2021 (10) TMI 1043 - AT - Income Tax

Belated Employee Contributions Allowed as Deduction under Section 43B

The Tribunal held that the belated payment of employees' contribution towards ESI and PF, if made before the due date of filing the return under Section ... Deductibility of employees' contribution to Provident Fund and ESI - section 43B-actual payment basis and extension to due date of filing return - interaction of section 36(1)(va) and section 43B regarding employees' contribution - where two reasonable constructions of a taxing provision exist, construction favourable to assessee - precedential preference when divergent High Court views existDeductibility of employees' contribution to Provident Fund and ESI - section 43B-actual payment basis and extension to due date of filing return - interaction of section 36(1)(va) and section 43B regarding employees' contribution - where two reasonable constructions of a taxing provision exist, construction favourable to assessee - Whether employees' contribution to PF and ESI paid after the statutory due date under respective Acts but before the due date for filing return under section 139(1) is deductible and not liable to disallowance under section 43B / section 36(1)(va). - HELD THAT: - The Tribunal noted conflicting High Court decisions but applied the Supreme Court principle that where two reasonable constructions of a taxing provision are possible the construction favourable to the assessee must be adopted. The Tribunal relied on coordinate decisions holding that 'contribution' under the Provident Fund Act includes both employer and employee shares and that section 43B grants an extension up to the due date of filing the income-tax return. Having considered authorities on both sides, the Tribunal preferred the view that there is no distinction between employer and employee contributions for the purpose of section 43B and that payment of the total contribution on or before the due date for furnishing the return under section 139(1) precludes disallowance. The Tribunal also recorded that later legislative treatment (Explanation to amendments with effect from 01/04/2021) supports the view that defaults before that date are to be viewed in the light of the more liberal interpretation. On these determinative grounds the addition made by the assessing officer and sustained by the Commissioner (Appeals) was held not sustainable. [Paras 5, 6]Employees' contributions to PF and ESI paid before the due date of filing the return under section 139(1) are deductible and the disallowance under section 43B / section 36(1)(va) is to be deleted.Final Conclusion: The Tribunal allowed the appeals and directed deletion of the additions: employees' contribution to PF and ESI paid before the due date for filing return under section 139(1) cannot be disallowed under section 43B / section 36(1)(va); both appeals (A.Y. 2019-20 and A.Y. 2016-17) stand allowed. Issues Involved:1. Whether the belated payment of employees' contribution towards ESI and PF is allowable as a deduction under Section 43B of the Income Tax Act, 1961.Detailed Analysis:1. Belated Payment of Employees' Contribution Towards ESI and PF:The primary issue in these appeals was whether the delayed payment of employees' contribution to ESI and PF, if made before the due date of filing the return under Section 139(1) of the Income Tax Act, 1961, is allowable as a deduction under Section 43B.Assessment and Initial Disallowance:The Assessee, a co-operative society engaged in manufacturing and selling sugar, filed its return of income on 31/10/2019 for the assessment year 2019-20. The assessment was completed on 16/09/2020, where an addition of Rs. 1,19,93,542/- was made for the delayed payment of employees' share of ESI and PF.Commissioner's Findings:The Assessee challenged this addition before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), who dismissed the appeal. The Commissioner relied on judgments from the Hon'ble Madras High Court, Hon'ble Gujarat High Court, and Hon'ble Kerala High Court, which supported the Revenue's stance that belated payment of employees' contribution is not allowable as a deduction under Section 43B. The Commissioner also referred to CBDT Circular No. 22/2015, which clarified that the provisions of Section 43B do not apply to employees' contributions to welfare funds governed by Section 36(1)(va).Assessee's Contentions:The Assessee contended that if the employees' contribution to ESI and PF is paid within the due date of filing the return under Section 139(1), it should be allowed as a deduction under Section 43B. The Assessee cited favorable judgments from the Hon'ble Karnataka High Court, Hon'ble Rajasthan High Court, and Hon'ble Punjab & Haryana High Court.Tribunal's Analysis:The Tribunal noted that there are divergent judgments from various High Courts on this issue. However, the Tribunal relied on the principle established by the Hon'ble Supreme Court in the case of CIT vs. M/s. Vegetables Products Ltd., which states that if two reasonable constructions of a taxing provision are possible, the construction that favors the Assessee should be adopted.The Tribunal also referred to its jurisdictional Co-ordinate Bench's decision in the case of DCIT vs. M/s. Eastern Power Distribution Company of A.P. Ltd., which held that if the employees' contribution is deposited before the due date of filing the return, no disallowance can be made under Section 43B.Conclusion:The Tribunal concluded that as the employees' contribution to ESI and PF for the assessment year 2019-20 was deposited before the due date of filing the return under Section 139(1), it cannot be subjected to disallowance. Consequently, the addition sustained by the Commissioner (NFAC) was deleted.Result:Both appeals under consideration (ITA Nos. 25 & 28/VIZ/2021) were allowed, and the disallowance of Rs. 1,19,93,542/- was deleted.Order Pronounced:The order was pronounced in open court on 23rd September 2021.