2023 (4) TMI 797 - AT - Income Tax

Appellate Tribunal upholds disallowance of late Provident Fund & ESI contributions despite timely filing.

Sri Chandrakant Shamappa Kontha Versus Deputy Commissioner of Income-tax CPC Bangalore

The Appellate Tribunal dismissed both appeals by the assessee, upholding the disallowance of employees' contribution for Provident Fund and ESI made after ... Employees’ contribution for the Provident Fund and ESI, which was made after due date of respective Act and paid within due date of filing return u/s 139(1) - HELD THAT:- This issue came for consideration before Hon’ble Supreme Court in the case of CHECKMATE SERVICES PVT LTD [2022 (10) TMI 617 - SUPREME COURT]decided the issue on allowability/treatment of ‘delayed’ Employee PF Contribution payment in hands of assessee under provisions of Income Tax Act and held that Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee's contribution is linked to payment before the due dates specified in the respective Acts and employer's contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of Income Tax Act, 1961. The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee's contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer's claim for deduction permanently forever u/s.36(1)(va). On the other hand, delay in payment of employer's contribution is visited with deferment of deduction on payment basis u/s.43B and is therefore not lost totally. Therefore, as per the above decision, the disallowance made by the Revenue authorities, were fully justified. Decided against assessee. Adjustment u/s 143(1) - Since the issue is already disposed of by the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. cited (supra), it has to be followed by the department as well as by this Tribunal. We find no merit in the argument of the assessee’s counsel that disallowance of employees’ contribution to ESI/PF deposited by the assessee after the specified date prescribed under the respective Act was beyond the scope of adjustment u/s 143(1) of the Act - Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether employees' contributions to Provident Fund and ESI paid after the due date prescribed under the respective statutes but paid before the due date for filing return under section 139(1) are allowable as business deduction under section 36(1)(va) of the Income-tax Act. 2. Whether adjustment or disallowance of such delayed employees' contributions can be made in proceedings under section 143(1) (processing of return) or in rectification proceedings under section 154. 3. Whether a coordinate bench decision holding that such adjustments are beyond the scope of section 143(1) remains binding where there is a contrary ratio laid down by the Supreme Court. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework Section 36(1)(va) disallows deduction in respect of employees' contribution to provident fund/ESI unless the contribution is paid before the due date prescribed under the respective statutes; section 43B(b) governs employer's contribution and links deductibility to payment before the due date for filing return under section 139(1). The differential temporal parameters in sections 36(1)(va) and 43B(b) are central. Issue 1 - Precedent Treatment The Supreme Court has directly considered the allowability/treatment of delayed employees' PF contribution and held that section 36(1)(va) and section 43B(b) operate on distinct principles with separate due dates and consequences for non-payment. Issue 1 - Interpretation and reasoning The Court (Tribunal) applies the Supreme Court's ratio that employees' contribution must be paid by the due date specified under the relevant statutory scheme to preserve deduction under section 36(1)(va). Payment made after the statutory due date cannot be regularized merely by paying before the return filing due date; such delay results in permanent negation of deduction under section 36(1)(va), unlike employer's contribution which is deferred under section 43B. Issue 1 - Ratio vs. Obiter The holding that employees' contributions paid after the statutory due date are not allowable is applied as ratio; the distinction drawn between sections 36(1)(va) and 43B(b) is treated as binding ratio from the Supreme Court precedent. Issue 1 - Conclusion The Tribunal upholds disallowance of employees' PF/ESI contributions paid after the statutory due date despite payment before section 139(1) return due date; deduction under section 36(1)(va) is permanently lost in such circumstances. Issue 2 - Legal framework Assessment adjustments may be made during processing under section 143(1) and by rectification under section 154, subject to jurisdictional and substantive limitations; whether section 143(1) processing can disallow employees' contributions depends on substantive law governing deductibility. Issue 2 - Precedent Treatment A coordinate tribunal decision held that adjustment for delayed employees' contribution was beyond the scope of section 143(1); however, that decision did not consider or distinguish the Supreme Court's controlling ratio. Issue 2 - Interpretation and reasoning The Tribunal reasons that the substantive law (section 36(1)(va) as interpreted by the Supreme Court) permits disallowance where employees' contributions were not paid by the statutory due date; such disallowance can be reflected in processing or rectification as appropriate because it is based on the settled legal test for deductibility, not a procedural impropriety. Issue 2 - Ratio vs. Obiter The Tribunal treats the question whether section 143(1) processing can give effect to the statutory disallowance as determined by the substantive rule in the Supreme Court decision; the coordinate-bench view excluding such adjustments from 143(1) is distinguished as obiter or non-decisive where it failed to address higher-court precedent. Issue 2 - Conclusion The Tribunal finds no jurisdictional defect in confirming disallowance effected through rectification or processing when the disallowance is compelled by section 36(1)(va) as interpreted by the Supreme Court; thus the additional ground contending that adjustment under section 143(1) was beyond scope is dismissed. Issue 3 - Effect of conflicting tribunal decisions The Tribunal recognizes that a coordinate-bench decision holding such adjustments outside section 143(1) was relied on by the assessee, but finds that decision did not consider or reconcile the Supreme Court's ruling. A tribunal decision failing to discuss and apply binding Supreme Court precedent lacks ratio decidendi on that point and cannot override the Supreme Court's authoritative interpretation. Issue 3 - Interpretation and reasoning The Tribunal holds that in presence of a binding Supreme Court decision on the legal test for allowability of delayed employees' contributions, earlier tribunal orders inconsistent with that ratio are not persuasive and must yield; therefore additional grounds based on the coordinate-bench decision are not tenable. Issue 3 - Conclusion The Tribunal dismisses the reliance on the contrary coordinate-bench decision and applies the Supreme Court's ratio as binding, confirming the disallowance and rejecting the additional grounds seeking to invoke the coordinate-bench view. Overall Disposition All main and additional grounds challenging disallowance of employees' PF/ESI contributions paid after statutory due dates are dismissed; the Tribunal affirms the disallowance in accordance with the Supreme Court's authoritative interpretation distinguishing sections 36(1)(va) and 43B(b) and their respective consequences for delayed payment.