2022 (1) TMI 526 - AT - Income Tax

Delayed employees share of contribution to ESI - amount not paid on or before the due date as mentioned in Sec 36(1)(va) - scope of amendment to section 36(1)(va) by insertion of explanation 2and the amendment to section 43B by insertion to explanation 5 by the Finance Bill 2021 - 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 returnof income for AY 2017-18 u/s.139(1) of the Act. The next aspect to be considered is 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. On this aspect, 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. Appeal of assessee allowed.

Summary

Issues involved:
1. Disallowance of employees' share of contribution to ESI under section 36(1)(va) of the Income Tax Act, 1961.
2. Interpretation of amendments made to section 36(1)(va) and 43B by the Finance Act, 2021.
3. Applicability of the amendments with retrospective effect.

Issue 1: Disallowance of employees' share of contribution to ESI under section 36(1)(va):
The assessee, a company, filed a return of income for AY 2018-19, declaring total income. The Centralized Processing Centre added a sum representing employees' share of contribution to ESI due to non-payment before the due date. The assessee contended that the ESI was paid before the due date for filing the return, relying on judicial decisions like CIT vs. Alom Extrusions Ltd. The CIT(A) referred to the amendment to section 36(1)(va) by the Finance Act, 2021, which clarified the applicability of section 43B for determining the due date. The CIT(A) differentiated between employees' and employer's contributions, emphasizing the legal distinction recognized by courts. The amendment was considered declaratory in nature and applicable retrospectively, upholding the addition made by the AO.

Issue 2: Interpretation of amendments to section 36(1)(va) and 43B by the Finance Act, 2021:
The Finance Act, 2021 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). The CIT(A) held that these amendments were declaratory and clarificatory, applying with retrospective effect. The legal distinction between employees' and employer's contributions was emphasized, with reference to judicial pronouncements. The Hon'ble Karnataka High Court's decision in Essae Teraoka Pvt. Ltd. supported the view that employees' contribution falls under section 43B, entitling deduction if paid before the due date for filing the return. However, the retrospective applicability of the amendments was debated, with the tribunal holding that the amendments were prospective from 01.04.2021.

Issue 3: Applicability of the amendments with retrospective effect:
The decision highlighted that the amendments to section 36(1)(va) and 43B by the Finance Act, 2021, were applicable only from 01.04.2021, based on the explanatory memorandum. The tribunal's view was that the amendments were prospective and not retrospective unless explicitly stated by the legislature. Considering this, the impugned additions made under section 36(1)(va) were deemed to be deleted, leading to the allowance of the assessee's appeal.

In conclusion, the judgment addressed the disallowance of employees' share of contribution to ESI, the interpretation of amendments to sections 36(1)(va) and 43B, and the applicability of these amendments with retrospective effect. The legal distinction between employees' and employer's contributions, along with the prospective nature of the amendments, played a crucial role in the decision to allow the assessee's appeal.