ITAT Mumbai Remands COVID-19 PF/ESI Delay Disallowance for Verification

Diamour Jewels Pvt. Ltd. Vs Centralised Processing Centre (ITAT Mumbai)

Summary: The appeal filed by the assessee was directed against the order of Ld. CIT(A), Chandigarh, vide order no. ITBA/ APL/S/250/2024- 25/1064054431(1), dated 12.04.2024, passed against the intimation issued by Centralised Processing Centre, Bengaluru, (CPC) u/s. 143(1) of the Income-tax Act, 1961, dated 22.09.2022 for Assessment Year 2021-22.

The assessee had raised grounds concerning disallowance of employees’ contribution to PF and ESI, reliance on the circular issued by Employees’ Provident Fund Organisation dated 15.05.2020 bearing Ref. No. C-I/Misc/2020-21/Vol.1/1112, and alleged violation of principles of natural justice in passing the CIT(A)’s order on 12.04.2024 despite submissions made on 10.04.2024.

The assessee filed its return of income on 07.02.2022 reporting total income of Rs.1,96,51,570/-. The return was processed by CPC u/s. 143(1), whereby disallowance of Rs.6,46,040/- (correct figure is Rs.6,26,351/-) was made u/s. 36(1)(va) towards delayed deposit of employees’ contribution of PF and ESI. The delay related to April 2020 and May 2020, when lockdown was imposed during the COVID-19 pandemic. The due dates for deposit for these two months were 15.05.2020 and 15.06.2020. The assessee deposited the delayed amounts in June 2020 when there was relaxation in lockdown and banking was permitted.

The assessee furnished copies of challans for the three delayed deposits made on 15.06.2020 and 16.06.2020. The record included an ESIC payment receipt showing an amount of 38393.00, transaction status as Successful and transaction date-time as 15/06/2020 09:16:52 PM. The record also included EPFO payment receipts for wage months Apr2020 and Mar 2020, including the establishment code MHBAN1014249000, TRRNs 3102006013424 and 3102006013606, and total amounts of 344794 00 and 243164.00 respectively.

The Ld. CIT(A), relying upon the decision of the Hon’ble Supreme Court in Checkmate Services P. Ltd. v. CIT [2022] 143 taxmann.com 178 (SC), did not allow the deduction and dismissed the appeal. Before the Tribunal, the assessee relied upon the Employees’ Provident Fund Organisation circular dated 15.05.2020, stating that the circular granted relief to employers in view of difficulties faced by establishments for timely deposit during the lockdown.

The Revenue relied upon the CIT(A)’s order and asserted that the issue was settled by the Supreme Court in Checkmate Services.

On the PF/ESI issue, the Tribunal noted that the undisputed delay pertained only to April 2020 and May 2020, which were the peak period of the COVID-19 pandemic when lockdown was imposed. It also noted that when relaxation was available, the assessee deposited the employees’ contribution for these two months on 15.06.2020 and 16.06.2020 without waiting for further delay. For all other months, the assessee had deposited employees’ contribution within the prescribed due dates.

The Tribunal considered the EPF Organisation circular according to which delay in deposit of contributions during the lockdown period was without mens rea of the employer and did not attract penal provisions of section 14B of the EPF Act. The circular stated that for delay in payment of contributions or administrative charges due for any period during lockdown, no proceeding would be initiated for levy of penal damages in such cases.

The Tribunal considered the effect of this circular alongside the Supreme Court’s decision in Checkmate Services, in which the issue was considered in the context of the due dates prescribed under the relevant Acts for claiming deduction under section 36(1)(va). The assessee’s contention was that since penal damages had been waived by the EPF Organisation for delay during lockdown, there could not be an adverse effect under section 36(1)(va).

The Tribunal observed that, in the peculiar facts before it, the delay occurred during the lockdown, the relevant contributions were deposited when relaxation was given, and there was no mischief on the part of the assessee in holding employees’ contributions for long periods. It noted that the relevant enactment itself had given a waiver from levy of penal damages for delay in deposit during the lockdown period.

However, the Tribunal did not finally allow the deduction at this stage. Since the assessee had furnished month-wise details of PF/ESI contributions along with challans and claimed that the delay was mainly on account of the lockdown, the Tribunal held that the factual claim required verification by the Assessing Officer. It therefore set aside the issue to the file of the AO and directed the AO to reconsider the claim in light of the evidence that may be filed by the assessee and decide the issue in accordance with the Tribunal’s findings.

On the issue of Rs.31,21,770/- towards interest on late payment of TDS, the assessee submitted that the interest was compensatory and allowable u/s. 37(1), relying on Resolve Salvage & Fire India (P) Ltd. v. DCIT reported in [2022] 195 ITD 266 (Mumbai-Trib.) and decisions of the ITAT Hyderabad Bench. The Revenue submitted that interest on TDS was in the nature of tax and penal, relying upon CIT v. Chennai Properties & Investment Ltd. reported in [1999] 239 ITR 435 (Mad.).

The Tribunal held that interest paid on TDS amounting to Rs.31,21,770/- was in the nature of payment connected with tax and that TDS was a mechanism for collection of tax on behalf of the Government. It held that interest charged for delay in remittance of TDS to the Government account partook a penal nature and could not be considered compensatory charges for business operations. Relying upon CIT v. Chennai Properties & Investment Ltd., the Tribunal held that interest paid u/s. 201(1A) could not be allowed as deduction. It therefore upheld the CIT(A)’s finding and rejected the assessee’s ground on this issue.

On the addition of Rs.2,64,040/- towards unproved purchases, the Tribunal found that the AO had made the addition because six parties did not respond to notices issued u/s. 133(6). Since the assessee had furnished purchase invoices and evidence of payment and no other discrepancy was pointed out, the Tribunal held that merely because the parties did not respond to notices u/s. 133(6), the purchases could not be treated as non-genuine. It set aside the CIT(A)’s order on this issue and directed the AO to delete the addition of Rs.2,64,040/-.

On the disallowance of Rs.1,14,15,885/- towards loss on fixed assets due to flash flood in Uttarakhand, the Tribunal noted that construction equipment, plant and machinery, stores and spares and inventories had been washed away. It held that where loss arose on account of natural calamity such as floods and not on account of sale or transfer of depreciable assets, the resultant loss could not be considered capital loss. The Tribunal set aside the CIT(A)’s order and directed the AO to delete the addition of Rs.1,14,15,885/-.

On denial of TDS credit of Rs.24,20,916/- relating to mobilization advance, the Tribunal considered section 199(3) r.w.r. 37BA of the Income Tax Rules, 1962. It held that although credit is allowable in the year in which income relatable to the TDS is offered to tax, whether such income had been offered was a matter of fact capable of verification from the assessee’s records. The assessee claimed that the mobilization advance had been adjusted against running bills and that it had received Rs.8.43 Crs. as material advance, against which Rs.8.41 Crs. was offered as Revenue from operations. The Tribunal held that the AO ought not to have denied the TDS credit and directed the AO to allow credit for TDS of Rs.24,20,916/- deducted from mobilization advance as claimed by the assessee.

Accordingly, the appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal’s decision on the PF/ESI issue was a remand for factual verification and was expressly confined to the peculiar facts of the case. The Tribunal stated that its observations and findings on that issue could not be taken as laying down a precedence on the issue addressed.

Cases Discussed:

• Resolve Salvage & Fire India (P) Ltd. v. DCIT reported in [2022] 195 ITD 266 (Mumbai-Trib.)
• CIT v. Chennai Properties & Investment Ltd., reported in [1999] 239 ITR 435 (Mad.)
• Diamour Jewels (P) Ltd. v. CPC reported in [2024] 208 ITD 189 (Mumbai-Trib.)
• Mercury Projects Pvt. Ltd. v. DCIT in ITA No.440/Hyd/2018 order dated 30.01.2019
• Trinity Infraventures Ltd. v. ACIT in ITA No.403/Hyd/2021 order dated 25.08.2022
• Taksheel Solutions Ltd. v. ACIT in ITA No.1768/Hyd/2012 order dated 17.06.2016
• Zelan Projects Pvt. Ltd., in ITA No.1361/Hyd/2013 order dated 12.01.2015

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal filed by the assessee is against the order of Ld. CIT(A), Chandigarh, vide order no. ITBA/ APL/S/250/2024- 25/1064054431(1), dated 12.04.2024 passed against the intimation issued by Centralised Processing Centre, Bengaluru, (CPC) u/s. 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 22.09.2022 for Assessment Year 2021-22.

2. Grounds taken by the assessee are reproduced as under:

“1. The learned Addl/JCIT(A) has erred in disallowing payment made of Rs. 6,46,040/- u/s 36(1)(va) for A.Y. 2021-22 ignoring the fact that the due date of payment was falling in the period of Covid Pandemic – complete lock down and on account of operational and economic difficulties, the payment in due date was not in the control of the appellant.

2. The learned Addl/JCIT(A) has not considered the Circular by Employee’s Provident Fund Organisation Head Office, New Delhi dated 15.05.2020 bearing Ref. No. C- I/Misc/2020-21/Vol.1/1112, relaxing the establishments and factories covered under EPF from levy of Penalty for delay in deposit of dues during lock down.

3. The learned Addl/JCIT(A) has violated the principle of natural justice by ignoring submissions made on 10.04.2024 though the due date mentioned in the notice u/s 250 was 25th April, 2024 and passed the order in hurry on 12th April, 2024 itself.

3. Brief facts of the case are that assessee filed its return of income on 07.02.2022 reporting total income at Rs.1,96,51,570/-. Return of the assessee was processed by CPC, u/s. 143(1) whereby disallowance of Rs.6,46,040/-(correct figure is Rs.6,26,351/-) was made u/s. 36(1)(va) towards delayed deposit of employees’ contribution of Provident Fund (PF) and ESI. The delay in deposit of PF and ESI of the employees’ share was for the month of April 2020 and May 2020. These months fell in the period of lockdown when pandemic of COVID-19 was at its peak. Due dates to deposit for these two months were 15.05.2020 and 15.06.2020. Assessee deposited the delayed amount in the month of June 2020 when there was relaxation in the lockdown and banking was permitted. The details of deposit of employees’ share of PF and ESI for the year under consideration and delay thereon is tabulated as under:

3.1. Assessee furnished copies of challans for the three delayed deposits which were made on 15.06.2020 and 16.06.2020, placed in the paper book and the same are extracted below:

ESIC PAYMENT RECEIPT

This is a computer generated receipt hence does not require any signature.

EPFO PAYMENT RECEIPT

This is a computer generated receipt hence does not require any signature.

4. Ld. CIT(A) by placing reliance on the decision of Hon’ble Supreme Court in the case of Checkmate Services (P) Ltd. v. CIT [2022] 143 taxmann.com 178 (SC) did not allow the deduction and dismissed the appeal of the assessee. According to him, Hon’ble Supreme Court had confirmed the stand of the Department that if the employees’ contribution towards EPF and ESI is not deposited within the due dates under the relevant Act as mandated by the explanation in Section 36(1)(va), the same will not be allowable as a deduction. Aggrieved, assessee is in appeal before the Tribunal.

5. Before us, ld. Counsel for the assessee reiterated the facts and referred to the documentary evidences placed on record as extracted above. She referred to circular issued by Employees’ Provident Fund Organisation dated 15.05.2020 vide circular No. C-I/Misc/2020-21/Vol.I/1112. The circular is issued by the office of Additional CPFC(Hqrs) Compliance & Legal with the approval of the Central PF Commissioner and is addressed to all the Additional CPFCs in charge of Zones, RPFCs in charge of Regional Offices and OICs in charge of District Offices. The subject of the said circular is “Relief to establishments and factories covered under EPF and MP Act, 1952 from levy of penal damages for delay in deposit of dues during lock down to prevent Covid 19”. According to the ld. Counsel, this circular by the EPF Organisation has granted relief to the employers by considering the difficulty faced by the establishments for timely deposit of contribution during the period of lockdown due to operational and economic reasons.

6. Per contra, ld. Sr. DR strongly relied on the decision of ld. CIT(A) as well as asserted that the issue is settled by the Hon’ble Supreme Court in the case of Checkmate Services (supra) which very much covers the case of the assessee against it.

7. We heard both the parties and perused the material on record. The undisputed fact is that the delay pertains only to the two months of April, 2020 and May, 2020 which were the peak period of pandemic of COVID-19 when lockdown was imposed by the government. It is also a fact that when there was relaxation in the lockdown, assessee vigilantly deposited employees’ contribution for these two months on 15.06.2020 and 16.06.2020 without waiting for any further delay on this account. It is also undisputed that for all other months, assessee had deposited the employees’ contribution of PF and ESI within the due dates prescribed under the relevant Acts irrespective of extended period of COVID-19 pandemic.

7.1. Before we delve into the issue raised before us, in the aforesaid factual matrix, it is worth taking note of the certain key data points relating to pandemic of COVID-19 and lockdown imposed thereby. We note that to control the spread of the coronavirus COVID-19 pandemic, the Government of India imposed various phases of lockdown starting from the third week of March 2020. The World Health Organization (WHO) declared COVID-19 a pandemic on 11.03.2020. In India, a complete nationwide lockdown was implemented for a total of 68 days through four phases, from 25.03.2020 to 31.05.2020 plus a pre-lockdown phase. The overall period was divided into five phases, starting from Phase 0 (pre-lockdown), followed by Phases 1–4, as per the lockdown phases implemented by the Government of India. Table below briefly lists the durations and restrictions imposed during each phase of the lockdown in India:

7.2. We have perused the afore stated circular issued by EPF Organisation according to which delay in deposit of contributions during the lockdown period is without mens rea of the employer and such delay cannot be attributed to any culpable state of mind of the employer and therefore does not attract penal provisions of section 14B of the EPF Act. It is stated in this circular that for any delay in payment of any contributions or administrative charges due for any period during the lockdown, no proceeding would be initiated for levy of penal damages in such cases.

7.3. In the given peculiar set of facts and circumstances of this present case, the moot point before us to be considered in respect of the aforesaid delay in depositing employees’ contribution to PF and ESI is the effect of circular issued by EPF Organisation as referred above, whereby levy of penal damages on account of delay under the relevant Act for deposit of contributions during the period of lockdown has been waived off vis-a-vis the decision of Hon’ble Supreme Court in the case of Checkmate Services (Supra) wherein the sole focus of the Hon’ble Court while deciding the instant issue was in the context of due dates prescribed under the relevant Act for claiming deduction under section 36(1)(va) of the Act.

7.4. The contention raised before us is that since the penal damages have been waived off by the EPF Organisation itself for the delay in deposit of contributions during the period of lockdown, there cannot be any adverse effect of not depositing the employees’ contribution of EPF and ESI within the meaning of section 36(1)(va) of the Act.

8. We delved into the judgment of the Hon’ble Supreme Court in the case of Checkmate Services (supra) to address the issue raised before us. In para 2 of the said decision, Hon’ble Court noted that as per the Assessing Officer, employees’ contributions were paid beyond the due dates as prescribed under the respective Acts, the right to claim such sums as allowable deduction while computing the income was lost forever. Hon’ble Court noted section 38 of the EPF Scheme which specifies timeline for deposit, i.e. “within fifteen days of the close of every month”. Circular issued by CBDT bearing no. 495 dated 22.09.1987 was also referred in para 9 which dealt with the scope and effect of the sections 36(1)(va) and provisos to section 43B inserted in the Act. The caption of the said circular reads as “Measures of penalising employers who misutilise contribution to the provident fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for welfare of employees.”

8.1. Contention of the Revenue before the Hon’ble Court was that “when the assessee did not deposit the employees’ contribution in the PF account before the due date provided under the EPF/ESI Act, the assessee was disentitled to deduction under Section 36 in the relevant assessment order, though the assessee might have deposited the employees’ contribution on or before the due date of filing of the return under Section 139 of the IT Act.”

8.2. Hon’ble Court in para 35 and 52 took note of the memorandum explaining the provisions in the Finance Bill, 1987 through which section 2(24)(x), section 36(1)(va) and second proviso to section 43B were introduced. It was observed that “these provisions were introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods.”

8.3. According to the Hon’ble Court, “the essential character of an employees’ contribution is that it is part of the employees’ income, held in trust by the employer and needs to be deposited on or before the due date under the relevant Act. These have to be deposited in terms of such welfare enactments. 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.” Thus, the essential condition for claim of deduction towards employees’ contribution of PF/ESI is that the terms of particular / relevant enactments governs their allowability under the provisions of the Act.

8.4. In the present case before us, in the given peculiar fact pattern and circumstance, when the EPF Organisation itself has waived off the levy of penal damages for delayed payment during the period of lockdown by issuing the aforesaid circular, there is no question of treating the delay which occurred during the period of lockdown detrimental to the assessee under the Act, more specifically under the explanation to section 36(1)(va) of the Act. The delay in deposit of PF and ESI of the employees’ share is for the month of April 2020 and May 2020. These months fell in the period of lockdown when pandemic of COVID-19 was at its peak. Due dates to deposit for these two months were 15.05.2020 and 15.06.2020 as per the relevant enactments. Assessee deposited the delayed amount in the month of June 2020 when there was relaxation in the lockdown and banking was permitted. There is no mischief on the part of the assessee in holding the employees’ contribution for long periods as contemplated in the memorandum explaining the provisions introduced in the Finance Bill, 1987 and CBDT circular (supra) and dealt by the Hon’ble Supreme Court in Checkmate Services (supra). In fact, assessee demonstrated its vigilance in depositing the impugned amounts at the first opportunity it got when the relaxation was given in the lockdown. Also, for all the subsequent months, the deposits have been on or before the prescribed due dates under the relevant enactments. Thus, in the present case under its peculiar set of facts, there cannot be any adverse effect on the assessee of not depositing the employees’ contribution of EPF and ESI within the meaning of section 36(1)(va) of the Act when the relevant enactment itself had given a waiver from levy of penal damages for the delay in deposit ‘during the lockdown period’. We delete the addition so made. Grounds taken by the assessee in this respect are allowed.

8.5. Before parting, we make it abundantly clear that our above observations and findings are specific to the peculiar set of facts in the present case, elaborately narrated above, which cannot be taken as laying down a precedence on the issue addressed.

9. In the result, appeal of the assessee is allowed.

Order is pronounced in the open court on 25 July, 2024