2025 (5) TMI 1060 - AT - Income Tax

Addition u/s 36(1)(va) r.w.s.43B - amount deposited towards employees contribution to EPF and ESIC after the due date in the respective statutes but was made before filing of the return u/s 139 especially in a case where the return of the assessee is processed u/s 143(1)(a) - HELD THAT - As decided in M/s BPS Infrastructure 2024 (4) TMI 1006 - CHHATTISGARH HIGH COURT Payments qua the employees contribution to provident fund made after the due date under the relevant statutes shall be liable to be disallowed even if the ITR is processed u/s 143(1) prior to the pronouncement of Judgment of Hon ble Apex Court in the case of Checkmate 2022 (10) TMI 617 - SUPREME COURT (LB) . In view of such observations the decision of CIT(A) following the decision of Allied Motors (P) Ltd. 1997 (3) TMI 9 - SUPREME COURT which is in concurrence with the view taken by Hon ble Apex Court in Checkmate (supra) was justified well-reasoned and acceptable. Thus we are of the considered view that the issue raised by the assessee assailing the applicability of the decision of Checkmate (supra) qua the disallowance regarding employee s contribution to provident fund under the provisions of section 143(1) on a date prior to the date of the order of Hon ble Apex Court cannot be accepted and allowed. Appeal of the assessee is dismissed.

Summary

The core legal questions considered in this appeal are:

1. Whether the deduction claimed under section 36(1)(va) read with section 43B of the Income Tax Act, 1961, in respect of employees' contributions to Provident Fund (EPF) and Employees State Insurance Corporation (ESIC) can be denied when such contributions are deposited after the due date prescribed under the relevant statutes but before filing the income tax return.

2. Whether the Central Processing Centre (CPC) had jurisdiction to make an enhancement under section 143(1)(a) of the Act by disallowing the said deduction on a debatable issue.

3. Whether the rectification application filed under section 154 of the Act against the disallowance was maintainable, and if the Tribunal erred in dismissing the appeal on the ground of maintainability without adjudicating on merits.

4. The legal effect of divergent High Court decisions on the issue and the binding nature of the Supreme Court's ruling in Checkmate Services Pvt. Ltd. regarding the timing of deposit of employees' contributions for claiming deduction.

Issue-wise Detailed Analysis

1. Deduction under Section 36(1)(va) read with Section 43B for Employees' Contribution Deposited After Due Date

Legal Framework and Precedents: Section 36(1)(va) allows deduction for the amount of employees' contribution to provident fund and ESIC paid by the employer, provided such payment is made on or before the due date specified under the relevant enactments. Section 43B mandates that certain deductions are allowable only if payment is made on or before the due date. Earlier, various High Courts had divergent views on whether delayed payment (post due date but before filing return) qualifies for deduction. The Supreme Court in Checkmate Services Pvt. Ltd. clarified this issue, holding that the deduction is allowable only if the payment is made on or before the due date.

Court's Interpretation and Reasoning: The Court examined the legislative intent behind sections 36(1)(va), 43B, and 2(24)(x). It emphasized the distinction between the employer's own contribution (section 36(1)(iv)) and the employees' contribution deducted by the employer (section 36(1)(va)). The latter is deemed income of the employer until deposited with the fund. The Supreme Court's ruling in Checkmate Services Pvt. Ltd. was pivotal, holding that the non-obstante clause in section 43B does not override the requirement of timely deposit of employees' contributions for deduction to be allowed.

Key Evidence and Findings: The assessee had deposited the employees' contribution after the due date prescribed under the EPF and ESIC statutes but before filing the return. The CPC disallowed the deduction on the ground of late payment. The assessee argued that since the issue was debatable, such disallowance was not permissible under section 143(1)(a). The Tribunal initially dismissed the appeal on maintainability grounds but was directed by the High Court to decide on merits.

Application of Law to Facts: Following the binding Supreme Court precedent and the recent decision of the Jurisdictional High Court in BPS Infrastructure vs. ITO, the Court held that the deduction cannot be allowed if the payment was made after the due date, notwithstanding that the return was processed under section 143(1)(a) prior to the Supreme Court judgment. The rationale is that employees' contributions are held in trust and must be deposited timely to qualify as deductible.

Treatment of Competing Arguments: The assessee relied on earlier High Court and Tribunal decisions supporting deduction despite late payment and argued that the CPC lacked jurisdiction to make adjustments on debatable issues under section 143(1)(a). The revenue relied on the recent binding Supreme Court and Jurisdictional High Court decisions to support the disallowance. The Court rejected the assessee's reliance on older precedents and held that the law as settled by the Supreme Court and followed by the Jurisdictional High Court must be applied.

Conclusion: The deduction under section 36(1)(va) read with section 43B is not allowable for employees' contributions deposited after the due date, even if deposited before filing the return. The disallowance by the CPC and confirmation by the appellate authorities were upheld.

2. Jurisdiction of CPC to Make Enhancement under Section 143(1)(a) on a Debatable Issue

Legal Framework and Precedents: Section 143(1)(a) allows the CPC to make adjustments in computing total income during processing of return. However, it is settled law that adjustments on debatable issues are not permissible at this stage. The Bombay High Court in Khatau Junkar Ltd. held that disallowance on a debatable issue is beyond the scope of section 143(1)(a).

Court's Interpretation and Reasoning: The Court acknowledged the assessee's contention that the issue was debatable due to conflicting High Court decisions at the time of processing. However, following the Supreme Court's ruling in Checkmate and the Jurisdictional High Court's decision in BPS Infrastructure, the Court found the issue no longer debatable and hence the CPC's action was within jurisdiction.

Key Evidence and Findings: The CPC disallowed the deduction during processing under section 143(1)(a) on the ground that payment was not made on or before the due date. The assessee challenged this as beyond CPC's jurisdiction on a debatable issue.

Application of Law to Facts: The Court held that since the issue was settled by the Supreme Court and followed by the Jurisdictional High Court, the CPC was justified in disallowing the deduction even at the stage of processing under section 143(1)(a). The prior divergent decisions did not confer a debatable status at the time of adjudication.

Treatment of Competing Arguments: The assessee's argument that the CPC acted beyond jurisdiction was rejected as the issue was no longer debatable. The revenue's reliance on binding Supreme Court and High Court rulings was accepted.

Conclusion: The CPC was competent to disallow the deduction under section 143(1)(a) as the issue was settled law, and the disallowance was not on a debatable issue.

3. Maintainability of Rectification Application under Section 154 and Tribunal's Jurisdiction to Decide on Merits

Legal Framework and Precedents: Section 154 permits rectification of mistakes apparent from the record. The Tribunal earlier dismissed the appeal on the ground that the rectification application was not maintainable as the mistake was not apparent but involved merits. The assessee challenged this before the High Court, which set aside the Tribunal's order and remitted the matter for adjudication on merits.

Court's Interpretation and Reasoning: The Court followed the High Court's direction that where an amount taxed is not legally recoverable, it may constitute a mistake touching upon merits and thus be rectifiable. The Tribunal was directed to decide the issue on merits rather than dismiss on maintainability grounds.

Key Evidence and Findings: The assessee's rectification application was rejected by the AO and appellate authorities. The Tribunal initially dismissed the appeal on maintainability. The High Court's intervention mandated merits adjudication.

Application of Law to Facts: The Tribunal complied with the High Court's order and proceeded to hear the matter on merits. The Court considered the submissions and relevant case law before concluding on the substantive issue.

Treatment of Competing Arguments: The revenue argued that the rectification was not maintainable and the appeal should be dismissed. The Court, however, followed the High Court's precedent and heard the matter on merits.

Conclusion: The rectification application under section 154 was maintainable where the disallowance was not legally sustainable. The Tribunal rightly adjudicated the issue on merits as directed by the High Court.

4. Impact of Divergent High Court Decisions and Binding Nature of Supreme Court Precedent

Legal Framework and Precedents: Prior to the Supreme Court's ruling in Checkmate Services Pvt. Ltd., various High Courts had conflicting decisions on the timing of deposit of employees' contributions for claiming deduction under section 36(1)(va). The Supreme Court clarified the law, which was subsequently followed by the Jurisdictional High Court in BPS Infrastructure and the Bombay High Court in Rohan Korgaonkar.

Court's Interpretation and Reasoning: The Court emphasized the principle of stare decisis and binding effect of the Supreme Court's decision. The divergent earlier decisions lost their persuasive value post the apex court ruling. The Court noted that the legislative intent and statutory provisions support the requirement of timely deposit for deduction.

Key Evidence and Findings: The Court considered the judgments cited by both parties and gave primacy to the Supreme Court and Jurisdictional High Court rulings.

Application of Law to Facts: The Court applied the settled law to the facts, holding that late payment disqualifies the deduction irrespective of the return processing stage or prior conflicting decisions.

Treatment of Competing Arguments: The assessee's reliance on older conflicting decisions was rejected. The revenue's reliance on recent binding decisions was accepted.

Conclusion: The issue is no longer debatable; the Supreme Court's decision is binding and must be followed.

Significant Holdings

"The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability... In the case of amounts which are held in trust, as it is in the case of employees' contributions - which are deducted from their income... It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date." (Extracted from the Jurisdictional High Court's decision in BPS Infrastructure vs. ITO, relying on the Supreme Court in Checkmate Services Pvt. Ltd.)

Core principles established include the distinction between employer's own contribution and employees' contribution, the trust nature of employees' contributions, and the mandatory requirement of timely deposit for claiming deduction under section 36(1)(va) read with section 43B.

Final determinations on each issue are:

1. The deduction claimed for employees' contributions deposited after the due date is rightly disallowed.

2. The CPC acted within its jurisdiction in making the adjustment under section 143(1)(a) as the issue was settled law and not debatable.

3. The rectification application was maintainable, and the Tribunal correctly adjudicated the matter on merits as directed by the High Court.

4. The binding precedent of the Supreme Court and Jurisdictional High Court overrides earlier conflicting decisions, and the settled law must be applied.