2022 (1) TMI 877 - AT - Income Tax

Delayed Employee s share of contribution to PF and ESI - determining the due date - scope of amendment made to section 36(1)(va) and 43B - HELD THAT - 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. 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. 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. In many decisions on identical issue the 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:
1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act regarding employees' share of contribution to ESI.
2. Application of the amendments made by the Finance Act, 2021 to Section 36(1)(va) and Section 43B.
3. Retrospective or prospective application of the amendments.
4. Legal distinction between employees' contribution and employer's contribution under the Act.

Issue 1: Interpretation of Section 36(1)(va) and Section 43B:
The appeal involved the interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act concerning the employees' share of contribution to ESI. The assessee contended that the employees' share of ESI was paid before the due date for filing the return under Section 139(1) of the Act, making it allowable based on judicial decisions like CIT vs. Alom Extrusions Ltd. The CIT(A) differentiated between employees' and employer's contributions, emphasizing the different due dates and consequences of non-payment. Various judicial pronouncements were cited to support this distinction.

Issue 2: Application of Amendments by Finance Act, 2021:
The CIT(A) referred to the amendments introduced by the Finance Act, 2021 to Section 36(1)(va) and Section 43B. The amendments clarified that the provisions of Section 43B shall not apply for determining the "due date" under Section 36(1)(va). The CIT(A) held that these amendments were declaratory in nature and applied retrospectively, upholding the addition made by the Assessing Officer.

Issue 3: Retrospective or Prospective Application of Amendments:
The Hon'ble Karnataka High Court's decision in Essae Teraoka Pvt. Ltd. established that if the employees' share of contribution is made before the due date for filing the return under Section 139(1), the assessee is entitled to claim a deduction. However, the issue of whether the amendments by the Finance Act, 2021 should be construed as retrospective was debated. The Tribunal held that these amendments were applicable only from 01.04.2021 and not retrospectively, leading to the deletion of the impugned additions under Section 36(1)(va).

Issue 4: Legal Distinction between Employees' and Employer's Contributions:
The legal distinction between employees' and employer's contributions under the Act was crucial in this case. The CIT(A) highlighted that failure to pay employees' contribution within the prescribed due date negates the employer's claim for deduction permanently, while delay in employer's contribution results in deferment of deduction. The CIT(A) cited judicial pronouncements recognizing this distinction and upheld the addition made by the Assessing Officer based on this legal differentiation.

In conclusion, the appeal was allowed in favor of the assessee, emphasizing the importance of understanding the legal nuances between employees' and employer's contributions under the Income Tax Act.