KAVITHA SUVVARI,SRIKAKULAM vs. INCOME TAX OFFICER, WARD-1, SRIKAKULAM

PER Duvvuru RL Reddy, Judicial Member :

2 arising out of the order passed U/s. 143(3) of the Income Tax Act, 1961 [the Act] for the AY 2018-19.

Accordingly, notice U/s. 143(2) of the Act was issued and duly served upon the assessee. Subsequently, notice U/s. 142(1) of the Act was also issued to the assessee on 31/01/2020 seeking details with reference to the return of income. As per the information available in ITR filed by the assessee for the AY 2018-19, the Ld. AO observed that the expenses incurred in respect of Recognized Provident Fund in the P & L Account amounted to Rs.1,94,76,114/- which exceeded the statutory limit of 27% of salary, as laid down in Rule 87 of the Income Tax Rules, 1962. The excess expenditure in respect of contribution to Recognized Provident Fund is Rs. 53,82,870/- [Rs. 1,94,76,114 – Rs. 1,40,93,444] which is excess of 27% of salary expenses incurred to the tune of Rs. 5,21,97,939/-. The Ld. AO asked the assessee to furnish the details in this regard vide notices U/s. 142(1) of the Act dated 31/1/2020, 19/3/2020 & 3/11/2020. In 3 reply dated 3/2/2021, the assessee admitted that she had incurred the expenditure of Rs. 1,94,76,114/- as EPF contribution in the year under consideration. Before the Ld. AO the assessee contested that since the expenditure was actually incurred by the assessee, the same should be allowed. However, the Ld. AO rejected the assessee’s contention on the ground that as per Rule 87 of the Income Tax Rules, 1962, the ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed 27% of his/her salary for each year as reduced by the employer’s contribution to any Provident Fund in respect of such employee for that year. The Ld. AO therefore observed that since the assessee has violated Rule 87 of IT Rules, 1962 by way of depositing an excess of Rs. 53,82,670/- to a Recognized Provident Fund by exceeding the statutory limit of 27% of total salary expenses. Accordingly, the Ld. AO issued a show cause notice dated 10/02/2021 to explain as to why the excess claim of Rs. 53,82,670/- should not be disallowed and added back to the assessee’s total income as per Rule 87 of the IT Rules, 1962. In the absence any explanation from the assessee, the Ld. AO disallowed the excess claim of Rs. 53,82,670/- and made addition. Thus, the Ld. AO computed the assessed income at Rs. 1,02,13,550/- and passed the assessment order U/s. 143(3) r.w.s 143(3A) & 143(3B) of the Act, dated 18/02/2021. Aggrieved by the order of the Ld. AO, the assessee carried the matter in appeal before the Ld. CIT(A)-NFAC.

3. On appeal, the Ld. CIT(A)-NFAC, carefully perused the submissions of the assessee and discussed the issue at length and held that “……the addition of Rs. 53,82,670/- made by the Ld. AO for not depositing of employees contribution to the PF covered under section 36(1)(va) r.w.s 2(24)(x) of the Act but paid to the respective funds after the due dates as specified by Rules of the relevant funds are collected held as deemed income and therefore the disallowance is hereby confirmed…..”. Aggrieved by the decision of the Ld. CIT (A), the assessee is in further appeal before the Tribunal by raising the following grounds:

“1. The order of the Ld. CIT(A) was arbitrary and quite injustice.

2. The Ld. CIT(A) ought to have considered the fact that the addition made has been considered U/s. 43B of the Act instead of where we claimed expenditure U/s. 37 of the Act. This may kindly be considered. The same may be considered as per the provisions of section 37 of the Act.

4. The ITAT ought to have considered the fact that the entire PF collected from the employees has been paid by the appellant, thereby, there is no loss to the ex-cure. The same may kindly be deleted.

5. Any other ground(s) that may be urged at the time of hearing before the Hon’ble ITAT.”

per the P & L Account the assessee paid a total salary of Rs.

5,21,97,939/- and claimed Rs. 1,94,76,114/- as expenses under the head Employee Provident Fund. Since the amount of expenditure incurred exceeded the statutory limit of 27% of 6 salary to the extent of Rs. 53,82,670/- [Rs. 1,94,76,114 – Rs.

1,40,93,444], as per the Ld. AO it is in violation of Rule 87 of the IT Rules, 1962 and therefore the addition of Rs. 53,82,670/- was made by the Ld. AO. On appeal, the Ld. CIT(A)-NFAC dismissed the grounds raised by the assessee against addition made by the Ld. AO and partly allowed the appeal. On perusal of the material before us, it is the case of the assessee that since the assessee has furnished the details of payment of EPF contribution as well as the details of expenditure actually incurred, the same should be allowed. It is also the case of the assessee that the entire PF contribution collected from the employees of the assessee has been paid by the assessee and therefore, there is no loss to the exchequer. In these circumstances, it is apparent from records that the assessee has not deposited the employee contributions of EPF to the respective fund account before the due date specified under the provisions of respective Acts. In such situation, Hon’ble Supreme Court in its judgment in the case of Checkmate Services Private Limited, Civil Appeal No.2833 of 2016 dated 2nd October 2022, held that delayed payment of employee contributions of PF / ESI are no longer available for deduction u/s 43B and should suffer disallowance u/s 36(1)(va). For the 7 sake of clarity and convenience, relevant part of the order of the Hon’ble Supreme Court is extracted as under :

“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.

8 this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed.”

“7. Under these circumstances and following the clarificatory amendments made by the Finance Act, 2021 to section 36(1)(va) and section 43B, the contentions made in the submissions are not found acceptable and the additions of Rs. 53,82,670/- made by the AO for not depositing of employee’s contribution to the PF covered under section 36(1)(va) r.w.s 2(24)(x) of “the Act” but paid to the respective funds after the due dates as specified by rules of the relevant funds are correctly held as deemed income and therefore the disallowance is hereby confirmed as the said late payments are not covered under 43B of the Act. Accordingly, the ground raised by the appellant in this regard is dismissed following the decisions of the Hon’ble Supreme Court in the case of Checkmate Services vs. CIT

1. (supra) dated 12/10/2022.”

Pronounced in the open Court on 30th August, 2023.