Delhi ITAT Deduction on Late deposit of ESIC- EPF

This is not a good decision, the order is passed completely from department perspective mind. The decisions relied upon considered by high courts of Delhi and Madras in their subsequent decisions and decided the issue in favour of assessee. Even the amendment made vide Finance Bill, 2021 is prospective and applicable from AY 2021-22 onwards, this fact is specifically mentioned in Memorandum of Explanation. Why the observations given by Hon’ble Member Dr. B.R.R. Kumar are not good:

1. Settled proposition of rule of law:
It is well settled that if two views are possible in interpreting the provisions of law in taxation, the one favorable to the assessee has to be preferred. In Sun Export Corporation, Bombay vs Collector of Customs (1997) 6 SCC 564 it was observed that “even assuming that there are two views possible, it is well settled that one favourable to the assessee in matters of taxation has to be preferred.”. IN CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC) it has held that provisions for deduction, exemption and relief should be interpreted liberally, reasonably and in favour of the assessee. In CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC): “if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted”.

2. Non-application of enforcement of amendment w.e.f. 1.04.2021:
In The Finance Bill, 2021 amendments are made in section 36 & 43B vide clause 8 & 9 and in the Memorandum of Explanation provides that these amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years. In this regard attention is invited towards section 1(2)(a) of Finance Act, 2021 wherein it has specifically mentioned that section 2 to 88 shall come into force on the first day of April 2021. Further as per Finance Act, 2021 section 9 relates to amendment of section 36 and section 11 in relates to amendment of section 43B.

Further, the hon’ble ITAT Hyderabad in a recent decision in the case of Crescent Roadways Pvt Ltd vs DCIT, ITA No. 1952/2018 vide Order dated 1.07.2021 observed that the legislature has not only incorporated necessary amendment in Sections 36(1)(va) as well as 43B vide Finance Act, 2021 to this effect but also the CBDT has issued Memorandum of Explanation that the same applies w.e.f. 1.4.2021 only, and deleted the addition of Rs.2,83,203/- Rs.44129 made by the Assessing Officer representing delay in remittance of employees contribution towards provident fund and ESI respectively and allowed the appeal of the assessee.

Also refer the decision in the case of ValueMomentum Software Services Pvt Ltd vs DCIT, ITA No. 2197/2017 order dated 19.05.2021, ITAT-Hyderabad.

3. Recent decisions of Hon’ble ITAT Delhi, Chennai and Agra in favour:

i. The hon’ble ITAT Delhi in DCIT vs Dee Development Engineers Ltd ITAT No. 4959/2016 order dt. 8.04.2021 after due consideration of the decision in the case of CIT vs Bharat Hotels Ltd ITA No. 271/2005 order dated 6.09.2018 reported in 410 ITR 417 and the decision in the case of Pr. CIT vs Pro Interactive Services (India) Pvt Ltd ITA No. 983/2018 order dated 10.09.2018 the hon’ble court has held that:

“7. We have heard both the parties and perused all the relevant material available on record. As regards Ground No. 1, the assessee company has not deposited the employees’ contribution within the due date which is prescribed under the said statute i.e. Provident Fund and ESIC. This issue is dealt by the Hon’ble Delhi High Court in case of CIT vs. M/s Bharat Hotels Ltd. 410 ITR 417 wherein the issue is decided in favour of the Revenue, without considering the decision of the Hon’ble Delhi High Court in case of CIT vs. AIMIL Ltd. (2010) 321 ITR 508 (Del.). But the Ld. AR relied upon the decision of the Hon’ble Delhi High Court in case of Pr. CIT vs. Pro Interactive Service (India) Pvt. Ltd. ITA No. 983/2018 pronounced on 10.09.2018 wherein the Hon’ble High Court decided the issue in favour of the assessee relying upon the judgment of AIMIL Ltd. (supra). The Hon’ble Delhi High Court held that the legislative intent was/is to ensure that the amount paid is allowed as expenditure only when payment is actually made. We do not think that the legislative intent and objective is to treat belated payment of Employee’s Provident Fund (EPD) and Employee’s State Insurance Scheme (ESI) as deemed income of the employer under Section 2(24)(x) of the Act. It is settled law that when two judgments are available giving different views then the judgment which is in favour of the assessee shall apply as held in case of Vegetable Products Ltd. 82 ITR 192 by the Hon’ble Supreme Court. Hence, in light of the latest decision in case of Pro Interactive Service (India) Pvt. Ltd., the issue is covered in favour of the assessee. Hence, Ground No. 1 is dismissed.”
Also refer the decisions in the case of:
(a) DCIT vs Repco Home Finance Pvt Ltd, ITA No.2885/2017 order dated 17.06.2020 reported in (2020) 183 ITD 782, ITAT-Chennai
(b) Srinivasa Fashins Pvt Ltd vs ITO Corporate, ITA No. 1396/2019 order dated 28.09.2020, followed the Repco

ii. The hon’ble ITAT Delhi in a DCIT vs Planman HR (P) Ltd ITA No. 5152/2017 order dated 15.07.2021 confirmed the finding of the CIT(A) deleting addition of Rs.8,90,53,240/- relying on the decisions in the case of Pr.CIT vs Planman HR (P) Ltd ITA 599/2017 order dt. 11.09.2017, CIT vs Aimil Ltd 321 ITR 508 (Delhi), Sagun Foundry Pvt Ltd vs CIT 291 CTR 557 (All) and Essac Teraoka Pvt Ltd vs DCIT 366 ITR 408 (Kar.), refer Ground No. 2 of the order appeal.

iii. The hon’ble ITAT Chennai in DCIT vs Talenpro India HR Pvt Ltd ITA No. 265/2019 order dt. 9.04.2021 confirmed the finding of the CIT(A) deleting addition of Rs.1,50,07,637/- relying on the decision in the case of CIT vs Industrial Security & Interlligence India Pvt Ltd TCA Nos. 585 & 586/2015 order dated 24.07.2015 (Mad), CIT vs Alom Extrusions Ltd 319 ITR 306 (SC) and CIT vs Aimil Ltd 321 ITR 508 (Delhi) wherein it has been observed that if the assessee has remitted the remittance of the employee’s contribution to PF and ESI much before the filing of the return of income under section 139(1) of the Act, no disallowance is called for i.e. it is an allowable deduction u/s 43B of the Income Tax Act, 1961.

iv. The hon’ble ITAT Agra in Mahadev Cold Storage vs Jurisdiction Assessing Officer ITA Nos. 41&42/2021 and Vinod Thanwerdas vs Jurisdiction Assessing Officer 20&21/2021 order dt. 14.06.2021 following the decision in the case of Sagun Foundry (P) Ltd vs CIT 145 DTR 265, allowed the appeals deleting additions observing that as the payment have been made before the due date specified u/s 139(1) and as such are fully allowable.

v. The Bharat Hotels Limited decision relied upon by Ld CIT(A) is different on facts and hence not applicable: (i) it has not considered the earlier decision in the case of Aimil Ltd which is land mark ruling on subject matter and issue, (ii) It pertains to AY 2000-01 i.e. prior to amendment in section 43B by Finance Act, 2003 by which deleted 2nd proviso, (iii) there was no issue before the court for determination applicability of section 43B of the Act. Further, in Pr. CIT vs. Pro Interactive Service (India) Pvt. Ltd. ITA No. 983/2018 order dated 10.09.2018 the hon’ble Delhi High Court observed that no disallowance is called for where the assessee had paid the employee’s contribution to PF&ESI before the due date of furnishing of return of income u/s 139(1) of the Act,. This decision is passed after the decision of Bharat Hotels Ltd hence the latest and majority decisions of the hon’ble jurisdictional High Court are assessee’s favorable and cannot be ignored.

vi. In the case of DCIT vs Repco Home Finance Pvt Ltd ITA No.2885/2017 order dated 17.06.2020 reported in (2020) 183 ITD 782, ITAT-Chennai wherein the hon’ble ITAT discussed the issue in length considering all relevant decisions of various High Courts whether in favour of the assessee and or the revenue, including the decision in the case of Bharat Hotels Ltd 410 ITR 417 relied upon by Ld CIT(A) in the case of appellant while confirming the addition, and relevant decisions of the Hon’ble Supreme Court the honble members in para 10.3.11 of the order observed as under:
10.3.11 Thus, keeping in view strict and literal interpretation of provisions of Section 36(1)(va) of the 1961 Act read with Explanation 1 and Section 2(24)(x) of the 1961 Act , the assessee will not be entitled for deduction as the employee contribution towards PF received by assessee was deposited late beyond the time stipulated under the relevant statute governing PF. But, it is equally true that the Constitutional Courts viz. Hon’be High Courts and Hon’ble Supreme Court in India have powers to read down the provisions of the 1961 Act to make it workable and to avoid absurdity. On perusal of the decision of Hon’ble Supreme Court in the case of Alom Extrusion (supra) , it is observed that Hon’ble Supreme Court has elaborately discussed provisions of Section 36(1)(va) ,2(24)(x) and amendments made by Finance Act, 2003 to Section 43B of the 1961 Act, which amendments to Section 43B of the 1961 Act were held to be retrospective in nature. The Hon’ble Supreme Court also referred in its decision in Alom Extrusion (supra) to its earlier decision in CIT v. J.H. Gotla [1985] 156 ITR 323(SC) , para 10 that intention of the legislature is to be found out from the language used and if strict literal construction leads to an absurd result i.e. result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. The Hon’ble Delhi High Court and Hon’ble Bombay High Court after considering, analyzing and interpreting the decision in the case of Alom Extrusion (supra) has held that it will apply both to employers and employee contribution and if the same is deposited before the due date of filing of return of income u/s 139(1) of the 1961 Act, the deduction shall be allowed , even if the same is deposited beyond the time stipulated as due date as prescribed under the provisions of Statute governing PF/ESI Act. Thus, the applicable provision as is contained in Section 36(1)(va) is read down by most of the Constitutional Courts including our Jurisdictional High Court (barring Hon’ble Gujarat High Court and Hon’ble Kerala High Court) to make it workable as otherwise the tax-payer will lose the deduction for ever if the employee contribution is not deposited within due date as prescribed under relevant statute , although the said contribution stood deposited by employer belatedly before the due date for filing of return of income u/s 139(1) of the 1961 Act and the amount will stood brought to tax as income keeping in view provisions of Section 2(24)(x) of the 1961 Act so far employee share of contribution towards PF ,ESI and other employees welfare funds is concerned. No doubt it is well cherished objective that there should not be an unjust enrichment of the employer of the amount which it collects from its employees towards employees share of PF , ESI and other employees welfare funds and in the ideal situation , the said amounts ought to have been deposited by employer which it collected from its employees, to the credit of employee with relevant funds within time stipulated as due date by respective statute governing PF/ESI etc. but at the same time if the employer does not deposit the contribution towards PF/ESI etc within due date as prescribed under relevant statute governing PF/ESI etc, the employers are visited with Interest for delayed deposit of PF/ESI as well Penalties for late deposit beyond the time stipulated under the relevant statute governing PF/ESI and other employees welfare funds. Reference is drawn to Section 7Q and 14 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Similarly, Hon’ble Madras High Court in the case of Industrial Security and Intelligence India Private Limited (supra) after considering and interpreting the decision of Hon’ble Supreme Court in the case of Alom Extrusion (supra) and Hon’ble Delhi High Court in the case of Aimil Limited(supra) held that deduction is to be allowed for belated payment of employee contribution to PF/ESI which is deposited beyond the due date stipulated under the relevant statutes governing PF/ESI , but the same stood deposited before the due date for filing of return of income as is prescribed u/s 139(1) of the 1961 Act. We at tribunal being inferior judicial body to Hon’ble Madras High Court , are bound by decision of Hon’ble jurisdictional High Court in the case of Industrial Security(supra) as a cardinal principles of judicial discipline and to instill certainty among tax-payers, thus, Respectfully following the decision of Hon’ble Madras High Court in the case of Industrial Security and Intelligence(supra) , we allow the claim of the assessee for deduction of Rs. 6,31,788/- towards employees contribution to PF which was deposited late beyond due date as prescribed under relevant statute governing PF , but the same stood deposited to the credit of employees with relevant fund before the due date for filing of return of income as prescribed u/s 139(1) of the 1961 Act. The Revenue fails on this issue for the reasons cited above. We order accordingly.

4. Provisions of law:
(i) Section 36(1)(va) states that ‘any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date, ….specified in the Fund Act

(ii) Section 2(24)(x) states that ‘income will include any sum received by the assessee from his employees as contributions to any provident fund, or superannuation fund or any other fund setup under the provisions of Employees’ State Insurance Act 1948, or any other fund for the welfare of employees.’

(iii) Section 43B(b) states that notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall be allowed if the such sum actually paid by the assessee on or before the due date for furnishing the return of income under sub-section (1) of section 139 of the Act

(iv) THE EMPLOYEES‟ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952
The word “contribution” has not been defined under the Income Tax Act. But as per section 2(c) of THE EMPLOYEES‟ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952 “contribution” means a contribution payable in respect of a member under a Scheme or the contribution payable in respect of an employee to whom the Insurance Scheme applies. Further Rule 26A(2) of The Employees’ Provident Funds Scheme, 1952 provides that every member employed as an employee other than an excluded employee, in a factory or other establishment to which this Scheme applies, shall contribute to the Fund, and the contribution shall be payable to the Fund in respect of him by the employer. Rule 29 describes the amount of contribution payable by the employer as well as employee. Further Rule 30(1) provides that the employer shall, in the first instance, pay both the contribution payable by himself (in this Scheme referred to as the employer’s contribution) and also, on behalf of the member employed by him directly or by or through a contractor, the contribution payable by such member (in this Scheme referred to as the member’s contribution). Rule 30(3) provides that it shall be the responsibility of the principal employer to pay both the contribution payable by himself in respect of the employees directly employed by him and also in respect of the employees employed by or through a contractor and also administrative charges. Further as per section 7Q of the Fund Act, for delay or default payment the employer is liable to pay interest, there in such circumstances it can be said that the payment id not made in time, can be paid later but liable to pay interest.

From the above discussion it is clear that the employer has to in the first instance, pay both the contributions payable and thereafter recover the same by means of deduction from the wages of the member. After the deduction from salary, the employees contribution becomes payable in the hands of employer along with his own contribution. Thus there is no difference in employees’ or employer’s contribution, both are same as per the Fund Act.

5. It has already been settled by majority views that the due date referred in section 36(1)(va) of the Act must be read in conjunction with section 43B of the Act. Section 43B begins with a non-obstante clause and as per the settled principle of interpretation, a non-obstante clause assumes an overriding effect over the other provisions of the Act in respect of deduction and allowance of an expenditure. Therefore, according to the provisions of section 43B, if the actual payment is done either with-in the due date of deposit of such sums, or, on or before the due date of filing of return, such expenses should be allowed. Refer the following

1. CIT Vs. Vinay Cement Ltd (2007) 213 CTR 268 (SC),
2. CIT vs Alom Extrusions Ltd (2009) 319 ITR 306 (SC)
3. CIT v. AIMIL Ltd. [2010] 188 Taxman 265 (Delhi),
4. CIT vs Ghatge Patil Transports Ltd (2014) 368 ITR 749 (Bom)
5. CIT vs Hemla Embroidery Mills (P) Ltd (2014) 366 ITR 167 (P&H)
6. Sagun Foundry Private Limited vs. CIT (2006) 145 DTR 265 (All)
7. Essae Teraoka P. Ltd. Vs DCIT (2014) 366 ITR 408 (Kar)
8. Pr. CIT vs Rajasthan State Beverages Corporation Ltd 84 taxmann.com 173 (Raj) and SLP filed by the department dismissed, reported in [2017] 84 taxmann.com 185 (SC),
9. CIT vs George Williamson (Assam) Ltd (2006) 284 ITR 619 (Gauhati-HC)
10. CIT vs Mark Auto Industries Ltd (2013) 358 ITR 43 (P&H),
11. CIT Vs. SPL Industries Limited [2011] 9 Taxmann.com 195 (Delhi),
12. CIT Vs. PM Electronics Limited [2009] 313 ITR 161 (Delhi),
13. CIT Vs. A & Z Information Technology Pvt Ltd [2009] (KAR),
14. CIT Vs. Nipso Polyfebrics Ltd [2013] (HML),
15. CIT Vs. Kachha Sugar Co. Ltd. [2013] (UK),
16. CIT Vs Kamal Family Trust (2013) 38 Taxmann.com 334 (P&H),
17. CIT v. Rai Agro Industries Ltd. [2011] 334 ITR 122 (P&H),
18. Essae-Teraoka Private limited Vs. DCIT (2014) 43 Taxmann.com 33 (Kar)
19. Bihar State Warehousing Corporation Ltd vs CIT & Anr, [TS-451-HC-2016(PAT)
20. ACIT vs Ranbaxy Laboratories Ltd, 20 taxmann.com 334 (Delhi)
21. CIT vs Pro Interactive Services (India) Pvt Ltd , ITA NO. 983/2018 order dated 10.09.2018, High Court Delhi
22. CIT vs Industrial Security & Intelligence India Pvt Ltd (2015) 7 TMI 1063 (Mad.)

Therefore it would be wrong to say that the words “any sum payable by the assessee as an employer by way of contribution to any…” mentioned in section 43B(b) are used only for employer’s contribution. If this was the intention of the legislature then these words should be read as “any sum payable by the assessee as an employer by way of his contribution to any provident fund …….

Thus we can say that the word “contribution” used in clause (b) of Section 43B of Act 1961 means the contribution of employer and employee, both, and that being so, if contribution is deposited on or before due date for furnishing Return of income under subsection (1) of Section 139 of Act 1961, employer is entitled for deduction.

So the assessee should challenge it before HC.