2023 (11) TMI 1337 - AT - Income Tax

Delayed PF/ESI contributions cannot be claimed under Section 37(1) when covered under Section 36(1)(va)

ITAT Delhi held that delayed PF/ESI contributions cannot be claimed as deduction under Section 37(1) when specifically covered under Section 36(1)(va). ... Delayed contributions towards PF & ESI - whether the due date under PF/ESI Acts should be as per the calendar month for which the salary is payable or from the month in which the salary is paid to the employee by the employer? - HELD THAT:- As decided in Sentinel Consultants Pvt. Ltd. [2023 (6) TMI 1419 - ITAT DELHI] no merit in such plea that the belated deposit of employees contributions to PF/ESIC governed u/s 36(1)(va) is also simultaneously amenable to deduction u/s 37(1) of the Act. In terms of the provision, Section 37(1) permits deduction of expenditure which is not in the nature of expenditure prescribed in Sections 30 to 36 of the Act and also not being in the nature of capital expenditure or personal expenses of the assessee. Thus, in view of such mandate of law, the deduction of expenditure under the general clause of Section 37(1) would not extend to expenditure specially covered within the ambit of Section 36(1)(va) of the Act. The Hon’ble Supreme Court in the case of Checkmate Pvt. Ltd.[2022 (10) TMI 617 - SUPREME COURT] itself explains this position. Methodology of calculation of default under the relevant PF/ESIC Act - The accrual of liability towards payment of salary without actual disbursement would not fasten obligation for deposits of employees contribution in the labour Acts per se. as observed by the co-ordinate bench in Kanoi Paper and Industries Ltd.. [2001 (5) TMI 139 - ITAT CALCUTTA-E]. This aspect has not been found to be examined by the Assessing Officer or CIT (A). Hence without expressing any opinion on merits on this aspect, we deem it expedient to restore the matter to the file of designated AO. Also see M/S. VVDN TECHNOLOGIES PVT. LTD. [2023 (7) TMI 375 - ITAT DELHI] Appeal of the assessee is allowed for statistical purpose. 1. ISSUES PRESENTED and CONSIDEREDThe judgment primarily revolves around the following legal issues:Whether the addition of Rs. 1,18,48,520/- made by the ADIT, CPC while processing the return under Section 143(1) was legally justified.Whether the jurisdiction was validly assumed by the ADIT, CPC under Section 143(1).Whether the addition related to employee's contributions to ESI and EPF was made in accordance with the principles of natural justice and relevant legal provisions.Whether the interest charged under Sections 234A, 234B, and 234C of the Income Tax Act, 1961 was appropriate.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality of Addition under Section 143(1)Relevant Legal Framework and Precedents: The processing of returns under Section 143(1) allows for adjustments, but these must be clearly communicated, and the taxpayer should be given an opportunity to respond. The Supreme Court's decision in Checkmate Pvt. Ltd. vs. CIT was referenced for guidance on employee contributions to PF/ESI.Court's Interpretation and Reasoning: The Tribunal noted that the adjustments were made after providing an opportunity for e-response, aligning with the Supreme Court's stance in Checkmate Pvt. Ltd.Key Evidence and Findings: The Tribunal found that the CIT (A) upheld the adjustments based on the Supreme Court's judgment, which supports the adjustments made under Section 143(1).Application of Law to Facts: The Tribunal applied the principles from Checkmate Pvt. Ltd., supporting the adjustments due to the absence of a timely e-response from the assessee.Treatment of Competing Arguments: The assessee's contention that such additions cannot be made under Section 143(1) was dismissed based on precedent.Conclusions: The Tribunal upheld the legality of the addition under Section 143(1), as proper procedure was followed.Issue 2: Jurisdiction under Section 143(1)Relevant Legal Framework and Precedents: Jurisdiction under Section 143(1) requires adherence to procedural norms and timely communication with the taxpayer.Court's Interpretation and Reasoning: The Tribunal found that jurisdiction was validly assumed as the procedural requirements were met, including the provision of an opportunity for e-response.Key Evidence and Findings: The Tribunal noted that the opportunity for e-response was provided, which was not utilized by the assessee.Application of Law to Facts: The Tribunal applied the procedural norms under Section 143(1) to affirm the validity of jurisdiction.Treatment of Competing Arguments: The assessee's argument regarding invalid jurisdiction was not supported by evidence of procedural lapses.Conclusions: The Tribunal concluded that jurisdiction under Section 143(1) was validly assumed.Issue 3: Addition Related to Employee Contributions to ESI and EPFRelevant Legal Framework and Precedents: The treatment of employee contributions to ESI and EPF is governed by Section 36(1)(va) and related judicial precedents, including the Supreme Court's decision in Checkmate Pvt. Ltd.Court's Interpretation and Reasoning: The Tribunal emphasized the need to determine the due date for remittance based on when the salary is disbursed, not merely accrued.Key Evidence and Findings: The Tribunal noted that the CIT (A) sustained the addition based on the Supreme Court's judgment, but also acknowledged the need to examine the due date determination.Application of Law to Facts: The Tribunal applied the principles from Checkmate Pvt. Ltd. and other cases to highlight the importance of determining the correct due date for remittance.Treatment of Competing Arguments: The Tribunal considered the assessee's argument regarding the calculation of default and remitted the issue to the AO for further examination.Conclusions: The Tribunal remitted the issue to the AO to ascertain the correct due date for remittance, allowing the assessee to present additional evidence.Issue 4: Interest Charged under Sections 234A, 234B, and 234CRelevant Legal Framework and Precedents: Interest under Sections 234A, 234B, and 234C is charged for defaults in furnishing return, advance tax, and deferment of advance tax, respectively.Court's Interpretation and Reasoning: The Tribunal did not provide detailed reasoning on this issue, as it was contingent on the resolution of the primary issues.Key Evidence and Findings: The Tribunal's decision on this issue was dependent on the outcome of the remitted issues.Application of Law to Facts: The Tribunal's application of law to this issue was deferred pending further examination by the AO.Treatment of Competing Arguments: The Tribunal did not address competing arguments on this issue directly, as it was linked to the primary issues.Conclusions: The Tribunal deferred the resolution of this issue pending further examination by the AO.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The disallowance of employees' contribution to PF/ESIC for breach of condition under Section 36(1)(va) is in controversy.'Core principles established: The determination of the due date for remittance of employee contributions should consider the month of salary disbursement, not just accrual. Jurisdiction under Section 143(1) is valid if procedural norms are followed.Final determinations on each issue: The Tribunal upheld the legality of the addition under Section 143(1) and the validity of jurisdiction. The issue of employee contributions was remitted to the AO for further examination. The resolution of interest charges under Sections 234A, 234B, and 234C was deferred.