2022 (4) TMI 1504 - AT - Income Tax

Late payment of Employee contribution of PF and ESI - CPC has processed the return u/s 143(1) - whether by the Finance Act 2021 the provisions of Section 36(1)(va) by inserting the Explanation 2 r.w.s. 43B of the Act have been amended whereby it is clarified that the provisions of Section 43B of the Act shall not apply and shall be deemed or ought to have been applied for the purpose of determining the due date under this clause? - HELD THAT - As before insertion of Explanation 2 to Section 36(1)(va) of the Act there is ambiguity regarding due date of payment of employees contribution on account of provident fund and ESI whether the due date is as per the respective Acts or up to the due date of filing of return of income of the assessee. As noted in the case of CIT vs. Vatika Township Pvt. Ltd. 2014 (9) TMI 576 - SUPREME COURT an amendment made to a taxing statute can be said to be intended to remove hardship only of the assessee and not of the Department. Imposing of a retrospective levy on the assessee would cause undue hardship and for that reason Parliament specifically chose to make the proviso affective from a particular date. In the present case also the amendment brought out by Finance Act 2021 by way of Explanation-2 to s. 36(1)(va) of the Act along with Explanation-5 to s. 43B of the Act w.e.f. 01.04.2021 i.e. for and from assessment year 2021-22 cannot be applied retrospectively. Thus from the above it is clear that the amendment brought in the statute i.e. by Finance Act 2021 the provisions of Section 36(1)(va) r.w.s. 43B of the Act amended by inserting Explanation 2 is prospective and not retrospective. Hence the amended provisions of Section 43B r.w.s. 36(1)(va) of the Act are not applicable for the assessment year 2018-19 but will apply from assessment year 2021-22 and subsequent assessment years. Hence this issue of assessee s appeal is allowed.

Summary

Issues:
- Disallowance of deduction claimed on account of Employees’ contribution to PF & ESI
- Applicability of amended provisions of section 36(1)(va) r.w.s. 43B of the Act
- Clarification on retrospective or prospective application of the amended provisions

Analysis:

Issue 1: Disallowance of Deduction Claimed on Account of Employees’ Contribution to PF & ESI
The assessee filed an appeal against the order of the Commissioner of Income Tax (Appeals) sustaining the disallowance of deduction claimed on account of Employees’ contribution to PF & ESI. The CIT(A) held that the late payment of employees' contribution is not allowable under section 36(1)(va) of the Income Tax Act, 1961. The CIT(A) relied on various High Court decisions to support this conclusion. The Finance Act 2021 clarified this by inserting an explanation in section 36, emphasizing the due date for crediting employee contributions. The issue revolved around the treatment of employees' contributions made after the due date specified under PF/ESI schemes.

Issue 2: Applicability of Amended Provisions of Section 36(1)(va) r.w.s. 43B of the Act
The Tribunal considered whether the amended provisions of section 36(1)(va) r.w.s. 43B of the Act, specifically the insertion of Explanation 2 by the Finance Act 2021, were applicable retrospectively or prospectively. The assessee contended that the amendment should be construed as prospective, effective from 01.04.2021, for the assessment year 2021-22 onwards. The Revenue argued that the amended provisions should apply retrospectively, affecting the assessment year 2018-19.

Issue 3: Clarification on Retrospective or Prospective Application of the Amended Provisions
The Tribunal analyzed the memorandum explaining the provisions of the Finance Act 2021, highlighting that the amendment intended to provide certainty and would apply from 01.04.2021 onwards. The Tribunal noted that retrospective application of the amendment would cause undue hardship to the assessee, as clarified by the Hon’ble Supreme Court in previous cases. Therefore, the Tribunal concluded that the amended provisions of Section 36(1)(va) r.w.s. 43B of the Act were prospective and not retrospective, applicable from the assessment year 2021-22 and subsequent years. Consequently, the issue in the assessee’s appeal was allowed, and the appeal was allowed in favor of the assessee.

This detailed analysis of the judgment highlights the key legal issues, arguments presented, and the Tribunal's reasoning in resolving the appeal concerning the disallowance of deduction claimed on account of Employees’ contribution to PF & ESI and the applicability of the amended provisions of the Income Tax Act.