Format of submission to CIT(A) for deduction of employee contributions – section 36(1)(va)

Written submission to CIT(A) for deduction of employee contributions under section 36(1)(va) of Income Tax Act, 1961

25.06.2020

The Commissioner of Income-tax (Appeal) – __,
Income-tax Department,
_________

In the matter of:

______________

PAN:

A/Y: 2018-19

SUB: Submission regarding Appeal No.              u/s 246A of Income-tax Act, 1961

Dear Sir,

On behalf of Assessee (Appellant), we submit as under:

(1) FACTS:

Precisely stated the facts are as under:

(1.1) The assessee submitted Return of Income on  at a total income of Rs. __________/-.

(1.2) The CPC (Hereinafter referred to as “Ld. AO”) issued Communication No._____________________ dated_____________________ with a proposal to invoke section 143(1)(a)(iv) and make an addition of Rs.________/- on account of disallowance u/s 36(1)(va) in respect of contributions received from employees but not deposited to the relevant funds by the due dates under respective laws. A copy of the Communication is submitted herewith (Annexure-1).

(1.3) The assessee submitted online Response on . _____________In this Response, the assessee attracted the attention of Ld. AO towards the various decisions of the Hon’ble Jurisdictional High Court (Hon’ble Rajasthan High Court) in which it has been consistently held that no disallowance can be made u/s 36(1)(va) in respect of employees contribution to PF and ESI paid after due date under the respective laws but before the due date u/s 43B of Income Tax Act, 1961. The assessee further stated that he is Jodhpur-based and falling within the jurisdiction of the Hon’ble Rajasthan High Court. Hence the decisions of the Hon’ble Rajasthan High Court are binding. Accordingly, the assessee disagreed to the addition proposed by Ld. AO. A copy of the Response is being submitted herewith (Annexure-2).

(1.4) Despite the categorical submission of assessee as aforesaid, the Ld. AO made addition of Rs. ____________while passing intimation u/s 143(1) on .___________

(1.5) Being aggrieved by the addition of Rs. ___________/-, the assessee has preferred the present appeal before your goodself with a hope to get justice and relief.

(1.6) Now the appeal is fixed for hearing. Hence we make following submission for your kind consideration.

(2) Re: GROUND No. 2:

(2.1) In this Ground, the assessee has submitted:

“On the facts and in the circumstances and in the law, the Ld. AO was not justified in making an addition of Rs. 12,51,779/- on account of disallowance u/s 36(1)(va) since the sum of Rs. 12,51,779/- was allowable under the provisions of Income-tax Act, 1961 and it was so held to be allowable in the binding decisions of Hon’ble jurisdictional High Court of Rajasthan in CIT Vs. State Bank of Bikaner and Jaipur (2014) 363 ITR 70, CIT Vs. Jaipur Vidyut Vitran Nigam Ltd (2014) 363 ITR 307 and CIT Vs. Udaipur Dugdh Utpadak Sahkari Sangh Ltd. (2014) 366 ITR 163”.

(2.2) At the outset, we would like to attract your kind attention towards the decisions referred to in this Ground:

CIT Vs. State Bank of Bikaner and Jaipur (2014) 363 ITR 70 dated 06.01.2014

CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. (2014) 363 ITR 307 dated 06.01 .2014

The Hon’ble Court held as under:

Para 23:

“Thus, we are of the view that where the PF and/or EPF, CPF, GPF etc., if paid after the due date under respective Act but before filing of the return of income under Section 139(1), cannot be disallowed under Section 43B or under Section 36(1)(va) of the IT Act.”

Para 24:

“Accordingly, the substantial question of law is answered against the appellant-revenue and in favour of the assessee.”

CIT Vs. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. (2014) 366 ITR 163

Relying on various decisions of Hon’ble Supreme Court as also the decision of Hon’ble Delhi Court in CIT Vs. Aimil Ltd (2010) 321 ITR 508, the Hon’ble High Court concluded that the payment of employees’ contributions to the PF, ESI, etc. made within the due date of filing the return u/s 43B, shall be allowable as deduction.

(2.3) Now we would like to attract your kind attention towards one more, latest decision of Hon’ble Rajasthan High Court in CIT Vs. Rajasthan State Beverages Corporation Ltd. /  Rajasthan State Ganganagar Sugar Mill dated 04.08.2016 (2017) 250 Taxman 32  (Rajasthan). In this decision, the Hon’ble High Court has once again held that the employees’ contributions to the PF, ESI, etc. made within the due date of filing the return u/s 43B, shall be allowable as deduction.

(2.4) Thus, the Hon’ble Jurisdictional High Court has consistently held that the employees’ contributions deposited after the due date under respective laws but upto the due date u/s 139(1), is allowable as deduction.

(2.5) Departmental SLP dismissed by Hon’ble Supreme Court on 04.07.2017:

It may also be noted that, against the aforesaid decision of Hon’ble Rajasthan High Court in CIT Vs. Rajasthan State Beverages Corporation Ltd. / Rajasthan State Ganganagar  Sugar Mill dated 04.08.2016, the department filed SLP to Hon’ble Supreme Court. But the Hon’ble Supreme Court has dismissed SLP on 04.07.2017. Therefore, the decision of Hon’ble Rajasthan High Court has attained finality.

(2.6) Though needless but for the sake of completeness, we would also like to mention that there is a plethora of decisions in which different High Courts have held that the employees’ contribution paid to relevant fund after the due date under respective laws but upto due date u/s 139(1) is allowable as deduction. We would like to quote a few decisions as under:

(i) High Court of Himachal Pradesh in CIT Vs Nipso Ployfabriks Ltd., (2013) 350 ITR 327

(ii) Karnataka High Court in CIT Vs Sabri Enterprises, (2008) 298 ITR 141.

(iii) Bombay High Court in CIT Vs Ghatge Patil Transports Ltd., (2014) 368 ITR 749.

(iv) CIT Vs. Nuchem Ltd. [2015] 59 com455 (Punjab & Haryana)

(v) CIT Vs. AIMIL Ltd. [2010] 321 ITR 508 (Delhi)

(vi) CIT Vs. George Williamson (Assam) Ltd. [2006] 284 ITR 619 (Gauhati)

(vii) CIT Vs. Kichha Sugar Co. Ltd. [2013] 356 ITR 351 (Uttarakhand)

(viii) Sagun Foundry (P) Ltd. Vs. CIT [2017] 78 com47 (Allahabad)

(ix) Bihar State Warehousing Corporation Ltd. Vs. DCIT [2017] 393 ITR 386 (Patna)

We have also come across the following decisions, in which the Hon’ble High Courts have not allowed deduction:

(i) CIT Vs. Suzlon Energy Ltd. [2020] 115 taxmann.com340 (Gujarat)

(ii) CIT Vs. Merchem Ltd. [2015] 378 ITR 443 (Kerala)

At this stage we would like to invite your kind attention towards CBDT Circular No. 10 / DV / 2013 dated 16.12.2013 in the matter of interpretation of section 40(a)(ia) [Annexure-3]. At the relevant time, there was a controversy over the application of section 40(a)(ia) and different high Courts had given different decisions. Therefore, the CBDT issued following instruction in this Circular:

Para No. 5:

Where any High Court decides an issue contrary to the ‘Departmental View’, the `Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. However, the CCIT concerned should immediately bring the judgement to the notice of the CTC. The CTC shall examine the said judgement on priority to decide as to whether filing of SLP to the Supreme Court will be adequate response for the time being or some legislative amendment is called for.

Para No. 6:

“The above clarification may be brought to the notice of all officers.”

Thus, even the CBDT has instructed that the decision of Hon’ble Jurisdictional Court has to be applied and any other view cannot be operative.

(2.7) Therefore, this Ground may please be allowed.

(3) Re: GROUND No. 3:

(3.1) In this Ground, the assessee has submitted:

“On the facts and in the circumstances and in the law, the Ld. AO was not justified in making addition of Rs. 12,51,779/- without considering the Response submitted online by the assessee in which it was clearly brought to his notice that the assessee is Jodhpur based falling within the jurisdiction of Hon’ble Rajasthan High Court and the binding decisions of Hon’ble Rajasthan High Court were directly applicable and therefore the addition of Rs. 12,51,779/- made by Ld. AO is violative of Second Proviso to section 143(1)(a).”

(3.2) We may first refer to the portion of the Second Proviso to section 143(1)(a) which reads
as under:

“Provided further that the response received from the assessee, if any, shall be considered before making any adjustment……..”.

(3.3) It may also be noted that the clause (iv) was introduced in section 143(1)(a) through Finance Act, 2016. While introducing the same, following explanation was given in the Memorandum to Finance Bill, 2016:

“In order to expeditiously remove the mismatch between the return and the information available with the Department, it is proposed to expand the scope of adjustments that can be made at the time of processing of returns under sub-section (1) of section 143. It is proposed that such adjustments can be made based on the data available with the Department in the form of audit report filed by the assessee, returns of earlier years of the assessee, 26AS statement, Form 16, and Form 16A. However, before making any such adjustments, in the interest of natural justice, an intimation shall be given to the assessee either in writing or through electronic mode requiring him to respond to such adjustments. The response received, if any, will be duly considered before making any adjustment.”

(3.4) Thus, the law is very much clear to the effect that Response submitted by the assessee
shall be duly considered before making any adjustment.

Reverting back to the facts, we have earlier submitted that the assessee submitted online Response (as marked Annexure-2 above) and in that response, it was clearly stated that the assessee is Jodhpur based, falling within the jurisdiction of Hon’ble Rajasthan High Court, and therefore the binding decisions of Hon’ble Rajasthan High Court were directly applicable. Despite such clear, categorical and unambiguous submission, the Ld. AO has made addition, which could not have been made.

(3.5) Therefore, it is very much apparent that the Ld. AO has made addition without due consideration of the Response submitted by the assessee and, thus, acted in violation of Second Proviso to section 143(1)(a).

(3.6) Therefore, this Ground may please be allowed.

(4) Re: GROUND No. 4:

(4.1) In this Ground, the assessee has submitted:

“On the facts and in the circumstances and in the law, the Ld. AO has grossly erred in invoking section 143(1)(a) and thereby making addition of Rs. 12,51,779/- and hence the addition of Rs. 12,51,779/- is beyond the authority, illegal and deserves to be deleted.”

(4.2) We reproduce below the section 143(1)(a)(iv):

“Section 143(1)(a) – the total income or loss shall be computed after making the following adjustments, namely:–

(iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return”.

Thus, it may be noted that the scope of section 143(1)(a)(iv) is very much restricted in as much as the only permissible adjustment is on account of “disallowance of expenditure indicated in the audit report” and nothing beyond that.

(4.3) At this stage we invite your kind attention to the Audit-Report (Form 3CD), which is being submitted herewith as Annexure-4.

A perusal of Form 3CD demonstrates that there are 44 clauses of reporting by the auditors and different clauses have different types of reporting.

Let us first move to Clause No. 20(b), which is relevant to us. This clause has following reporting:

“20(b):

Details of contributions received from employees for various funds as referred to in section 36(1)(va):

S.No.	Nature of fund	Sum received from employees	Due date for payment	The actual amount paid	The actual date of payment to the concerned authorities
1
2

This reporting, as can be seen, does not require reporting of any disallowance.

Now we move to some other clauses:

Clause No.	Reporting
21(b)	Amount inadmissible under section 40(a)
21(c)	Amounts debited to Profit and Loss account, being interest, salary, bonus, commission or remuneration inadmissible under section 40(b)/(ba) and computation thereof.
	S.No.	Particulars	Section	Amount debited to P&L A/c	Amount admissible	Amount inadmissible
21(d)	Disallowance / deemed income u/s 40A(3)
21(e)	Provision for payment of gratuity not allowable under section 40A(7)
21(f)	Any sum paid by the assessee as an employer not allowable under section 40A(9)
21(h)	Amount of deduction inadmissible in terms of section 14A in respect of expenditure incurred in relation to income which does not form part of the total income
21(i)	Amount inadmissible under the proviso to section 36(1)(iii)
22	Amount of interest inadmissible under section 23 of the Micro, Small and Medium Enterprises Development Act, 2006

These are the clauses which require auditor’s reporting of the amount “inadmissible”, “disallowable” or “not allowable”.

Thus, there is a material difference in reporting, viz. (i) Clause No. 20(b), which is relevant to present appeal, does not contain any kind of disallowance, but (ii) Clause No. 21(b) to 22, require reporting of disallowance.

(4.4) Turning back to the law, it is a well-settled law that the processing under section 143(1) is very limited and the AO can make only those adjustments as are prescribed in section 143(1)(a) and not beyond that. Further, the verdict of clause (iv) of section 143(1)(a) is very much clear. It permits the AO to make adjustment of a particular kind i.e. disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return.

Thus, the AO can make adjustment in respect of only those items which are reported by the auditor as disallowance. The AO cannot make adjustment of all the 44 clauses reported in Form 3CD.

(4.5) As the Clause No. 20(b) does not indicate any disallowance by the auditor, the Ld. AO has stepped beyond the authority of section 143(1)(a)(iv).

(4.6) Therefore, this Ground may please be allowed.

In view of above, the assessee very humbly prays to allow the various grounds of appeal to meet the end of law and justice.

Thanking you,

Yours Faithfully,

(_____________________ ) A/R