Belated employee’s cont. to PF/ ESI made before return due date, disallowance unjustified

J & K Tourism Development Corporation Ltd. Vs ACIT (ITAT Amritsar)

No disallowance can be made that the payment to the employee’s contribution to PF and ESI paid by the assessee before the due date of filing of return of income u/s. 139(1). Accordingly, we hold that no disallowance can be made in the assessment year prior to Assessment Year 2021-22.

Facts- In all the cases the action of the AO disallowing the amount being contribution of employees’ share towards Provident Fund, ESI, PF or any other fund set up for the welfare of the employee u/s 36(1)(va) read with Section 2(24)(x) when the payments were made within the due dates of filing of return u/s 139(1) of the Act.

In brief in the lead case the AO disallowed the deduction amount to Rs. 1,58,45,576/- during assessing the return U/s 143(3) of the Act in respect of employees’ contribution towards PF and ESI. According to the AO, in view of Section 2(24)(x) rws 36(1)(va) of the Act, the employees contribution is to be paid within the due date of payment as prescribed in the respective Acts (PF/ESI Acts) to claim deduction. But the assessee paid the amount before filing of Income tax Return U/s 139(1) of the Act not within the stipulated dates under PF & ESI Act.

CIT(A) uphold the order. Being aggrieved, the assessee preferred the present appeal.

Conclusion- The following the decisions of the High Court which are based on the principle laid down in the case of Vinay Cement Ltd. (supra), M.M. Technologies Ltd (supra), Vatika Township (P.) Ltd (supra) & the co-ordinate Benches (supra) have passed catena of judgments holding the same proposition that prior to the amendment brought in the statute w.e.f. 1-4-2021, no disallowance can be made that the payment to the employee’s contribution to PF and ESI paid by the assessee before the due date of filing of return of income u/s. 139(1). Accordingly, we hold that no disallowance can be made in the assessment year prior to Assessment Year 2021-22.

FULL TEXT OF THE ORDER OF ITAT AMRITSAR

All the aforesaid appeals have been filed by the captioned assessees against the orders of Commissioner of Income Tax (Appeal) passed under section 250(6) of the Income Tax Act, 1961.

2. First we will consider the Appeal No-153/Asr/2019 for AY 2015-2016 as lead case.

3. Grounds of the Assessee are as follows:-

“1. That the worthy CIT(A) is not justified in confirming the action of ld. AO in imposing addition of Rs. 15845576/- for not depositing share of employee’s contribution towards Provident Fund before the due date specified under the PF Act.

2. That the appellant craves, leave to alter, amend and add to substitute any ground of appeal before or at the time of hearing.”

4. In all the cases the action of the Assessing Officer (in brevity AO) disallowing the amount being contribution of employees’ share towards Provident Fund, ESI, PF or any other fund set up for the welfare of the employee u/s 36(1)(va) read with Section 2(24)(x) of the Income Tax Act, 1961 [hereinafter referred to as the Act] when the payments were made within the due dates of filing of return u/s 139(1) of the Act.

5. In brief in the lead case the AO disallowed the deduction amount to Rs. 1,58,45,576/- during assessing the return U/s 143(3) of the Act in respect of employees’ contribution towards provident fund. As per the Provident Fund Act (hereinafter referred to as the PF Act) & Employees’ State Insurance Act, 1948 (hereinafter referred to as the ESI Act). According to the AO, in view of Section 2(24)(x) rws 36(1)(va) of the Act, the employees contribution is to be paid within the due date of payment as prescribed in the respective Acts (PF/ESI Acts) to claim deduction. But the assessee paid the amount before filing of Income tax Return U/s 139(1) of the Act not within the stipulated dates under PF & ESI Acts.

5.1. The observation of the ld. AO is as follows:-

“During the assessment proceedings It has been observed in the Audit report that the assessee has not deposited Provident fund Employees share within due dates as reproduced hereunder. The same issue was discussed with the AR of the assessee company, it has been notice that provident fund has not been deposited by the due dates for the following months

In view of the of section 36 1 v read with 2(24) (x) the amount is 15845576/- is added back to the income of the assessee. It is upheld in various courts as below:

(i) It is Commissioner of Income T ax Cochin V/S M/S Mercham Ltd. (High Court of Kerala)”

6. The aggrieved assessee challenged the assessment order before the CIT(A). The CIT(A) is uphold the order of the ld AO. The observations of the ld. CIT(A) in Page No.11-12 of the order are as follows:-

“Section 36(l)(va) takes care of the employee’s contribution, which stands unaffected by section 43B as the restriction available in section 43B is already available under the Explanation to the said clause, with a qualification of the payment being before the due date, as stipulated by the statue or order creating the fund. We would also observe that, as the Supreme Court noticed, the legislature took a different approach with respect to the contributions deducted from the salary of the employees which had to be paid to the welfare fund within the due date; as provided under the statute which created the welfare fund. The contributions which are deducted at the time of payment of salary is received by the employer company and is treated as income under section 2(24). On remittance of this contribution, within the due date; it is allowed as a deduction under section 36. If it is not paid to the welfare fund within the due date provided under the relevant statute, it remains as an income in the books of account of the assesses\employer company. The said contribution having not been paid to the applicable welfare fund within the due date provided, the assessee for ail time is deprived of claiming such a remittance, made subsequently, as deduction from the income. This, as the Supreme Court noticed, is looking at the spirit behind the labour welfare legislation and the need for the employer to satisfy the remittance within the time provided under the statute creating the welfare fund. At least with respect to the employee’s contributions, which the employer deducts from the salary of the employees, if it is not remitted into the fund within the due date, the employer not only has defaulted the stipulation in the labour legislation but has received an income; albeit an illegal enrichment. Sub-section (v) is with respect to and confined to a gratuity fund and does not have any relevance here. Hence, the other questions of law framed is also answered against the assesses and in favour of the revenue.

[para 18]

4. Following the aforesaid decision, this appellant authority cannot be detained anyfurther in dismissing the ground of appeal raised by the appellant Corporation and confirming the order of the AO. it is held that the appellant Corporation is not entitled to deduction in respect of employees’ contribution to provident fund as the same has, admittedly, not been deposited within the “due date” as envisaged and specified under the PF Act. It is ordered accordingly.”

7. Being aggrieved the order of CIT(A) the assessee filed appeal before us.

8. We have heard both the parties. The Departmental Representative of the Revenue (in brevity D/R) vehemently argued on the issues. The D/R relied on the order of CIT(A) and also placed that the employees contribution to PF/ESI can be allowed only if the same has been deposited within the due date prescribed under the respective Act (PF and ESI Act) and not before the due date of filing of return of income. He also mentioned that the Ld. CIT(A) has taken note of the amendment brought in by Finance Act, 2021, by virtue of it has been clarified that Section 43B does not apply to Section 36(1)(va) of the Act and it is deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of Section 2(24)(x) applies. And thus according to Ld. CIT(A), it is a clarificatory amendment and so is retrospective in operation and therefore he upheld the action of AO.

9. The counsel of the assessee also vehemently argued the matter before us. He placed the orders of jurisdictional High Court & coordinate benches which are in favour of asseessee. The orders are as follows:

a. Jurisdictional High Court:-

i. CIT vs Mark Auto Industries Ltd ITA no 57 of 2009, 358 ITR 0043 (Punjab & Haryana)

ii. CIT vs Nuchem Ltd [2015] 59 com 455 (Punjab & Haryana) and [2013] 40 taxmann.com 371 (Punjab & Haryana)

b. Coordinate Benches:-

a) ACIT,Cir-3, Srinagar vs M/s Jammu & Kashmir Tourism Development Corporation, TRC, Srinagar, ITA 644&645/Asr/2017 date of order-19/03/2019

b) M/s Vinko Auto Industries Ltd vs. DCIT, CPC, Bangalore ITA:- 63 & 64/Asr/202, date of order:-08/11/2021

The counsel also placed that the all the payments have been made within due date of filing of return of income u/s. 139(1) of the Income-tax Act and as such payment has been made and deposited in the Government account within the stipulated time u/s. 139(1) then no disallowance can be made in view of the decision of the Hon’ble Apex Court in the case of CIT v. Vinay Cement Ltd. [2007] 213 CTR 268, Hon’ble Delhi High Court in the case of CIT v. AIMIL Ltd. [2010] 188 Taxman 265/321 ITR 508 and Commissioner Of Income Tax, Circle-I, Kolkata vs M/S. Vijay Shree Limited, ITAT- 245 of 2011.

10. During the argument of the D/R relied on the orders of the ld AO & the ld. CIT(A).

11. The reliance was made on the judgment of Hon’able Supreme Court in the case of M/s M.M. Aqua Technologies Ltd. vs. CIT, Delhi and drew our attention to Para 22 wherein the Hon’ble Supreme Court has held that if the retrospectivity of a taxing statute is urged due to the expression used in the Statute is “for the removal of doubts” cannot be presumed to be retrospective, if it alters or changes the law as it earlier stood and has relied on several decisions of the Hon’ble Supreme Court which reads as under:

“a. M.M. Aqua Technologies Ltd. v. Commissioner of Income-tax, Delhi-III, [2021] 129 taxmann.com 145 (SC)

22. Second, a retrospective provision in a tax Act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 (SC) as follows:

17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139]). An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598] . If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.

18. There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word “earned” had been judicially defined in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”.

19. When the Explanation seeks to give an artificial meaning to “earned in India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.

23. This being the case, Explanation 3C is clarificatory – it explains section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court.

24. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate (supra) as followed by judgments of this Court – See Vodafone International Holdings BV v. Union of India [2012] 17 com 202/204 Taxman 408/341 ITR 1 (SC) at paras 60 to 70 per Kapadia, C.J. and para 333, 334 per Radhakrishnan, J.”

b. Commissioner of Income-tax (Central)-I, New Delhi v. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249 (SC)

“Reasons in Support

a…………….

b…………….

c…………….

Notes on Clauses” appended to Finance Bill, 2002 while proposing insertion of proviso categorically states that “this amendment will take effect from 1st June, 2002”. These become epigraphic words, when seen in contradistinction to other amendments specifically stating those to be clarificatory or retrospectively depicting clear intention of the legislature. It can be seen from the same notes that few other amendments in the Income Tax Act were made by the same Finance Act specifically making those amendments retrospectively. For example, clause 40 seeks to amend S.92F. Clause iii (a) of S.92F is amended “so as to clarify that the activities mentioned in the said clause include the carrying out of any work in pursuance of a contract.” This amendment takes effect retrospectively from 01.04.2002. Various other amendments also take place retrospectively. The Notes on Clauses show that the legislature is fully aware of 3 concepts:

(i) prospective amendment with effect from a fixed date;

(ii) retrospective amendment with effect from a fixed anterior date; and

(iii) clarificatory amendments which are retrospective in nature.

Thus, it was a conscious decision of the legislature, even when the legislature knew the implication thereof and took note of the reasons which led to the insertion of the proviso, that the amendment is to operate prospectively. Learned counsel appearing for the assessees sagaciously contrasted the aforesaid stipulation while effecting amendment in Section 113 of the Act, with various other provisions not only in the same Finance Act but Finance Acts pertaining to other years where the legislature specifically provided such amendment to be either retrospective or clarificatory. In so far as amendment to Section 113 is concerned, there is no such language used and on the contrary, specific stipulation is added making the provision effective from 1st June, 2002.

(e) There is yet another very interesting piece of evidence that clarifies the provision beyond any pale of doubt, viz. understanding of CBDT itself regarding this provision. It is contained in CBDT circular No.8 of 2002 dated 27th August, 2002, with the subject “Finance Act, 2002 – Explanatory Notes on provision relating to Direct Taxes”. This circular has been issued after the passing of the Finance Act, 2002, by which amendment to Section 113 was made. In this circular, various amendments to the Income Tax Act are discussed amply demonstrating as to which amendments are clarificatory/retrospective in operation and which amendments are prospective. For example, explanation to Section 158BB is stated to be clarificatory in nature. Likewise, it is mentioned that amendments in Section 145 whereby provisions of that section are made applicable to block assessments is made clarificatory and would take effect retrospectively from 1st day of July, 1995. When it comes to amendment to Section 113 of the Act, this very circular provides that the said amendment along with amendments in Section 158BE, would be prospective i.e. it will take effect from 1st June, 2002. “

12. The reliance is made on order of coordinate Bench in the case of ITA 644 & 645/Asr/2017 date of order-19/03/2019.

13. We heard both the parties & consider the documents available in record. The employees’ contribution under PF & ESI Acts are already settled in order of the cases CIT Vinay Cement Ltd. [2007] 213 CTR 268, CIT v. AIMIL Ltd. [2010] 188 Taxman 265/321 ITR 508, CIT vs Nuchem Ltd [2015] 59 taxmann.com 455 (Punjab & Haryana) and [2013] 40 taxmann.com 371 (Punjab & Haryana). The catena of judgments is in favour of assessee.

14. The other point, the Finance Bill, 2021 has brought in an amendment which disallows the employees’ contribution made in PF and ESI if not made within the due date as prescribed by the respective statutes (PF and ESI Act). As per assessee the amendment has been inserted which takes effect from 1st April, 2021 i.e AY 2021-22 which is subsequent in nature. Whereas according to the CIT(A), the amendment brought in is clarificatory in nature so, retrospective in operation.

15. So, we have to adjudicate this issue whether the amendment brought in by Finance Act, 2021 is prospective or retrospective in operation. The following the decisions of the High Court which are based on the principle laid down in the case of Vinay Cement Ltd. (supra), M.M. Technologies Ltd (supra), Vatika Township (P.) Ltd (supra) & the co-ordinate Benches (supra) have passed catena of judgments holding the same proposition that prior to the amendment brought in the statute w.e.f. 1-4-2021, no disallowance can be made that the payment to the employee’s contribution to PF and ESI paid by the assessee before the due date of filing of return of income u/s. 139(1). Accordingly, we hold that no disallowance can be made in the assessment year prior to Assessment Year 2021-22. In the result, the disallowance confirmed by the revenue related ITA no.153/Asr/2019, 39/Asr/2022, 45/Asr/2022 & 49/Asr/2022 are deleted.

16. In the result, appeals of the assessees ITA Nos. 153/Asr/2019, 39/Asr/2022, 45/Asr/2022 & 49/Asr/2022 are allowed & the appeal of the Revenue, ITA No. 46/Asr/2022 is dismissed.

Order pronounced in the open court on 10.05.2022