Prospective amendment and no exempt income defeat PF, ESI and section 14A disallowances for the assessee.

Employees' contribution to provident fund and ESI deposited before the return-filing due date, though after the welfare-law deadline, was treated as deductible because the Finance Act 2021 amendment to section 36(1)(va) and the related section 43B explanation was applied prospectively from 1 April 2021. Section 14A was held inapplicable where no exempt income was earned or receivable during the relevant year, so no disallowance could be made on that basis. The result was deletion of both additions in favour of the assessee.

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Issues: (i) Whether the disallowance of employees' contribution to provident fund and ESI could be sustained where the sums were deposited before the due date for filing the return but after the due date under the relevant welfare enactments. (ii) Whether disallowance under section 14A was permissible when no exempt income was earned during the year.

Issue (i): Whether the disallowance of employees' contribution to provident fund and ESI could be sustained where the sums were deposited before the due date for filing the return but after the due date under the relevant welfare enactments.

Analysis: The amendment proposed by the Finance Act, 2021 to section 36(1)(va) and the corresponding explanation to section 43B indicated that the legislative change was to operate from 1 April 2021. The employees' contribution in dispute related to a prior period, and the reasoning adopted was that the default, for that earlier period, stood covered by the pre-amendment legal position.

Conclusion: The disallowance towards provident fund and ESI was deleted, in favour of the assessee.

Issue (ii): Whether disallowance under section 14A was permissible when no exempt income was earned during the year.

Analysis: Section 14A applies only where expenditure is incurred in relation to income not forming part of total income. Where no exempt income is received or receivable, the provision has no application. On the facts, the investments did not yield exempt income during the relevant year.

Conclusion: The addition under section 14A was deleted, in favour of the assessee.

Final Conclusion: Both substantive additions were deleted and the appeals succeeded.

Ratio Decidendi: An amendment introducing a stricter treatment of employees' contribution is prospective where so stated, and section 14A cannot be invoked in the absence of exempt income.

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