2022 (6) TMI 330 - AT - Income Tax

ITAT rules on finance act amendments: Contributions before filing return are valid.

The ITAT allowed the appeal of the assessee, holding that the amendments brought by the Finance Act, 2021, to Section 36(1)(va) and Section 43B are ... Deductibility of employee contribution to PF/ESI under clause (va) of section 36(1) read with section 2(24)(x) - application of section 43B to employee contributions - effect of clarificatory/amending provisions and prospectivity of Finance Act, 2021 - processing adjustment under section 143(1)(a)(ii) based on information in the returnDeductibility of employee contribution to PF/ESI under clause (va) of section 36(1) read with section 2(24)(x) - application of section 43B to employee contributions - processing adjustment under section 143(1)(a)(ii) based on information in the return - Deletion of additions made by CPC/Assessing Officer for delayed remittance of employees' PF and ESI contributions which were deposited after the statutory due date but before filing the return for AY 2018-19. - HELD THAT: - The Tribunal found on the admitted facts that the assessee had deposited employees' contributions to PF and ESI before filing the return under section 139(1) though after the statutory due dates under the respective labour enactments. Having considered binding decisions of the jurisdictional High Court and consistent coordinate bench precedents, the Tribunal held that such deposits made before filing the return cannot be disallowed under section 43B read with section 36(1)(va). The Tribunal noted that the processing adjustment under section 143(1)(a)(ii) may be triggered by information in the return, but on merits where deposits were made prior to filing the return the addition is not sustainable. Following earlier orders of this Bench and other Tribunals which applied the ratio of the Rajasthan High Court, the impugned additions on account of employees' contribution paid prior to filing the return were deleted. [Paras 11]Addition disallowing employees' PF/ESI contributions (paid after statutory due date but before filing the return) is deleted.Effect of clarificatory/amending provisions and prospectivity of Finance Act, 2021 - application of section 43B to employee contributions - Whether the amendments introduced by Finance Act, 2021 (Explanation 2 to section 36(1)(va) and Explanation 5 to section 43B) operate retrospectively so as to affect the assessment year 2018-19. - HELD THAT: - The Tribunal examined the legislative memorandum, the text of the Finance Act, 2021 and binding principles of statutory interpretation. While recognising that the amendments clarify that section 43B shall not apply to sums received from employees, the Tribunal concluded that those amendments are prospective in operation and intended to take effect from 1 April 2021, applying to assessment year 2021-22 and subsequent years. Relying on Supreme Court authority on prospectivity and on the legislative history and explanatory memorandum, the Tribunal held that the Finance Act, 2021 clarificatory provisions do not apply to the assessment year under consideration and therefore cannot be invoked to deny deduction for earlier years. [Paras 20]Amendments by Finance Act, 2021 are prospective and do not apply to AY 2018-19.Final Conclusion: Appeal allowed: additions made for delayed remittance of employees' PF and ESI contributions (paid before filing return) set aside; Finance Act, 2021 amendments held prospective and not applicable to assessment year 2018-19. Issues Involved:1. Addition of Rs. 2,47,833/- for delay in remittance of employees' provident fund contributions.2. Addition of Rs. 21,067/- for delay in remittance of employees' ESI contributions.Issue-wise Detailed Analysis:1. Addition of Rs. 2,47,833/- for delay in remittance of employees' provident fund contributions:The assessee filed its income tax return for the assessment year 2018-19, declaring a total income of Rs. 5,32,317/-. The return was processed under Section 143(1) of the IT Act, 1961, resulting in a disallowance of Rs. 2,47,833/- due to the delayed remittance of employees' provident fund contributions. The assessee contended that these contributions were paid before the due date of filing the return of income, citing various judgments from the Rajasthan High Court, including 'Rajasthan Renewable Energy Corp. Ltd.' and 'State Bank of Bikaner and Jaipur,' which held that contributions paid before the filing of the return should not be disallowed under Section 36(1)(va) or Section 43B of the IT Act.The CIT(A) upheld the disallowance, stating that the adjustment made by the AO fell under Section 143(1)(a)(ii) of the Act, as the assessee's return itself showed the delay in payments. The CIT(A) noted that the amendment brought by the Finance Act, 2021, clarified that Section 43B does not apply to employees' contributions and is deemed never to have applied, thus supporting the disallowance.However, the ITAT observed that the payments were made before the due date of filing the return under Section 139(1) and referred to several ITAT decisions, including 'Dhabriya Polywood Ltd. vs. ADIT,' which held that the amendment by the Finance Act, 2021, is prospective and not retrospective. Therefore, the amended provisions of Section 43B read with Section 36(1)(va) do not apply to the assessment year 2018-19. The ITAT concluded that the addition of Rs. 2,47,833/- should be deleted.2. Addition of Rs. 21,067/- for delay in remittance of employees' ESI contributions:Similar to the provident fund contributions, the assessee faced a disallowance of Rs. 21,067/- for delayed remittance of employees' ESI contributions. The CIT(A) upheld this disallowance based on the same reasoning applied to the provident fund contributions, citing the amendment brought by the Finance Act, 2021.The ITAT, however, reiterated its stance that the amendment is prospective and not applicable to the assessment year 2018-19. The ITAT referred to multiple decisions, including 'Mohanlal Khatri vs. ACIT,' which supported the view that contributions paid before the due date of filing the return under Section 139(1) should not be disallowed. Consequently, the ITAT directed the deletion of the addition of Rs. 21,067/-.Conclusion:The ITAT allowed the appeal of the assessee, holding that the amendments brought by the Finance Act, 2021, to Section 36(1)(va) and Section 43B are prospective and not applicable to the assessment year 2018-19. Therefore, the disallowances of Rs. 2,47,833/- for provident fund contributions and Rs. 21,067/- for ESI contributions were deleted. The judgment emphasized that contributions paid before the due date of filing the return under Section 139(1) should not be disallowed.