ITAT allows employee contribution deductions when payments made before return filing deadline under Section 143(1)

ITAT Mumbai allowed the assessee's appeal regarding disallowance of employees' contributions to provident fund, ESIC and welfare funds under Section 143(1). The tribunal held that since payments were made before the due date of filing income tax returns under Section 139(1), no disallowance was warranted. Following the precedent in Kalpesh Synthetics Pvt. Ltd., the tribunal ruled that the due date under Section 36(1)(va) explanation is not decisive for determining disallowance when computing total income. The adjustment made during return processing was deemed vitiated in law and deleted.

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Issues Involved:

1. Disallowance of employees' contribution to provident fund, ESIC, and other welfare funds.
2. Applicability of the amendment to Section 36(1)(va) of the Income Tax Act for Assessment Year 2019-20.

Issue-wise Detailed Analysis:

1. Disallowance of Employees' Contribution to Provident Fund, ESIC, and Other Welfare Funds:

The appellant challenged the disallowance of Rs. 21,54,180/- related to employees' contributions to provident fund, ESIC, and other welfare funds. The disallowance was confirmed by the Centralized Processing Centre (CPC) and the CIT(A), despite the contributions being credited before the due date of filing the income tax return.

The Tribunal referred to a co-ordinate bench decision in the case of Kalpesh Synthetics Pvt. Ltd. The issue was whether the delay in depositing provident fund dues, as reported in the tax audit report, could justify a disallowance under Section 143(1). The Tribunal noted that the tax auditor's report indicated delays, but the appellant argued that payments made before the due date of filing the return should be deductible, as held by the jurisdictional High Court.

The Tribunal emphasized that the scope of prima facie disallowance under Section 143(1) is limited to claims that are conclusively inadmissible based on the material on record. The Tribunal found that the appellant's claim, supported by judicial precedents, could not be considered prima facie inadmissible.

The Tribunal also addressed the argument that the tax auditor's report should not bind the assessee, as the auditor is an independent professional. The Tribunal held that the auditor's observations are not sufficient justification for disallowance, especially when contrary to judicial precedents.

2. Applicability of the Amendment to Section 36(1)(va) for Assessment Year 2019-20:

The appellant argued that the amendment to Section 36(1)(va) by the Finance Bill 2021 is prospective and should not apply to the assessment year 2019-20. The Tribunal agreed, noting that judicial precedents have held that payments made before the due date of filing the return are deductible, even if made beyond the statutory due date.

The Tribunal rejected the Departmental Representative's argument that the amendment clarifies that Section 43B does not apply to employees' contributions. The Tribunal held that the amendment's prospective nature means it does not affect periods before 1st April 2021.

Conclusion:

The Tribunal concluded that the impugned adjustment under Section 143(1) is vitiated in law and deleted the disallowance of Rs. 21,54,180/-. The Tribunal emphasized the need for a speaking order when disposing of objections to proposed adjustments and held that the tax auditor's report alone cannot justify disallowance contrary to judicial precedents. The appeal was allowed, and the adjustment was deleted.

Pronouncement:

The judgment was pronounced in the open court on 3rd August 2022.

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