Case Law Details
Kanwar Enterprises Pvt. Ltd. Vs ACIT (ITAT Delhi)
In the recent ruling of Kanwar Enterprises Pvt. Ltd. vs. ACIT, the Income Tax Appellate Tribunal (ITAT) Delhi has reinforced the critical importance of timely deposits for Employee Provident Fund (EPF) and Employees’ State Insurance (ESI) to claim tax deductions under Section 36(1)(va) of the Income Tax Act, 1961. This decision underscores the necessity for employers to adhere to statutory deadlines for EPF and ESI contributions to secure income tax benefits.
Background of the Case
The case at hand involves Kanwar Enterprises Pvt. Ltd., a company engaged in construction and related activities. The company had filed its return of income for the assessment year 2018-19, declaring an income of ₹11,86,50,720. However, the Central Processing Centre (CPC) disallowed a sum of ₹16,75,602 under Section 2(24)(x) read with Section 36(1)(va) of the Income Tax Act, 1961, due to the delayed payment of EPF and ESI contributions. Additionally, CPC had also made a disallowance of ₹1,83,24,900 related to ICDS adjustment under Section 145(2), though this was later rectified by the Commissioner of Income Tax (Appeals) [CIT(A)].
The core issue that remained contested was the disallowance of ₹16,75,602 due to the delayed deposit of EPF and ESI contributions. The CIT(A) upheld the disallowance, citing the Supreme Court’s judgment in the case of Checkmate Services Pvt. Ltd. vs. CIT-I, which mandates that deductions under Section 36(1)(va) can only be claimed if the contributions are deposited within the stipulated due dates.
Legal Precedents and Tribunal’s Ruling
The ITAT Delhi’s ruling hinges on the Supreme Court’s judgment in the Checkmate Services Pvt. Ltd. case. The Supreme Court clarified that the employee’s contribution to EPF and ESI, once deducted from their salary, must be deposited with the authorities on or before the due date specified under the respective statutes for it to be eligible for a deduction under Section 36(1)(va). The court distinguished between the employer’s own contribution and the employee’s contribution, emphasizing that the latter, being deemed income, must be deposited promptly.
In Checkmate Services Pvt. Ltd., the Apex Court addressed the distinction between an employer’s contribution and an employee’s contribution. It highlighted that while the employer’s contribution is a statutory liability, the employee’s contribution is considered to be held in trust and must be deposited in accordance with the statutory deadlines to qualify for a deduction.
Impact on Employers
This ruling is significant for employers as it underscores the necessity of adhering to the due dates for EPF and ESI contributions. Employers who fail to make these deposits on time cannot claim tax deductions for these amounts, which could impact their financial statements and tax liabilities. The ITAT’s affirmation of the CIT(A)’s decision reinforces the requirement for timely deposits and serves as a reminder of the importance of compliance with statutory deadlines.
Conclusion
The ITAT Delhi’s decision in the Kanwar Enterprises Pvt. Ltd. vs. ACIT case reiterates the strict adherence required for the timely deposit of EPF and ESI contributions to claim tax deductions under Section 36(1)(va) of the Income Tax Act. The ruling aligns with the Supreme Court’s judgment in Checkmate Services Pvt. Ltd., which sets a clear precedent for employers. It is crucial for businesses to ensure that they meet the deadlines for these contributions to avoid disallowance of deductions and potential tax implications. The case serves as an important reminder for all employers to review their compliance practices regarding EPF and ESI payments.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of National Faceless Appeal Centre (NFAC), Delhi dated 21.11.2023.
2. Following grounds have been raised by the assessee:
“1. The ld. CIT(A) has erred in upholding the disallowance of Rs.16,75,602/- u/s 2(24)(x) read with Section 36(1) of the Income Tax Act, 1961 as made by the AO.”
3. The assessee company is engaged in the business of construction of buildings, road, rails etc. Further, it is involved in the business of hiring of machineries for construction and trading of all kind building materials. The assessee filed return of income on 14.09.2018 declaring an income of 11,86,50,720/-.
4. The CPC made a disallowance of Rs.16,75,602/- u/s 2(24)(x) r.w.s. 36(1)(va) and Rs. 1,83,24,900/- on account of ICDS adjustment u/s 145(2) of the Income Tax Act, 1961.
5. Aggrieved, the assessee filed appeal before the ld. CIT(A) who deleted the addition of Rs. 1,83,24,900/- made on account of ICDS adjustment u/s 145(2) and affirmed the order of the CPC disallowing Rs.16,75,602/- u/s 2(24)(x) r.w.s. 36(1)(va) on account of delayed payment of ESI/PF invoking the judgment of Hon’ble Supreme Court in the case of Checkmate Services Pvt. vs. CIT-I.
6. None attended during the hearing.
7. We find that the issue before us has been squarely covered by the judgment of the Hon’ble Apex Court, hence proceeded to adjudicate the grounds.
8. The issue of ESI/PF payment has attained finality by the order of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. vs. CIT-I, vide order dated 12th October, 2022 wherein it was observed that employers have to deposit the employee’s contribution towards EPF/ESI on or before the due date for availing deduction. In the cases before the Hon’ble Apex Court, the employers had belatedly deposited their employees’ contribution towards the EPF and ESI, considering the due dates under the relevant provisions of the Act. The Assessing Officer ruled that by virtue of Section 36(1)(va) read with Section 2(24)(x) of the IT Act, such sums received by the appellants constituted “income”. It was held that those amounts could not have been allowed as deductions under Section 36(1)(va) of the IT Act when the payment was made beyond the relevant due date under the respective acts. The Income Tax Appellate Tribunal and later the Gujarat High Court dismissed the challenge against this order of AO. In appeal, the court noted that the Hon’ble Kerala High Court has also ruled in favour of revenue on this issue whereas the Hon’ble High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi have favoured the interpretation beneficial to the assessee. The Hon’ble Apex Bench effectively reversed the judgment in Commissioner of Income Tax vs. Alom Extrusions Ltd. (1 SCC 489) relied upon by the assessee.
9. The Hon’ble Apex Court in the case of Checkmate Services P. Ltd. vs. Commissioner Of Income Tax-I in CA No. 2833/2016 vide order dated 12.10.2022 observed that there is a marked distinction between the nature and character of the two amounts viz., the employers’ contribution and employees’ contribution required to be deposited by the employer. The first one is the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. The Hon’ble Apex Court held as under:
“In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43 B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.”
10. As the issue of payment of employees contribution towards the PF has been ruled against the assessee by the Hon’ble Supreme Court, the appeal of the assessee on this ground is liable to be dismissed.
11. In the result, the appeal of the assessee is dismissed.
Order Pronounced in the Open Court on 29/07/2024.
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