TaxTMI 
TaxTMI 
2024 (11) TMI 225
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of delayed payment of employee's contribution to ESIC made by the A.O invoking Sec.36(1)(va). The disallowance made by the Ld. CIT(A) is arbitrary, baseless and not justified. 3. I.d. CIT(A) erred in confirming disallowance of Rs. 352355/- on account of delayed payment of employee's contribution to any other fund made by the A.O invoking Sec.36(1)(va). The disallowance made by the Ld.CIT(A) is arbitrary, baseless and not justified. 4. Without prejudice to above grounds, Ld.CIT(A) erred in confirming the disallowance made by the A.O without appreciating the fact that the adjustment made by AO/CPC is not permissible u/s. 143(1). 5 The appellant reserves the right to add, alter, and omit all or any of the grounds of appeal with the permission of the Hon'ble ITAT." 2. Succinctly stated, the Centralized Processing Centre (CPC), Bengaluru while processing the return of income of the assessee had vide an intimation u/s. 143(1) of the Act disallowed his claim for deduction of delayed deposit of employees share of contribution towards ESIC and EPF of Rs. 1,41,16,990/-. 3. As is discernible from the record, the assessee had, inter alia, assailed the disallowance of the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd the material available on record as well as considered the judicial pronouncement that have been pressed into service by the Ld. DR to drive home his contentions. 9. Admittedly, it is a matter of fact borne from record that the Hon'ble Apex Court in the case of Checkmate Services P. Ltd. Vs. Commissioner of Income Tax-I, Civil Appeal No.2833 of 2016 dated 12.10.2022, while clarifying the position of law, had held that the delayed deposit of employee's share of contributions towards labour welfare funds, viz. Employee's Provident fund (EPF) and Employee's State Insurance (ESI) is liable to be disallowed as per the mandate of Section 36(1)(va) r.w.s. 2(24)(x) of the Act. Considering the law laid down by the Hon'ble Apex Court in the case of Checkmate Services P. Ltd. Vs. Commissioner of Income Tax-I (supra), we concur with the CIT(Appeals) that the disallowance of the assessee's claim for deduction of delayed deposit of employees share of contribution towards ESIC & EPF made by the CPC, Bengaluru u/s. 143(1) of the Act had, thereafter, rightly been upheld by the A.O vide his order passed u/s. 154 of the Act. 10. The Hon'ble Apex Court in the case of Checkmate Services Pvt. L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us heads (including depreciation). Each of these deductions, has its contours, depending upon the expressions used, and the conditions that are to be met. It is therefore necessary to bear in mind that specific enumeration of deductions, dependent upon fulfilment of particular conditions, would qualify as allowable deductions: failure by the assessee to comply with those conditions, would render the claim vulnerable to rejection. In this scheme the deduction made by employers to approved provident fund schemes, is the subject matter of Section 36 (iv). It is noteworthy, that this provision was part of the original IT Act; it has largely remained unaltered. On the other hand, Section 36(1)(va) was specifically inserted by the Finance Act, 1987, w.e.f. 01-04-1988. Through the same amendment, by Section 3(b), Section 2(24) - which defines various kinds of "income" - inserted clause (x). This is a significant amendment, because Parliament intended that amounts not earned by the assessee, but received by it, - whether in the form of deductions, or otherwise, as receipts, were to be treated as income. The inclusion of a class of receipt, i.e., amounts received (or deducted from the emplo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o Section 2(24), the definition clause (x), with effect from 1 April 1988; it also brought in Section 36(1)(va). The memorandum explaining these provisions, in the Finance Bill, 1987, presented to the Parliament, is extracted below: "Measures of penalising employers mis-utilising contributions to the provident fund or any funds set up under the provisions of the Employees State Insurance Act, 1948, or any other fund for the welfare of employees - 12.1. The existing provisions provide for a deduction in respect of any payment by way of contribution to the provident fund or a superannuation fund or any other fund for welfare of employees in the year in which the liabilities are actually discharged (Section 43B). The effect of the amendment brought about by the Finance act, is that no deduction will be allowed in the assessment of the employer, unless such contribution is paid into the fund on or before the due date. "Due date" means the date by which an employer is required to credit the contribution to the employees account in the relevant fund or under the relevant provisions of any law or term of the contract of service or otherwise. (Explanation to Section 36 (1) of the Fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ard from their income on the ground that the liability to pay these amounts had been incurred by them in the relevant previous year. It was to stop this mischief that Section 43B was inserted." 39. Original Section 43B(b) enabled the assessee/employer to claim deduction towards contribution as an employer, "by way of contribution to any provident fund". The second proviso was substituted by Finance Act, 1989 with effect from 01.04.1989 and read as under: "...Provided further that no deduction shall in respect of any sum referred to in clause (b) be allowed unless such sum has actually been paid in cash or to by issue of a cheque or draft or by any other mode on or before the due date as defined in the explanation below Clause (va) of sub-section (1) of Section 36, and where such payment has been made otherwise than in cash, the same has been realised within 15 days from the due date." 40. The position in law remained unchanged for 14 years. The Central Government then constituted the Kelkar Committee, to suggest tax reforms. The report suggested amendments inter alia, to Section 43B. The relevant extract of the report is as follows: "In terms of the provisions of section 43....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ordingly apply in relation to the assessment year 2004-05 and subsequent years." 41. The Notes on Clauses inter alia, reads as follows: "It is also proposed to amend the first proviso to the said section so as to omit the references of clause (a), clause (c), clause (d), clause (e) and clause (f) which is consequential in nature. It is also proposed to omit the second proviso to the said section. These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years." 42. The rationale for introduction of Section 43B was explained by this court in M.M. Aqua Technologies Ltd. vs. Commissioner of Income Tax, Delhi: 16 "19. The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non- obstante Clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the Assessee according to the method of accounting regularly employed by it. In short, a mercantile system of accounting cannot be looked at when a deductio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 43-B. 11. By this first proviso, it was, inter alia, laid down, in the context of any sum payable by the assessee(s) by way of tax, duty, cess or fee, that if an assessee(s) pays such tax, duty, cess or fee even after the closing of the accounting year but before the date of filing of the return of income under Section 139(1) of the Act, the assessee(s) would be entitled to deduction under Section 43-B on actual payment basis and such deduction would be admissible for the accounting year. This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds. To this effect, the first proviso stood introduced with effect from 1-4-1988. *** 15. By the Finance Act, 2003, the amendment made in the first proviso equated in terms of the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to the Employees' Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from 1-4-2004. Therefore, the argument of the assessee(s) is that the Finance Act, 2003, was curative in nature, it was not amendatory and, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hold that the Finance Act, 2003 will operate retrospectively with effect from 1- 4-1988 (when the first proviso stood inserted). 23. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that the Finance Act, 2003, to the above extent, operated prospectively. Take an example, in the present case, the respondents have deposited the contributions with RPFC after 31st March (end of accounting year) but before filing of the returns under the Income Tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under Section 43-B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right up to 1-4-2004, and who pays the contribution after 1-4-2004, would get the benefit of ded....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right upto 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction under Section 43B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003". 46. A discussion on the Principles of interpretation of tax statutes is warranted. In Ajmera Housing Corporation & Ors. vs. Commissioner of Income 17 this court held as follows: "27. It is trite law that a taxing statute is to be construed strictly. In a taxing Act one has to look merely at what is said in the relevant provision. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. There is no room for any intendment. There is no equity about a tax. (See: Cape Brandy Syndicate v. In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ifferent from the theme of mercantile system of accounting on accrual of liability basis qua the specific head of deduction covered therein and not to other heads. But that is a matter for the legislature and its wisdom in doing so. 22. The existence of Section 43B traces back to 1983 when the legislature conceptualised the idea of such a provision in the 1961 Act. Initially, the provision included deductions in respect of sum payable by Assessee by way of tax or duty or any sum payable by the employer by way of contribution to any provident fund or superannuation fund. It is noteworthy that the legislature explained the inclusion of these deductions by citing certain practices of evasion of statutory liabilities and other liabilities for the welfare of employees..." *** 23. With the passage of time, the legislature inserted more deductions to Section 43B including cess, bonus or commission payable by employer, interest on loans payable to financial institutions, scheduled banks etc., payment in lieu of leave encashment by the employer and repayment of dues to the railways. Thus understood, there is no oneness or uniformity in the nature of deductions included in Section 43B.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in the industrial policy and the exemption notifications. 25. In our view, the failure to comply with the requirements renders the writ petition filed by the respondent liable to be dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule. 26. Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to severe consequences, such requirement would be mandatory. It is the cardinal rule of interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, non-compliance with the same must result in cancelling the concession made in favour of the grantee, the responden....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erson, it must be shown that he falls within the ambit of the charging section by clear words used in the section; and (iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing Commissioner of Income Tax v. Ace Multi Axes Systems Ltd., 2018 (2) SCC 158 Commissioner. of Customs v. Dilip Kumar & Co, 2018 (9) SCC 1. unjust in a taxpayer escaping if the letter of the law fails to catch him on account of the legislature's failure to express itself clearly.'" 51. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd. 24; Commissioner of Income-Tax and another v. Sabari Enterprises 25; Commissioner of Income Tax v. Pamwi Tissues Ltd. 26; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. 27 and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers' contribution (Section 36(1)(iv)) and employees' contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees' liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that 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. 53. 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 (S....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, 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. 55. In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed." 11. Apropos the Ld. AR's claim that the A.O could not have disallowed the delayed deposit of employees share of contribution towards ESIC & EPF u/s. 36(1)(va) r.w.s. 2(24) (x) of the Act prior to the judgment of the Hon'ble Apex Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (supra), vide an intimation issued u/s. 143(1)(a) of the Act we are unable to persuade ourselves to subscribe to the same. We find that the aforesaid i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....war Prasad Sahu, partner of the assessee firm received the aforesaid order from his accountant only as on 08.10.2023. The Ld. AR submitted that Shri Amitabh Paul, accountant had admitted that though the order of the CIT(Appeals) was received by him way back but it had skipped from his mind to bring the same to the notice of the partners of the assessee firm. Carrying this contention further, the Ld. AR submitted that it was only when Shri Bhuwaneshwar Prasad Sahu (supra) had further brought the aforesaid order of the CIT (Appeals) on 29.09.2021, to the notice of his chartered account, viz. Shri Ajay Agrawal that he was informed that the appeal of the assessee firm had been dismissed by the CIT(Appeals) Raipur. The Ld. AR further submitted that as the order of the CIT(Appeals) was dropped in the email account, viz., "[email protected]" i.e. email account that was generated by his accountant Shri Amitabh Paul and the partners of the assessee firm had no access to the same, thus, it was for the said bonafide reason that they had remained unaware about the order passed by the CIT/Appeals) dated 29.09.2021....." 11. The reason that the delay in filing of the present appeal ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he legal issue on merits in the matter of Checkmate Services P. Ltd. v. Commissioner of Income Tax-1, {Civil Appeal No. 2833 of 2016, decided on 12.10.2022}, wherein at paragraphs 51 to 54, it was observed as under:- "51. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd. [2010] 321 ITR 508 (Delhi High Court); Commissioner of Income-Tax and another v. Sabari Enterprises [2008] 298 ITR 141 (Karnataka High Court).; Commissioner of Income Tax v. Pamwi Tissues Ltd. [2009] 313 ITR 137 (Bombay High Court).; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. [2013] 35 taxmann.com 616 (Rajasthan High Court) and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that 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. 53. 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....