Assessee wins appeal against section 36(1)(va) disallowance for delayed PF contributions during COVID lockdown

The ITAT Pune allowed the assessee's appeal regarding disallowance under section 36(1)(va) for late payment of employees' contribution to Provident Fund. The Tribunal held that delays in PF and ESI deposits for April-May 2020 occurred during COVID-19 lockdown when EPF Organisation itself waived penal damages. The assessee deposited amounts in June 2020 when banking resumed and maintained timely deposits thereafter. Following precedent in Diamour Jewels case, the Tribunal found no detrimental delay under the Act's explanation to section 36(1)(va). Additionally, the Tribunal allowed deletion of disallowance for superannuation fund contribution as it was deposited before statutory due date.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the disallowance of Rs. 64,469/- under section 36(1)(va) of the Income Tax Act, 1961 ("the Act") on account of late payment of employees' contribution towards Provident Fund (PF) is justified, particularly in light of the delay occurring during the COVID-19 lockdown period;

(b) Whether the disallowance of Rs. 1,64,120/- under section 36(1)(va) of the Act on account of employees' contribution towards Superannuation Fund is justified when the payment was made in advance and within the due date;

(c) Whether the issue of disallowance under section 36(1)(va) due to delayed payments qualifies as a "mistake apparent on the face of record" under section 154 of the Act to warrant rectification;

(d) The applicability and interpretation of the Supreme Court's decision in Checkmate Services (P) Ltd. vs. CIT concerning the timing of deposit of employees' contributions for claiming deduction under section 36(1)(va); and

(e) The effect of the circular issued by the Employees' Provident Fund (EPF) Organisation waiving penal damages for delay in deposit of contributions during the COVID-19 lockdown on the allowability of deduction under section 36(1)(va).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Rs. 64,469/- under section 36(1)(va) on account of late payment of employees' PF contribution during COVID-19 lockdown

Relevant legal framework and precedents: Section 36(1)(va) of the Act disallows deduction for employees' contribution to PF unless such contribution is deposited within the due date prescribed under the relevant enactment. The Supreme Court in Checkmate Services (P) Ltd. vs. CIT clarified that the essential character of employees' contribution is that it is held in trust by the employer and must be deposited on or before the due date specified in the relevant welfare enactments (e.g., EPF Act). The CBDT Circular No. 495 dated 22.09.1987 emphasized timely payment to avoid misuse of employees' contributions. The memorandum explaining the Finance Bill, 1987, highlighted the objective of ensuring timely payments to prevent employers from retaining employees' monies.

Court's interpretation and reasoning: The Tribunal noted the peculiar facts of the COVID-19 pandemic and consequent lockdown phases imposed by the Government of India from March to May 2020. During this period, various restrictions severely impacted business operations, including banking and payment facilities. The EPF Organisation issued a circular waiving penal damages for delay in deposit of contributions during the lockdown, acknowledging that delays were without mens rea and should not attract penal consequences under section 14B of the EPF Act.

The Tribunal relied on the Mumbai Bench's decision in Diamour Jewels Pvt. Ltd. vs. CPC and the Chandigarh Bench's decision in Ethos Limited vs. DCIT, both of which dealt with similar facts and deleted disallowances made under section 36(1)(va) for delayed PF/ESI contributions during the lockdown period. The Tribunal emphasized that the delay in deposit of employees' contribution for April and May 2020 occurred during the lockdown and was rectified at the earliest opportunity when restrictions eased.

Key evidence and findings: The assessee's payments for PF contributions were delayed by a few days beyond the due date of 15.05.2020, with actual payments made in late May and early June 2020. The lockdown phases and restrictions were detailed, demonstrating the difficulty in timely payments. The EPF Organisation's circular explicitly waived penal damages for delays during this period. The assessee deposited contributions for all other months within due dates.

Application of law to facts: The Tribunal applied the principle from Checkmate Services that timely deposit is essential for deduction but balanced it against the exceptional circumstances of the lockdown and the EPF Organisation's waiver of penalties. Since the delay was caused by the lockdown and no penal damages were imposed by the EPF Organisation, the Tribunal found no mischief of retaining employees' monies and thus no justification for disallowance under section 36(1)(va).

Treatment of competing arguments: The Revenue argued that the statutory due dates were not met and hence disallowance was justified. The Tribunal rejected this by distinguishing the exceptional COVID-19 circumstances and the EPF Organisation's circular waiving penalties, which mitigated the adverse effect of delay.

Conclusions: The disallowance of Rs. 64,469/- for late payment of PF contribution during the lockdown period was deleted. The Tribunal clarified that this decision is fact-specific and does not establish a general precedent.

Issue 2: Disallowance of Rs. 1,64,120/- under section 36(1)(va) on account of employees' contribution to Superannuation Fund paid in advance

Relevant legal framework and precedents: Section 36(1)(va) requires employees' contributions to be deposited within the due date prescribed under the relevant enactment for claiming deduction. The timing of payment is critical.

Court's interpretation and reasoning: The Tribunal examined the payment records submitted by the assessee, which showed that the entire amount of Rs. 1,64,120/- was paid on or before the due date of 31.10.2019. There was no delay in payment.

Key evidence and findings: Detailed entries in the paper book demonstrated timely payments of superannuation fund contributions, all dated 31.10.2019, matching the due date.

Application of law to facts: Since the payments were made in advance or on due date, the statutory requirement under section 36(1)(va) was satisfied, and no disallowance was warranted.

Treatment of competing arguments: The Revenue maintained the disallowance was justified, but the Tribunal found no basis for this given the evidence of timely payment.

Conclusions: The Tribunal directed deletion of the disallowance of Rs. 1,64,120/- as the payments were made within the prescribed time.

Issue 3: Whether the disallowance can be challenged as a "mistake apparent on the face of record" under section 154 of the Act

Relevant legal framework and precedents: Section 154 of the Act allows rectification of mistakes apparent on the face of the record. The Supreme Court in Sanjay Kumar Agarwal vs. State Tax Officer clarified that an error must be self-evident and not require a long-drawn process of reasoning to qualify as a mistake apparent on record. The Constitution Bench in Beghar Foundation vs. Justice K.S. Puttaswamy held that changes in law or subsequent decisions do not justify review or rectification. Review petitions cannot be used as appeals in disguise.

Court's interpretation and reasoning: The Ld. CIT(A) / NFAC held that the issue of disallowance under section 36(1)(va) is contentious with divergent views and thus does not constitute a mistake apparent on the face of record. The Tribunal noted this reasoning and upheld that such controversial issues fall outside the scope of rectification under section 154.

Key evidence and findings: The prior orders and the divergent judicial opinions on the issue were considered.

Application of law to facts: The Tribunal agreed that the controversy over the timing of deposit and consequent disallowance is a matter requiring detailed examination and cannot be treated as an apparent mistake.

Treatment of competing arguments: The assessee contended that the rectification was warranted, but the authorities rejected this on the basis of the legal principles governing rectification.

Conclusions: The Tribunal upheld the view that rectification under section 154 is not available for such contentious issues.

3. SIGNIFICANT HOLDINGS

"An error which is not self-evident and has to be detected by a process of reasoning, can hardly be said to be an error apparent on the face of record justifying the court to exercise its power of review."

"Even the change in law or subsequent decision / judgment of a co-ordinate or larger Bench by itself cannot be regarded as a ground for review."

"In the present case under its peculiar set of facts, there cannot be any adverse effect on the assessee of not depositing the employees' contribution of EPF and ESI within the meaning of section 36(1)(va) of the Act when the relevant enactment itself had given a waiver from levy of penal damages for the delay in deposit 'during the lockdown period'."

"The essential character of an employees' contribution is that it is part of the employees' income, held in trust by the employer and needs to be deposited on or before the due date under the relevant Act."

Final determinations:

(a) The disallowance of Rs. 64,469/- for delayed PF contribution during the COVID-19 lockdown period is deleted, given the EPF Organisation's waiver and exceptional circumstances;

(b) The disallowance of Rs. 1,64,120/- for superannuation fund contributions paid in advance or on due date is deleted;

(c) Rectification under section 154 for such disallowances is not permissible as the issues are contentious and do not constitute mistakes apparent on the face of record;

(d) The Tribunal's decision is fact-specific and does not constitute a precedent for other cases with different facts.

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