2025 (10) TMI 1288 - AT - Income Tax

Late PF/ESI employer contributions non-deductible under s.36(1)(va); s.143(1) order valid, s.250 affirmed; no draft required

ITAT, Pune upheld the disallowance under s.36(1)(va) read with s.143(1) for employees' contributions to PF/ESI not deposited by the statutory due date, ... Addition u/s 36(1)(va) - disallowance u/s 143(1) - Sum received from employees as contribution to any provident fund or superannuation fund or any fund set up under ESI Act or any other fund for the welfare of employees to the extent not credited to the employees account on or before the due date - HELD THAT:- This issue is covered against the Assessee by the decision of Hon’ble Supreme Court in the case of Checkmates Services Pvt. Ltd [2022 (10) TMI 617 - SUPREME COURT (LB)] as laid down the law that Employees Contribution towards ESI/PF if not deposited within the time mentioned in the respective welfare laws, it will not be allowed as deduction. In the case under consideration, Employees Contribution towards ESI/PF were not deposited within the due dates mentioned in the respective statutes. Hence, respectfully following the Hon’ble Supreme Court(supra), we uphold the order u/s 143(1) and order under section 250 of the Act. Accordingly, grounds of appeal raised by the assessee are dismissed. Assessee has pleaded that since Draft Assessment Order was not provided, the order u/s.143(1) is bad in law. There is no provision of providing Draft Assessment Order under section 143(1) of the Act, therefore, Ground No.3 is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether employees' contributions towards provident fund/ESI, retained by the employer but deposited after the due date prescribed under the respective welfare enactments, qualify for deduction under section 36(1)(va) of the Income Tax Act. 2. Whether opportunity of hearing was given by the assessing authority prior to making disallowance under section 143(1) when a notice was sent by email. 3. Whether a Draft Assessment Order is required to be provided under section 143(1) of the Income Tax Act before passing the assessment order. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Deductibility of employees' contributions (PF/ESI) deposited after statutory due date under section 36(1)(va) Legal framework: Section 36(1)(va) permits deduction for sums received from employees as contribution to provident fund, superannuation fund or any fund for welfare of employees to the extent credited to employees' accounts on or before the due date. The welfare enactments (PF/ESI laws) prescribe specific due dates for deposit of employees' contributions. Section 43B (non-obstante clause) generally addresses timing of deduction linked to payment before filing return, but must be read in context. Precedent treatment: The Tribunal followed the binding pronouncement of the highest court (referred to in the record) which held that employee contributions held in trust are not employer income and that deposit on or before the statutory due date is an essential condition for deduction; the non-obstante clause of section 43B does not override this requirement. Earlier decisions relied upon by the assessee were all rendered prior to that apex court decision and were treated as not applicable in view of the later authoritative ruling. Interpretation and reasoning: The Court emphasized that employees' contributions are monies belonging to employees and are held in trust by the employer; they are only 'deemed' income for the employer until deposited as required by the welfare law. The statutory scheme treats deposit on or before the due date as the triggering event for allowing deduction. The non-obstante clause in section 43B, viewed in the context of the entire provision, ensures timely payment of certain liabilities but cannot be invoked to excuse non-compliance with the due date mandate where the amounts are trust funds (i.e., employees' contributions). The Tribunal noted that the assessing officer recorded that the contributions were paid after the statutory due dates and that there was no denial of this fact by the assessee in pleadings. Ratio vs. Obiter: Holding that deposit of employees' contributions within the statutory due date is an essential condition for deduction under section 36(1)(va) is treated as ratio following the higher court's authoritative interpretation. Discussion of the purpose of section 43B and characterization of employee contributions as trust monies is part of the ratio; references to earlier contrary decisions are effectively overruled/distinguished by the higher court and thus treated as not applicable. Conclusions: The Tribunal upheld the disallowance of the claimed deduction where employees' contributions towards PF/ESI were deposited after the statutory due dates. Following the controlling higher court ruling, such delayed deposits do not qualify for deduction under section 36(1)(va). Issue 2: Adequacy of opportunity of hearing before disallowance under section 143(1) Legal framework: Principles require that when an assessing authority proposes adjustment or disallowance under section 143(1), the assessee must be given an opportunity of hearing prior to such action (as evidenced by issuance of notice and an opportunity to respond). Precedent treatment: The record treats issuance of a notice by the Assistant Director of Income Tax (CPC) dated 15.05.2019 as satisfying the requirement to provide an opportunity prior to making the adjustment under section 143(1). The Tribunal relied on the presence of that notice in the assessment record. Interpretation and reasoning: The Tribunal observed that the assessing authority had sent a notice to the assessee's email before making the disallowance and therefore provided the opportunity of hearing. The assessee had not contested the non-receipt of opportunity in a manner that would impugn the adequacy of notice; no written submission or attendance was furnished by the assessee at multiple fixed hearings. Ratio vs. Obiter: The conclusion that the opportunity requirement was satisfied in the particular facts (notice dated 15.05.2019 issued before disallowance) is a fact-specific holding (ratio as applied to the record) rather than a general rule on modes of service. Conclusions: Ground alleging absence of opportunity of hearing was dismissed: issuance of the notice prior to disallowance meant the assessing authority complied with the requirement to provide an opportunity before passing the order under section 143(1). Issue 3: Necessity of providing Draft Assessment Order under section 143(1) Legal framework: Statutory provisions do not mandate issuance of a 'Draft Assessment Order' in the context of an assessment under section 143(1); procedural obligations are governed by the text of the statute and applicable rules. Precedent treatment: The Tribunal relied on the absence of any provision requiring a draft order under section 143(1) and held that there is no legal foundation for the ground challenging the order on that basis. Interpretation and reasoning: The argument that failure to provide a draft assessment order renders the 143(1) order bad in law was rejected because the statute contains no such requirement; procedural compliance was assessed against the actual statutory mandates, not against a non-existent draft-order norm. Ratio vs. Obiter: The holding that no draft assessment order is required under section 143(1) is a legal conclusion applied to the appeal and serves as ratio on that point. Conclusions: Ground contending invalidity of the 143(1) order for lack of a draft assessment order was dismissed as unsustainable in law. Cross-references and General Conclusion All grounds of appeal challenging the disallowance were considered to arise from the central factual-legal issue of late deposit of employees' contributions. In light of the higher court's authoritative interpretation that timely deposit (on or before the statutory due date) is an essential condition for deduction of employees' contributions, the Tribunal upheld the disallowance and dismissed the appeal. Other jurisprudence relied on by the assessee, being prior to the controlling higher court decision, was held not applicable and therefore not followed.