2024 (12) TMI 1618 - AT - Income Tax

Disallowance under s.36(1)(va) for late ESI/PF upheld; s.143(1) processing additions sustained; factual issues remanded for fresh adjudication

Novelvox Softwares India Pvt. Ltd. Versus ADIT, CPC, Bengaluru.

Novelvox Softwares India Pvt. Ltd. Versus ADIT, CPC, Bengaluru. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance of employer's ESI/PF contribution under section 36(1)(va) can be sustained when made in proceedings under section 143(1) (CPC 'processing'). 2. Whether the statutory compliance for crediting employee's share of ESI/PF is to be tested against the due date prescribed in the respective ESI/PF statutes (or rules) or against the due date of filing return under section 139(1) of the Income Tax Act. 3. Whether the month in which salary is actually disbursed (month of payment) is the relevant month for computing the due date of deposit of ESI/PF for the purpose of determining the employer's deductibility under section 36(1)(va), and whether this factual question requires remand. 4. Ancillary: Whether interest under sections 234A/234B/234C and alleged violations of natural justice required separate adjudication in the instant appeal (as raised but not finally disposed on merits by the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of disallowance made in section 143(1) processing Legal framework: Section 143(1) permits assessment proceedings and processing adjustments by Centralized Processing Centre (CPC) under the statutory scheme of the Income Tax Act. Section 36(1)(va) disallows employer's deduction where employee's share of contribution to recognised funds is not paid by due date prescribed by statute. Precedent Treatment: The Court applied and followed the apex-court precedent establishing that compliance must be judged by the due date fixed in the respective social-security statutes, and recent High Court authority rejecting the plea that disallowances made in 143(1) processing cannot be sustained. Interpretation and reasoning: The Tribunal found no merit in the assessee's contention that a disallowance made in CPC's 143(1) processing was impermissible. Reliance was placed on higher judicial authority that settled the legal position in favour of the Department, thereby validating disallowances arising from processing where statutory non-compliance exists. Ratio vs. Obiter: Ratio - the Tribunal affirms that disallowances under section 36(1)(va) can be sustained when made in 143(1) processing where non-compliance with the statutory due date is established; this follows controlling precedent. No obiter on alternative procedural limits was laid down beyond applying existing authority. Conclusion: The challenge to the validity of a 143(1)-stage disallowance was rejected; such disallowance is sustainable in law where statutory requirements are unmet and controlling precedents support processing adjustments. Issue 2 - Relevant due date for crediting employee's share: statutory due date v. section 139(1) filing date Legal framework: Deductibility under section 36(1)(va) hinges on deposit/crediting to the prescribed account by the due date prescribed in the corresponding social-security statute/regulation (ESI/PF statutes), not the due date for filing income-tax returns under section 139(1). Precedent Treatment: The Tribunal applied a binding apex-court decision holding that compliance is to be judged against the statutory due dates of the social-security enactments; a subsequent High Court decision was also noted as rejecting the contention that processing-stage disallowances are unsustainable. Interpretation and reasoning: The Tribunal concluded that the assessee's submission - that payment before the section 139(1) return filing date suffices - is untenable in view of the controlling authority which requires deposit by the social-security statute's due date. The Tribunal thus rejected the argument equating the return filing due date with the statutory deposit due date for ESI/PF. Ratio vs. Obiter: Ratio - statutory due dates under ESI/PF statutes govern the question of deductibility under section 36(1)(va); compliance cannot be retrofitted by reference to the income-tax return filing date. Conclusion: The assessee's argument based on section 139(1) was rejected and the Tribunal confirmed that the statutory ESI/PF due dates determine eligibility for deduction. Issue 3 - Month of salary disbursement as relevant month for deposit due date; remand for factual verification Legal framework: The temporal nexus for deposit obligations under ESI/PF statutes depends on the statutory scheme and on when salary is treated as having been paid/disbursed; relevant month determination affects the due date for employer/employee contribution crediting. Precedent Treatment: The Tribunal acknowledged that certain judgments support treating the month of actual salary disbursement as the relevant month for computing deposit due dates; the lower authorities had not considered this factual question. Interpretation and reasoning: While the Tribunal upheld legal principles adverse to the assessee on Issues 1-2, it found that the factual aspect - whether the assessee had credited/deposited ESI/PF in the month of actual salary disbursement (thereby meeting the statutory due date) - was not examined by the Assessing Officer/CIT(A). Given this lacuna, the Tribunal remanded the question for fresh adjudication and factual verification by the Assessing Officer, allowing the assessee three effective opportunities to plead and prove relevant facts. Ratio vs. Obiter: Ratio - the Tribunal's direction to remit the factual issue for re-adjudication is a dispositive order in the appeal (core to disposition); the observation that month-of-disbursement-based compliance can be determinative is operative for remand rather than merely obiter. Conclusion: The Tribunal restored the specific factual ground concerning month of salary disbursement to the Assessing Officer for fresh verification; the assessee may argue and prove facts within three opportunities, failing which adverse findings may follow. Issue 4 - Interest under sections 234A/234B/234C and natural justice/contentions not finally decided Legal framework: Sections 234A/234B/234C govern levy of interest for defaults; principles of natural justice require opportunity to be heard before adverse orders. Parties had raised issues on interest computation and denial of opportunity. Precedent Treatment: The Tribunal did not specifically re-determine or overturn prior authority on interest computation or procedural fairness beyond noting the assessee's contentions. Interpretation and reasoning: The judgment does not contain an express final adjudication on the merits of the interest computations or a detailed disposal of the natural-justice objection; the Tribunal focused on the legal validity of the processing-stage disallowance and on remanding the month-of-disbursement factual issue. The natural-justice plea and interest charging issues were not sustained as independent bases to set aside the impugned orders in entirety. Ratio vs. Obiter: Obiter/Non-final - absence of a conclusive finding on the interest and natural-justice pleas means these aspects remain collateral; the Tribunal did not grant relief solely on these grounds. Conclusion: No separate relief was granted on interest or alleged violation of natural justice in the operative disposal; such issues were not finally determined in favour of the assessee in this judgment. Overall Disposition The appeal was partly allowed: the Tribunal upheld the legal proposition that statutory ESI/PF due dates govern deductibility and that processing-stage disallowances can be sustained, but remitted the specific factual question whether deposits were made in the month of actual salary disbursement to the Assessing Officer for fresh adjudication (with three opportunities to the taxpayer). The appeal was otherwise dismissed for statistical purposes.