Depreciation on demerger assets upheld, PF-ESI delay under Section 36(1)(va) remanded based on salary payment date

ITAT Dehradun dismissed the Revenue's appeal challenging allowance of depreciation on assets received by the assessee on demerger from a state power entity, following its own earlier decision in assessee's case and holding the assessee eligible for depreciation on such transferred assets. On the assessee's appeal regarding disallowance of delayed employees' contribution to PF and ESI under s. 36(1)(va), the ITAT accepted that the due date under the respective welfare laws should be computed with reference to the actual date of salary payment. The matter on this issue was remanded to the AO for verification and fresh adjudication; the assessee's appeal was partly allowed for statistical purposes.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether depreciation is allowable on assets acquired by the assessee pursuant to demerger/split-up from another undertaking, where similar claims have been allowed in earlier assessment years and those orders are under challenge before the High Court.

1.2 Whether disallowance of employees' contribution to PF and ESI, on the ground of delayed payment under section 36(1)(va), could be sustained in an intimation under section 143(1), and how the "due date" for deposit is to be reckoned in light of the applicable PF/ESI law and judicial precedents.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Depreciation on assets received on demerger/split-up

Interpretation and reasoning

2.1 The solitary dispute in the Revenue's appeal concerned disallowance of depreciation on assets acquired by the assessee on split-up/demerger from another utility company.

2.2 The Court noted that in the assessee's own case for an earlier year, depreciation on such assets had been allowed by the Tribunal, and that the Commissioner (Appeals) had followed that order while granting relief in the present year.

2.3 It was further observed that, following the same earlier order, the Tribunal had allowed the assessee's claim for depreciation on identical facts in subsequent assessment years, and the Revenue itself admitted that the facts in the present year are identical to those years.

2.4 The Court considered the fact that the earlier Tribunal order had been challenged before the High Court, but found that this pendency does not, by itself, furnish a ground to deviate from the coordinate Bench's view in the absence of any contrary binding decision.

Conclusions

2.5 By respectfully following the coordinate Bench's decisions in the assessee's own case for preceding and subsequent years, the Court held that the assessee is eligible for depreciation on the assets received on demerger/split-up.

2.6 All grounds raised by the Revenue on this issue were dismissed and the Revenue's appeal was rejected.

Issue 2 - Disallowance of employees' contribution to PF/ESI under section 36(1)(va) in processing under section 143(1); determination of "due date" with reference to actual salary payment

Legal framework as discussed

2.7 The assessee's return showed a loss, which was reduced in an intimation under section 143(1) by disallowing employees' contribution to PF and ESI under section 36(1)(va) for delayed payment.

2.8 The Commissioner (Appeals) upheld the disallowance following the decision of the Supreme Court in Checkmate Services (P) Ltd. v. CIT, which held that delayed deposit of employees' contributions beyond the "due date" under the respective Acts is not allowable under section 36(1)(va), irrespective of payment before the due date of filing the return.

Interpretation and reasoning

2.9 Before the Court, the assessee accepted that the principle in Checkmate Services (P) Ltd. is against it to the extent that any deposit beyond the statutory "due date" under the PF/ESI law is disallowable under section 36(1)(va).

2.10 The assessee, however, contended that, for computing the "due date" under the relevant PF/ESI statutes, the month from which the 15-day period is to be reckoned should be the month of actual disbursement of salary, and not the month to which the salary relates.

2.11 In support, reliance was placed on a coordinate Bench decision in M.S. Vigilant Security Placement & Detective Services (P) Ltd., which, in turn, followed the Kolkata Bench decision in Kanoi Papers & Industries Ltd. v. ACIT. Those decisions interpreted clause 38 of the Employees' Provident Fund Scheme, 1952, to hold that:

- The "month" for the purpose of computing the 15-day period for deposit of contributions is the month in which wages/salary is actually disbursed, irrespective of the month to which the wages relate.

- This interpretation recognizes that contributions are "generated" when salary is actually paid and deductions are made, and that a liberal approach is appropriate in construing provisions leading to disallowance for delay.

2.12 The Court found force in the assessee's contention that, for determining the due date under the respective PF/ESI Acts, the actual date of payment of salary should be taken into account, consistent with the above coordinate Bench decisions.

2.13 Applying Checkmate Services (P) Ltd., the Court accepted that delayed payment of employees' PF/ESI contribution beyond the statutory due date remains not allowable as expenditure, but held that the correct due date first has to be ascertained on the basis of the actual salary disbursement dates.

Conclusions

2.14 The Court affirmed, in principle, the applicability of section 36(1)(va) as interpreted by the Supreme Court in Checkmate Services (P) Ltd., i.e., that employees' contribution paid beyond the statutory due date under the respective enactments is not deductible.

2.15 At the same time, the Court accepted the proposition that the statutory "due date" for deposit under the PF/ESI law is to be reckoned from the month in which salary is actually disbursed, in line with the decisions in Kanoi Papers & Industries Ltd. and M.S. Vigilant Security Placement & Detective Services (P) Ltd.

2.16 The matter was remitted to the Assessing Officer to:

- verify the actual dates of salary disbursement; and

- recompute, under the applicable PF/ESI provisions, the due dates for deposit of employees' contributions and determine the allowability of deduction accordingly, in accordance with law.

2.17 On this basis, all grounds in the assessee's appeal were treated as partly allowed for statistical purposes, with no further interference at the appellate stage.

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