2022 (3) TMI 609 - 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) - payments made beyond the due date prescribed under respective statutes, but before the due date prescribed u/s 139(1) - Scope of amendment by Finance Act, 2021, to section 36 1 va and 43B - HELD THAT - As in Bangalore Bench of the Tribunal in the case of M/s. Shakuntala Agarbathi Company 2021 (10) TMI 1196 - ITAT BANGALORE by following the dictum laid down in the case of Essae Teraoka Pvt. Ltd 2014 (3) TMI 386 - KARNATAKA HIGH COURT held that the assessee would be entitled to deduction of employees contribution to PF and ESI provided that the payments were made prior to the due date of filing of the return of income u/s 139(1) - Also further held by the ITAT that amendment by Finance Act, 2021, to section 36 1 va and 43B of the Act is not clarificatory. Therefore, the amended provisions of section 43B as well as 36(1)(va) of the I.T.Act are not applicable for the assessment years under consideration. By following the binding decision of the Hon ble jurisdictional High Court in the case of Essae Teraoka Pvt. Ltd Vs. DCIT (supra), the employees contribution paid by the assessee before the due date of filing of return of income u/s 139(1) of the I.T.Act is an allowable deduction - Decided in favour of assessee.

Summary

Issues Involved:

1. Deduction of employees' contribution to Provident Fund (PF) and Employees' State Insurance (ESI) if payments are made before the due date for filing the return of income under Section 139(1) of the Income Tax Act.
2. Nature of the amendments by Finance Act, 2021 to sections 36(1)(va) and 43B - whether they are clarificatory and retrospective or prospective.

Issue-wise Detailed Analysis:

1. Deduction of Employees' Contribution to PF and ESI:

The core issue was whether the assessee is entitled to a deduction for the belated remittance of employees' contributions to PF and ESI, provided the payments were made before the due date for filing the return of income under Section 139(1) of the Income Tax Act. The assessee argued that the contributions, though delayed, were made before the return filing date, thus qualifying for deduction under Section 43B, as supported by the Supreme Court in CIT v. Alom Extrusions Ltd. The CIT(A) disallowed the deduction, distinguishing between employees' and employer's contributions, citing that Section 36(1)(va) specifically addresses employees' contributions and does not align with Section 43B. The CIT(A) relied on various High Court decisions, including CIT v. Gujarat State Road Transport Corporation and CIT v. Merchem Ltd, which upheld that delayed employees' contributions are not deductible even if paid before the return filing date.

2. Nature of Amendments by Finance Act, 2021:

The CIT(A) held that the amendments to sections 36(1)(va) and 43B by the Finance Act, 2021, which inserted explanations clarifying that Section 43B does not apply to employees' contributions, were declaratory and clarificatory, thus having retrospective effect. The assessee contested this, arguing that the amendments were prospective, effective from 01.04.2021, and thus not applicable to the assessment years in question (2018-2019 and 2019-2020). The ITAT Bangalore, in the case of M/s. Shakuntala Agarbathi Company v. DCIT, supported the assessee's view, holding that the amendments alter the law adversely to the assessee and cannot be presumed retrospective. The Tribunal cited the Supreme Court's judgment in M.M. Aqua Technologies Limited v. CIT, which stated that a retrospective provision for "removal of doubts" cannot be presumed if it changes the existing law.

Conclusion:

The ITAT Bangalore, following the decision in M/s. Shakuntala Agarbathi Company and the jurisdictional High Court's ruling in Essae Teraoka Pvt. Ltd. v. DCIT, concluded that the employees' contributions paid before the due date of filing the return under Section 139(1) are deductible. The amendments by Finance Act, 2021, to sections 36(1)(va) and 43B were deemed prospective and not applicable to the relevant assessment years. Thus, the disallowance made by the Assessing Officer was deleted, and the appeals filed by the assessee were allowed.