2023 (3) TMI 1582 - AT - Income Tax

Employee PF and ESI contributions paid after statutory deadlines cannot be claimed as deductions under section 36(1)(va)

ITAT Visakhapatnam dismissed the assessee's appeal challenging CPC adjustments under section 143(1) for disallowing employees' PF and ESI contributions ... CPC power to make adjustment u/s 143(1) - Non deposit of employees’ contribution to PF and ESI for any single month within due date specified in the respective Acts - as contended that the CPC is not justified in disallowing the employees share of contribution of PF and ESI on account of late payment, even though the same were paid before the due date of filing the return of income u/s 139(1) - HELD THAT:- As rightly pointed out by the Ld. DR, the issue with regard to late remittance of the contribution under PF and ESI is settled in the case of Checkmate Services Pvt. Ltd [2022 (10) TMI 617 - SUPREME COURT (LB)]. CPC jurisdiction and power to make adjustments disallowing such deduction through intimation issued u/s 143(1) - Adjustments u/s 143(1)(a) has been made on the basis of information contained in the tax audit report with respect to the belated payments of employees contribution of EPF and ESI paid beyond the due dates prescribed under the respective Act and these funds are referred in section 36(1)(va) of the Act The information gives the details of due date of payment, actual date of payment to the concerned authorities and these payments have been made beyond the due dates specified in the respective Acts i.e. Provident Fund Act & ESI Act, which attracts the provisions of section 36(1)(va) r.w.s. 2(24)(x) of the Act, leading to disallowance of this sum to the extent not paid on or before the due date stipulated in the respective PF and ESI Act. The above view has been taken in the case of Sree Gokulam Chit and Finance Co. P. Ltd. [2022 (12) TMI 1528 - ITAT CHENNAI] and also AA520 Veerappampalayam Primary Agricultural Cooperative Credit Society Ltd. [2021 (4) TMI 1169 - MADRAS HIGH COURT] wherein, it was categorically held that if there is any incorrect claim made in the return, the disallowance made by the CPC is valid. Adjustments made by CPC u/s 143(1) are valid and disallowance made by way of adjustment by CPC has been rightly upheld by the Ld.CIT(A). Appeal of the assessee is dismissed. The core legal questions considered in this appeal are:1. Whether the disallowance of deduction claimed under section 36(1)(va) of the Income Tax Act, 1961, on account of delayed remittance of employees' contribution to Provident Fund (PF) and Employees' State Insurance (ESI), is justified when such payments were made after the due date prescribed under the respective Acts but before the due date of filing the income tax return under section 139(1).2. Whether the Central Processing Centre (CPC) has the jurisdiction and power to make adjustments disallowing such deduction through intimation issued under section 143(1) of the Act.3. The applicability of amendments made by the Finance Act, 2021, to sections 36(1)(va) and 43B of the Act, with respect to the assessment year under consideration (2019-20).Issue-wise Detailed AnalysisIssue 1: Admissibility of deduction under section 36(1)(va) for delayed remittance of employees' contribution to PF and ESIRelevant legal framework and precedents: Section 36(1)(va) disallows deduction for employees' contribution to PF and ESI if such contributions are not paid on or before the due date specified under the respective Acts. The Hon'ble Supreme Court, in the case of Checkmate Services Pvt. Ltd., has held that belated payments of PF and ESI contributions, even if made before filing the return of income under section 139(1), do not qualify for deduction under section 36(1)(va).Court's interpretation and reasoning: The Tribunal noted that the issue regarding the timing of payment of employees' contribution and consequent disallowance is settled by the Supreme Court's ruling. The delayed payments beyond the due dates prescribed under the PF and ESI Acts attract disallowance under section 36(1)(va) read with section 2(24)(x) of the Act.Key evidence and findings: The tax audit report contained details of the due dates and actual dates of payment of employees' contribution to PF and ESI, showing that the payments were made after the due dates specified in the respective Acts.Application of law to facts: Since the payments were made beyond the due dates prescribed by the respective statutes, the deduction claimed was not allowable under section 36(1)(va). The Tribunal relied on the audit report as information in the return, which made the incorrect claim apparent.Treatment of competing arguments: The assessee contended that since payments were made before the return filing date, deduction should be allowed. However, the Tribunal rejected this argument based on the binding Supreme Court precedent and the statutory language.Conclusion: The disallowance of the deduction for delayed remittance of employees' contribution to PF and ESI is justified and in accordance with settled law.Issue 2: Power of CPC to make adjustments under section 143(1) of the ActRelevant legal framework and precedents: Section 143(1) provides for processing of returns with certain specified adjustments, including disallowance of 'incorrect claims apparent from any information in the return' under clause (a)(ii). The Memorandum to the Finance Bills of 2008 and 2016 clarifies that the scope of adjustments under section 143(1) extends beyond mere arithmetical errors to incorrect claims evident from the return or related information such as audit reports.Court's interpretation and reasoning: The Tribunal examined the text of section 143(1)(a)(ii) and the legislative intent expressed in the Finance Bills' Memoranda. It held that the CPC is empowered to make adjustments for incorrect claims apparent from information in the return, including audit reports.The Tribunal further relied on the decision of the Madras High Court in AA520 Veerappampalayam Primary Agricultural Cooperative Credit Society Ltd. vs. Deputy Commissioner of Income Tax, which held that the scope of 'intimation' under section 143(1)(a) extends to adjustments based on errors apparent from the return and the record, and that the explanation to the section should not restrict the scope of such adjustments.Key evidence and findings: The audit report, which was part of the return, indicated the delayed payments. This rendered the claim incorrect and apparent from the return itself.Application of law to facts: Since the incorrect claim was apparent from the return and related information, the CPC's disallowance through intimation under section 143(1) was valid.Treatment of competing arguments: The assessee argued that the CPC's power under section 143(1) does not extend to disallowing such deductions and that the amendments to section 36(1)(va) and section 43B effective from 01.04.2021 are not applicable to the assessment year 2019-20. The Tribunal agreed that the amendments do not apply to the year under consideration but rejected the contention that CPC lacks power under section 143(1). The Tribunal emphasized that the CPC's power includes disallowing incorrect claims apparent from the return, including those revealed by audit reports.Conclusion: The CPC was within its jurisdiction to make the disallowance through intimation under section 143(1), and the CIT(A) rightly upheld the same.Issue 3: Applicability of amendments made by Finance Act, 2021Relevant legal framework: Amendments to sections 36(1)(va) and 43B by the Finance Act, 2021, are effective from 01.04.2021, i.e., applicable from assessment year 2022-23 onwards.Court's interpretation and reasoning: The Tribunal noted that these amendments do not apply retrospectively and hence are not relevant for the assessment year 2019-20 under consideration.Conclusion: The amendments are not applicable to the facts of this case and do not affect the disallowance made.Significant Holdings'The scope of an 'intimation' under section 143(1)(a) of the Act, extends to the making of adjustments based upon errors apparent from the return of income and patent from the record. Thus to say that the scope of 'incorrect claim' should be circumscribed and restricted by the Explanation which employs the term 'entry' would, in my view, not be correct and the provision must be given full and unfettered play. The explanation cannot curtail or restrict the main thrust or scope of the provision and due weightage as well as meaning has to be attributed to the purpose of section 143(1)(a) of the Act.'This principle was adopted by the Tribunal to uphold the CPC's disallowance of deduction under section 36(1)(va) on account of late payment of employees' contribution to PF and ESI.The Tribunal confirmed the settled legal position that delayed remittance of employees' contribution beyond the due date prescribed under the respective Acts attracts disallowance under section 36(1)(va), notwithstanding payment before the return filing date.It was conclusively held that the CPC has the power under section 143(1) to disallow incorrect claims apparent from the return and related information, including audit reports, and that such disallowance does not require a separate assessment proceeding.The Tribunal dismissed the appeal, affirming the order of the CIT(A) and the adjustment made by the CPC.