2023 (6) TMI 1515 - AT - Income Tax

Late deposit of employees' PF/ESI contributions beyond welfare Act due dates, disallowed u/s36(1)(va) on rectification (1)(va)

Deductibility of employees' PF/ESI contributions deposited after the statutory due dates under the respective welfare Acts was the dominant issue in a ... Rectification/recalling of the Tribunal order - delayed deposit of employees' contribution to PF/ESI - reliability of law as conclusively settled by the Supreme Court in Checkmate Services Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] - doctrine of prospective overruling - Revenue is seeking rectification in the decision of Tribunal whereby assessee’s claim of deduction u/s. 36(1)(va) in respect of Employees contribution towards PF and ESIS beyond “due date” under the relevant Acts, i.e. Provident Fund Act and Employees State Insurance Act, respectively has been allowed. HELD THAT:- Hon'ble Apex Court 2022 (10) TMI 617 - SUPREME COURT (LB)] in an unambiguous manner explained the legal position that to be eligible to claim deduction u/s. 36(1)(va) of the Act, the employer is under obligation to deposit Employees share of contribution towards PF and ESIS before the “due date” under the respective laws. Whether the aforesaid decision rendered by Hon'ble Supreme Court of India would apply prospectively or it has any impact on the decisions that have already been rendered prior to the date of decision in the case of Checkmate Services Pvt. Ltd. (supra)? - Doctrine of prospective overruling was first introduced to the Indian jurisprudence in Golaknath’s case [1967 (2) TMI 95 - SUPREME COURT (LB)] - The said doctrine was drawn from American jurisprudence. The Indian legal system has always been following Blackstonian theory i.e. duty of the Court was “ not to pronounce a new rule but to maintain and expand the old one”. In other words, it was always said that the Judges does not make the law but only discovers or find the true law. In contrast to the old school Blackstonian theory, the doctrine of “prospective overruling” expounded by American Jurists suggested, a Court should recognize a duty to announce a new and better rule for future transactions whenever the Court has reached the conviction that an old rule (as established by the precedence) is unsound even though the feeling compelled by stare decisis to apply the old and condemned rule to the instant case and to transactions which had already taken place. From the decisions rendered by Hon'ble Apex Court, where the doctrine of prospective overruling was put into operation, it can be deduced that retrospective application of the decision rendered by Hon'ble Apex Court is a rule and prospective overruling is an exception. Wherever, the Hon'ble Court intended that the law explained by it would apply prospectively, it specifically states so in the judgment. We find no merit in the arguments raised by Assessee questioning retrospective applicability of decision in the case of Checkmate Services Pvt. Ltd.(supra). There is a mistake apparent in the order of Tribunal that warrants rectification in light of the decision rendered in the case of Checkmate Services Pvt. Ltd. (supra). Decided in favour of revenue. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the subsequent judgment of the Supreme Court in relation to section 36(1)(va) regarding delayed deposit of employees' contribution to PF/ESI renders the earlier Tribunal order a 'mistake apparent from record' rectifiable under section 254(2) of the Income-tax Act, 1961. 1.2 Whether the Supreme Court judgment clarifying the law on employees' contribution to PF/ESI operates prospectively only, on the basis of the doctrine of prospective overruling, or retrospectively as a declaration of the law as it always stood. 1.3 Whether, in exercise of powers under section 254(2), the Tribunal can recall its earlier order and restore the appeal for fresh hearing in light of the subsequent Supreme Court decision. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Rectifiability under section 254(2) based on subsequent Supreme Court decision on section 36(1)(va) Legal framework (as discussed): 2.1 The application was filed under section 254(2) seeking rectification of the Tribunal's order which had allowed deduction under section 36(1)(va) for delayed deposit of employees' contribution to PF/ESI. The Revenue relied on the subsequent Supreme Court decision which clarified the legal position on section 36(1)(va), and on a High Court decision holding that a Tribunal order contrary to the law subsequently declared by the Supreme Court constitutes a 'mistake apparent from record' rectifiable under section 254(2). Interpretation and reasoning: 2.2 The Tribunal noted that after its earlier order, the Supreme Court, in a detailed exposition of sections 2(24)(x), 36(1)(iv), 36(1)(va) and 43B, clarified that employees' contribution to PF/ESI, deemed as income under section 2(24)(x), is deductible under section 36(1)(va) only if deposited on or before the 'due date' prescribed under the respective welfare enactments, and that the non obstante clause in section 43B does not override this specific condition. 2.3 The Tribunal recorded that the Supreme Court treated employer's contribution under section 36(1)(iv) and employees' contribution under section 36(1)(va) as distinct in nature and character, and held that decisions of various High Courts taking a contrary view did not lay down the correct law. 2.4 Referring to a High Court decision, the Tribunal emphasized that, as per the Supreme Court's jurisprudence, judicial decisions act retrospectively; judges 'discover or find the law', and when a later Supreme Court judgment overrules or corrects an earlier view, the law declared in the later judgment is to be treated as having always been the law. Consequently, an order of the Tribunal that is inconsistent with the law as so declared is erroneous and constitutes a 'mistake apparent from record', provided rectification is sought within limitation and in a proceeding that has not finally concluded. 2.5 On this basis, the Tribunal held that its earlier order allowing deduction for delayed deposit of employees' contribution to PF/ESI, being contrary to the legal position clarified by the Supreme Court, contained a mistake apparent from record amenable to rectification under section 254(2). Conclusions: 2.6 The Tribunal concluded that, in light of the subsequent Supreme Court judgment on section 36(1)(va), its earlier order involved a 'mistake apparent from record' and fell within the scope of rectification under section 254(2). Issue 2: Prospective overruling vs. retrospective operation of the Supreme Court judgment on section 36(1)(va) Legal framework (as discussed): 2.7 The assessee invoked the doctrine of prospective overruling, relying on constitutional and other Supreme Court authorities, contending that the Supreme Court judgment on employees' contribution to PF/ESI should operate only prospectively, and that completed assessments or decisions (including the Tribunal's earlier order) could not be unsettled. 2.8 The Tribunal examined the origin and contours of the doctrine of prospective overruling in Indian law, as first adopted in a constitutional context, including the specific conditions laid down for its application: (i) it is confined to matters arising under the Constitution; (ii) it can be applied only by the Supreme Court; and (iii) the extent of retroactivity/prospectivity is to be expressly moulded by the Supreme Court in the interest of justice. 2.9 The Tribunal reviewed illustrative Supreme Court decisions where the doctrine was actually applied and noted that in those cases the Supreme Court clearly and explicitly directed that the law declared would operate prospectively only. Interpretation and reasoning: 2.10 From the jurisprudence surveyed, the Tribunal deduced that the general rule is that a Supreme Court declaration of law operates retrospectively, i.e., the law is taken as having always been as declared, and that prospective overruling is an exception, applied sparingly and only when specifically invoked and stated by the Supreme Court in its judgment. 2.11 Turning to the decision on employees' contribution to PF/ESI, the Tribunal observed that the Supreme Court, in its analysis, expressly explained the statutory scheme as it 'has always been', clarified that Parliament always intended to treat employees' and employer's contributions differently, and held that contrary High Court views did not lay down the correct law. 2.12 The Tribunal found no indication in that judgment that the Supreme Court intended its ruling to be prospective. There was no express or implied invocation of the doctrine of prospective overruling, nor any direction that the law declared would apply only to future periods or to specified stages of proceedings. 2.13 In light of the principle that prospective overruling must be clearly stated by the Supreme Court and is not to be implied, the Tribunal rejected the contention that the judgment on section 36(1)(va) was only prospective, and noted that the Revenue's reliance thereon for rectification did not amount to unsettling matters in a manner inconsistent with the doctrine as applied by the Supreme Court. Conclusions: 2.14 The Tribunal held that the Supreme Court judgment on employees' contribution to PF/ESI operates retrospectively as a declaration of what the law has always been, and that the doctrine of prospective overruling was neither invoked nor applicable in that case. 2.15 Consequently, the assessee's plea that the judgment could not affect the Tribunal's earlier order, or that it should be applied only prospectively, was rejected. Issue 3: Scope of section 254(2) and power to recall earlier order Legal framework (as discussed): 2.16 The assessee contended that section 254(2) does not empower the Tribunal to recall its order; that the rectification power is narrow and cannot be used to reopen or rehear the appeal on merits. 2.17 The Revenue sought recall/restoration of the appeal on the footing that the Tribunal's earlier decision on the allowability of employees' contribution to PF/ESI was a mistake apparent from record in light of the subsequent Supreme Court clarification. Interpretation and reasoning: 2.18 Proceeding on the basis that, after the Supreme Court's clarification, the earlier allowance of deduction under section 36(1)(va) was contrary to the correct legal position, the Tribunal treated that error as a rectifiable mistake within section 254(2). 2.19 Given that the core issue decided earlier (deductibility of employees' contribution deposited after the due date under the relevant Acts) itself stood vitiated by a mistake apparent from record, the Tribunal considered it appropriate to recall its earlier order and restore the appeal, rather than attempt partial modification in isolation. Conclusions: 2.20 The Tribunal held that, in the circumstances of the case, exercise of power under section 254(2) validly extended to recalling the earlier order and restoring the appeal to its original number for fresh hearing in accordance with the law as declared by the Supreme Court. 2.21 The Miscellaneous Application was allowed; the earlier order dated 18/05/2022 was recalled and the appeal directed to be fixed for hearing, there being a mistake apparent from record warranting such rectification.