BHIM SINGH,GURGAON vs. DCIT, CIRCLE-1, GURGON

These two appeals are filed by the assessee against two separate orders of the ld. Commissioner of Income Tax (Appeals) [hereinafter referred to CIT (Appeals)]/National Faceless Appeal 1 & 2979/Del/2022 Appeal Centre [NFAC] Delhi, both dated 18.11.2022 for assessment years 2018-19 and 2019-20.

The assessee has raised the following common substantive grounds in both the assessment years:-

In view of the facts and circumstances of the case CIT(A) has failed to consider that the CPC has erred in making 2 & 2979/Del/2022 disallowance of Rs. 45,88,351/- u/s 36(1)(va) of the Act on account of contributions received from employees for funds referred in Section 36(1)(va) of the Act.

That the CIT(A)/CPC has failed to appreciate that the Finance Act, 2021 amendment is prospective in nature and are applicable from AY 2021-22 only and thus has no application to the facts under consideration for this AY.

In view of the facts and circumstances of the case, the CIT(A)/CPC has failed to appreciate that in the absence of issuance of any notice under Section 143(1) before making such an addition, the addition is illegal and bad in law. The same is against principles of natural justice and is in gross violation of the statutory mandate of Section 143(1). Hence, the addition is liable to be deleted.

That the CIT(A)/CPC has failed to consider the material placed and available on record and has failed to judicially interpret the same as the same do not justify the addition/ disallowance made.”

The issue of whether the employees’ contribution to PF/ESI is allowable expenditure under section 36(1)(va) of the Act if it is paid beyond the due date specified under PF/ESI Act came up befor the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. Vs. CIT in Civil Appeal No. 2833 of 2016 (dated October 12, 2022) and the Hon’ble Supreme Court decided the issue against the assessee, holding as under:-

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. 24 Commissioner of Income-Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi High Court). 25 Commissioner of Income-Tax and another Vs. Sabari Enterprises, [2008] 298 ITR 141 (Karnataka High Court). 26 Commissioner of Income Tax Vs. Pamwi Tissues Ltd., [2009] 313 ITR 137 (Bombay High Court). 27 Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd., [2013] 35 taxmann.com 616 (Rajasthan High Court). 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 4 I.T.A. Nos. 2978 & 2979/Del/2022 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 & 2979/Del/2022 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 decision of the Hon’ble Supreme Court applies to the facts of the case. Respectfully following the above decision, we hold that the employees’ contribution to PF/ESI remitted beyond the due date specified under PF/ESI Act are not allowable as deduction under section 36(1)(va) of the Act. Therefore, we see no merit in the grounds of appeal