2022 (6) TMI 290 - AT - Income Tax

Addition of employees share of contribution to EPF/ESI to the extent not paid on or before the due date as mentioned in Sec 36(1)(va) - HELD THAT - 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) . Scope of amendment - 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 the decisions referred to by us in the earlier paragraph of this order 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. Appeal of assessee allowed.

Summary

Issues:
1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act.
2. Applicability of newly inserted explanations under the Finance Act, 2021.
3. Whether the amendments are retrospective or prospective.

Analysis:

Issue 1: Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act:
The case involved appeals by an individual assessee against orders related to the Assessment Year 2019-20. The Centralized Processing Centre added a sum representing employees' share of contribution to EPF/ESI not paid before the due date under Sec 36(1)(va) of the Income Tax Act. The assessee argued that the contribution was paid before the due date for filing the return under Sec 139(1) and relied on various judicial decisions to support their claim.

Issue 2: Applicability of newly inserted explanations under the Finance Act, 2021:
The CIT(A) referred to the amendments made 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) noted the distinction between employees' and employer's contributions under the Act, emphasizing that failure to pay employees' contribution before the due date negates the employer's deduction permanently, while delay in employer's contribution leads to deferment of deduction under Section 43B.

Issue 3: Whether the amendments are retrospective or prospective:
The CIT(A) held that the amendments by the Finance Act, 2021 were declaratory/clarificatory in nature and applied retrospectively. However, the Tribunal disagreed, citing that the amendments were applicable only prospectively from 01.04.2021 based on the explanatory memorandum to the Finance Act. The Tribunal also referred to previous decisions on similar issues, where it was held that the amendments were prospective. Consequently, the additions made under Section 36(1)(va) were deemed to be deleted.

Conclusion:
The Hon'ble Karnataka High Court's decision supported the assessee's claim that if the employee's contribution is made before the due date for filing the return, the deduction can be claimed. However, the Tribunal found that the amendments under the Finance Act, 2021 were prospective and not retrospective. Therefore, the appeal of the assessee was allowed, and the additions made under Section 36(1)(va) were deleted.