Tribunal allows deductions for employees' contributions to ESIC and EPF, citing 'Sagun Foundry' judgment

The Tribunal allowed the appeals of the assessee, deleting the disallowances of employees' contributions to ESIC and EPF for both assessment years. The Tribunal relied on the judgment in 'Sagun Foundry' and concluded that contributions made before the filing of the return should be allowed as deductions, despite the late payment. The amendment by the Finance Act, 2021, clarifying that section 43B does not apply to employees' contributions, was noted as prospective from 1.4.2021.

---

---

Issues Involved:
1. Disallowance of employees' contribution to ESIC and EPF under section 43B read with section 36(1)(va) of the Income Tax Act, due to late payment but before the filing of the income tax return.

Issue-wise Detailed Analysis:

1. Disallowance of Employees' Contribution to ESIC and EPF:

The primary issue in these appeals is the disallowance of Rs. 3,38,882/- for the Assessment Year 2018-19 and Rs. 8,19,475/- for the Assessment Year 2019-20. The disallowance was made under section 43B read with section 36(1)(va) of the Income Tax Act due to the late payment of employees' contributions to ESIC and EPF, although the payments were made before the filing of the income tax return. The assessee contended that these contributions should be allowed as deductions since they were made before the filing of the return.

Arguments by the Assessee:

The assessee's counsel argued that the issue is covered in favor of the assessee by the judgment of the Hon'ble Jurisdictional High Court in 'Sagun Foundry (P.) Ltd. vs. CIT', which relied on the Supreme Court's decision in 'CIT vs. Alom Extrusions Ltd.'. The counsel emphasized that contributions made before the filing of the income tax return should be allowed as deductions.

Arguments by the Revenue:

The Revenue's representative argued that the CIT(A) correctly sustained the disallowance, relying on various case laws. The representative also referred to an amendment by the Finance Act, 2021, which they claimed was clarificatory or curative and had retrospective effect, thus justifying the disallowance.

Tribunal's Findings:

The Tribunal reviewed the material on record and noted that there was no dispute regarding the dates of deposit, which were beyond the prescribed date but before the filing of the return. The Tribunal referred to the Allahabad High Court's judgment in 'Sagun Foundry (P.) Ltd. vs. CIT', which had addressed a similar issue and decided in favor of the assessee. The High Court had considered various judgments from different High Courts and the Supreme Court, concluding that contributions made before the filing of the return should be allowed.

Amendment by Finance Act, 2021:

The Tribunal acknowledged the amendment to section 36(1)(va) by the Finance Act, 2021, which clarified that section 43B does not apply to employees' contributions. However, the Tribunal noted that this amendment is prospective, effective from 1.4.2021, and not retrospective. The Allahabad Bench of the Tribunal, in 'JCIT, Circle-2, Allahabad vs. Bharat Pumps and Compressors Ltd.', had also held that the amendment applies from April 2021 only.

Conclusion:

The Tribunal concluded that the issue should be decided in favor of the assessee, following the judgment in 'Sagun Foundry'. Consequently, the disallowance of employees' contributions to ESIC and EPF was deleted for both assessment years.

Order:

The appeals of the assessee were allowed, and the disallowances made by the CIT(A) were deleted. The order was pronounced in the open court on 27/04/2022.

---