2023 (9) TMI 1501 - AT - Income Tax

Delayed payment of employees' contribution towards Provident Fund (PF) and Employees State Insurance (ESI) - processing the returns of income under section 143(1) - HELD THAT - Unless employees contribution to PF and ESI are deposited within the due date prescribed under the PF and ESI Acts, not only the assessee would get no deduction under section 36(1)(va), but the amount in question has to be treated as assessee s income u/s 2(24)(x) of the Act. To that extent, the issue stands squarely settled by the ratio laid down in case of Checkmate Services (P) Ltd. 2022 (10) TMI 617 - SUPREME COURT Clear indication by the auditor in the audit report calls for suo motu disallowance of such amount paid beyond the due date, as it is in contravention of section 36(1)(va) of the Act, while computing the total income in the return of income. Instead of doing that, the assessee has claimed deduction of the amount under section 36(1)(va) of the Act. Thus, in our considered opinion, the adjustment clearly falls within the ambit of section 143(1)(a)(iv) read with Explanation (a). Therefore, we reject assessee s contention in this regard. The concept of prima facie adjustment under section 143(1)(a) has long been obliterated, as, after the amendment of section 143(1), first and second proviso to section 143(1)(a) provide for complying with the requirements of rule of natural justice in case of any adjustment. Thus, we do not find any merit in the submissions of the assessee contesting the adjustment made under section 143(1)(a) of the Act. Effect that the amendment to section 36(1)(va) by introducing Explanation-2 will apply prospectively - Even, accepting assessee s aforesaid contention, as we have already discussed earlier in the order, section 36(1)(va) in its original form, sans the amendment, had no ambiguity, as it clearly provided that no deduction in respect of employees contribution to PF and ESI can be granted unless such contribution is remitted within the due date prescribed under the relevant Acts. Therefore, retrospective or prospective application of the amendment to section 36(1)(va) would be of no help to the assessee. Decided against assessee.

Summary

Issues Involved:
1. Disallowance of deduction claimed on account of delayed payment of employees' contribution towards Provident Fund (PF) and Employees State Insurance (ESI).
2. Scope and applicability of adjustments under section 143(1)(a)(iv) of the Income-tax Act, 1961.
3. Prospective versus retrospective application of amendments to section 36(1)(va) of the Income-tax Act, 1961.
4. Allowability of the disallowed amount under section 37 of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance of Deduction Claimed on Account of Delayed Payment of Employees' Contribution towards Provident Fund (PF) and Employees State Insurance (ESI):

The assessee, a partnership firm, filed its returns for the assessment years 2018-19 and 2019-20, claiming deductions for employees' contributions to PF and ESI, which were paid after the due date prescribed under the respective Acts. The Centralized Processing Centre (CPC) disallowed these deductions under section 36(1)(va) of the Income-tax Act, 1961, treating the delayed payments as income under section 2(24)(x). The first appellate authority upheld these disallowances based on the Supreme Court's decision in Checkmate Services (P) Ltd. vs. CIT (2022) 143 taxmann.com 178. The Tribunal confirmed that if employees' contributions to PF and ESI are not deposited within the due date, they must be treated as the income of the assessee and are not deductible under section 36(1)(va).

2. Scope and Applicability of Adjustments under Section 143(1)(a)(iv) of the Income-tax Act, 1961:

The Tribunal examined whether the adjustments made by the CPC under section 143(1)(a)(iv) were within its scope. The assessee argued that the tax auditor only reported the details of contributions and did not indicate any disallowance. However, the Tribunal observed that the tax audit report provided clear indications that the contributions were paid beyond the due date, which warranted a disallowance. The Tribunal concluded that the adjustment made by the CPC falls within the ambit of section 143(1)(a)(iv), rejecting the assessee's contention that the adjustment was beyond the scope of the provision.

3. Prospective Versus Retrospective Application of Amendments to Section 36(1)(va) of the Income-tax Act, 1961:

The assessee contended that the amendment to section 36(1)(va) by introducing Explanation-2, which clarifies that the provisions of section 43B shall not apply for determining the due date, should apply prospectively. The Tribunal, even accepting this contention, noted that the original provision of section 36(1)(va) was clear and unambiguous in stating that no deduction would be allowed unless the contribution was remitted within the due date under the relevant Acts. Hence, the retrospective or prospective application of the amendment would not change the outcome.

4. Allowability of the Disallowed Amount under Section 37 of the Income-tax Act, 1961:

The assessee made an alternative claim that the disallowed amount should be allowed as an expenditure under section 37. The Tribunal rejected this claim, stating that section 36(1)(va) specifically deals with employees' contributions to PF and ESI, and the conditions for deduction under this section must be strictly complied with. The Tribunal emphasized that the Supreme Court's decision in Checkmate Services (P) Ltd. (supra) is binding and leaves no room for alternative interpretations under section 37.

Conclusion:

The Tribunal upheld the disallowance of deductions for delayed payments of employees' contributions to PF and ESI, confirming that such contributions must be remitted within the due date specified under the respective Acts to qualify for deduction under section 36(1)(va). The adjustments made by the CPC under section 143(1)(a)(iv) were deemed appropriate, and the amendments to section 36(1)(va) were considered to have no impact on the assessment years in question. The alternative claim for deduction under section 37 was also rejected. The appeals were dismissed, affirming the decision of the first appellate authority.