2022 (2) TMI 763 - AT - Income Tax

Appellate tribunal grants deductions for timely payments, distinguishes between employee and employer contributions

Shri Devarayapatana Thimmappa Paramesha Versus The Deputy Commissioner of Income Tax, Central Processing Centre, Bengaluru

The appellate tribunal allowed the appeal of the assessee, emphasizing the applicability of deductions based on timely payments and the legal distinction ... Late remittance of employees’ contribution to PF and ESI - As submitted assessee had paid the employees’ contribution prior to the due date of filing of the return u/s 139(1) - Scope of amendment to section 36(1)(va) and 43B - HELD THAT:- As following the dictum laid down in the case of Essae Teraoka Pvt. Ltd Vs. DCIT [2018 (2) TMI 115 - SUPREME COURT] held that the assessee would be entitled to deduction of employees’ contribution to PF and ESI provided that the payments were made prior to the due date of filing of the return of income u/s 139(1) - Also further held by the ITAT that amendment by Finance Act, 2021, to section 36[1][va] and 43B of the Act is not clarificatory. Therefore, the amended provisions of section 43B as well as 36(1)(va) of the I.T.Act are not applicable for the assessment years under consideration. By following the binding decision of the Hon’ble jurisdictional High Court in the case of Essae Teraoka Pvt. Ltd Vs. DCIT (supra), the employees’ contribution paid by the assessee before the due date of filing of return of income u/s 139(1) of the I.T.Act is an allowable deduction - Decided in favour of assessee. 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 ESIThe 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, 2021The 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 contributionThe 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 retrospectivelyThe 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 pronouncementsThe 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.