2021 (10) TMI 843 - AT - Income Tax

Tribunal rules Finance Act 2021 amendment not retroactive, allows deductions for PF/ESI contributions

The Tribunal allowed the appeal, ruling that the amendment to section 36(1)(va) and 43B by Finance Act, 2021 was prospective and did not apply to the ... Deductibility of employees' contribution to provident fund and ESI - payment made before the due date for filing return under section 139(1) - clarificatory amendment to section 36(1)(va) and section 43B by Finance Act, 2021 - retrospective versus prospective operation - precedential effect of jurisdictional High Court decisionDeductibility of employees' contribution to provident fund and ESI - payment made before the due date for filing return under section 139(1) - Employees' contribution to PF and ESI paid after the statutory deposit due date but before the due date for filing the return under section 139(1) is allowable as deduction for AY 2019-2020. - HELD THAT: - The Tribunal applied the ruling of the jurisdictional High Court in Essae Teraoka (P.) Ltd. v. DCIT which held that where the employees' contribution (together with employer's contribution) is paid on or before the due date for furnishing the return under section 139(1), the employer is entitled to deduction. The assessee admittedly paid the employees' contribution after the statutory due dates under the respective Acts but before the return-filing due date; accordingly the Tribunal directed the Assessing Officer to allow the deduction. The Tribunal rejected the revenue's reliance on contrary authority by following the jurisdictional High Court's categorical conclusion that such payment entitles the employer to deduction and that the amount should not be treated as the employer's income under section 2(24)(x). [Paras 7]Deduction in respect of employees' contribution to PF and ESI is to be granted for AY 2019-2020 as payment was made before the due date of filing the return under section 139(1).Clarificatory amendment to section 36(1)(va) and section 43B by Finance Act, 2021 - retrospective versus prospective operation - precedential effect of jurisdictional High Court decision - The amendments made by the Finance Act, 2021 to section 36(1)(va) and section 43B cannot be treated as retrospective so as to affect AY 2019-2020; they do not apply to the relevant assessment year. - HELD THAT: - The Tribunal considered whether the 2021 amendments were merely clarificatory and therefore retrospective. Relying on the Supreme Court's approach in M.M. Aqua Technologies (regarding presumption against retrospectivity where the amendment alters existing law) and on tribunal precedents holding the amendments to be prospective, the Tribunal concluded that the Finance Act, 2021 altered the law adversely to the assessee and is effective from 01.04.2021 for assessment years from 2021-22 onwards. Consequently, the amendments do not apply to AY 2019-2020 and cannot be invoked to deny deduction for that year. [Paras 7]The Finance Act, 2021 amendments are not to be applied retrospectively to AY 2019-2020 and therefore do not preclude the deduction claimed by the assessee for that year.Final Conclusion: The appeal is allowed: the Assessing Officer is directed to grant deduction for employees' contribution to PF and ESI for AY 2019-2020 because the payments were made before the due date for filing the return under section 139(1); the Finance Act, 2021 amendments do not apply retrospectively to the relevant assessment year. Issues:- Disallowance of employees' contribution to PF and ESI under section 36(1)(va) of the Income Tax Act- Retrospective nature of the amendment to section 36(1)(va) and 43B by Finance Act, 2021Issue 1: Disallowance of employees' contribution to PF and ESI under section 36(1)(va) of the Income Tax Act:The appeal was against the CIT(A)'s order upholding the disallowance of employees' contribution to PF and ESI amounting to Rs. 1,22,245 under section 36(1)(va) of the Income Tax Act. The assessee contended that the payments were made before the due date for filing the return u/s 139(1) of the Act, citing judicial pronouncements. However, the CIT(A) affirmed the disallowance, considering the amendment by Finance Act, 2021 as retrospective. The CIT(A) held that the amendments clarified that any delay in depositing employees' contributions would not be allowed as a deduction. The assessee further appealed to the Tribunal, arguing that the amendment was clarificatory and retrospective.Issue 2: Retrospective nature of the amendment to section 36(1)(va) and 43B by Finance Act, 2021:The Tribunal analyzed whether the amendment to section 36(1)(va) and 43B by Finance Act, 2021 was clarificatory and retrospective. The Tribunal considered previous orders and judicial decisions to determine the nature of the amendment. It was highlighted that the Hon'ble jurisdictional High Court's judgment emphasized that deductions for employees' contributions to PF and ESI were permissible if paid before the due date for filing the return of income u/s 139(1) of the Act. The Tribunal concluded that the amendment was not retrospective as it altered the law adversely to the assessee and was effective from 01.04.2021 onwards. Relying on various Tribunal orders, the Tribunal held that the amendment was only prospective and directed the Assessing Officer to grant the deduction for employees' contributions to PF and ESI for the relevant assessment year, A.Y. 2019-2020.In conclusion, the Tribunal allowed the appeal, emphasizing that the amendment to section 36(1)(va) and 43B by Finance Act, 2021 was prospective and did not apply to the relevant assessment year. The decision was based on the principle that deductions for employees' contributions to PF and ESI were permissible if paid before the due date for filing the return of income u/s 139(1) of the Act, as established by judicial pronouncements and the nature of the amendment itself.