Delayed deposit of employee PF and ESIC contributions disallowed under Section 36(1)(va) following Supreme Court precedent

ITAT Raipur upheld disallowance of delayed deposit of employee's share of PF and ESIC contributions under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act. Following SC precedent in Checkmate Services case, the tribunal dismissed assessee's appeal and confirmed that delayed deposits of employee welfare fund contributions are not deductible. The tribunal rejected assessee's Section 154 rectification application seeking to reverse the disallowance made prior to the SC judgment.

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The core legal issues considered in this appeal pertain to the disallowance of deduction claimed by the assessee for delayed payment of employees' share of contributions towards Employees Provident Fund (EPF) and Employees State Insurance Corporation (ESIC) under the Income-tax Act, 1961. Specifically, the issues are:

1. Whether the disallowance of Rs. 32,77,451/- made by the Assessing Officer (AO)/Centralized Processing Centre (CPC) under Section 36(1)(va) read with Section 2(24)(x) of the Act for non-timely payment of employees' contributions towards EPF and ESIC was justified.

2. Whether such disallowance could be made under Section 143(1) of the Act via intimation, especially when the payment was made before the due date for filing the Income Tax Return.

3. Whether the explanation inserted by the Finance Act, 2021 to Sections 36(1)(va) and 43B of the Act, which is effective from Assessment Year 2021-22, applies retrospectively to the year under consideration (AY 2019-20).

4. Whether the judgment of the Hon'ble Apex Court in Checkmate Services Pvt. Ltd. (dated 12.10.2022) could be applied retrospectively to validate the disallowance made prior to its pronouncement.

5. Whether the delay of 517 days in filing the present appeal merits condonation.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction for Delayed Payment of Employees' Contributions under Section 36(1)(va) r.w.s. 2(24)(x)

Legal Framework and Precedents: Section 36(1)(va) of the Income-tax Act disallows deduction for any sum received from employees as contributions to provident fund or other welfare funds unless such sum is credited to the employee's account on or before the due date prescribed under the relevant enactments. Section 2(24)(x) defines such sums as income of the employer if not timely deposited. Section 43B mandates that certain deductions are only available on actual payment.

The Hon'ble Apex Court in Checkmate Services Pvt. Ltd. clarified that delayed deposit of employees' share of contributions to EPF and ESIC is liable to be disallowed under Section 36(1)(va) read with Section 2(24)(x), notwithstanding the non-obstante clause in Section 43B. The Court emphasized the statutory distinction between employer's contribution (Section 36(1)(iv)) and employee's contribution (Section 36(1)(va)), highlighting that employee contributions are deemed income of the employer unless deposited by the due date.

Court's Interpretation and Reasoning: The Court analyzed the legislative history, including the Finance Act, 1987 and subsequent amendments, to conclude that Parliament intended strict compliance with deposit timelines for employee contributions. The non-obstante clause in Section 43B does not override the condition of timely deposit for employee contributions. The Court rejected the argument that delayed payments made before filing returns should be allowed as deduction, distinguishing employee contributions from employer's contributions and other statutory payments.

Key Evidence and Findings: The AO/CPC disallowed the deduction for delayed deposit of Rs. 32,77,451/-. The CIT(Appeals) upheld this disallowance relying on judicial pronouncements, including the Apex Court's ruling in Checkmate Services Pvt. Ltd., which was rendered after the AO's intimation but before the appeal.

Application of Law to Facts: The Tribunal concurred with the CIT(Appeals) that the disallowance was rightly made under Section 36(1)(va) read with Section 2(24)(x). The delayed deposit did not meet the statutory condition for deduction, and the non-obstante clause in Section 43B did not provide relief.

Treatment of Competing Arguments: The assessee contended that the disallowance was not permissible under Section 143(1) intimation, and that the Finance Act, 2021 explanation was not retrospective. The Tribunal rejected these contentions, holding that the law as clarified by the Apex Court governs the case. The Tribunal also noted that the explanation inserted by the Finance Act, 2021 is prospective, effective from AY 2021-22, and hence not applicable to AY 2019-20.

Conclusion: The disallowance of the delayed deposit of employees' contributions towards EPF and ESIC was valid and sustainable under the statutory provisions and judicial pronouncements.

2. Validity of Disallowance via Intimation under Section 143(1)

Legal Framework: Section 143(1) allows the AO to make certain adjustments during processing of returns. The issue was whether such disallowance for delayed deposit could be effected through intimation under Section 143(1).

Court's Reasoning: The Tribunal referred to a recent decision of the Hon'ble High Court of Chhattisgarh in M/s. BPS Infrastructure Vs. ITO, which upheld the validity of disallowance made by AO under Section 143(1) for delayed deposit of employees' contributions. The Court held that the AO was justified in making the disallowance through intimation, and the CIT(Appeals) rightly approved the adjustment.

Application: The Tribunal found no infirmity in the AO's action of disallowing the claim through intimation under Section 143(1) and rejected the assessee's contention to the contrary.

3. Retrospective Application of Finance Act, 2021 Explanation

Legal Framework: The Finance Act, 2021 inserted explanations to Sections 36(1)(va) and 43B, effective from AY 2021-22, clarifying conditions for deduction of employee contributions.

Court's Interpretation: The Tribunal observed that these amendments are prospective in nature and do not apply retrospectively to AY 2019-20. Hence, the assessee's reliance on these explanations to negate the disallowance for the year under consideration was rejected.

4. Application of Apex Court Judgment in Checkmate Services Pvt. Ltd. to Pre-Judgment Assessments

Legal Framework and Precedents: The Apex Court's judgment in Checkmate Services Pvt. Ltd. was delivered after the AO's intimation but before the appeal. The question was whether the AO's disallowance prior to this judgment could be sustained.

Court's Reasoning: The Tribunal held that the principles laid down by the Apex Court clarify the law and are applicable retrospectively. The AO's disallowance was in accordance with the law as interpreted by the Apex Court. The Tribunal also referred to the High Court's decision in M/s. BPS Infrastructure, which upheld such retrospective application.

Conclusion: The disallowance made prior to the Apex Court's judgment was valid and sustainable.

5. Condonation of Delay of 517 Days in Filing the Appeal

Legal Framework: The delay in filing the appeal was 517 days. The Tribunal considered whether this delay should be condoned under the principle of "sufficient cause" as per Section 253(5) of the Act.

Court's Reasoning: The assessee submitted multiple reasons for delay including wrong advice by previous counsel, financial instability, absence of key personnel, and involvement in multiple litigations. The Tribunal relied on an affidavit filed by a director of the assessee and noted that the department did not rebut these reasons. The Tribunal also referred to the Hon'ble High Court of Chhattisgarh's judgment in Navojit Samaj Sevi Sanstha Vs. ITO, which advocated a liberal approach in condoning delay when it is bona fide and not mala fide.

Conclusion: The Tribunal held the delay was occasioned by reasons beyond the assessee's control and condoned the delay in the interest of substantial justice.

Significant Holdings:

"The employee's share of contributions towards ESI & EPF deposited by the assessee beyond the due dates prescribed under the said respective Acts would by virtue of Section 36(1)(va) r.w.s. 2(24)(x) of the Act constitute income of the assessee."

"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."

"The Finance Act, 2021 explanations to Sections 36(1)(va) and 43B are not retrospective and are categorically effective from Assessment Year 2021-22."

"A liberal approach in considering the application for condonation of delay construing sufficient cause has to be adopted and appeal has to be decided on merits unless the case is hopelessly without merit."

"The disallowance of delayed deposit of employees' share of contribution towards EPF and ESIC made by the AO under Section 36(1)(va) r.w.s. 2(24)(x) of the Act through intimation under Section 143(1) is valid and sustainable."

The Tribunal dismissed the appeal on merits, upheld the disallowance of Rs. 32,77,451/-, and condoned the delay of 517 days in filing the appeal based on sufficient cause. The principles established reinforce the strict statutory conditions for claiming deductions of employees' contributions and clarify the non-applicability of the Finance Act, 2021 explanations retrospectively. The ruling affirms the binding nature of the Apex Court's interpretation in Checkmate Services Pvt. Ltd. and the validity of disallowances made through intimation under Section 143(1).

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