2022 (11) TMI 1568 - AT - Income Tax

Employer PF/ESI deductions allowed only if deposited by due date; s.43B doesn't excuse late deposit; s.234C interest applies

Mayur Uniquoters Ltd Versus Commissioner of Income Tax, NFAC, New Delhi AND Deputy Commissioner of Income Tax, Circle-7, Jaipur

ITAT JAIPUR - AT held that employer deductions for employee PF/ESI are allowable only if deposited by the statutory due date; s.43B's non-obstante clause ... Late deposit of PF & ESI amount - whether the same is allowable expenditure by virtue of amendment made by the Finance Act 2021? - HELD THAT:- Apex Court in the case of “Checkmate Services P Ltd [2022 (10) TMI 617 - SUPREME COURT (LB)] deliberated on the issue and clarified that the non-obstante clause in section 43B would not in any manner dilute or override the employer's obligation u/s 36(1)(va) to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction. Addition by way of adjustment while processing the return of income u/s 143(1) so made by the CPC towards the deposit of the employee’s contribution towards ESI and PF though paid before the due date of filing of return of income u/s 139(1) of the Act is here sustained. Chargeability of interest u/s 234C - As per Explanation to section 234C (1) of the I.T. Act, “tax due on returned income” means the tax chargeable on the total income declared in the return of income furnished by the assessee for the relevant assessment year. As per the provisions of the Act, the assessee is liable to interest under section 234C for deferment of advance tax on the returned income. In light of the aforesaid discussions, and as per the provisions of section 234C, the law is clear regarding the chargeability of interest under section 234C of the I.T. Act in a case where the assessment is completed at a figure more than the returned income, therefore, this ground of appeal of the assessee is allowed. Claim of Education Cess as an allowable expenditure - Education and Secondary Higher Education Cess were held to be allowable expenses and no addition was warranted u/s 40(a)(ii) as per the law stood before the enactment of Finance Act 2022. Subsequently, the Finance Act, 2022 brought about a retrospective amendment inthe Income Tax Act whereby the “Education and Secondary Higher Education Cess” (‘Education Cess’) paid by an assessee is clarified to be a disallowable expense. The Finance Act 2022 has amended section 40 by inserting Explanation 3 with effect from 1-4-2005 to provide that the term ‘tax’ shall include and shall be deemed to have always included any surcharge or cess. In light of the amendment effected retrospectively, it is held that Education cess is not an allowable Expense and the additional ground raised by the assessee is dismissed. Claim of deduction u/s 80JJAA to be allowed as claimed by the assessee as per the Form 10DA. Claim of deduction u/s 80-IA on power generation in the form of Steam and heat - The counsel has applied the rate which it has charged to the electricity board (including all expenses i.e. landed cost) whereas the rate should have been the rate charged by the electricity board to its consumers. We, therefore, set aside this issue to the file of the Assessing Officer with a direction to verify the rates charged by the electricity board to its consumers and to compute the deduction after taking into consideration of total number of power generated into KWH/steam as per the Technical Certificate issued by the Chartered Engineer and compute the deduction accordingly. For the purpose of computation of deduction on Steam, the assessee has taken 50% of landed cost which is supported in the case of Shahi Export [2022 (1) TMI 1367 - ITAT DELHI] and found correct. Therefore, additional Ground is allowed for statistical purposes. Incentive received under Merchandise Export from India Scheme (MEIS) - We may refer to the decision of Hon’ble jurisdictional High court as referred by the Ld. AR in the case of PCIT vs. M/s Nitin Spinners Limited [2019 (9) TMI 1154 - RAJASTHAN HIGH COURT] wherein it has been held that incentive under Focus Market Scheme as per Foreign Trade Policy was a capital receipt since the Central Government gave the subsidy to enhance Indian Export potential in the International Market and it was not granted to meet the cost of expenditure to meet the competition of the Indian Textile market. Further the SLP filed by the department against the above decision was dismissed by Hon'ble Supreme Court [2021 (9) TMI 430 - SC ORDER] The claim of the assessee that MEIS is capital receipt being given in the form of Reward and is not assistance is correct and hence the additional ground raised by the assessee is allowed. Disallowance u/s 14A of the Act r.w.r. 8D is deleted as if investments in securities is made out of common funds and the assessee has available, noninterest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made. ISSUES PRESENTED AND CONSIDERED 1. Whether employees' contributions to Provident Fund and ESI, paid after statutory due date under respective welfare enactments but before filing of return under section 139(1), are allowable deductions under section 36(1)(va) read with section 43B. 2. Whether Explanation(s)/amendments to section 36(1)(va) and section 43B introduced by Finance Act, 2021 (effective A.Y. 2021-22) operate retrospectively to deny deduction for employees' contributions in earlier assessment years. 3. Whether interest under section 234C must be computed on returned income or assessed income when assessment increases taxable income above return. 4. Whether education cess on income tax is an allowable business expense (claim raised as additional ground) in view of retrospective amendment by Finance Act, 2022. 5. Whether deduction under section 80JJAA can be entertained when not claimed in original return but supported by audit report/Form 10DA and other records (additional ground). 6. Whether deduction under section 80-IA is allowable for captive generation of heat and steam (treated as 'power'), and quantification methodology (conversion to kWh and applicable rate). 7. Whether export incentives under Merchandise Exports from India Scheme (MEIS) constitute capital receipt (reward) not chargeable as income under normal provisions. 8. Whether disallowance under section 14A read with Rule 8D is sustainable where assessee had sufficient interest-free funds to meet investments yielding exempt income. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Deductibility of employees' contributions to PF/ESI (section 36(1)(va) and section 43B) Legal framework: Section 36(1)(va) allows deduction for employees' contributions to specified welfare funds if deposited 'on or before the due date' prescribed; section 43B prescribes that certain deductions are allowable only on actual payment. Finance Act, 2021 introduced/explained provisions clarifying timing and effectivity (effective A.Y. 2021-22). Precedent treatment: Several High Courts (notably the jurisdictional Rajasthan High Court) and coordinate Tribunals have held that where employees' contributions were deposited after statutory due date but before filing return under section 139(1), deduction cannot be disallowed under sections 36(1)(va)/43B. Divergent view exists (e.g., Gujarat High Court). The Supreme Court in Checkmate Services clarified the character of employees' contributions and the effect of non-obstante clause in section 43B. Interpretation and reasoning: The Court examined factual admission that contributions were deposited before filing return. It considered the legislative history, the memorandum to Finance Act, 2021 and the Supreme Court's reasoning in Checkmate Services. Checkmate emphasized the distinct character of employees' contributions (deemed income under section 2(24)(x)) and held that depositing such amounts on or before statutory due dates is an essential condition for deduction; the non-obstante clause of section 43B cannot override that condition. However the 2021 amendments and memorandum expressly apply from A.Y. 2021-22; thus, in impugned earlier assessment years the amended wording is not directly applicable. The Court weighed binding coordinate bench decisions and the jurisdictional High Court precedents holding in favour of allowability where deposits were made before filing return, but ultimately followed the Supreme Court's authoritative exposition in Checkmate, treating the critical distinction between employer's contribution and employees' contribution as decisive. Ratio vs. Obiter: Ratio - deduction under section 36(1)(va) for employees' contributions requires deposit on or before statutory due date; non-obstante clause in section 43B does not negate that condition (as per Supreme Court). Obiter - discussion of conflicting High Court/Tribunal decisions and effect of jurisdictional precedents where not determinative in light of Supreme Court ruling. Conclusion: The disallowance of employees' contributions made by processing under section 143(1) is sustained for the relevant assessment years because, following the Supreme Court's authoritative reasoning, deposit on or before the statutory due date is an essential precondition for deduction; the Finance Act, 2021 clarification operates prospectively from A.Y. 2021-22 and its memorandum confirms temporal applicability but does not alter the Supreme Court's interpretation relied upon by the Court. Issue 3 - Computation of interest under section 234C Legal framework: Section 234C levies interest for deferment of advance tax; Explanation clarifies 'tax due on returned income' as tax chargeable on total income declared in the return furnished under section 139. Interpretation and reasoning: Where assessment determines taxable income higher than returned income, section 234C interest is chargeable on returned income (i.e., tax due on declared total income), not on assessed income. The Court applied the statutory Explanation and concluded AO's enhancement of interest by Rs. 16,539 was incorrect. Ratio vs. Obiter: Ratio - interest under section 234C must be computed on returned income where that is the basis for advance tax deferment liability. Conclusion: The ground succeeds; interest under section 234C recalculated on returned income and enhanced interest set aside. Issue 4 - Education cess as business expense (additional ground) Legal framework: Section 40(a)(ii) disallows 'tax' levied on profits or gains as business expenditure; CBDT guidance and judicial decisions historically treated education cess variably. Finance Act, 2022 (with retrospective effect from 1-4-2005) inserted Explanation 3 to section 40 clarifying 'tax' includes cess/surcharge. Interpretation and reasoning: Prior authorities had allowed education cess as deductible, but the Finance Act, 2022's retrospective amendment deems education cess to be part of 'tax' and thus disallowable as business expenditure with effect from A.Y. 2005-06. The Court applied the retrospective statutory amendment and held the additional claim inadmissible. Ratio vs. Obiter: Ratio - retrospective amendment to section 40 renders education cess not allowable as business expenditure; jurisdictional decisions favouring allowability are superseded by the legislative change. Conclusion: Additional ground for deduction of education cess is dismissed in view of retrospective statutory amendment. Issue 5 - Entertaining fresh claim for deduction under section 80JJAA not made in original return Legal framework: Section 80JJAA provides deduction for additional employee cost subject to statutory conditions; appellate authorities have discretion to entertain fresh claims where question is one of law and facts are on record; Supreme Court and Tribunals have allowed fresh claims where bona fide and supported by records. Precedent treatment: Decisions (including International Tractors and Tribunals) recognize power of appellate authorities to admit and decide additional grounds if merits can be adjudicated from record and claim is bona fide. Interpretation and reasoning: The assessee produced audit report, Form 10DA and supporting particulars showing additional employees and wages; Tribunal relied on precedent that appellate authorities can entertain such statutory claims. The Court evaluated factual compliance with conditions (wages, days worked, documentation) and held the claim sustainable in law. Ratio vs. Obiter: Ratio - appellate authority may admit and allow a fresh statutory deduction claim (80JJAA) not made in original return when facts are on record and the claim is legally sustainable; the Court directed AO to allow deduction per Form 10DA. Conclusion: Deduction under section 80JJAA allowed; AO directed to give effect. Issue 6 - Deduction under section 80-IA for captive generation of heat and steam Legal framework: Section 80-IA provides deduction for profits of undertakings engaged in generation/distribution of 'power'; term 'power' not defined in Act. Precedent treatment: Tribunals and Courts have recognized non-electrical forms (steam, heat) as 'power' for section 80-IA where used for industrial processes; Apex Court's Tanfac decision supports inclusion of steam for captive consumption. Interpretation and reasoning: The Court accepted that heat/steam generated by thermal fluid heaters and boilers, used captively in manufacture, constitute 'power' and are eligible for 80-IA deduction. Quantification requires technical conversion (kcal to kWh) and application of appropriate rate; AO directed to verify rates charged by electricity board to consumers and recompute deduction using Chartered Engineer certificate and accepted conversion methodology; for steam, adoption of 50% of landed cost as conservative basis (supported by decisions) permitted. Ratio vs. Obiter: Ratio - captive generation of steam/heat qualifies as 'power' for section 80-IA where supported by technical certification and used in manufacturing; computation to be verified and recomputed by AO as directed. Obiter - guidance on conversion efficiency and selection of rate (conservative approach) for computation. Conclusion: Additional ground allowed for adjudication; AO directed to verify technical certificates, consumer tariff rates and compute deduction accordingly. Issue 7 - MEIS incentives as capital receipt (reward) not taxable Legal framework: FTP/MEIS provides rewards to exporters to promote manufacture and export; taxability hinges on whether incentive is revenue (taxable) or capital (non-taxable) receipt. Precedent treatment: Courts have treated certain export incentives and subsidies as capital receipts where objective is to promote industry and create enduring benefits (e.g., jurisdictional High Court decisions cited). Interpretation and reasoning: The Court examined FTP objectives, nature of MEIS as a 'reward' for increased exports (not an assistance to meet current operating cost), and applied purpose test. Drawing on precedent that incentives granted to promote exports/industry can be capital in nature, the Court held MEIS scrips are capital receipts not chargeable to tax under normal provisions. The fact that assessee had offered the receipts to tax earlier does not preclude recharacterisation when correctly raised as additional ground. Ratio vs. Obiter: Ratio - MEIS rewards granted under FTP, being incentives aimed at promoting export capacity, are capital receipts and not taxable as income under normal provisions when correctly characterized on record. Conclusion: Additional ground allowed; MEIS incentives treated as capital receipt and not taxable under normal provisions. Issue 8 - Disallowance under section 14A/Rule 8D where sufficient interest-free funds available Legal framework: Section 14A read with Rule 8D permits disallowance of expenditures in relation to exempt income; jurisprudence recognises that where investments yielding exempt income are made out of interest-free own funds sufficiently covering such investments, proportionate disallowance is not warranted. Precedent treatment: Supreme Court in South Indian Bank and coordinate Tribunal decisions hold that where interest-free funds exceed investments in exempt securities, disallowance under section 14A is impermissible. Interpretation and reasoning: The assessee demonstrated substantial interest-free funds (share capital, reserves) exceeding investments producing exempt dividend income; reliance on South Indian Bank and jurisdictional tribunal authority supported rejection of section 14A disallowance. The Court applied these principles and found disallowance unsustainable. Ratio vs. Obiter: Ratio - where assessee had sufficient interest-free funds to cover investments yielding exempt income, disallowance under section 14A/Rule 8D cannot be made; AO must delete such disallowance. Conclusion: Addition under section 14A set aside and AO directed to delete the disallowance.