2022 (4) TMI 504 - AT - Income Tax

Late payment of Employee contribution of PF and ESI - addition made by the CPC u/s 143(1) - whether by the Finance Act, 2021, the provisions of Section 36(1)(va) by inserting the Explanation 2 r.w.s. 43B of the Act have been amended, whereby it is clarified that the provisions of Section 43B of the Act shall not apply and shall be deemed or ought to have been applied for the purpose of determining the due date under this clause? - HELD THAT - It is settled issue that no debatable issues are permitted to be made adjustments u/s 143(1) of the Act. In the instant case, what was added in the intimation u/s 143(1) was the employees contribution to PF and ESI. Hon ble Madras High Court in the case of Redington (India) Ltd. held that employees contribution to PF and ESI is also allowable deduction, if, the same is paid before the due date for filing the return of income. This Tribunal in the case of Andhra Trade Development Corporation in 2021 (5) TMI 263 - ITAT VISAKHAPATNAM held that debatable issues are not permitted to be made adjustments while processing the return of income u/s 143(1). As before insertion of Explanation 2 to Section 36(1)(va) of the Act, there is ambiguity regarding due date of payment of employees contribution on account of provident fund and ESI, whether the due date is as per the respective Acts or up to the due date of filing of return of income of the assessee. As noted by Hon ble Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. 2014 (9) TMI 576 - SUPREME COURT an amendment made to a taxing statute can be said to be intended to remove hardship only of the assessee and not of the Department. Imposing of a retrospective levy on the assessee would cause undue hardship and for that reason Parliament specifically chose to make the proviso affective from a particular date. In the present case also, the amendment brought out by Finance Act, 2021 by way of Explanation-2 to s. 36(1)(va) of the Act along with Explanation-5 to s. 43B of the Act w.e.f. 01.04.2021 i.e. for and from assessment year 2021-22, cannot be applied retrospectively. Thus, from the above, it is clear that the amendment brought in the statute i.e., by Finance Act, 2021, the provisions of Section 36(1)(va) r.w.s. 43B of the Act amended by inserting Explanation 2 is prospective and not retrospective. Hence, the amended provisions of Section 43B r.w.s. 36(1)(va) of the Act are not applicable for the assessment year 2018-19 but will apply from assessment year 2021-22 and subsequent assessment years. On merits also, this Tribunal has consistently viewed that the employees contribution to PF and ESI is allowable deduction if the same is paid before the due date of filing the return of income - Decided in favour of assessee.

Summary

Issues Involved:
1. Maintainability of the appeal against intimation under Section 143(1) independent of rectification under Section 154.
2. Legitimacy of disallowance of employee contributions to PF and ESI under Section 143(1).
3. Applicability of Section 43B to employee contributions to PF and ESI if paid before the due date of filing the return.
4. Prospective vs. retrospective application of the amendment to Section 36(1)(va) by the Finance Act, 2021.

Issue-wise Detailed Analysis:

1. Maintainability of the Appeal:
The appellant contended that the CIT(A), NFAC erroneously dismissed the appeal against the intimation under Section 143(1), holding it as not maintainable. The CIT(A) had reasoned that the issue was already covered by the appeal against the order under Section 154. The Tribunal emphasized that the intimation under Section 143(1) is independent of the rectification procedure under Section 154 and thus maintainable.

2. Disallowance of Employee Contributions to PF and ESI:
The CPC had disallowed ?2,19,696/- for late payment of employee contributions to PF and ESI while processing the return under Section 143(1). The Tribunal noted that no scrutiny assessment under Section 143(3) was made, and it is a settled issue that no debatable issues are permitted for adjustments under Section 143(1). The Tribunal cited the case of Redington (India) Ltd. by the Hon’ble Madras High Court, which held that employee contributions to PF and ESI are allowable deductions if paid before the due date for filing the return of income.

3. Applicability of Section 43B:
The Tribunal discussed that the insertion of Explanation 2 by the Finance Act, 2021 to Section 36(1)(va) should be construed as prospective and not retrospective. The Tribunal referred to various judicial precedents, including the decision in the case of Andhra Trade Development Corporation, which clarified that debatable issues are not permitted for adjustments while processing the return of income under Section 143(1).

4. Prospective vs. Retrospective Application of Amendment:
The Tribunal examined the amendment brought by the Finance Act, 2021, which clarified that the provisions of Section 43B do not apply to employee contributions to PF and ESI. It was noted that the amendment is intended to be prospective, effective from 01.04.2021, and applicable from the assessment year 2021-22 onwards. The Tribunal emphasized that imposing a retrospective levy would cause undue hardship, as noted by the Hon’ble Supreme Court in CIT vs. Vatika Township Pvt. Ltd.

Conclusion:
The Tribunal held that the addition made by the CPC under Section 143(1) was unsustainable and accordingly deleted it. The Tribunal allowed the assessee’s appeal on the grounds that the disallowance of employee contributions to PF and ESI was not within the scope of Section 143(1) adjustments, and the amendment to Section 36(1)(va) by the Finance Act, 2021, is prospective. The Tribunal consistently viewed that employee contributions to PF and ESI are allowable deductions if paid before the due date of filing the return of income. Consequently, the appeals of the assessee were allowed.