Income Tax Deduction claim of Employees Contribution to PF or ESI is allowable only if deposited on or before statutory due date under ESI/PF Act: Delhi HC [Read Order]

A division bench of Justice V. Kameswar Rao and Justice Vinod Kumar observed that “Section 143(1)(a)(ii) permits adjustment in relation to an incorrect claim, if such incorrect claim is apparent from any information in the return. Employees’ contribution to PF/ESI deposited beyond the due date under the relevant law is disallowable under Section 36(1)(va), as now conclusively settled by Checkmate Services (P) Ltd. (supra). It also needs to be appreciated that the dates of deposit were disclosed in the tax audit report (Form 3CD). “

Woodland (Aero Club) Private Limited , the appellant assessee, filed appeal under Section 260A of the Income Tax Act, 1961 ("the Act”), challenging the order dated 09.01.2023 passed by the Income Tax Appellate Tribunal ("ITAT”) in ITA No.2293/DEL/2022 filed by the Revenue (respondent herein) in respect of Assessment Year (AY) 2019-20.

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The appellant is a Partnership Firm engaged in the business of manufacturing, supply and export of leather products like leather shoes, leather garments under the name of Woodland. On 30.11.2019 the appellant filed its return of income of ₹15,78,68,550/- electronically for assessment year 2019-20 under Section 139(1) of Act and same was selected for scrutiny by notice dated 17/12/2019 issued under section 143(l)(a) of Act wherein adjustments to the tune of ₹4,14,22,293/- were proposed to be deducted from the income of the appellant by the APO, Centralized Processing Centre, Income Tax Department [The Assessment Officer (AO)] on account of payment of Provident Fund, Employer's State Insurance and Labour Welfare Fund to the extent of the disputed amount deposited beyond the due date of the relevant fund under the Act.

The appellant filed its reply on 16.01.2020 against the notice by giving reasons against the proposed adjustments/deductions. The appellant clarified that the said employees contribution deposited before filing of the ITR should have been admissible, even though the same was deposited after the due date as prescribed under the relevant acts.

However, when the return was processed finally, an intimation notice/order dated 28.05.2020 was received under Section 143(1) of the Act, wherein the income of the appellant was enhanced by an amount of ₹4,14,22,293/-, thereby disallowing the deduction of the disputed amount under Section 36(1) (va) of the Act. The AO, arrived at the said conclusion on the basis that the said deposit was made after the due date as prescribed under the relevant law, though as per the appellant, the deposit was made prior to the due date of furnishing of the ITR under Section 139(1) of the Act.

Thereafter, the appellant filed an appeal dated 14.07.2020 under Section 246A of the Act bearing Appeal No. CIT(A), Delhi-17110041/202021 before the Commissioner of Income Tax (Appeals), Delhi ("CIT(Appeals)") contesting the deduction/adjustment of the disputed amount by the AO. Thereafter, several hearing notices dated 28.10.2021, 02.05.2022, 08.06.2022 were issued by the CIT(Appeals) under Section 250 of the Act. Against the said notice(s), the appellant filed its written submissions dated 31.07.2021, 11.11.2021, 05.05.2022 and 14.06.2022.

Mr. S. Ganesh, Senior Counsel appearing for the appellant submitted that it is an undisputed factual position that, in respect of the

Employees’ Provident Fund (EPF) and Employees State Insurance (ESI) contributions received by the appellant from its employees, there was a delay in making payment of these amounts to the funds in question, as compared to the due dates set out in the EPF/ESI Acts. However, it is also the undisputed position that the appellant made the said payments before the due date for the submission of the appellant’s Income-tax Return.

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In the assessment order made by the AO in the appellant’s case under Section 143(1) of the Act, the AO made adjustments/additions in respect of these payments. The Section 143(1) permits the AO to make adjustments/additions only in respect of arithmetical mistakes and clerical errors.

It was submitted that the AO under Section 143(1) cannot make any adjustment or addition in respect of any debatable or arguable matter. Further, in any event, no such adjustment or addition can possibly be made contrary to a binding judgments of the Supreme Court or High Courts which has held the issue in question in favour of the assessee. In the present case, the Section 143(1) adjustment was made on 28/5/2020.

The ITAT erred in dismissing the disallowance of the deduction of ₹4,14,22,293 from the income of the appellant for the year 2019-20. The PF payment was made before the due date of filing of the ITR, thereby making the Appellant eligible for deduction under Section 36(l)(va) of the Act. The statutory mandate provided under second proviso to Section 36(1)(va) of the Act inserted by the Finance Act, 2021 was to be made applicable from 01.04.2021.

Mr. Siddhartha Sinha, SSC, Senior Standing Counsel for the respondent submitted that CIT(A), NFAC order dated 05.08.2022 allowed the appeal holding that employees’ contribution deposited before the due date under Section 139(1) was allowable

It is submitted that Section 143(1)(a)(ii) permits adjustment in relation to an incorrect claim, if such incorrect claim is apparent from any information in the return. Employees’ contribution to PF/ESI deposited beyond the due date under the relevant law is disallowable under Section 36(1)(va), as now conclusively settled by Checkmate Services (P) Ltd. It also needs to be appreciated that the dates of deposit were disclosed in the tax audit report (Form 3CD).

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The court observed that “Since the due dates under the respective welfare laws are fixed, the delay was apparent from the record. Furthermore, the ratio of Checkmate Services (P) Ltd. (supra) that employees’ contributions are distinct from employers’ contributions and Section 43B does not override Section 36(1)(va), is an interpretation of substantive law, not dependent on the nature of assessment. This principle governs adjustments even in intimation under Section 143(1)(a).”

The bench viewed that it is clear from the observations of the Supreme Court that while examining the issue whether for the benefit of deductions to be made available to the assessee, the employees’ contributions have to be deposited on or before the due date, there was no occasion to even consider Explanation 5 to Section 43B of the Act.

The ITAT is justified in relying upon Checkmate Services (P) Ltd. while dismissing the appeal filed by the appellant and dismsiised the appeal before the court.

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