2022 (6) TMI 290 - AT - Income Tax

High Court rules timely EPF/ESI payments deductible, Finance Act 2021 prospective

The Karnataka High Court allowed the appeal of the assessee in a case concerning the interpretation of Section 36(1)(va) and Section 43B of the Income Tax ... Deductibility of employees' contribution under section 36(1)(va) - application of section 43B to employees' contribution - due date for payment vis-a -vis due date for furnishing return under section 139(1) - retrospective operation of Finance Act, 2021 amendmentsDeductibility of employees' contribution under section 36(1)(va) - application of section 43B to employees' contribution - due date for payment vis-a -vis due date for furnishing return under section 139(1) - Employees' share of contribution to EPF/ESI paid on or before the due date for furnishing the return under section 139(1) is allowable as deduction and the addition made under section 36(1)(va) is to be deleted. - HELD THAT: - The Tribunal considered the legal distinction between employees' and employer's contributions but noted that the Karnataka High Court in Essae Teraoka Pvt. Ltd. has held that employees' contribution under section 36(1)(va) would be covered by section 43B and that payment on or before the due date for furnishing the return under section 139(1) entitles the assessee to claim deduction. In the present case there is no dispute that the employees' share of PF/ESI was paid on or before the due date for filing the return for the relevant year. Applying the view of the High Court and the authorities dealing with identical issues, the Tribunal held that the impugned addition under section 36(1)(va) cannot be sustained and therefore deleted the addition.Addition under section 36(1)(va) deleted; deduction allowed as employees' contribution was paid on or before the due date for filing return.Retrospective operation of Finance Act, 2021 amendments - application of section 43B to employees' contribution - Amendments made by the Finance Act, 2021 to section 36(1)(va) and section 43B are declaratory/clarificatory in form but are applicable prospectively from 01.04.2021 and do not apply to periods prior to that date. - HELD THAT: - The Tribunal examined the explanatory memorandum to the Finance Act, 2021 and concluded that the amendments, which clarify the relation between section 36(1)(va) and section 43B, operate from 01.04.2021. Since the provisions impose liability and the legislature has not expressly made them retrospective, they cannot be applied to earlier assessment years by necessary implication. Consequently, the amendment cannot be invoked to sustain the addition for Assessment Year 2019-20.Finance Act, 2021 amendments held prospective from 01.04.2021 and not applicable to the assessment year in issue.Final Conclusion: The assessee's appeals are allowed; the addition under section 36(1)(va) for Assessment Year 2019-20 is deleted because the employees' contribution was paid on or before the due date for filing the return and the Finance Act, 2021 amendments operate prospectively from 01.04.2021. Revenue permitted to seek rectification if a contrary view is taken by the Supreme Court, subject to statutory limitations. Issues:1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act.2. Applicability of newly inserted explanations under the Finance Act, 2021.3. Whether the amendments are retrospective or prospective.Analysis:Issue 1: Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act:The case involved appeals by an individual assessee against orders related to the Assessment Year 2019-20. The Centralized Processing Centre added a sum representing employees' share of contribution to EPF/ESI not paid before the due date under Sec 36(1)(va) of the Income Tax Act. The assessee argued that the contribution was paid before the due date for filing the return under Sec 139(1) and relied on various judicial decisions to support their claim.Issue 2: Applicability of newly inserted explanations under the Finance Act, 2021:The CIT(A) referred to the amendments made by the Finance Act, 2021 to Section 36(1)(va) and Section 43B. The amendments clarified that the provisions of Section 43B shall not apply for determining the 'due date' under Section 36(1)(va). The CIT(A) noted the distinction between employees' and employer's contributions under the Act, emphasizing that failure to pay employees' contribution before the due date negates the employer's deduction permanently, while delay in employer's contribution leads to deferment of deduction under Section 43B.Issue 3: Whether the amendments are retrospective or prospective:The CIT(A) held that the amendments by the Finance Act, 2021 were declaratory/clarificatory in nature and applied retrospectively. However, the Tribunal disagreed, citing that the amendments were applicable only prospectively from 01.04.2021 based on the explanatory memorandum to the Finance Act. The Tribunal also referred to previous decisions on similar issues, where it was held that the amendments were prospective. Consequently, the additions made under Section 36(1)(va) were deemed to be deleted.Conclusion:The Hon'ble Karnataka High Court's decision supported the assessee's claim that if the employee's contribution is made before the due date for filing the return, the deduction can be claimed. However, the Tribunal found that the amendments under the Finance Act, 2021 were prospective and not retrospective. Therefore, the appeal of the assessee was allowed, and the additions made under Section 36(1)(va) were deleted.