Late ESI Contribution Deposited Before ITR Due Date: ITAT Upholds Deletion of Disallowance [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) confirmed the deletion of an addition made under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act, 1961 (the Act) for the late deposit of the employee’s contribution to the Employees' State Insurance (ESI) fund.

Samarth Lifestyle Retailing Pvt. Ltd. (assessee), a private limited company, filed its return of income for the Assessment Year (A.Y.) 2018-19. During the assessment proceedings, the Assessing Officer (AO) observed that the tax audit report indicated a late payment of ₹1,46,390 for a fund set up under the provisions of the ESI Act, 1948.

The assessee contended that while the payment was made after the statutory due date for ESI deposit, it was made before the due date for filing the return of income under Section 139(1) of the Act. The assessee further referred to a notification from the ESI Corporation to argue that the due date for the relevant months was revised to the 21st of the next month.

The AO rejected the assessee’s explanation, stating that the ESI notification was not applicable and that the issue of late payment under Section 36(1)(va) had not attained finality, as the department had filed an Special Leave Petition (SLP) against favorable High Court decisions. Accordingly, the AO made an addition of ₹1,46,390 to the total income.

Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) deleted the said disallowance.

The CIT(A) considered the applicable ESI circular and relied on several judicial precedents that established that the employee’s contribution, if deposited before the due date for filing the ITR is allowable as a deduction and cannot be disallowed under Section 36(1)(va) of the Income Tax Act. Aggrieved by the CIT(A)'s order, the department filed an appeal before the ITAT.

The two-member bench comprising Gagan Goyal (Accountant Member) and Narinder Kumar (Judicial Member) observed that the CIT(A) was justified in relying on the settled legal position across multiple High Courts, including the jurisdictional High Court.

The tribunal observed the legal position which held that a disallowance under Section 36(1)(va) was not warranted if the payment of the employee's contribution is made before the due date for filing the return of income.

The Tribunal held that the department was unable to successfully assail the findings recorded by the CIT(A) or defend the AO's opinion. The tribunal dismissed the ground raised by the department. The bench upheld the deletion of the addition. In the result, the appeal filed by the department was dismissed.

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