2022 (5) TMI 616 - AT - Income Tax

Delay in payment towards Provident Fund (P.F) / Employees State Insurance Corporation (ESIC) and other welfare fund under section 36(1)(va) r/w section 2(24) - intimation under section 143(1) - HELD THAT - As relying on KALPESH SYNTHETICS PVT LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, CPC BENGALURU. 2022 (5) TMI 461 - ITAT MUMBAI When the due date under Explanation to Section 36(1)(va) is judicially held to be not decisive for determining the disallowance in the computation of total income, there is no good reason to proceed on the basis that the payments having been made after this due date is indicative of the disallowance of expenditure in question. While preparing the tax audit report, the auditor is expected to report the information as per the provisions of the Act, and the tax auditor has done that, but that information ceases to be relevant because, in terms of the law laid down by Hon ble Courts, which binds all of us as much as the enacted legislation does, the said disallowance does not come into play when the payment is made well before the due date of filing the income tax return under section 139(1). Viewed thus also, the impugned adjustment is vitiated in law, and we must delete the same for this short reason as well. adjustment in the course of processing of return under section 143(1) is vitiated in law, and we delete the same. As we hold so, we make it clear that our observations remain confined to the peculiar facts before us, that our adjudication is confined to the limited scope of adjustments which can be carried out under section 143(1) and that we see no need to deal with the question, which is rather academic in the present context, as to whether if such an adjustment was to be permissible in the scheme of Section 143(1), whether the insertion of Explanation 2 to Section 36(1)(va), with effect from 1st April 2021, must mean that so far as the assessment years prior to the assessment years 2021-22 are concerned, the provisions of Section 43B cannot be applied for determining the due date under Explanation (now Explanation 1) to Section 36(1)(va). That question, in our humble understanding, can be relevant, for example, when a call is required to be taken on merits in respect of an assessment under section 143(3) or under section 143(3) r.w.s. 147 of the Act, or when no findings were to be given on the scope of permissible adjustments under section 143(1)(a)(iv). That is not the situation before us. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 5,43,800 due to alleged delay in payment towards Provident Fund (P.F) / Employees State Insurance Corporation (ESIC) and other welfare funds under section 36(1)(va) read with section 2(24) of the Income Tax Act, 1961, while processing the income tax return under section 143(1).

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 5,43,800 due to Alleged Delay in Payment towards P.F/ESIC:

The appeal was filed by the assessee against the disallowance of Rs. 5,43,800 on account of alleged delay in payment towards Provident Fund (P.F) / Employees State Insurance Corporation (ESIC) and other welfare funds under section 36(1)(va) read with section 2(24) of the Income Tax Act, 1961. This disallowance was made by the Centralized Processing Centre, Bengaluru, while processing the income tax return under section 143(1) and was upheld by the learned Commissioner of Income Tax (Appeals) (CIT(A)).

During the hearing, both parties agreed that the issue was covered by a recent decision of the Co-ordinate Bench of the Tribunal in Kalpesh Synthetics Pvt. Ltd. v/s DCIT, ITA no.1785/Mum./2021, dated 27th April 2022. The Tribunal in Kalpesh Synthetics Pvt. Ltd. allowed the appeal by observing that the payments made after the due date under the respective statute but before filing the income tax return are deductible in the computation of business income, and thus, the adjustment in question was unsustainable in law.

The Tribunal noted that the scope of prima facie disallowance under section 143(1) is very limited and only such a disallowance can be made which can be conclusively held to be inadmissible based on material on record. The Tribunal emphasized that a claim backed by binding judicial precedents of the Hon’ble jurisdictional High Court cannot fall in this category. It was also highlighted that the insertion of Explanations to Section 36(1)(va) and 43B, by the Finance Bill 2021, is prospective in nature, and accordingly, such a disallowance cannot come into play for periods prior to 1st April 2021.

The learned Departmental Representative argued that the scope of expression "an incorrect claim, if such claim is apparent from any information in the return" under Section 143(1)(a) is now statutorily defined and includes claims inconsistent with the tax audit report. However, the Tribunal held that the tax auditor's observations, by themselves, cannot justify any disallowance of expenditure under the Act, especially when these observations are contrary to the law laid down by the jurisdictional High Court.

The Tribunal further noted that the process of making adjustments under section 143(1) involves an interactive and cerebral process where objections raised by the assessee must be disposed of judiciously by the Assessing Officer CPC, setting out specific reasons for the decision. The Tribunal found that the Assessing Officer CPC had used a standard reason without specific justification, which was insufficient for a quasi-judicial decision.

The Tribunal concluded that the tax auditor's opinion cannot bind the auditee and that the due date under Explanation to Section 36(1)(va) is not decisive for determining the disallowance in the computation of total income when payments are made before the due date of filing the income tax return under section 139(1). Therefore, the impugned adjustment was vitiated in law and was deleted.

Respecting the decision in Kalpesh Synthetics Pvt. Ltd., the Tribunal allowed the grounds raised by the assessee in the present appeal, thereby allowing the appeal.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, holding that the disallowance of Rs. 5,43,800 due to alleged delay in payment towards P.F/ESIC was unsustainable in law. The Tribunal emphasized that payments made before the due date of filing the income tax return are deductible, and the tax auditor's observations alone cannot justify disallowance, especially when contrary to the jurisdictional High Court's binding judicial precedents.