2023 (9) TMI 1649 - AT - Income Tax

Court Rules Late PF, ESI Contributions Not Deductible; Remands for Further Verification u/s 36(1)(va.

Bercos Melody House Versus DCIT Circle 52 (1), New Delhi

The court addressed whether contributions to PF and ESI made by the assessee after the due date could be considered timely under Section 36(1)(va) of the ... Disallowing PF & ESI contributions u/s 36(1)(va) - HELD THAT:- Identical issue came up before the coordinate bench in the case of Rekha [2023 (8) TMI 1605 - ITAT DELHI] wherein sustained the adjustments towards belated deposits of employees’ contribution to PF/ESIC in the light of the judgment rendered in Checkmate Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT] - The contention of the Assessee that such additions cannot be made under the umbrella of S. 143(1) is covered against the assessee the decision of the co-ordinate bench in the case of Weather Comfort Engineers Private Limited. [2023 (2) TMI 1332 - ITAT DELHI] 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 AO 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. It shall be open to the assessee to place factual matrix before the AO and take such plea for evaluation of the AO. Appeals of the assessee are allowed for statistical purpose. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the contributions towards Provident Fund (PF) and Employees' State Insurance (ESI) made by the assessee for the months of April, May, and July 2017 (for AY 2018-19) and similar months for AY 2019-20, which were paid in subsequent months, should be considered as made within the due date according to Section 36(1)(va) of the Income Tax Act.Whether the assessee can claim a deduction under the general provisions of Section 37 of the Income Tax Act for the belated deposit of employees' contributions to PF/ESI.What is the relevant date for determining the due date for deposit of PF/ESI contributions: the month of salary accrual or the month of actual disbursementRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Due Date for PF & ESI ContributionsRelevant Legal Framework and Precedents: The issue revolves around Section 36(1)(va) of the Income Tax Act, which mandates the timely deposit of employees' contributions to PF/ESI. The precedent set by the Supreme Court in Checkmate Pvt. Ltd. vs. CIT was also considered, which upheld the necessity of adherence to specified timelines.Court's Interpretation and Reasoning: The court considered the argument that the due date should be reckoned from the month of salary disbursement. However, it emphasized the necessity of compliance with the existing legal framework and precedents.Key Evidence and Findings: The court noted the absence of e-response from the assessee when given the opportunity for adjustments, leading to the CPC's action in enhancing the assessed income.Application of Law to Facts: The court applied the Supreme Court's interpretation that the due date is linked to the month of salary accrual, not disbursement, thereby supporting the actions of the CPC and CIT(A).Treatment of Competing Arguments: The court acknowledged the assessee's argument but found it unsupported by the legal framework, thus restoring the issue to the AO for reevaluation in light of the precedent.Conclusions: The court restored the issue to the AO for factual verification and redetermination, allowing the assessee to present further evidence.Issue 2: Deduction under Section 37Relevant Legal Framework and Precedents: Section 37(1) of the Income Tax Act allows for deductions of business expenditures not covered by Sections 30 to 36. The court referenced the Supreme Court's decision in Checkmate Pvt. Ltd. and Pr.CIT vs. Khyati Realtors (P) Ltd.Court's Interpretation and Reasoning: The court reasoned that Section 37(1) does not apply to expenditures specifically covered under Section 36(1)(va), as these are distinct provisions with separate mandates.Key Evidence and Findings: The court found that the belated deposit of contributions does not qualify for deduction under Section 37(1) due to its specific coverage under Section 36(1)(va).Application of Law to Facts: The court applied the Supreme Court's interpretation, affirming that the specific provisions of Section 36(1)(va) override the general provisions of Section 37(1).Treatment of Competing Arguments: The court dismissed the assessee's argument for Section 37(1) deduction as lacking merit, given the specific legislative framework.Conclusions: The court concluded that the alternate plea for deduction under Section 37(1) is without merit.Issue 3: Relevant Date for Due Date CalculationRelevant Legal Framework and Precedents: The determination of the due date for PF/ESI contributions involves the interpretation of labor laws and tax statutes. The court referenced the case of Kanoi Paper & Industries Ltd. vs. ACIT for guidance.Court's Interpretation and Reasoning: The court considered the argument that the due date should be based on the month of salary disbursement rather than accrual, but noted that this aspect was not fully examined by the AO or CIT(A).Key Evidence and Findings: The court found that the methodology for calculating the default was not adequately addressed by the lower authorities.Application of Law to Facts: The court did not express an opinion on the merits but restored the matter to the AO for further examination.Treatment of Competing Arguments: The court allowed the assessee to present this argument before the AO for evaluation.Conclusions: The court restored the matter to the AO to determine the relevant date for due date calculation.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: '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.'Core Principles Established: The court reinforced the principle that specific provisions override general ones in the context of tax deductions, and compliance with statutory timelines is mandatory for PF/ESI contributions.Final Determinations on Each Issue: The appeals were allowed for statistical purposes, with the issues restored to the AO for further examination, allowing the assessee to present additional evidence and arguments.