2023 (7) TMI 1538 - AT - Income Tax

Delayed contributions towards PF ESI - additions made under the umbrella of S. 143(1) - grant of deduction under general provisions for deduction of expenditure u/s 37 - HELD THAT - No merit in such plea that the belated deposit of employees contributions to PF/ESIC governed u/s 36(1)(va) is also simultaneously amenable to deduction under Section 37(1) of the Act. In terms of the provision, Section 37(1) permits deduction of expenditure which is not in the nature of expenditure prescribed in Sections 30 to 36 of the Act and also not being in the nature of capital expenditure or personal expenses of the assessee. Thus, in view of such mandate of law, the deduction of expenditure under the general clause of Section 37(1) would not extend to expenditure specially covered within the ambit of Section 36(1)(va) of the Act. The Hon ble Supreme Court in the case of Checkmate Pvt. Ltd. 2022 (10) TMI 617 - SUPREME COURT itself explains this position - Such view also draws support from the observations made in recent judgment in the case of Pr.CIT vs. Khyati Realtors (P) Ltd. 2022 (8) TMI 1141 - SUPREME COURT . The alternate plea is thus without any merit. Methodology of calculation of default under the relevant PF/ESIC Act - as contented the month during which the disbursement of salary is actually made would be relevant for the purposes of determination of due date of deposit under the respective statute - The accrual of liability towards payment of salary without actual disbursement would not fasten obligation for deposits of employees contribution in the labour Acts per se. as observed in Kanoi Paper and Industries Ltd. 2001 (5) TMI 139 - ITAT CALCUTTA-E . This aspect has not been found to be examined by the Assessing Officer or CIT(A). Hence without expressing any opinion on merits on this aspect, we deem it expedient to restore the matter to the file of designated AO. Therefore in view of foregoing discussion and observations the intimations u/s. 143(1) of the Act for AY 2019-20 is set aside and the issue of allowability of employees contribution to ESIC PF is restored to the file of Assessing Officer for a fresh adjudication after allowing due opportunity of hearing to the assessee by considering the explanation and factual matrix of the issue and factual contentions of assessee, without being influence with the earlier intimation and first appellate order.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core legal questions:

1. Whether the CIT(A) was correct in law and on facts in deleting the addition of Rs. 2,63,96,393/- related to the late deposit of employees' contributions to Provident Fund (PF) and Employees' State Insurance (ESI) by the employer.

2. Whether the provisions of Section 2(24)(x) read with Section 36(1)(va) of the Income Tax Act, 1961, were correctly interpreted in relation to the late deposit of employees' contributions to PF and ESI.

3. Whether the judgment of the Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. Commissioner of Income Tax is applicable to the present case.

4. Whether the Assessing Officer (AO) had the jurisdiction to make additions/disallowances under Section 143(1) of the Income Tax Act.

5. Whether the late deposit of employees' contributions to PF and ESI can be considered allowable under Section 37(1) of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deletion of Addition by CIT(A)

Relevant legal framework and precedents: The case revolves around the interpretation of Section 2(24)(x) and Section 36(1)(va) of the Income Tax Act, which pertain to the treatment of employees' contributions to PF and ESI.

Court's interpretation and reasoning: The court considered whether the CIT(A) was justified in deleting the addition made by the AO for the late deposit of employees' contributions.

Key evidence and findings: The CIT(A) had deleted the addition, which was contested by the Revenue based on the Supreme Court's judgment in Checkmate Services Pvt. Ltd.

Application of law to facts: The court examined whether the CIT(A)'s decision aligned with the legal provisions and the Supreme Court's precedent.

Treatment of competing arguments: The Revenue argued that the Supreme Court's judgment was applicable, while the Assessee contended that the addition was not permissible under Section 143(1).

Conclusions: The court set aside the CIT(A)'s order and remanded the issue back to the AO for fresh adjudication.

Issue 2: Interpretation of Section 2(24)(x) and Section 36(1)(va)

Relevant legal framework and precedents: These sections address the inclusion of employees' contributions to PF and ESI as income and the conditions for their deduction.

Court's interpretation and reasoning: The court emphasized that the deduction of employees' contributions is contingent upon timely deposit as per the respective statutes.

Key evidence and findings: The court noted the Supreme Court's judgment in Checkmate Services Pvt. Ltd., which upheld strict adherence to the statutory due dates.

Application of law to facts: The court found that the Assessee's interpretation was inconsistent with the statutory provisions and the Supreme Court's ruling.

Treatment of competing arguments: The Assessee argued for a broader interpretation, while the Revenue relied on the Supreme Court's strict interpretation.

Conclusions: The court concluded that the provisions of Section 2(24)(x) and Section 36(1)(va) were correctly interpreted by the Revenue.

Issue 3: Applicability of the Supreme Court Judgment

Relevant legal framework and precedents: The Supreme Court's judgment in Checkmate Services Pvt. Ltd. provided a precedent for the treatment of late deposits of employees' contributions.

Court's interpretation and reasoning: The court considered the relevance of the Supreme Court's judgment to the present case.

Key evidence and findings: The court found that the judgment was directly applicable and supported the Revenue's stance.

Application of law to facts: The court applied the Supreme Court's reasoning to the facts of the case, supporting the Revenue's position.

Treatment of competing arguments: The Assessee's arguments were deemed insufficient to counter the Supreme Court's precedent.

Conclusions: The court upheld the applicability of the Supreme Court's judgment to the present case.

Issue 4: Jurisdiction of AO under Section 143(1)

Relevant legal framework and precedents: Section 143(1) pertains to the processing of returns and adjustments by the AO.

Court's interpretation and reasoning: The court examined whether the AO had the jurisdiction to make the contested adjustments.

Key evidence and findings: The court noted that the adjustments were made following due process and were permissible under Section 143(1).

Application of law to facts: The court found that the AO acted within jurisdiction in making the adjustments.

Treatment of competing arguments: The Assessee's challenge to the AO's jurisdiction was not upheld.

Conclusions: The court confirmed the AO's jurisdiction to make the adjustments under Section 143(1).

Issue 5: Allowability under Section 37(1)

Relevant legal framework and precedents: Section 37(1) allows deductions for business expenditures not covered by Sections 30 to 36.

Court's interpretation and reasoning: The court considered whether late deposits could be allowed under Section 37(1).

Key evidence and findings: The court referenced the Supreme Court's judgment, which clarified that Section 37(1) does not cover expenditures specified under Section 36(1)(va).

Application of law to facts: The court found no merit in the Assessee's claim for deduction under Section 37(1).

Treatment of competing arguments: The Assessee's argument for allowance under Section 37(1) was rejected.

Conclusions: The court concluded that the late deposits were not allowable under Section 37(1).

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The deduction of expenditure under the general clause of Section 37(1) would not extend to expenditure specially covered within the ambit of Section 36(1)(va) of the Act."

Core principles established: The judgment reinforces the importance of adhering to statutory due dates for the deposit of employees' contributions and confirms the non-applicability of Section 37(1) to such expenditures.

Final determinations on each issue: The court set aside the CIT(A)'s order, remanding the matter to the AO for fresh adjudication, confirming the applicability of the Supreme Court's judgment, and upholding the AO's jurisdiction under Section 143(1).