2023 (9) TMI 1678 - AT - Income Tax

Additions u/s 143(1)(a)(iv) - late deposit of ESI/EPF of employee share - HELD THAT - We find that the issue is no more res integra as Hon ble Apex Court has conclusively decided the issue in the case of Checkmate Services P. Ltd 2022 (10) TMI 617 - SUPREME COURT that no infirmity in AO s action in the addition u/s 36(1)(va) in the total income of the appellant. Hence no infirmity in the order of the CIT (A) and uphold the same. Appeals filed by the assessee are dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the late deposit of the employee's share of ESI/EPF contributions constitutes a debatable issue, thus preventing prima facie additions under section 143(1)(a)(iv) of the Income Tax Act.

2. Whether the order of the Commissioner of Income-tax (Appeals) was in violation of the principles of natural justice due to the lack of an opportunity for the assessee to be heard in person.

3. Whether the amount treated as income under section 2(24)(x) and section 36(1)(va) is allowable as a deduction under section 37(1) of the Income Tax Act, being wholly and exclusively incurred for the purpose of business.

4. Whether the income under section 2(24)(x) read with section 36(1)(va) is an income diversion with overriding title, thus allowing the deduction of the employee's contribution to ESI/EPF when deposited with the authorities.

ISSUE-WISE DETAILED ANALYSIS

1. Late Deposit of ESI/EPF Contributions as a Debatable Issue

Relevant Legal Framework and Precedents: The legal framework involves section 143(1)(a)(iv) of the Income Tax Act, which allows for adjustments to be made to the income declared by the assessee if there are apparent errors. The appellant contended that the late deposit of ESI/EPF contributions was a debatable issue, referencing various High Court judgments.

Court's Interpretation and Reasoning: The Tribunal referred to the Supreme Court's decision in Checkmate Services P. Ltd. vs. CIT, which clarified the distinction between the employer's primary liability and the obligation to deposit employee contributions. The Supreme Court held that the non-obstante clause in section 43B does not override the obligation to deposit employee contributions by the due date.

Application of Law to Facts: The Tribunal found that the issue was not debatable as the Supreme Court had conclusively decided it in Checkmate Services P. Ltd., affirming that late deposits are not allowable deductions.

Conclusions: The Tribunal upheld the addition made by the Assessing Officer, finding no infirmity in the application of section 36(1)(va).

2. Violation of Principles of Natural Justice

Relevant Legal Framework: The principles of natural justice require an opportunity for the assessee to be heard before any adverse decision is made.

Court's Interpretation and Reasoning: The Tribunal did not specifically address this issue in detail, as the primary focus was on the substantive legal question regarding the applicability of section 36(1)(va).

Conclusions: The lack of detailed discussion suggests that the Tribunal did not find sufficient merit in this claim to affect the outcome of the appeal.

3. Deductibility of Amounts under Section 37(1)

Relevant Legal Framework and Precedents: Section 37(1) allows for deductions of expenses wholly and exclusively incurred for business purposes. The appellant argued that the contributions, though late, were for the business's benefit and should be deductible.

Court's Interpretation and Reasoning: The Tribunal, relying on the Supreme Court's ruling, emphasized that employee contributions, if not deposited by the due date, are not deductible, regardless of the business purpose.

Conclusions: The Tribunal upheld the disallowance of the deduction under section 36(1)(va), as the Supreme Court had clearly delineated the conditions for such deductions.

4. Income Diversion with Overriding Title

Relevant Legal Framework and Precedents: The concept of income diversion by overriding title pertains to whether the income is received with an obligation to be passed on, thus not forming part of the assessee's income.

Court's Interpretation and Reasoning: The Tribunal, guided by the Supreme Court's decision, noted that employee contributions are deemed income until deposited with the authorities. The obligation to deposit does not negate its character as income until such compliance.

Conclusions: The Tribunal found no merit in the argument of income diversion, as the statutory framework and Supreme Court precedent clearly classify such contributions as income until duly deposited.

SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: The Tribunal extensively cited the Supreme Court's decision in Checkmate Services P. Ltd., emphasizing the distinction between employer and employee contributions and the conditions under which deductions are permissible.

Core Principles Established: The Tribunal reinforced the principle that employee contributions to welfare funds must be deposited by the due date to qualify for deductions, as per section 36(1)(va). The non-obstante clause in section 43B does not override this requirement.

Final Determinations on Each Issue: The Tribunal dismissed the appeals for both assessment years, affirming the additions made by the Assessing Officer under section 36(1)(va) and rejecting the arguments presented by the assessee regarding the debatable nature of the issue, violation of natural justice, deductibility under section 37(1), and income diversion.