Amendment to Section 36(1)(va) is Prospective: ITAT Allows Deductions for Pre-Amendment Contributions

The ITAT held that the amendment introduced by the Finance Act, 2021, regarding section 36(1)(va) is prospective. Contributions made before the due date of filing the return of income should be allowed as deductions. The ITAT allowed the assessee's appeals, overturning the disallowances imposed by the AO and upheld by the CIT(A) for the relevant assessment years (2017-18 and 2019-20).

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Issues Involved:
1. Sustaining the addition made under section 2(24)(x) read with section 36(1)(va) of the IT Act for late deposit of employees' contribution to PF and ESI.
2. Determining whether the explanation to section 36(1)(va) introduced by Finance Act, 2021 is prospective or retrospective in nature.

Detailed Analysis:

Issue 1: Sustaining the Addition for Late Deposit of Employees' Contribution to PF and ESI

The assessee, a Private Limited Company, faced disallowance of Rs. 10,26,853/- by the AO under section 2(24)(x) read with Section 36(1)(va) of the IT Act for late deposit of employees' PF and ESI contributions. The AO made these additions during the assessment proceedings.

The assessee appealed against this order, presenting detailed payment records showing that the contributions were deposited before the due date of filing the return of income under section 139(1) of the IT Act. Despite this, the CIT(A) upheld the AO's decision, citing various High Court decisions that emphasized the necessity of depositing employees' contributions within the due date specified under relevant statutes.

Issue 2: Prospective or Retrospective Nature of Explanation to Section 36(1)(va)

The CIT(A) held that the explanation introduced by the Finance Act, 2021 to section 36(1)(va) was prospective. The CIT(A) relied on High Court decisions which stated that belated payments of employees' contributions are not allowable as deductions under section 43B if not deposited within the statutory due dates.

During the hearing, the assessee's representative argued that the CIT(A)'s decision was erroneous and cited various ITAT judgments, including those from the Jaipur Bench, which had deleted similar additions on the grounds that contributions paid before the due date of filing returns should be allowed.

The ITAT noted that the issue was covered by the decision of the Coordinate Bench in M/s Mohanlal Khatri vs. ACIT, where it was held that contributions deposited before the due date of filing the return of income under section 139(1) are allowable. The ITAT also referenced decisions from other benches and High Courts, including the Hon'ble Calcutta High Court in Vijayshree Ltd., which supported the view that such contributions are deductible if paid before the return filing due date.

Conclusion:

The ITAT concluded that the amendment brought by the Finance Act, 2021, which clarified that section 43B does not apply to employees' contributions under section 36(1)(va), is prospective and not retrospective. Therefore, for the assessment years under consideration (2017-18 and 2019-20), the contributions made before the due date of filing the return of income should be allowed as deductions. Consequently, the ITAT allowed the appeals of the assessee, deleting the disallowances made by the AO and sustained by the CIT(A).

Order:

Both appeals of the assessee were allowed, and the order was pronounced in the open court on 25/04/2022.

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