ITAT grants appeal for ESI Act compliance, directs AO verification

The ITAT Rajkot allowed the appeal for statistical purposes, directing the matter to be sent back to the AO for verification of timely payments under the ESI Act. The appellant's arguments regarding the payment of ESI contributions within statutory time limits and a software error were considered, leading to the decision in favor of the assessee pending verification by the AO.

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Issues: Disallowance of employee's contribution under section 36(1)(va) and interpretation of recent amendments in Finance Act, 2021

Issue 1: Disallowance of employee's contribution under section 36(1)(va)

The appeal pertains to the disallowance of employee's contribution under section 36(1)(va) of the Income Tax Act, 1961. The appellant contested the disallowance, arguing that the amount was paid before the due date for filing the income tax return under section 139(1). However, the CIT(A) upheld the disallowance, emphasizing the legal distinction between employee's and employer's contributions, citing the decision of the Hon'ble Madras High Court in Unifac Management Services (India) (P.) Ltd. vs DCIT. The CIT(A) also highlighted the recent amendments in the Finance Act, 2021, clarifying that the provisions of section 43B do not apply to determine the due date for employee's contribution.

Issue 2: Interpretation of recent amendments in Finance Act, 2021

The Finance Act, 2021 introduced amendments to sections 36 and 43B of the Income Tax Act. Explanation 2 was added to section 36(1)(va), clarifying that the provisions of section 43B do not apply for determining the due date under this clause. Similarly, Explanation 5 was inserted into section 43B to specify that its provisions do not apply to sums received by the assessee from employees to which section 2(24)(x) applies. The amendments aimed to remove doubts regarding the applicability of section 43B to employee's contributions, emphasizing that such contributions made after the due date are to be added to the appellant's income.

Conclusion:

The ITAT Rajkot, comprising Shri Waseem Ahmed and Shri Siddhartha Nautiyal, considered the appellant's submissions regarding the payment of ESI contributions within statutory time limits and a software error leading to the misunderstanding. In the interest of justice, the matter was restored to the AO for verification of timely payments under the ESI Act. Consequently, the appeal of the assessee was allowed for statistical purposes, pending the AO's verification.

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