ITAT quashes Disallowance of Employees’ ESI/EPF Contributions u/s 36(1)(va) of Income Tax Act [Read Order]

The Agra Bench of the Income Tax Appellate Tribunal (ITAT) has held that a disallowance under Section 36(1)(va) of the Income Tax Act, 1961, on account of delayed remittance of employees’ contributions towards Provident Fund (PF) and Employees’ State Insurance (ESI), could not be made through an intimation issued under Section 143(1)(a) of the Income Tax Act, 1961.

The assessee filed its return of income for Assessment Year (AY) 2018-19 on 20.10.2018, declaring a total income of ₹4,34,71,238. The return was processed by the Centralized Processing Centre (CPC) under Section 143(1) of the Income Tax Act, 1961, through an intimation, wherein a disallowance of ₹33,47,986 was made under Section 36(1)(va) of the Income Tax Act, 1961, on account of delayed remittance of employees’ contributions to PF and ESI.

Aggrieved by the adjustment, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). In the meantime, the case was selected for scrutiny and an assessment under Section 143(3) of the Income Tax Act, 1961 and the AssessingOfficer accepted the returned income without making any disallowance under Section 36(1)(va) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals), also relying on the decision of the Supreme Court in Checkmate Services Pvt. Ltd. v. CIT dismissed the appeal.

Before the Tribunal, it was contended that the issue was no longer res integra in view of the decision of the Delhi Bench of the Tribunal in R.K. and Company Manpower Private Limited v. DCIT, wherein it was held that as on the date of issuance of the intimation under Section 143(1) of the Income Tax Act, 1961, the issue regarding delayed deposit of employees’ PF and ESI contributions was highly debatable. Consequently, such a disallowance could not be made through prima facie adjustments under Section 143(1)(a) of the Income Tax Act, 1961.

The Tribunal also took note of a similar view expressed by the Delhi Bench of the Tribunal in Hisar Metal Industries Pvt. Ltd. as well as the judgment of the Chhattisgarh High Court in Raj Kumar Bothra v. DCIT.

Following the aforesaid judicial precedents, the Tribunal of M. Balaganesh, Accountant Member held that the disallowance under Section 36(1)(va) of the Income Tax Act, 1961, could not have been made through an intimation under Section 143(1) of the Income Tax Act, since the issue was highly debatable at the relevant point of time. Accordingly, the adjustment made by the CPC was deleted.

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