AI Drafter 
TaxTMI 
TaxTMI 
2024 (1) TMI 1275
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....by the A.O and sustained by the Ld. CIT(A) is arbitrary, baseless and not justified. 2. The assessee reserves the right to add, urge, alter or withdraw any ground/grounds at the time or before the date of hearing." 2. Succinctly stated, the assessee company had filed its return of income for A.Y. 2018-19 declaring an income of Rs. 84,31,610/-. Assessee's claim for deduction of delayed deposit of employees share of contribution towards ESI/PF of Rs. 24,72,236/- was disallowed by the CPC, Bengaluru vide intimation issued u/s. 143(1) of the Act dated 16.10.2019. 3. Thereafter, the assessee filed an application u/s. 154 of the Act, which, however, was rejected by the CPC, Bengaluru vide its impugned order dated 28.11.2019. 4. The assessee assailed the order passed by the CPC, Bengaluru u/s. 154 of the Act dated 28.11.2019 before the CIT(Appeals) but without success. For the sake of clarity the relevant observations of the CIT(Appeals) are culled out as under: "7. The grounds of appeal raised by the appellant have been carefully examined and it is observed that the grounds are related to the disallowance of the employee's share of contributions towards PF u/s.....
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....essing Officer was right in disallowing the deduction claimed u/s 36(1)(va) of the IT Act. The appellant furnished the copies of challans for remittance of EPF and claimed in the written submissions that such sums have been remitted before the due date of filing of the return and hence, are allowable as deduction. The appellant has also relied on several judicial pronouncements in this regard. However, these decisions have been rendered prior to the Hon'ble Supreme Court settling this matter finally with the decisions quoted in the subsequent paragraphs. 7.4 This issue has been settled with the decision of the Hon'ble Supreme court in the following cases a. Checkmate Services (P.) Ltd. v. CIT [2022] 143 taxmann.com 1781[2023] 290 Taxman 19 /(2022) 448 ITR 518. b. Principal Commissioner of Income-tax Vs Strides Arcolab Ltd [2023] 147 taxmann.com 202 (SC). 7.5 While drawing a difference between the Employers' contribution u/s 43B and the Employee's contribution u/s 36(1)(va), the Hon'ble Apex Court of- India has observed the following: "When Parliament introduced section 438, what was on the statute book, was only employer's....
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....hat if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual, payments were a necessary pre-condition for allowing the expenditure. [Para 52] ■ The distinction between an employer's contribution which is its primary liability under law - in terms of section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers' income, and the later retains its character as an income (albeit deemed), by virtue of section 2(24) (x) - unless the conditions spelt by Explanation to section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts - the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees' income and held in trust by the employer. This marked distinction has to be borne while....
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....reme Court judgment in Checkmate Services (P.) Ltd. v. CIT [2022] 143 taxmann.com 178/(2023] 290 Taxman 19/(2022) 448 ITR 518 was justified" It has further held that, "Non-obstante clause under section 43B would not absolve assessee employer from its liability to deposit employees' contribution on or before due date as prescribed under section 36(1)(va) as a condition for deduction". 9. In light of the above judicial pronouncements and the facts and circumstance of the case, I am of the opinion that the grounds of appeal raised by the appellant do not stand and accordingly are dismissed." 5. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us. 6. We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 7. Before proceeding any further, we may herein observe that as held by the Hon'ble High Court of Chhattisgarh in the case of Bhuneshwar Prasad Sahu Vs. DCIT, C....
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....s of the ITAT, Mumbai in the case of Kalpesh Synthetics (P) Ltd. Vs. DCIT (2022) 137 taxmann.com 475 (Mumbai) and P.R. Packaging Service Vs. ACIT (2023) 148 taxmann.com 153 (Mumbai), had held that no such disallowance of the delayed deposit of the employee's share of contribution towards labour welfare fund could have been made in the hands pf the assessee company while processing of its return of income u/s. 143(1)(a) of the Act. The Tribunal while concluding as hereinabove had observed as under: "6. I have heard the Ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 7. Controversy involved in the present appeal lies in a narrow compass, i.e as to whether or not the delayed deposit of the employee's share of contributions towards ESI & EPF by the assessee-employer, could have summarily been held by the A.O, as the assessee's income under Section 36(1)(va) r.w.s 2(24)(x) of the Act while processing his return of income u/s. 143(1) of the Act,.? ....
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....ention had drawn support from the following judicial pronouncements: (i) CIT Vs. M/s. Alom Extrusions Ltd. (2009) 185 Taxman 416 (SC) (ii) CIT Vs. Vinay Cement Ltd. (2007) 213 CTR 268(SC) (iii) Pr. CIT, Jaipur Vs. Rajasthan State Beverages Corporation Ltd. (2017) 84 taxmann.com 185(SC) (iv) CIT Vs. State Bank of Bikaner & Jaipur (2014) 43 taxmann.com 411 (Rajasthan) (v) Sagun Foundry Pvt. Ltd. Vs. CIT (Kanpur) (2017) 78 taxmann.com 47 (Allahabad) (vi) CIT Vs. Aimil Limited (2010) 188 TaXMAN 265 (Delhi) It was submitted by the Ld. AR, that now when the department on the one hand was of the view that the delayed deposit of the employee's share of contributions towards ESI & EPF were to be disallowed u/s. 36(1)(va) r.w.s. 2(24)(x); while for the courts on the other hand had accepted the assessee's claim that such delayed deposits which were made by the assessee not later than the "due date" of filing of its return of income under sub section (1) of Section 139 of the Act were saved by the provisions of Section 43B of the Act, therefore, the said delayed deposits could not have been summarily held by the A.O as the income o....
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....rt from that, we find substance in the claim of the Ld. AR that the assessee's auditor in his audit report in Form 3CD r.w.s. 6G(2), as per the statutorily required, had only furnished the details of the contributions towards employee's share of contributions towards various funds as referred to in Section 36(1)(va) of the Act, and at no stage had offered the same as the income of the assessee. 13. On a conjoint perusal of the aforesaid facts, viz. (i). the issue as to whether the delayed deposit of employees share of contribution towards labour welfare funds, i.e. ESI and EPF by the assesseeemployer were liable to be held as the income of the assessee u/s. 36(1)(va) r.w.s. 2(24)(x) of the Act, as was the view of the department; or the same were saved by the provisions of Section 43B of the Act, i.e to the extent such deposits were made not later than the "due date" of filing of the return of income of the assessee as prescribed under sub-section (1) of Section 139 of the Act, was a highly debatable; AND (ii). that the assessee's chartered account had only furnished the details of such delayed deposits in column 20(b) of his audit report in Form 3CD and had not offered the....
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.... "prima facie inadmissible" came up for consideration before Hon'ble Courts above. While the expression used in section 143(1)(a)(i) is materially similar inasmuch as its wordings are "an incorrect claim, if such incorrect claim is apparent from any information in the return", there are two important things that one must bear in mind- (a) firstly, the expression "an incorrect claim, if such incorrect claim is apparent from any information in the return" is well defined in Explanation to Section 143(1), and; (b) secondly, and perhaps much more importantly, that is just one of the permissible types of adjustments, denying a deduction, under section 143(1)(a) which goes well beyond such adjustments and includes the cases such as "(iii) disallowance of loss claimed, if the return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139; (iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return; (v) disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished....
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....a)- such as Hon'ble jurisdictional High Court's judgment in the case of Khatau Junkar (supra). To that extent, we must uphold the plea of the learned Departmental Representative. 6. Coming to the mechanism of application of Section 143(1), we find that the first proviso to Section 143 (1) mandates that "no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode" and, under the second proviso to Section 143(1), "the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made". The scope of permissible adjustments under section 143(1)(a) now is thus much broader, and, as long as an adjustment fits the description under section 143(1)(a) (i) to (v), read with Explanation to Section 143(1), such an adjustment, subject to compliance with first and second proviso to Section 143(1), is indeed permissible. It is, however, important to take note of the fact that unlike the old scheme of 'prima facie adjustments' under section 143(1)(a), the sc....
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....timation under section 143(1) is an appealable order, and when consideration of objections raised by the assessee is an integral part of the process of finalizing the intimation under section 143(1) unless the reasons for such rejection are known, a meaningful appellate exercise can hardly be carried out. When the first appellate authority has no clue about the reasons which prevailed with the Assessing Officer- CPC, in rejecting the submissions of the assessee, because no such reasons are indicated by the Assessing Officer CPC anyway, it is difficult to understand on what basis the first appellate authority sits in judgment over correctness or otherwise of such a rejection of submissions. Whether the statute specifically provides for it or not, in our considered view, the need for disposal of objections by way of a speaking order has to be read into it as the Assessing Officer CPC, while disposing of the objections raised by the assessee, is performing a quasi-judicial function, and the soul of a quasijudicial decision making is in the reasoning for coming to the decision taken by the quasi-judicial officer. While on this aspect of the matter, we may usefully refer to the observat....
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....ations enough for any disallowance of expenditure under the Act? As we deal with this question, we are alive to the fact section 143(1)(a)(iv) specifically an adjustment in respect of "disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return". It does proceed on the basis that when a tax auditor indicates a disallowance in the tax audit report, for this indication alone, the expense must be disallowed while processing under section 143(1) by the CPC. It is nevertheless important to bear in mind the fact that a tax audit report is prepared by an independent professional. The fact that the tax auditor is appointed by the assessee himself does not dilute the independence of the tax auditor. The fact remains that the tax auditor is a third party, and his opinions cannot bind the auditee in any manner. As a matter of fact, no matter how highly placed an auditor is, and even within the Government mechanism and with respect to CAG audits, the audit observations are seldom taken an accepted position by the auditee- even when the auditor is appointed by the auditee himself. These are mere opinions and at best these opin....
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....al position, the tax audit report has to make way for the correct legal position. The reason is simple. Under Article 141 of the Constitution of India, the law laid down by the Hon'ble Supreme Court unquestionably binds all of us, and the Hon'ble Supreme Court has, in numerous cases- including, for example, in the case of East India Commercial Co. Ltd. v. Collector of Customs 1962 taxmann.com 5, speaking through Hon'ble Justice Subba Rao observed, inter alia, as follows: ............Under article 215, every High Court shall be a Court of record and shall have all the powers of such a Court including the power to punish for contempt of itself. Under article 226, it has a plenary power to issue orders or writs for the enforcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under article 227 it has jurisdiction over all Courts and Tribunals throughout the territories in relation to which it exercises jurisdiction. It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that Court and start....
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....ore, in the present case, whether the CPC is within the jurisdiction of Hon'ble Bombay High Court or not, as long as the regular Assessing Officer of the assessee and the assessee are located in the jurisdiction of Hon'ble Bombay High Court, the jurisdictional High Court, for all matters pertaining to the assessee, will be Hon'ble Bombay High Court. In our considered view, it cannot be open to the Assessing Officer CPC to take a view contrary to the view taken by the Hon'ble jurisdictional High Court- more so when his attention was specifically invited to the binding judicial precedents in this regard. For this reason also, the inputs in question in the tax audit report can not be reason enough to make the impugned disallowance. The assessee must succeed for this reason as well. 9. What a tax auditor states in his report are his opinion and his opinion cannot bind the auditee at all. In this light, when one considers what has been reported to be 'due date' in column 20 (b) in respect of contributions received from employees for various funds as referred to in Section 36(1)(va) and the fact that the expression 'due date' has been defined under Explanation (now Explanation 1....
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....e of adjustments which can be carried out under section 143(1) and that we see no need to deal with the question, which is rather academic in the present context, as to whether if such an adjustment was to be permissible in the scheme of Section 143(1), whether the insertion of Explanation 2 to Section 36(1)(va), with effect from 1st April 2021, must mean that so far as the assessment years prior to the assessment years 2021-22 are concerned, the provisions of Section 43B cannot be applied for determining the due date under Explanation (now Explanation 1) to Section 36(1)(va). That question, in our humble understanding, can be relevant, for example, when a call is required to be taken on merits in respect of an assessment under section 143(3) or under section 143(3) r.w.s. 147 of the Act, or when no findings were to be given on the scope of permissible adjustments under section 143(1)(a)(iv). That is not the situation before us. We, therefore, see no need to deal with that aspect of the matter at this stage. 11. In a result, this appeal is allowed." 14. Also, I find that a similar view had been taken by the ITAT, Mumbai in the case of P.R Packaging Service Vs. ACIT (supra)....
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....ollow the same. 10. We, thus, in terms of our aforesaid observations, set-aside the order passed by the CIT(Appeals) wherein he had upheld the order passed by the CPC/A.O u/s. 154 of the Act, and thus, declined the assessee's claim for deduction of delayed deposit of employees share of contribution towards ESI/PF and vacate the addition of Rs. 24,72,236/ made by the A.O. 11. In the result, appeal of the assessee company is allowed in terms of our aforesaid observations. Order pronounced in open court on 11th day of January, 2024. ============= Document 1 20 b Details of contributions received from employees for various funds as referred to in section 36(1)(va): Nature of fund Sum received from Due date for The payment actual The actual amount paid of payment date to employees the authorities concerned Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund Provident Fund 169302 15/05/2017 169302 18/11/2017 213948 15/06/2017 213948 18/11/2017 238308 15/07/2017 92400 15/08/2017 ....