2022 (4) TMI 721 - AT - Income Tax

Tribunal allows employee contributions to ESI/PF as deductions under Income Tax Act

The appeals challenged the disallowance of employee contributions to ESI/PF and Education Cess under the Income Tax Act. The Tribunal ruled in favor of ... Delayed deposit of employee shares of ESI/PF - assessee is not entitled to claim deduction u/s. 36(1)(va) - HELD THAT:- It is an undisputed fact that the assessee in the instant cases has deposited the employee’s contribution to PF & ESI before the due date of filing of return, although the same has been paid after the dates specified in the relevant Act. If the assessee has deposited the employees’ share of contribution to PF & ESI before the due date of filing of return u/s.139(1) then no disallowance u/s. 36(1)(va) can be made. It has further been held that the amendment to the provisions of section 43B and 36(1)(va) of the Act by the Finance Act, 2021 has to be construed as prospective and applicable for the period after 01.04.2021. It is held that this provision imposes a liability on the assessee and therefore, cannot be construed as applicable with retrospective effect since the legislature has not specifically said so. Since the assessee in the instant case has admittedly deposited the employee’s contribution to PF & ESI before the due date of filing of return of income, therefore, we are of the considered opinion that the ld. CIT(A) is not justified in sustaining the disallowance made by the CPC. We, therefore, direct the Assessing Officer to delete the disallowances in the hands of the assessee. - Decided in favour of assessee. Issues:Disallowance of employee contribution to ESI/PF under section 36(1)(va) for delayed deposit, disallowance of Education Cess and Secondary and Higher Education Cess under section 40(a)(ii).Issue 1: Disallowance of employee contribution to ESI/PF under section 36(1)(va) for delayed depositThe appeals by the assessee challenged the orders passed by the CIT(A) for the assessment years 2018-19 and 2019-20 regarding the disallowance of employee contributions to ESI/PF under section 36(1)(va) due to delayed deposits. The main contention was that the assessee had paid the contributions before the due date of filing the return under section 139(1) of the Income Tax Act. The CIT(A) upheld the disallowance, stating that the deductions were not allowable since the payments were made after the specified dates. The assessee argued that the payments were made before the due date of filing the return, relying on various decisions supporting their claim.Issue 2: Disallowance of Education Cess and Secondary and Higher Education Cess under section 40(a)(ii)The additional ground raised by the assessee questioned the disallowance of Education Cess and Secondary and Higher Education Cess amounting to a specific sum under section 40(a)(ii) of the Income-tax Act, 1961. The assessee sought clarification on whether these expenses were disallowable. The Tribunal considered the arguments presented by both parties and examined the records. The assessee's representative contended that the payments were made before the due date of filing the return, while the Senior DR argued against interference with the CIT(A)'s orders.The Tribunal analyzed the precedents, including the decisions in Sagun Foundry (P) Ltd. vs. CIT and CIT vs. AIMIL LIMITED, to determine the applicability of section 36(1)(va) in cases where the employee contributions to ESI/PF were deposited before the due date of filing the return. The Tribunal concluded that if the employee's share of contribution was paid before the due date of filing the return, no disallowance under section 36(1)(va) could be made. It was emphasized that the amendment by the Finance Act, 2021 should be construed prospectively, applicable after 01.04.2021. As the assessee had deposited the contributions before the due date, the Tribunal directed the Assessing Officer to delete the disallowances. Consequently, the appeals filed by the assessee were allowed, overturning the CIT(A)'s decision.This comprehensive analysis of the judgment highlights the key legal issues, arguments presented by both parties, relevant case law, and the Tribunal's final decision on the matters at hand.