2025 (12) TMI 870 - AT - Income Tax

Employee PF/ESI paid late not deductible u/s 36(1)(va), Supreme Court Checkmate ruling applies retrospectively now

The ITAT (Chennai) dismissed the assessee's appeal challenging disallowance of employees' contribution to PF/ESI paid after the statutory due dates but ... Disallowance of PF & ESI in the Intimation u/s.143(1) - reliability of law as conclusively settled by the Supreme Court - whether the assessee is entitled to deduction of employees’ contribution to PF/ESI deposited beyond the due dates under the respective Acts but before the due date of filing the return of income u/s 139(1)? - HELD THAT:- The law as settled by the Supreme Court in Checkmate Services Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] is that delayed remittance of employees’ contribution, even if deposited before filing of return under section 139(1), is not allowable as deduction. In Raj Kumar Bothra [2025 (5) TMI 980 - CHHATTISGARH HIGH COURT] held that at the time when the return was processed (i.e., prior to the judgment in Checkmate Services Pvt. Ltd.), the issue regarding delayed deposit of employees’ contributions was debatable and hence could not form part of prima facie adjustment u/s 143(1)(a). However, the said decision was rendered in the context of an intimation dated 16.12.2021, i.e., prior to the pronouncement of Checkmate Services Pvt. Ltd. (supra) on 12.10.2022. The Hon’ble High Court’s observations were based on the legal uncertainty prevailing at that time. In the present case, the appellate proceedings are taking place after the Supreme Court’s decision, which has conclusively settled the law. Once the Hon’ble Apex Court has interpreted section 36(1)(va) authoritatively, such interpretation operates retrospectively, as it declares the correct position of law as it always stood. The ratio of Raj Kumar Bothra [2025 (5) TMI 980 - CHHATTISGARH HIGH COURT] is distinguishable on facts and law, and cannot be applied to override the binding authority of the Hon’ble Supreme Court in Checkmate Services Pvt. Ltd. (supra). We find no infirmity in the order of the CIT(A) confirming the disallowance made by CPC under section 154 in respect of delayed payment of employees’ contribution to PF/ESI. Appeal filed by the assessee is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether employees' contribution to PF/ESI, deposited after the due dates prescribed under the respective welfare enactments but before the due date of filing the return under section 139(1), is allowable as deduction under section 36(1)(va) of the Income-tax Act. 1.2 Whether disallowance of delayed payment of employees' contribution to PF/ESI could validly be made as an adjustment in processing under section 143(1)(a), and upheld in rectification proceedings under section 154, in view of the contention that the issue was 'debatable' on the date of such processing. 1.3 Whether the interpretation of section 36(1)(va) laid down by the Supreme Court in the decision concerning employees' contribution to PF/ESI operates retrospectively so as to govern pending appellate proceedings, notwithstanding earlier perceived legal uncertainty or contrary High Court views. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Allowability of deduction for employees' contribution to PF/ESI paid after statutory due dates but before due date of return Legal framework (as discussed) 2.1 The Tribunal noted that employees' contribution to PF/ESI is governed by section 36(1)(va) read with section 2(24)(x) of the Act, and that section 43B applies only to employer's contribution. 2.2 The Tribunal relied on the categorical exposition of law by the Supreme Court in the decision on employees' contribution to PF/ESI, wherein it was held that such contribution, if not deposited within the due date prescribed under the relevant enactments, is treated as income of the employer and is not saved by section 43B even if paid before the due date of filing the return under section 139(1). Interpretation and reasoning 2.3 The Tribunal recorded that in the present case the assessee had 'admittedly' deposited the employees' contribution to PF/ESI beyond the due dates specified under the respective Acts. 2.4 Applying the ratio of the Supreme Court decision, the Tribunal held that once the contribution is deposited after the statutory due dates under the PF/ESI Acts, deduction under section 36(1)(va) is not allowable, regardless of the fact that payment was made before the due date of filing the return under section 139(1). 2.5 The Tribunal thus treated the law as conclusively settled by the Supreme Court, leaving no scope to invoke section 43B in respect of employees' contribution. Conclusions 2.6 The Tribunal concluded that the delayed employees' contribution to PF/ESI is not allowable as deduction under section 36(1)(va) when paid after the due dates under the relevant welfare enactments, even if paid before the due date for filing the return. 2.7 Consequently, the disallowance of Rs. 17,28,945/- made by CPC and confirmed by the Commissioner (Appeals) on account of delayed employees' contribution to PF/ESI was upheld as legally justified. Issue 2: Legality of adjustment under section 143(1)(a) and rectification under section 154 in respect of delayed employees' contribution; alleged 'debatable' nature of issue Legal framework (as discussed) 2.8 The assessee contended that (i) disallowance under section 36(1)(va) could not be made at the stage of processing under section 143(1)(a) because it did not fall within the scope of prima facie adjustments, and (ii) on the date of such processing, the issue was debatable and therefore outside the ambit of section 143(1)(a), relying on a High Court decision (Raj Kumar Bothra) taking that view. 2.9 The Tribunal examined prior decisions of co-ordinate Benches, including those in TalentPro India HR Pvt. Ltd. and DCIT v. Amazing Export Corporation & Others, wherein it had been held that adjustments for late payment of employees' contribution to PF/ESI could be made under section 143(1)(a), based on information in the tax audit report (Form 3CD). Interpretation and reasoning 2.10 The Tribunal noted that co-ordinate Benches had already held that adjustments under section 143(1)(a) are permissible for disallowance of employees' contribution to PF/ESI paid beyond the due date, since such disallowance is a clear, quantifiable item discernible from the audit report, and can be brought within clause (ii) and clause (iv) of section 143(1). 2.11 The Tribunal referred to the Chhattisgarh High Court decision (Raj Kumar Bothra), which had held that, for an intimation dated 16.12.2021 issued before the Supreme Court's decision on employees' contribution, the issue was then 'highly debatable' and thus beyond the scope of section 143(1)(a). 2.12 The Tribunal distinguished that High Court decision on two grounds: (i) it was rendered in the context of a pre-Supreme Court intimation where legal uncertainty existed, and (ii) in the present case, appellate proceedings were being decided after the Supreme Court's authoritative interpretation, which retrospectively declares what the law always was. 2.13 The Tribunal emphasized that once the Supreme Court has settled the interpretation of section 36(1)(va), such interpretation is binding and applies retrospectively unless the Court itself declares a decision to be prospective. For this proposition, the Tribunal relied on the Supreme Court's pronouncement in M.A. Murthy v. State of Karnataka, which clarifies that the doctrine of prospective overruling is to be applied only when explicitly indicated by the Court. 2.14 On that basis, the Tribunal held that the subsequent Supreme Court decision governs the assessment and appellate proceedings, and the characterization of the issue as 'debatable' at the time of original processing cannot defeat a prima facie adjustment which, when tested in appeal, must be examined in light of the law as now declared by the Supreme Court. 2.15 The Tribunal therefore accepted the view of the co-ordinate Benches that processing under section 143(1)(a) could validly include disallowance of late-paid employees' contribution to PF/ESI, based on the audit data, and that the CPC's rectification order under section 154 refusing to delete such adjustment did not suffer from illegality. Conclusions 2.16 The Tribunal held that disallowance of delayed employees' contribution to PF/ESI is a permissible and valid adjustment under section 143(1)(a), as it is a clear, arithmetically determinable item discernible from the tax audit report. 2.17 The plea that the issue was 'debatable' at the time of processing and thus beyond the scope of section 143(1)(a) was rejected, in view of the binding co-ordinate Bench decisions and the retrospective operation of the Supreme Court's interpretation of section 36(1)(va). 2.18 The rectification order under section 154 declining to remove the adjustment was upheld, and no infirmity was found in the order of the Commissioner (Appeals) sustaining the disallowance. Issue 3: Retrospective operation of Supreme Court's interpretation of section 36(1)(va) Legal framework (as discussed) 2.19 The Tribunal examined the effect of the Supreme Court's decision on employees' contribution to PF/ESI, specifically whether it operates prospectively or retrospectively, and whether it controls assessments and appeals relating to earlier years. 2.20 The Tribunal referred to M.A. Murthy v. State of Karnataka, where the Supreme Court held that the law declared by the Court is ordinarily retrospective, and that prospective overruling must be expressly indicated in the particular decision. Interpretation and reasoning 2.21 The Tribunal observed that the Supreme Court decision on employees' contribution did not state that it would operate prospectively, and therefore, under the principle set out in M.A. Murthy, it is to be applied retrospectively as a declaration of what section 36(1)(va) has always meant. 2.22 On this premise, the Tribunal held that appellate authorities are bound to decide pending matters in accordance with the Supreme Court's interpretation, regardless of any earlier contrary understanding or High Court decisions that had treated the issue as debatable. 2.23 Consequently, the Tribunal found that the High Court decision in Raj Kumar Bothra, which focused on the debatable nature of the issue at the time of processing under section 143(1)(a), could not override the binding and retrospective effect of the Supreme Court's ruling on the substantive allowability of the deduction. Conclusions 2.24 The Tribunal concluded that the Supreme Court's interpretation of section 36(1)(va) regarding employees' contribution to PF/ESI applies retrospectively and governs the present assessment year. 2.25 In light of that retrospective operation, the Tribunal upheld the disallowance and dismissed the appeal, finding no legal infirmity in the orders passed under sections 143(1)(a), 154, and by the Commissioner (Appeals).