2022 (3) TMI 1390 - AT - Income Tax

Delayed employees share of contribution to PF and ESI - amount not paid on or before the due date as mentioned in Sec 36(1)(va) - HELD THAT - The Hon ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd. ( 2014 (3) TMI 386 - KARNATAKA HIGH COURT ) has taken the view that employee s contribution under section 36(1)(va) of the Act would also be covered under section 43B of the Act and therefore if the share of the employee s share of contribution is made on or before due date for furnishing the return of income under section 139(1) of the Act then the assessee would be entitled to claim deduction. Therefore the issue is covered by the decision of the Hon ble Karnataka High Court. In this case there is no dispute that the assessee made payment of the Employees share of PF/ESI on or before the due date for filing return of income for AY 2017-18 u/s.139(1) of the Act. Whether the amendment to the provisions to section 43B and 36(1)(va) of the Act by the Finance Act 2021 has to be construed as retrospective and applicable for the period prior to 01.04.2021 also? - As we find that the explanatory memorandum to the Finance Act 2021 proposing amendment in section 36(1)(va) as well as section 43B is applicable only from 01.04.2021. These provisions impose a liability on an assessee and therefore cannot be construed as applicable with retrospective effect unless the legislature specifically says so. In the decisions referred to by us in the earlier paragraph of this order on identical issue the tribunal has taken a view that the aforesaid amendment is applicable only prospectively i.e. from 1.4.2021. We are therefore of the view that the impugned additions made under section 36(1)(va) of the Act deserves to be deleted. - Decided in favour of assessee.

Summary

Issues:
1. Allowability of employees' share of contribution to PF and ESI under section 36(1)(va) of the Income Tax Act 1961.
2. Interpretation of amendments made to section 36(1)(va) and 43B by the Finance Act, 2021.
3. Distinction between employees' and employer's contributions under the Act.
4. Retrospective applicability of the amendments by the Finance Act, 2021.
5. Precedents and judicial interpretations on similar issues.

Analysis:

Issue 1:
The appeal focused on the allowability of employees' share of contribution to PF and ESI under section 36(1)(va) of the Income Tax Act 1961. The Centralized Processing Centre (CPC) added a sum to the assessee's income, contending that the contributions were not paid before the due date. The assessee argued that the payments were made before the due date for filing the return, citing relevant judicial decisions to support their claim.

Issue 2:
The amendments made by the Finance Act, 2021 to section 36(1)(va) and 43B were crucial for the case. The insertion of Explanation 2 and Explanation 5 clarified the applicability of section 43B and its linkage to determining the "due date" under section 36(1)(va). The CIT(A) held that these amendments were declaratory in nature and had retrospective effect, upholding the addition made by the Assessing Officer.

Issue 3:
The distinction between employees' and employer's contributions under the Act was highlighted, emphasizing that failure to pay employees' contributions before the due date would permanently negate the employer's claim for deduction under section 36(1)(va). In contrast, delay in paying employer's contributions would result in deferment of deduction under section 43B.

Issue 4:
The retrospective applicability of the amendments introduced by the Finance Act, 2021 was a critical point of contention. While the CIT(A) deemed the amendments to be applicable with retrospective effect, the tribunal disagreed, citing that the explanatory memorandum to the Finance Act, 2021 specified the prospective application from 01.04.2021. The tribunal concluded that the impugned additions under section 36(1)(va) deserved to be deleted.

Issue 5:
Various judicial pronouncements and decisions were referenced to support the arguments presented in the appeal. The Hon'ble Karnataka High Court's decision in Essae Teraoka Pvt. Ltd. was particularly crucial, as it clarified the coverage of employees' contributions under section 43B and supported the assessee's entitlement to claim deduction if payments were made before the due date for filing the return.

The appeal was allowed, and the tribunal held that the impugned additions under section 36(1)(va) should be deleted, emphasizing the prospective application of the amendments introduced by the Finance Act, 2021.