Covid Lockdown Delay in Employees’ PF & ESI Deposit: Section 36(1)(va) Disallowance Deleted by ITAT Delhi

Cargo Construction Company Private Limited Vs DCIT (ITAT Delhi)

ITAT Delhi allowed the appeal of Cargo Construction Company Private Limited for AY 2021-22 and deleted the disallowance under Section 36(1)(va) of the Income Tax Act, 1961 relating to delayed deposit of employees’ contributions towards PF and ESI during the Covid-19 pandemic. The assessee explained that the delays occurred during the lockdown period and relied upon the EPFO communication dated 15.05.2020, under which a liberal approach was adopted towards delayed contributions caused by operational and economic difficulties during lockdown and no proceedings for levy of penal damages were to be initiated for such delay.

The Tribunal noted that the delayed deposits related to the months falling within the Covid-affected period and considered the exceptional circumstances prevailing at that time. It followed the Mumbai Tribunal ruling in Diamour Jewels P. Ltd. v. CPC, where, despite considering the Supreme Court ruling in Checkmate Services P. Ltd. v. CIT, relief had been granted on the peculiar facts because the EPFO itself had waived penal damages for delayed payments during lockdown.

The Delhi Tribunal observed that the period of delay in the present case was similarly affected by the unprecedented Covid-19 situation. Taking into account the EPFO relief and the peculiar circumstances in which the delay occurred, the Tribunal directed deletion of the disallowance under Section 36(1)(va), set aside the impugned appellate order and allowed the assessee’s appeal.

Cases Discussed

• Diamour Jewels P. Ltd. vs. CPC, ITA No. 1965/Mum/2024, AY 2021-22, order dated 25.07.2024 (ITAT Mumbai) — Followed. On materially similar Covid-lockdown facts, the Mumbai Bench held that where EPFO itself waived penal damages for delayed payment during lockdown, the peculiar delay in depositing employees’ PF and ESI contribution should not operate adversely under Section 36(1)(va). The Delhi Tribunal followed this reasoning and deleted the disallowance.
• Artistes Unlimited Charitable Trust vs. ITO, ITA No. 1177/Del/2024, AY 2020-21, order dated 18.06.2024 (ITAT Delhi) — Relied upon by the assessee. Cited in support of the assessee’s plea for relief in view of difficulties arising during the Covid-19 pandemic.
• In Re: Cognizance for Extension of Limitation, Miscellaneous Application No. 21 of 2022 in M.A. No. 665 of 2021 in Suo Motu Writ Petition (C) No. 3 of 2020 (Supreme Court) — Relied upon by the assessee. Invoked in the context of the exceptional disruption caused by the Covid-19 pandemic and the Supreme Court’s intervention concerning limitation during that period.
• Checkmate Services P. Ltd. vs. CIT, (2022) 143 taxmann.com 178 / 448 ITR 518 (Supreme Court) — Considered through Diamour Jewels P. Ltd. The Supreme Court ruling concerning the statutory due-date requirement for employees’ PF/ESI contributions was considered by the Mumbai Bench; the relief followed in the present case was confined to the peculiar Covid-lockdown circumstances and EPFO’s waiver of penal damages.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)/Additional/Joint Commissioner of Income Tax-(Appeals) Kochi (hereinafter referred to as ‘the CIT(A)’) dated 05.11.2024, for assessment year 2021-22.

2. Shri Ashok Khandelwal, appearing on behalf of the assessee submits that solitary issue raised in appeal is disallowance u/s. 36(1)(va) of the Income Tax Act, 1961(hereinafter referred to as ‘the Act’) for alleged delay in deposit of employees contribution to EPF and ESI fund. The ld. Counsel for the assessee submits that the assessee has been regularly depositing employee’s contribution to ESI and PF. It was during the Covid period that there was delay of 3 to 10 days in deposit of ESI  contributions in two months i.e. May 2020 and June 2020. Similarly, there was minor delay in deposit of employee’s contribution to Provident Fund during May 2020 to August 2020. He further submitted that to mitigate the problem faced by the employers in deposit of EPF during Covid period, the Employees Provident Fund Organization under Ministry of Labour & Employment, Govt. of India (in short ‘EPFO’) vide communication dated 15.05.2020 (at page 13 of paper book) had granted relief to the establishments where it was difficult to timely deposit contributions during the period of lockdown due to operational economic reasons. Referring to Disaster Management Act, 2005 the EPFO held that any delay in payment of any contributions or administrative charges due for any period during the lockdown, no proceedings shall be initiated for levy of panel damages. He thus, prayed that in light of above letter from EPFO, no disallowance u/s. 36(1)(va) of the Act should be made in the hands of assessee. To further buttress his arguments he placed reliance on following decisions:-

(i) Diamour Jewels P. Ltd. vs. CPC, ITA No. 1965/Mum/2024, AY 2021-22, decided on 25.07.2024 (ITAT Mumbai);

(ii) Artistes Unlimited Charitable Trust vs. ITO, ITA No. 1177/Del/2024, AY 2020-21, decided on 18.06.2024 (ITAT Delhi); &

(iii) IN RE: COGNIZANCE FOR EXTENSION OF LIMITATION, Miscellaneous Application No. 21 of 2022 (Supreme Court).

3. Per contra, Shri Sanjay Kumar representing the department supported findings of the CIT(A) and prayed for dismissing appeal of the assessee.

4. Both sides heard. The short issue in appeal is disallowance u/s. 36(1)(va) of the Act in respect of delay in deposit of employees contribution to PF and ESI during Covid pandemic. The delay is in respect of deposits during the months of May 2020 to August 2020. The delay in deposit of PF and ESI during the Financial Year 2020-21 is tabulated herein under:-

Details of Employee’s Cont. to ESI F.Y. 2020-21 (AY 2021-22)

Details of Employee’s Cont. to PF F.Y. 2020-21 (AY 2021-22)

5. Undisputedly, the period of delay was infested with Covid-19 pandemic. To mitigate problems face by employers in timely deposit of contributions during such period, the EPFO had taken a liberal view on delay in payment of any contributions and it was directed that no penal proceedings or damages should be levied for delay in deposits during lockdown period. Thus, taking into consideration the circumstances under which delay had occurred in deposit of contributions, disallowance made u/s. 36(1)(va) of the Act is directed to be deleted. The Division Bench of the Tribunal in the case of Diamour Jewels P. Ltd. vs. CPC (supra)wherein under similar circumstances there was delay in deposit and the Revenue had disallowed amount u/s. 36(1)(va) of the Act deleted disallowance made by the Department. The Division Bench in similar facts held as under:-

“8.4. In the present case before us, in the given peculiar fact pattern and circumstance, when the EPF Organisation itself has waived off the levy of penal damages for delayed payment during the period of lockdown by issuing the aforesaid circular, there is no question of treating the delay which occurred during the period of lockdown detrimental to the assessee under the Act, more specifically under the explanation to section36(1)(va) of the Act The delay in deposit of PF and ESI of the employees’ share is for the month of April 2020 and May 2020. These months fell in the period of lockdown when pandemic of COVID-19 was at its peak. Due dates to deposit for these two months were 15.05.2020 and 15.06.2020 as per the relevant enactments. Assessee deposited the delayed amount in the month of June 2020 when there was relaxation in the lockdown and banking was permitted. There is no mischief on the part of the assessee in holding the employees’ contribution for long periods as contemplated in the memorandum explaining the provisions introduced in the Finance Bill, 1987 and CBDT circular (supra) and dealt by the Hon’ble Supreme Court in Checkmate Services (supra). In fact, assessee demonstrated its vigilance in depositing the impugned amounts at the first opportunity it got when the relaxation was given in the lockdown. Also, for all the subsequent months, the deposits have been on or before the prescribed due dates under the relevant enactments. Thus, in the present case under its peculiar set of facts, there cannot be any adverse effect on the assessee of not depositing the employees’ contribution of EPF and ESI within the meaning of section36(1)(va) of the Act when the relevant enactment itself had given a waiver from levy of penal damages for the delay in deposit ‘during the lockdown period’. We delete the addition so made. Grounds taken by the assessee in this respect are allowed.”

6. In light of peculiar circumstances deeply affected by unprecedented situation caused due to Covid pandemic, impugned order is set aside and appeal of the assessee is allowed.th

Order pronounced in the open court on Tuesday the 14 day of January,