PF, ESI employee contributions allowed when paid before s.139(1) due date; s.36(1)(va) additions u/s143(1) deleted

ITAT held that disallowance of employees' contribution to PF and ESI u/s 36(1)(va), made during processing of returns u/s 143(1), was unsustainable where the contributions were deposited before the due date u/s 139(1). For the assessment years under appeal, which preceded A.Y. 2021-22, the amendments introduced by Finance Act 2021 were held to be inapplicable. Relying on binding HC precedent, the Tribunal treated such payments as allowable deductions and directed the AO to delete the additions u/s 36(1)(va) in all captioned appeals.

---

---

1. ISSUES PRESENTED AND CONSIDERED

Issue 1: Whether employees' contribution to Provident Fund and Employees' State Insurance, deposited after the due dates prescribed under the respective welfare statutes but before the due date for filing the return of income under section 139(1), is allowable as deduction under section 36(1)(va) read with section 43B for assessment years prior to assessment year 2021-22.

Issue 2: Whether the amendments introduced by the Finance Act, 2021, including insertion of Explanation 2 to section 36(1)(va) and related amendment/Explanation to section 43B, operate retrospectively so as to govern assessment years prior to assessment year 2021-22 in respect of employees' contributions deposited after the statutory due dates but before the section 139(1) due date.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of employees' contribution to PF/ESI paid after statutory due date but before section 139(1) due date (pre-A.Y. 2021-22)

Legal framework (as discussed):

* Section 36(1)(va) governing deduction of employees' contributions to specified funds.

* Section 43B allowing deduction on actual payment basis where payment is made up to the due date for filing return under section 139(1).

* Judicial precedents discussed: decisions of the Pune Bench of the Tribunal in earlier cases on identical facts; decision of the jurisdictional High Court in "CIT v. Ghatge Patil Transports Ltd."; decision of the Himachal Pradesh High Court in "CIT v. Nipso Polyfabriks Ltd."

Interpretation and reasoning:

* The Tribunal recorded the admitted factual position that in all the appeals, the employees' contributions to PF/ESI were deposited after the due date prescribed under the respective welfare statutes but before the due date for filing the return of income under section 139(1) for the relevant assessment years.

* The Tribunal noted that identical issues had been decided in favour of assessees by coordinate benches in "Prashant Arun Sangai v. ADIT, CPC, Bengaluru", "SIP Moulds Pvt. Ltd. v. ITO", and in a consolidated order in "Tilokchand Bhabutmal Shah v. ADIT, CPC, Bengaluru & Ors."

* Extracting and relying on the reasoning in "Prashant Arun Sangai", the Tribunal reiterated that several High Courts have held that employees' contribution, when deposited after the due date under the relevant Acts but before the section 139(1) due date, is allowable as deduction under section 36(1)(va) by virtue of section 43B.

* The decision of the Himachal Pradesh High Court in "Nipso Polyfabriks Ltd." was specifically referred to, wherein it was held that there exists no difference between employees' and employer's contributions for this purpose and that both are allowable if deposited before the due date for filing the return.

* The Tribunal further noted that the jurisdictional Bombay High Court in "Ghatge Patil Transports Ltd." has taken an identical view and, therefore, that ratio is binding and squarely applicable.

* Applying these precedents and the principle of consistency, the Tribunal held that the earlier view allowing such deductions where payments are made before the section 139(1) due date continues to govern the assessment years under consideration.

Conclusions:

* For assessment years 2017-18, 2018-19 and 2019-20, employees' contributions to PF/ESI deposited after the statutory due dates under the respective Acts but before the due date for filing the return under section 139(1) are allowable as deduction.

* The disallowances made under section 36(1)(va) by treating such payments as delayed beyond the statutory due dates are not sustainable for the years under appeal.

* The Assessing Officer was directed to delete the additions made under section 36(1)(va) in all the appeals.

Issue 2: Temporal operation of Finance Act, 2021 amendments to section 36(1)(va) and section 43B

Legal framework (as discussed):

* Finance Act, 2021 inserted Explanation 2 below section 36(1)(va), providing that the provisions of section 43B shall not apply for determining "due date" under that clause.

* The effect, as explained by the Tribunal, is that if employees' contribution towards EPF/ESI, etc., is deposited beyond the due date under the respective Acts, disallowance is mandated irrespective of payment before the section 139(1) due date.

* The Memorandum explaining the provisions of the Finance Bill, 2021, explicitly states that the amendment takes effect from 1 April 2021 and applies in relation to assessment year 2021-22 and subsequent assessment years.

Interpretation and reasoning:

* The Tribunal noted the express effective date in the Finance Bill Memorandum and treated the amendment as applicable only from assessment year 2021-22 onwards.

* It was emphasized that the assessment years involved in the present appeals (2017-18, 2018-19, 2019-20) are anterior to the effective date of the amendment.

* Consequently, for these earlier assessment years, the pre-amendment legal position, as laid down by various High Courts (including "Ghatge Patil Transports Ltd." and "Nipso Polyfabriks Ltd."), continues to govern the treatment of employees' contributions.

Conclusions:

* The amendments introduced by the Finance Act, 2021 to section 36(1)(va) (including Explanation 2) and the related position under section 43B are prospective in operation, effective from assessment year 2021-22 onwards.

* These amendments do not apply to assessment years 2017-18, 2018-19 and 2019-20 under consideration, and cannot be invoked to justify disallowance of employees' contributions that were deposited before the section 139(1) due date for those years.

---