THE ADIT CPC , BENGALURU vs. SUNDERLAL MOOLCHAND JAIN, INDORE

Feeling aggrieved by appeal-order dated 29.04.2021, passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“Ld. CIT(A)”], which in turn arises out of rectification-order dated 31.01.2020 passed by CPC, Bangalore [“Ld. AO”] u/s 154 of Income-tax Act, 1961 [“the act”] for assessment-year [“AY”] 2018-19, the assessee has filed this appeal on following effective grounds:

“1. That on the facts and in the circumstances of Legal Ground the case and in law, the Ld CIT(A) erred in maintaining the addition of Rs. 30,28,280/- made by the Ld ADIT, CPC, Bengaluru to the total income of the appellant in the rectification order passed under section 154 of the Income-tax Act, 1961 on account of delay in depositing Employees' Sunderlal Moolchand Jain Page 2 of 7 Contribution towards PF and ESIC under section 36(1)(va) of the Income-tax Act, 1961 even when the said issue is highly debatable in nature and therefore is outside the purview of the provisions of section 154 of the Income-tax Act, 1961 2. That on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in maintaining the addition of Rs. 30,28,280/- education made by the Ld ADIT, CPC, Bengaluru to the total income of the appellant in the rectification order passed under section 154 of the Income-tax Act, 1961 on account of delay in depositing Employees' Contribution towards PF and ESIC under section 36(1)(va) of the Income-tax Act, 1961 without properly appreciating facts of the case and submissions made before him even when the said amount of Employees' Contribution towards PF and ESIC were deposited before due date of filing of income-tax return under section 139(1) of the Income-tax Act, 1961 and Henceforth, no disallowance is called for as per section 43B r.w.s. 36(1)(va) of the Income-tax Act, 1961.”

Ground No. 1:

Sunderlal Moolchand Jain Page 3 of 7 of events has been mentioned, in which it is categorically mentioned from assessee’s side that the assessee filed return of income on 25.10.2018; thereafter the AO passed intimation u/s 143(1) on 27.11.2019 after making impugned disallowance of Rs. 30,28,280/-; then the assessee filed rectification-application on 21.12.2019 u/s 154; and finally the Ld. AO passed rectification-order u/s 154 on 31.01.2020 maintaining the disallowance as already made in the intimation u/s 143(1). Thus, the true state of affairs as culled out from the submission of assessee’s side itself is that the impugned disallowance was made in the intimation u/s 143(1) and not in the rectification-order u/s 154 as claimed in the ground. Thus, the ground raised by assessee is itself not correct and therefore rejectable as such and we need not go further. But, however, for the sake of a fair and complete adjudication, we would also like to deal whether the impugned disallowance as made in the intimation u/s 143(1) was also legal or not? We would cover this aspect in the subsequent discussion in “Ground No. 2” and there we would agree with the view taken by Co- Ordinate Bench of ITAT, Indore that such a disallowance could be made in an intimation u/s 143(1). Thus, looking from all angles, the assessee’s claim is not acceptable. Therefore, Ground No. 1 is dismissed.

Ground No. 2:

6. In this ground, the assessee claims that the Ld. CIT(A) has erred in maintaining the disallowance made by Ld. AO u/s 36(1)(va) on account of delayed payment of employees’ contributions to Provident Fund/Employees State Insurance (“PF/ESI”) after the due dates prescribed under PF / ESI laws.

Sunderlal Moolchand Jain Page 4 of 7 and various judicial rulings. The order of Hon’ble Co-ordinate Bench is extracted below:

“5. The assessee is in appeal before us against the order passed by Ld. CIT(Appeals). Before us, the counsel for the assessee submitted that firstly, in the audit report, the auditor has not made any specific observation regarding inadmissibility of the claim u/s 36(1)(va) of the Act which was required to be made by the auditors in the Tax Audit Report and the Auditors have only mentioned the “actual dates” and “due dates” of remittance. Accordingly, in view of the Mumbai ITAT decisions in the case of PR Packaging in ITA number 2376/Mum/2022 and Kalpesh Synthetics 137 Taxmann.com 475 (Mumbai), this claim of deduction u/s 36(1)(va) of the Act cannot be disallowed u/s 143(1) of the Act (more specifically under sub- clause (d) to 143(1) of the Act). Secondly, the counsel argued that the issue at the time when the disallowance was made, issue was debatable and accordingly could not be the subject matter of disallowance under section 143(1) of the Act. In response, DR relied upon the observations made by the Ld. CIT(Appeals) in the appellate order.

Assessment.

143.(1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, 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 69[section 10AA or under any of the provisions of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes", if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or Sunderlal Moolchand Jain Page 5 of 7 (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:

A perusal of section 143(1) of the Act shows that the words used are “(iv) disallowance of expenditure …indicated in the audit report”

6.1 Therefore, there is no specific requirement under section 143(1) of the Act that the auditor has to make a specific observation regarding “admissibility/inadmissibility” with regard to any claim of expenditure and all that is required under section 143(1) of the Act is that disallowance of such expenditure should be “indicated in the audit report”. Now, on going through the specific clauses of the Tax Auditors Report in Form Number 3CD issued under section 44AB of the Act, we observe that serial number 20(b) of Form Number 3CD, which is specific to allowability of claim of deduction u/s 36(1)(va) of the Act, does not require the auditor to make any specific observation regarding admissibility of the amount under section 36(1)(va) of the Act. At the same time, when we observe several other parts of the tax audit report viz. serial number 21(b)-amounts inadmissible under section 40(a), serial number 21(c)-amounts inadmissible under section 40(b)/40(a)(ia) of the Act (ba), serial number 21(e)- the provision for payment of gratuity not allowable under section 40A(7), serial number 21(f)- any sum paid by the assessee as an employer not allowable under section 40A(9), serial number 21(h) amount of deduction inadmissible in terms of section 14A etc, there is a specific requirement that the auditor has to mention whether the expenditure is admissible/allowable or not. However, so far as section 36(1)(va) of the Act, the audit report does not require the auditor to make a specific observation regarding “admissibility/inadmissibility” of the above expenditure.

6.2 Therefore, once the auditor has mentioned the “actual” dates of ESI/PF remittance and the “due” dates of ESI/PF remittance by the assessee u/s 36(1)(va) of the Act at serial number 20(b) of the audit report, then, in our considered view, the requirement of section 143(1) of the Act viz. “disallowance of expenditure ….indicated in the tax audit report” stands satisfied and the Department is permitted to make disallowance in terms of section 143(1) of the Act.

6.3 With regards to the second argument of the counsel for the assessee that at the time when the disallowance was made, the issue was debatable, we observe that the position on this issue has now been unambiguously clarified by the Hon'ble Supreme Court with respect to all assessment years prior to AY 2021-22 in the case of Checkmate Services (P.) Ltd. [2022] 143 taxmann.com 178 (SC) wherein the Supreme Court held that for assessment years prior to AY 2021-22, non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was held in trust by assessee-employer as per section 2(24)(x), 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. The Supreme Court observed that there is a marked difference between nature and character of assessee-employer's contribution and amounts retained by assessee from out of employee's income by way of deduction wherein one is liability to be paid by employer and second is deemed income as per section 2(24)(x) which is held in trust by assessee-employer,

Sunderlal Moolchand Jain Page 6 of 7 thus, said marked difference was to be borne while interpreting obligation of assessee-employer under section 43B of the Act. The Hon'ble Supreme held that the non obstante clause under section 43B could not apply in case of amounts which were held in trust as was case of employee's contribution which were deducted from their income and was not part of assessee- employer's income, 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. Again the Supreme Court in the case of Harrisons Malayalam Ltd. [2022] 145 taxmann.com 608 (SC), dismissed the SLP of the Assessee against order of High Court that where assessee-company failed to pay employees’ contribution towards EPF and ESI within due date prescribed in respective Acts, deduction under section 36(1)(va) was not allowable. Recently in the case of Ms. Nalina Dyave Gowda [2023] 146 taxmann.com 420 (Bangalore - Trib.) the assessee during, financial year 2018-19 (assessment year 2019-20) made payment of employees' contribution to ESI and PF beyond due date specified under relevant Act and claimed deduction of same under section 36(1)(va). The Assessing Officer made disallowance of employees' contribution to ESI and PF while electronically processing return of income under section 143(1)(a) of the Act. The ITAT held that disallowance under section 143(1)(a) was valid in view of Supreme Court's decision in case of Checkmate Services (P.) Ltd. v. CIT [2022] 143 taxmann.com 178 and the assessee will not be entitled to deduction of belated payment of ESI and PF of employees' share of contribution as per provisions of section 36(1)(va) of the Act. Again, recently Pune ITAT in the case of Cemetile Industries v. ITO [2022] 145 taxmann.com 209 (Pune-Trib.) held that where assessee-employer deposited amount of employees contribution towards employees' provident fund and employees' state insurance corporation beyond due date stipulated in respective Acts, disallowance made under section 36(1)(va) was justified. The ITAT further held that adjustment under section 143(1)(a) by means of disallowance made for late deposit of employees' share to relevant funds beyond date prescribed under respective Acts was proper.

6.4 In view of the above observations respectfully following the decision of the Honourable Supreme Court in the case of Checkmate Services Private Ltd supra and Harrisons Malayalam Ltd supra and in the light of our observations, we hereby dismiss the assessee’s appeal. In the result, the appeal of the assessee is dismissed.” 7.

Sunderlal Moolchand Jain Page 7 of 7 statement showing the correct dates of payment and how the auditors have made mistakes in reporting. In principle, we find merit in the claim of assessee that if some of the payments were made before due dates under PF/ESI laws, no disallowance is attracted to that extent under the provisions of Income-tax. However, this aspect is not verified at lower-level and it would involve verification of the fact and figures with necessary evidences in support from assessee’s side. Since that exercise is not done at first-appellate stage, we think it appropriate to remand this ground to to Ld. CIT(A) who would give opportunities to assessee, examine the evidences as may be adduced before him and thereafter take a final view on the correct quantum of disallowance. We accept this ground accordingly.

Order pronounced as per Rule 34 of I.T.A.T. Rules, 1963 on 13/03/2023.