PF and ESI employee contributions allowed as deduction when paid before return due date, sections 36(1)(va), 43B

ITAT Bangalore allowed the assessee's claim for deduction of employees' contributions to PF and ESI that were remitted after the statutory due dates under the respective welfare laws but before the due date for filing the return under s.139(1) of the Act. Relying on the binding precedent of the jurisdictional HC, the Tribunal held that such payments are deductible under ss.36(1)(va) and 43B. It further held that the Finance Act 2021 amendments to ss.36(1)(va) and 43B are prospective and not applicable to the assessment years in question.

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Issues:
1. Allowability of employees' share of contribution to ESI as per Section 36(1)(va) of the Income Tax Act.
2. Interpretation of amendments made to Section 36(1)(va) and 43B by the Finance Act, 2021.
3. Distinction between employees' and employer's contribution under the Act.
4. Applicability of amendments retrospectively.
5. Comparison of judicial pronouncements on the issue.

Issue 1: Allowability of employees' share of contribution to ESI

The assessee appealed against an order adding employees' share of ESI to their income. The assessee argued that the ESI was paid before the due date for filing the return under Sec 139(1) of the Act, citing relevant court decisions supporting this claim. The CIT(A) referred to the amendment by the Finance Act, 2021, inserting Explanation-2 to Section 36(1)(va) clarifying the non-application of Section 43B for determining the "due date." The CIT(A) highlighted the distinction between employees' and employer's contributions, emphasizing the different parameters and consequences for non-payment. The CIT(A) upheld the addition made by the AO, considering the amendments declaratory/clarificatory and applicable retrospectively.

Issue 2: Interpretation of amendments by the Finance Act, 2021

The amendments to Section 36(1)(va) and 43B by the Finance Act, 2021, were analyzed by the CIT(A) to determine their effect on the due dates and applicability of deductions. The CIT(A) concluded that the amendments were clarificatory in nature and applied retrospectively. The CIT(A) highlighted the impact on deductions based on actual payments and the distinction between employees' and employer's contributions under the Act.

Issue 3: Distinction between employees' and employer's contribution

The CIT(A) emphasized the legal distinction between employees' and employer's contributions under the Act, noting the different due dates and consequences for non-payment. Judicial pronouncements recognized this distinction, supporting the CIT(A)'s decision. The CIT(A) referred to relevant cases acknowledging the separate treatment of employees' and employer's contributions, reinforcing the importance of timely payments for deductions.

Issue 4: Applicability of amendments retrospectively

The CIT(A) considered the retrospective application of the amendments introduced by the Finance Act, 2021, regarding Sections 36(1)(va) and 43B. While the CIT(A) deemed the amendments applicable retrospectively, the tribunal in previous decisions held that the amendments were prospective from 01.04.2021. The CIT(A) upheld the addition made by the AO based on the retrospective application of the amendments.

Issue 5: Comparison of judicial pronouncements

The CIT(A) compared various judicial pronouncements on the issue, including decisions by different tribunals and high courts. The CIT(A) highlighted the decision of the Hon'ble Karnataka High Court supporting the assessee's claim regarding the employees' share of contribution. The CIT(A) also referred to tribunal decisions regarding the prospective application of the amendments by the Finance Act, 2021. The CIT(A) upheld the addition made by the AO, considering the judicial precedents and the retrospective application of the amendments.

In conclusion, the appellate tribunal allowed the appeal of the assessee, emphasizing the applicability of deductions based on timely payments and the legal distinction between employees' and employer's contributions under the Income Tax Act. The decision considered the retrospective application of the amendments introduced by the Finance Act, 2021, and compared various judicial pronouncements to support the final ruling in favor of the assessee.

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