2022 (1) TMI 367 - AT - Income Tax

Disallowance of Employees Provident Fund Employees ESI u/s. 36(1)(va) - Whether the said amount has been deposited before the filing of return u/s. 139(1) - HELD THAT - As decided in AIMIL Ltd. 2009 (12) TMI 38 - DELHI HIGH COURT the employees' contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in Vinay Cement 2007 (3) TMI 346 - SC ORDER - also see PRO INTERACTIVE SERVICE (INDIA) PVT. LTD. 2018 (9) TMI 2009 - DELHI HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Legality of increasing income under section 143(1).
2. Disallowance of Employees Provident Fund (EPF) and Employees State Insurance (ESI) under section 143(1)(a).
3. Disallowance of EPF and ESI under section 36(1)(va) despite deposits made before filing the return under section 139(1).
4. Applicability of the amendment by Finance Bill 2021, whether prospective or retrospective.

Detailed Analysis:

1. Legality of Increasing Income Under Section 143(1):
The assessee challenged the action of increasing income by ?18,00,520/- for the assessment year 2018-19 and ?19,30,330/- for the assessment year 2019-20 under section 143(1). The Tribunal did not specifically address this issue separately in the judgment, as the primary focus was on the disallowance of EPF and ESI contributions.

2. Disallowance of EPF and ESI Under Section 143(1)(a):
The assessee argued that the disallowance of EPF and ESI contributions amounting to ?13,73,715/- for AY 2018-19 and ?16,70,007/- for AY 2019-20 under section 143(1)(a) was outside the scope of this section. The Tribunal did not provide a detailed analysis on the procedural aspect of section 143(1)(a) but focused on the substantive issue of whether the contributions were allowable deductions.

3. Disallowance of EPF and ESI Under Section 36(1)(va) Despite Deposits Made Before Filing the Return Under Section 139(1):
The assessee contended that the disallowance was incorrect as the contributions were deposited before the filing of the return under section 139(1). The Tribunal found merit in the assessee's contention, citing the judgments of the Hon'ble Delhi High Court in the cases of PCIT vs. Pro Interactive Service (India) Pvt. Ltd. and CIT vs. AIMIL Ltd., which held that if the employees' contributions are deposited before the due date of filing the return, the employer is entitled to the deduction.

4. Applicability of the Amendment by Finance Bill 2021, Whether Prospective or Retrospective:
The Tribunal extensively analyzed whether the amendment made by the Finance Bill 2021 to sections 36(1)(va) and 43B is prospective or retrospective. The amendment clarified that the provisions of section 43B do not apply to employees' contributions. The Tribunal noted that the explanatory notes to the Finance Bill 2021 indicated that the amendment was intended to clarify the original legislative intent and was thus explanatory in nature. Consequently, the Tribunal held that the amendment is not prospective but rather clarifies the existing law, reinforcing that section 43B never applied to employees' contributions.

Conclusion:
The Tribunal, after considering the judgments of the Hon'ble Delhi High Court and the explanatory notes to the Finance Bill 2021, directed the Assessing Officer to delete the disallowance of ?13,73,715/- for AY 2018-19 and ?16,70,007/- for AY 2019-20. The appeals filed by the assessee were allowed, and the disallowances were deleted, following the principle that contributions deposited before the due date of filing the return are allowable deductions.

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