2023 (2) TMI 1325 - AT - Income Tax

Disallowance in respect of employee s contribution towards provident fund and ESIC as paid beyond the period prescribed under the PF/ ESI Act - Adjustment u/s 143(1) - as argued auditors did not specifically mention in the audit report regarding inadmissibility of claim with respect to contributions received from the employees for various funds as referred to in section 36(1)(va) HELD THAT - There is no specific requirement under section 143(1) of the Act that the auditor has to make a specific observation regarding admissibility/inadmissibility with regard to any claim of expenditure and all that is required under section 143(1) of the Act is that disallowance of such expenditure should be indicated in the audit report . Once the auditor has mentioned the actual dates of ESI/PF remittance and the due dates of ESI/PF remittance by the assessee u/s 36(1)(va) of the Act at serial number 20(b) of the audit report, then, in our considered view, the requirement of section 143(1) of the Act viz. disallowance of expenditure indicated in the tax audit report stands satisfied and the Department is permitted to make disallowance in terms of section 143(1) of the Act. Debatable issues - Disallowance under section 143(1)(a) was valid in view of Supreme Court's decision in case of Checkmate Services (P.) Ltd. 2022 (10) TMI 617 - SUPREME COURT and the assessee will not be entitled to deduction of belated payment of ESI and PF of employees' share of contribution as per provisions of section 36(1)(va) of the Act. Again, recently in the case of Cemetile Industries 2022 (12) TMI 354 - ITAT PUNE held that where assessee-employer deposited amount of employees contribution towards employees' provident fund and employees' state insurance corporation beyond due date stipulated in respective Acts, disallowance made under section 36(1)(va) was justified. ITAT further held that adjustment under section 143(1)(a) by means of disallowance made for late deposit of employees' share to relevant funds beyond date prescribed under respective Acts was proper. Appeal of the assessee is dismissed.

Summary

Issues:
1. Disallowance of employees' contribution to Provident Fund deposited late under Section 36(1)(va).
2. Failure to follow binding decision of Jurisdictional Income Tax Appellate Tribunal.
3. Auditor's role in indicating inadmissibility of claims under Section 36(1)(va).
4. Debatable nature of the issue at the time of disallowance under Section 143(1).
5. Interpretation of Section 143(1) regarding disallowance of expenditure indicated in the audit report.

Analysis:

1. Disallowance of Employees' Contribution:
The appeal arose from the National Faceless Appeal Centre's order confirming the disallowance of Rs. 4,64,014 on account of employees' contribution to Provident Fund deposited late. The CIT(A) dismissed the appeal, citing the Finance Act 2021 amendments clarifying the due dates under Section 36(1)(va). The Tribunal upheld the disallowance, emphasizing the recent amendment's clarification that the due dates under Section 43B do not apply to employees' contributions. The Tribunal concluded that the disallowance was rightly made under Section 36(1)(va) and Section 2(24)(x) of the Income Tax Act, 1961.

2. Failure to Follow Binding Decision:
The appellant argued that the NFAC erred in not following a binding decision of the Jurisdictional Income Tax Appellate Tribunal. However, the Tribunal found that the recent amendment post the Finance Act 2021 clarified the issue, rendering the previous decision inapplicable. Therefore, the failure to follow the previous decision was not considered a valid ground for appeal.

3. Auditor's Role and Inadmissibility:
The appellant contended that the auditor did not specifically mention the inadmissibility of the claim under Section 36(1)(va) in the audit report. The Tribunal analyzed Section 143(1) of the Act, noting that the auditor's role is to indicate the expenditure in the audit report, not specifically comment on admissibility. The Tribunal concluded that the Department could make disallowances based on the information indicated in the audit report.

4. Debatable Nature of the Issue:
The appellant argued that the issue of disallowance was debatable at the time, precluding its inclusion under Section 143(1) of the Act. However, the Tribunal referenced recent Supreme Court judgments clarifying the non-applicability of Section 43B to amounts held in trust, such as employees' contributions. Based on these clarifications, the Tribunal dismissed the argument of the issue being debatable at the time of disallowance.

5. Interpretation of Section 143(1) Regarding Disallowance:
The Tribunal analyzed Section 143(1) of the Act concerning the disallowance of expenditure indicated in the audit report. It clarified that the auditor's report does not require specific observations on the admissibility of claims under Section 36(1)(va). The Tribunal highlighted that once the audit report indicates the relevant dates, the Department is permitted to make disallowances as per Section 143(1) of the Act.

In conclusion, the Tribunal upheld the disallowance of the employees' contribution to Provident Fund deposited late, citing the recent amendments and Supreme Court judgments as clarifications on the issue. The appeal was dismissed based on the comprehensive analysis of the legal provisions and judicial interpretations.