2010 (7) TMI 81 - HC - Income Tax

PF /ESI deposit during the grace period - AO found that in Form No. 3CD the tax auditor had given and certified the details of contribution deducted from the employees salary towards the Provident Fund (PF) and the contribution under the Employees State Insurance (ESI). The assessee had not fulfilled its obligation of depositing the Provident Fund contribution deducted from the employees salary as well as its own contribution within the due date as stipulated under the statute. Held that - that as soon as employees contribution towards provident fund or ESI is received by the assessee by way of deduction or otherwise from the salary / wages of the employees, it will be treated as income at the hands of the assessee. It clearly follows therefrom that if the assessee does not deposit this contribution with provident fund/ESI authorities, it will be taxed as income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of Section 36(1)(va) of the Act. Section 43B (b), however, stipulates that such deduction would be permissible only on actual payment. - the payments are made before the due date of filing the return, no such disallowance can be made under Section 43B

Summary

Issues:
Assail to order passed by Income Tax Appellate Tribunal regarding late deposit of PF and ESI contributions. Interpretation of Sections 43B, 36(1)(va), and 2(24)(x) of the Income Tax Act. Applicability of grace period for depositing contributions. Validity of penalty under Section 271(1)(c) of the Act.

Analysis:
The High Court dealt with an appeal under Section 260A of the Income Tax Act concerning an order by the Income Tax Appellate Tribunal related to the assessment year 2005-06. The respondent, engaged in textiles processing, failed to deposit Provident Fund (PF) and Employees State Insurance (ESI) contributions on time, resulting in a late deposit of Rs. 75,21,624. The assessing officer added this amount to the taxable income, imposed interest under Sections 234B and 234D, and initiated penalty proceedings under Section 271(1)(c).

The CIT(A) partially allowed the appeal, holding that certain contributions were paid within the grace period and should be deleted from the addition. The revenue challenged this decision before the tribunal, arguing that the provisions of Section 2(24)(x) read with Section 36(1)(va) were not properly considered. However, the tribunal upheld the CIT(A)'s decision, emphasizing that all payments were made before the due date of filing the return, citing the precedent set in CIT vs. P.M. Electronics Ltd.

The revenue contended that the decision in CIT vs. P.M. Electronics Ltd. did not apply to the case at hand, as it only addressed employer contributions, not employee contributions. Referring to Commissioner of Income Tax vs. AIMIL Limited, the court analyzed the provisions of Section 36(1)(va) and Section 43B, concluding that the Act allows for delayed deposits of employees' contributions if made before filing the return.

The court also referenced a decision by the Gauhati High Court, affirmed by the Supreme Court, supporting the allowance of benefits under Section 43B for timely employee contributions. It clarified the distinction between employer and employee contributions, emphasizing that the Act permits deductions for actual payments made by the due date specified.

In conclusion, the High Court affirmed the decisions of previous cases, including P.M. Electronics Ltd. and AIMIL Limited, stating that the law correctly interpreted the provisions regarding employees' contributions to PF and ESI. The appeal was dismissed, upholding the rulings in favor of the assessee.

This comprehensive analysis highlights the interpretation of relevant sections of the Income Tax Act, the application of grace periods for contribution deposits, and the legal principles governing deductions for timely payments, providing a thorough understanding of the judgment's key aspects.