961 made by the DCIT (CPC), Bengaluru. (2) on the facts and circumstances of the case and in law, the learned CIT(A)NFAC has erred in confirming the disallowance of Rs.23,64,533/-under section 36(1)(va) of the Act made by the learned DCIT(C PC),without appreciating that the contribution to PF and ESI has been deposited on or before the due date of filing of return of income of appellant company and is allowable under section 43B of the Act. Thus, the disallowance of Rs.23,64,533/-is liable to be deleted. (3) On the facts and circumstances of the case and in law, the learner assessing officer, CPC has erred in making disallowance under section 36(1)(va) the Act by way of making adjustment under section 143 (1)(a)(iv)of the Act without appreciating thatthe issue relating to disallowance u/s 36(1)(va)of the Act due to delay in deposit of the employees contribution to PF/ESIC cannot be decided by way of computerised adjustment under section 143(1)(a)(iv)of the Act and is beyond the jurisdiction of CPC, Bengaluru. Thus, intimation under section 143(1) of the Act is liable to be quest.
The appellate company craves leave to add, alter, modify, or delet, or remove any of the grounds of appeal before or during the course of appeal at hearing of the case.
3. The assessee company is engaged in the business of sale and service of computer and peripherals. The assessee submitted its return of income under section 139(1) of the income tax act on 16 10. 2018 declaring total income of Rs.1,21,49,697/-. Return was processed under section 143(1) whereby an adjustment of Rs.23,64,533/- on account of disallowance of employees contribution to PF and ESI deposited beyond the due date for prescribedunder the respective Acts. The CPC made the disallowance under section 36(1)(va) of the income tax act due to delay in payment of the employees contribution to the PF and ESI.
The assesee challenged the disallowance mad by the CPC before the CIT appeal but could not succeed.
Before the tribunal Ld AR of the assessee has submitted that disallowance of employees contribution to PF and ESI has been made by the CPC while processing the return of income under section 143(1)(a) of the income tax act which is beyond the scope and jurisdiction of the CPC. He has further submitted that the enabling amendment in the provisions of section 143(1)(a) has been made by finance act 2021 which is not applicable for the year under consideration. Therefore, the adjustment made by the CPC, by making a disallowance of employee’s contribution to PFand ESI is not justified and liable to be deleted.
On the other hand, the learned DR has submitted that the issue is now settled and covered by the decision of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax 448 ITR 518 (SC).
Having considered the rival submissions as well as relevant material on record we find that there is a delay in making the payment by the assesse to EPF and ESI funds as the payments were made after the due dates as per the respective Acts. However, the payments made before the due date of filing the return under section 139(1) of the Income Tax Act. There is no dispute that earlier there were divergent views of the different High Courts on this issue and the same is now finally settled by the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. v Commissioner of Income Tax(supra). The relevant part of ruling of Hon’ble Supreme Court in para 51 to 55 is as under:- “51. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd.24; Commissioner of Income-Tax and another v. Sabari Enterprises25; Commissioner of Income Tax v. Pamwi Tissues Ltd.26; Commissioner of Income-Tax, Udaipur v. Udaipur DugdhUtpadakSahakariSandh Ltd.27 and NipsoPolyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, AlomExtrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act.
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 Section 2(24)(x) - unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.
In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. 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.”
Thus, now the issue is no longer res integra and has finally been settled by the Hon’ble Supreme Court against the assessee and in favour of the Revenue. The amendment in section 143(1)(a)(iv) vide finance Act 2021 has not changed the power of the CPC in making adjustment on account of disallowance of expenditure not allowable as per the provisions of the Act and reported so in tax audit report. Hence we do not find any substance in the contention of Ld. AR. Accordingly, respectfully following the judgment of Hon’ble Supreme Court, we do not find any error and illegality in the impugned order of the CIT(A) and the same is upheld.
In the result, the appeal of the assessee is dismissed.
Order is pronounced in the open court on 18.05.2023.