2023 (4) TMI 560 - AT - Income Tax

Delay in remittance of employees contribution towards provident fund - disallowance u/s 143(1) on account of assessee s failure to pay the employee s contribution of PF/ESI within the prescribed due dates as per Section 36(1)(va) - HELD THAT - We find that now this issue has been decided in favour of revenue in its recent decision in bunch of appeals titled as Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT There is a marked distinction between the nature and character of the two contributions the employer s liability is to be paid out of its income whereas the second is deemed to be an income, by definition, since it is the deduction from the employees income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B. If the same is not deposited as per mandate of Sec.36(1)(va), the deduction of the same would not be available to the assessee. Thus, this issue stands in favor of revenue and we respectfully follow the same. This decision of Hon ble Court would relate back to the date of consequential amendment brought in by legislatures in respective provisions of the act and it was to be presumed that the legal position was always like that i.e., both the contributions were to be treated differently since inception and the Employee s contribution was always subjected to rigors of Sec.36(1)(va). If the assessee complies with the same only then the deduction would be allowed to the assessee otherwise the same would continue to form the income of the assessee. The said decision, in our opinion, is to be given full consequential effect. Thus the impugned disallowances stand confirmed.

Summary

Issues Involved:
1. Confirmation of addition for delay in remittance of employees' contribution towards Provident Fund (PF).
2. Confirmation of addition for delay in remittance of employees' contribution towards Employees' State Insurance (ESI).

Detailed Analysis:

1. Confirmation of Addition for Delay in Remittance of Employees' Contribution towards Provident Fund (PF):

The assessee, a private limited company, filed its return of income for the assessment year 2018-19 declaring a total income of Rs. 7,60,410/-. The return was processed under Section 143(1) of the Income Tax Act, 1961, and an addition of Rs. 3,96,908/- was made due to the delay in remittance of employees' contribution towards PF as per Section 36(1)(va) of the Act. The CIT(A) confirmed this disallowance, stating that the contributions collected from employees' salaries must be deposited within the due date prescribed under the respective EPF/ESI Acts. The CIT(A) emphasized that the addition of the said amount as income of the employer under Section 2(24)(x) read with Section 36(1)(va) of the Act is automatic and mandatory if not deposited within the due date.

The assessee contended that the intimation issued under Section 143(1) was invalid as it did not follow the first proviso to Section 143(1)(a), which requires an intimation to be given to the assessee before making any adjustments. The assessee also argued that the amendment to Sections 36(1)(va) and 43B by the Finance Act, 2021, should be applied prospectively from 1.4.2021, and not retrospectively. The assessee relied on various judicial precedents and the CBDT Circular 1/2009 to support the claim that the adjustments made under Section 143(1) were beyond the permissible scope.

However, the tribunal, after considering the rival contentions and the recent decision of the Hon'ble Supreme Court in the case of Checkmate Services P. Ltd. vs. CIT (Civil Appeal No. 2833 of 2016 dated 12.10.2022), upheld the disallowance. The Supreme Court clarified that there is a clear distinction between the employer's contribution (Section 36(1)(iv)) and the employee's contribution (Section 36(1)(va)). The latter is deemed income under Section 2(24)(x) and must be deposited on or before the due date specified in the relevant statutes. The Court held that the non-obstante clause under Section 43B does not override the specific requirement under Section 36(1)(va) for timely deposit of employees' contributions.

2. Confirmation of Addition for Delay in Remittance of Employees' Contribution towards Employees' State Insurance (ESI):

Similar to the PF contribution, an addition of Rs. 1,31,254/- was made for the delay in remittance of employees' contribution towards ESI. The CIT(A) confirmed this disallowance as well, based on the same reasoning that the contributions must be deposited within the due date prescribed under the respective statutes.

The assessee's arguments against the disallowance of ESI contributions were identical to those made for the PF contributions. The assessee reiterated that the adjustments made under Section 143(1) were invalid due to the lack of intimation and that the amendments to Sections 36(1)(va) and 43B should be applied prospectively.

The tribunal, following the Supreme Court's decision in Checkmate Services P. Ltd. vs. CIT, upheld the disallowance for the delayed remittance of ESI contributions. The Court's rationale was that the employees' contributions, whether towards PF or ESI, are deemed income and must be deposited within the due date to qualify for deduction. The distinction between the employer's and employees' contributions was maintained, and the requirement for timely deposit was emphasized.

Conclusion:

The tribunal dismissed the appeal of the assessee and confirmed the disallowances for the delayed remittance of employees' contributions towards PF and ESI. The decision was based on the Supreme Court's ruling in Checkmate Services P. Ltd. vs. CIT, which clarified the distinction between employer's and employees' contributions and the necessity for timely deposit of the latter to qualify for deduction. The tribunal also noted that the amendments to Sections 36(1)(va) and 43B were to be applied retrospectively, aligning with the Supreme Court's interpretation.