2025 (1) TMI 1568 - AT - Income Tax

Disallowance u/s. 36(1)(va) - delay in deposit of employees contribution to EPF and ESI fund - delay is in respect of deposits during the months of May 2020 to August 2020 - HELD THAT -Undisputedly the period of delay was infested with Covid-19 pandemic. To mitigate problems face by employers in timely deposit of contributions during such period the EPFO had taken a liberal view on delay in payment of any contributions and it was directed that no penal proceedings or damages should be levied for delay in deposits during lockdown period. Thus taking into consideration the circumstances under which delay had occurred in deposit of contributions disallowance made u/s. 36(1)(va) of the Act is directed to be deleted. The Division Bench of the Tribunal in the case of Diamour Jewels P. Ltd. 2024 (8) TMI 536 - ITAT MUMBAI wherein under similar circumstances there was delay in deposit and the Revenue had disallowed amount u/s.36(1)(va) of the Act deleted disallowance made by the Department. In light of peculiar circumstances deeply affected by unprecedented situation caused due to Covid pandemic impugned order is set aside and appeal of the assessee is allowed.

Summary

The core legal issue considered in this appeal is whether the disallowance under section 36(1)(va) of the Income Tax Act, 1961 is justified on account of delay in deposit of employees' contributions to the Employees' Provident Fund (EPF) and Employees' State Insurance (ESI) during the Covid-19 pandemic period, specifically for the assessment year 2021-22.

The issue arises because the assessee delayed payment of employees' contributions to EPF and ESI during the months of April 2020 to August 2020, with delays ranging from 3 to 10 days. The Revenue disallowed the corresponding expenses under section 36(1)(va) of the Act, which mandates disallowance of any sum paid by an employer by way of contribution to any provident fund, superannuation fund, or other fund for the benefit of employees if such sum is not deposited within the prescribed time.

The legal framework revolves around section 36(1)(va) of the Income Tax Act, 1961, which provides that employer's contributions to provident fund and similar funds are allowable deductions only if deposited within the prescribed time. The explanation to this section clarifies that delay in deposit attracts disallowance. The issue is whether the delay during the Covid-19 lockdown period attracts automatic disallowance or whether exceptional circumstances justify waiver of such disallowance.

Relevant precedents include the decision of a Division Bench of the Tribunal in a similar matter where disallowance under section 36(1)(va) was deleted due to the pandemic-induced delay. The decision relied upon the circular issued by the Employees Provident Fund Organisation (EPFO) dated 15.05.2020, which waived levy of penal damages for delayed payment during the lockdown period under the Disaster Management Act, 2005. The Supreme Court's recognition of extension of limitation periods during the pandemic was also cited to support the assessee's case.

The Court's interpretation was that the delay in deposit of employees' contributions during the lockdown period was caused by extraordinary circumstances beyond the assessee's control. The EPFO's communication explicitly waived penal damages for delayed payments during the lockdown, reflecting a governmental policy to mitigate hardships faced by employers. The Court held that the purpose of section 36(1)(va) is to prevent employers from unduly withholding employees' contributions, but where the delay is minimal and caused by a force majeure event such as the Covid-19 pandemic, strict application of the provision would be unjust.

The key evidence included the tabulated details of delayed deposits showing specific months, amounts, due dates, actual deposit dates, and the corresponding disallowances. The delays were minor, mostly between 3 to 10 days, and occurred during the peak lockdown months when banking and operations were restricted. The EPFO's circular was a critical document establishing that the Government itself had granted relief from penal consequences for such delays.

Applying the law to the facts, the Court found that the delay did not amount to "mischief" contemplated under the provision, as the assessee promptly deposited the amounts at the earliest opportunity when lockdown restrictions eased. The Court emphasized the absence of any deliberate withholding or misuse of employees' contributions. The decision in the cited precedent reinforced that where the statutory authority itself has waived penalties for delay during the lockdown, the Income Tax provisions should not be interpreted to impose disallowance.

Competing arguments by the Revenue were that the statutory provision mandates strict compliance with deposit timelines and any delay attracts disallowance regardless of reasons. However, the Court rejected this rigid approach in light of the exceptional circumstances and the Government's own relaxation measures. The Revenue's insistence on disallowance was found to be inconsistent with the relief granted by the EPFO and the broader public policy considerations during the pandemic.

Consequently, the Court concluded that the disallowance under section 36(1)(va) for delayed deposit of employees' contributions to EPF and ESI during the Covid-19 lockdown period was not justified. The impugned order disallowing the expenses was set aside, and the appeal was allowed.

Significant holdings include the following verbatim excerpt from the Division Bench decision relied upon by the Court:

"In the present case before us, in the given peculiar fact pattern and circumstance, when the EPF Organisation itself has waived off the levy of penal damages for delayed payment during the period of lockdown by issuing the aforesaid circular, there is no question of treating the delay which occurred during the period of lockdown detrimental to the assessee under the Act, more specifically under the explanation to section 36(1)(va) of the Act. The delay in deposit of PF and ESI of the employees' share is for the month of April 2020 and May 2020. These months fell in the period of lockdown when pandemic of COVID-19 was at its peak. Due dates to deposit for these two months were 15.05.2020 and 15.06.2020 as per the relevant enactments. Assessee deposited the delayed amount in the month of June 2020 when there was relaxation in the lockdown and banking was permitted. There is no mischief on the part of the assessee in holding the employees' contribution for long periods as contemplated in the memorandum explaining the provisions introduced in the Finance Bill, 1987 and CBDT circular (supra) and dealt by the Hon'ble Supreme Court in Checkmate Services (supra). In fact, assessee demonstrated its vigilance in depositing the impugned amounts at the first opportunity it got when the relaxation was given in the lockdown. Also, for all the subsequent months, the deposits have been on or before the prescribed due dates under the relevant enactments. Thus, in the present case under its peculiar set of facts, there cannot be any adverse effect on the assessee of not depositing the employees' contribution of EPF and ESI within the meaning of section 36(1)(va) of the Act when the relevant enactment itself had given a waiver from levy of penal damages for the delay in deposit 'during the lockdown period'. We delete the addition so made. Grounds taken by the assessee in this respect are allowed."

The core principle established is that statutory disallowance under section 36(1)(va) of the Income Tax Act for delayed deposit of employees' contributions will not be rigidly applied where the delay is caused by exceptional circumstances such as a government-declared lockdown due to a pandemic, especially when the relevant statutory authority has waived penal consequences for such delay. This approach balances strict statutory compliance with equitable considerations arising from force majeure events.

In conclusion, the Court determined that the disallowance under section 36(1)(va) was not warranted for the delay in deposit of employees' contributions to EPF and ESI during the Covid-19 lockdown period and accordingly allowed the appeal of the assessee.