2009 (12) TMI 38 - HC - Income Tax

Late deposit of PF and ESI - During the assessment proceedings the Assessing Officer (AO) found that the assessee had deposited employers contribution as well as employees contribution towards provident fund and ESI after the due date as prescribed under the relevant Act/Rules. Accordingly he made addition of Rs. 42, 58, 574/- being employees contribution under Section 36(1)(va) of the Act and Rs. 30, 68, 583/- being employers contribution under Section 43B of the Act. CIT(A) deleted the addition by holding that the assessee had made the payment before the due date of filing of the return which was a fact apparent from the record - that if the employees contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late the employer not only pays interest on delayed payment but can incur penalties also for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore the Act permits the employer to make the deposit with some delays subject to the aforesaid consequences. Insofar as the Income Tax Act is concerned the assessee can get the benefit if the actual payment is made before the return is filed as per the principle laid down by the Supreme Court in Vinay Cement Decided in favor of assessee

Summary

Issues Involved:
1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961.
2. Deductibility of employees' and employers' contributions to provident fund and ESI when paid after the due date but before the filing of the income tax return.
3. Applicability of Supreme Court's judgment in CIT v. Vinay Cement Ltd.

Issue-wise Detailed Analysis:

1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961:
Section 36(1)(va) deals with the deductibility of any sum received by the assessee from employees as contributions to provident fund and ESI, provided it is credited to the employee's account by the due date. Section 43B stipulates that certain deductions, including contributions to provident fund or superannuation fund, are only allowable on actual payment. The first proviso to Section 43B allows deductions if the payment is made before the due date of filing the return. The second proviso, which was relevant during the period in question, required actual payment by the due date specified in Section 36(1)(va).

2. Deductibility of Employees' and Employers' Contributions to Provident Fund and ESI:
The Assessing Officer (AO) disallowed the deductions for contributions paid after the due date but before the filing of the return. The CIT(A) initially upheld the disallowance due to lack of documentary proof but later rectified the order upon receiving proof of payment. The ITAT, relying on the Supreme Court's judgment in Vinay Cement Ltd., held that if contributions are paid before the due date of filing the return, no disallowance should be made. This decision was challenged by the Revenue.

3. Applicability of Supreme Court's Judgment in CIT v. Vinay Cement Ltd.:
The ITAT's decision was based on the Supreme Court's judgment in Vinay Cement Ltd., which held that contributions paid before the filing of the return qualify for deduction. The Revenue argued that the second proviso to Section 43B should apply, requiring payment by the due date specified in Section 36(1)(va). However, the High Court noted that the Supreme Court's dismissal of the SLP in Vinay Cement Ltd. with a speaking order constituted a declaration of law under Article 141 of the Constitution, binding on all courts.

Detailed Analysis:
The High Court analyzed the provisions of Sections 36(1)(va) and 43B, noting that the latter allows deductions on actual payment, with the first proviso permitting deductions if payment is made before the return filing due date. The second proviso, which was later omitted, required payment by the due date specified in Section 36(1)(va). The Court emphasized that the Supreme Court's judgment in Vinay Cement Ltd. affirmed that contributions paid before the return filing due date qualify for deduction, even if paid after the due date under the relevant Acts.

The High Court also referred to its own judgments in CIT v. Dharmendra Sharma and CIT v. P.M. Electronics Ltd., which followed the Supreme Court's ruling in Vinay Cement Ltd. The Court dismissed the Revenue's reliance on contrary judgments from other High Courts, reiterating that the Supreme Court's decision in Vinay Cement Ltd. was binding.

The Court concluded that the deletion of the second proviso to Section 43B was retrospective, meaning it was never in existence. Therefore, the case was governed by the first proviso, allowing deductions if payments were made before the return filing due date.

Conclusion:
The High Court answered the question in favor of the assessee, holding that contributions paid before the return filing due date qualify for deduction. The appeals filed by the assessees were allowed, and those filed by the Revenue were dismissed. The judgment emphasized the binding nature of the Supreme Court's decision in Vinay Cement Ltd. and clarified the interpretation of Sections 36(1)(va) and 43B of the Income Tax Act.