Employee’s contribution to EPF/ESI Disallowed if Paid Late: ITAT Delhi

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.