Tribunal Allows Appeal on PF/ESI Disallowance - Precedents Upheld

The Tribunal allowed the appeals filed by the assessee, directing the deletion of the disallowance sustained by the CIT (A). The issue revolved around the disallowance of payment of employees' contribution towards Provident Fund (PF) and Employee State Insurance (ESI) under specific sections of the Income-tax Act, 1961. The Tribunal relied on binding judicial precedents and held that no disallowance can be made if the payment of employees' contribution to PF/ESI is made before the due date of filing the return of income. The decision was pronounced on April 5, 2022.

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Issues Involved:
1. Disallowance of payment of employees' contribution towards Provident Fund (PF) and Employee State Insurance (ESI) under section 36(1)(va) read with section 43B of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance of Payment of Employees' Contribution towards PF and ESI:

In these appeals, the assessee challenged the disallowance of payment of employees' contribution towards PF and ESI under section 36(1)(va) read with section 43B of the Income-tax Act, 1961. The Centralized Processing Center (CPC) had made a disallowance by enhancing the total income by Rs. 7,71,709/- and Rs. 2,31,519/- for Assessment Years (AYs) 2018-19 and 2019-20, respectively. This disallowance was upheld by the National Faceless Appeal Centre (NFAC), which referred to various judgments supporting the proposition that the amendment brought by the Finance Act, 2021, effective from 01.04.2021, was retrospective and clarificatory.

However, this issue has been covered by a series of decisions from various High Courts, including the Delhi High Court, which held that if the payment of employees' contribution to PF/ESI is made before the due date of filing the return of income, then no disallowance can be made. This was affirmed by the Tribunal in the case of Flying Fabrication vs. DCIT, where it was observed that disallowance merely by issuing an intimation cannot be made as it becomes a debatable issue. The intimation order was passed before the amendment in Section 36(1)(va) brought by the Finance Act, 2021, which was applicable from 1st April 2021.

The Tribunal noted that the assessee's claim was based on binding judicial precedents, such as the judgment of the Delhi High Court in CIT vs. AIMIL Ltd., which followed the Supreme Court's decision in Vinay Cement. The Delhi High Court in CIT v. Dharmendra Sharma and CIT v. P.M. Electronics Ltd. also supported this view, holding that amounts paid on account of PF/ESI after the due date are allowable if paid before the filing of the return of income under Section 139(1).

The Tribunal further referenced the judgment of the Supreme Court in Vinay Cement, where it was observed that the employer can get the benefit if the actual payment is made before the return is filed. The deletion of the second proviso to Section 43B by the Finance Act, 2003, was treated as retrospective, and the first proviso was applicable.

In the latest judgment of the coordinate Bench of the Tribunal in Raj Kumar vs. ITD, CPC, Bengaluru, it was held that the amendment regarding the due date of deposit of employees' contribution to PF/ESI is prospective, i.e., applicable from AY 2021-22 onwards. Therefore, no disallowance is called for if the payment is made before the due date of filing the Income-tax return for periods prior to AY 2021-22.

Conclusion:

The Tribunal directed that the disallowance sustained by the CIT (A) be deleted, and the appeals filed by the assessee were allowed. The order was pronounced on the 5th day of April, 2022.

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