2021 (12) TMI 938 - AT - Income Tax

Employees share of contribution to ESI to the extent not paid on or before the due date as mentioned in Sec 36(1)(va) - HELD THAT - The Hon ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd., 2014 (3) TMI 386 - KARNATAKA HIGH COURT has taken the view that employee s contribution under section 36(1)(va) of the Act would also be covered under section 43B of the Act and therefore if the share of the employee s share of contribution is made on or before due date for furnishing the return of income under section 139(1) of the Act, then the assessee would be entitled to claim deduction. Therefore, the issue is covered by the decision of the Hon ble Karnataka High Court. In this case there is no dispute that the assessee made payment of the Employees share of PF/ESI on or before the due date for filing return of income for AY 2017-18 u/s.139(1) of the Act. Whether the amendment to the provisions to section 43B and 36(1)(va) of the Act by the Finance Act, 2021, has to be construed as retrospective and applicable for the period prior to 01.04.2021 also? - We find that the explanatory memorandum to the Finance Act, 2021 proposing amendment in section 36(1)(va) as well as section 43B is applicable only from 01.04.2021. These provisions impose a liability on an assessee and therefore cannot be construed as applicable with retrospective effect unless the legislature specifically says so - tribunal has taken a view that the aforesaid amendment is applicable only prospectively i.e., from 1.4.2021. We are therefore of the view that the impugned additions made under section 36(1)(va) of the Act, deserves to be deleted.- Decided in favour of assessee.

Summary

Issues: Appeal against CIT(A) order regarding employees' share of contribution to ESI and PF, applicability of newly inserted explanations to sections 36(1)(va) and 43B of the Income Tax Act, 1961, retrospective effect of Finance Act, 2021 amendments.

Analysis:
1. Employees' Share of Contribution to ESI: The assessee, a Private Limited Company, filed a return for AY 2017-18 declaring total income. The Centralized Processing Centre added an amount representing employees' share of contribution to ESI due to non-payment before the specified due date. The assessee contended that the contribution was paid before the due date for filing the return, citing relevant judicial decisions supporting the deductibility of such payments.

2. Amendments to Sections 36(1)(va) and 43B: The CIT(A) referred to the Finance Act, 2021 amendments to sections 36(1)(va) and 43B of the Act. The amendments inserted Explanation-2 to section 36(1)(va) and Explanation-5 to section 43B, clarifying the non-applicability of section 43B for determining the "due date" under section 36(1)(va) and exempting sums received from employees. The CIT(A) emphasized the distinction between employees' and employer's contributions, noting different treatment under the Act and judicial recognition of this differentiation.

3. Applicability and Retrospective Effect: The CIT(A) held that the amendments were declaratory/clarificatory and applied retrospectively. However, the tribunal found that the amendments were applicable only from 01.04.2021, based on the explanatory memorandum to the Finance Act, 2021. Considering previous decisions and the absence of specific retrospective language in the amendments, the tribunal concluded that the additions made under section 36(1)(va) should be deleted, allowing the appeal of the assessee.

4. Judicial Precedents and High Court Decision: The tribunal referred to various decisions, including the view of the Hon'ble Karnataka High Court in Essae Teraoka Pvt. Ltd., supporting the deductibility of employees' contributions under section 36(1)(va) if paid before the due date for filing the return. The tribunal highlighted the importance of legislative intent in determining the retrospective application of amendments and emphasized the need for clear language to establish retroactive effect.

5. Final Decision: The tribunal allowed the appeal of the assessee, emphasizing that the Finance Act, 2021 amendments did not have retrospective effect before 01.04.2021. The tribunal's decision aligned with previous interpretations and judicial precedents, providing relief to the assessee regarding the deductibility of employees' share of contributions to ESI and PF.