2025 (5) TMI 1698 - AT - Income Tax

Allowable Expenditure - Interest on delay in depositing Employee s contribution to Provident Fund PF - CPC disallowed Interest on late deposit of EPF on account of the inconsistency in income tax return and Tax Audit Report - appellant s contention that the said interest is compensatory and not penal in nature and was incurred wholly and exclusively for purpose of business and hence same is an allowable expenditure u/s.37(1) - HELD THAT - 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. The extended timeline until the due date of return of income however cannot apply in the case of amounts that are held in trust as it is in the case of employee s contributions which are deducted from their income. They are not part of the assessee employer s income nor are they deduction per se in the form of a statutory payout. They are other s income monies only deemed to be income with the object of ensuring that they are paid within the due date specified in the particular law. Upon deposit on or before the due dates as per the relevant statutes the amount which is otherwise retained and deemed an income is treated as a deduction. We also concur with the ld.DR that in view of the Explanation 1 to section 37 of the Act which prohibits deduction of any expenditure incurred for a purpose that is an offence or prohibited by law allowing deduction of such interest on account of delayed payment of employees contribution would undermine the legislative intent behind section 36(1)(va) of the Act which prioritise timely remittance of workers dues to safeguard their social security. The deduction claimed u/s.37 was rightly disallowed by the CPC while processing return filed by the assessee. Accordingly we do not find any infirmity in the appellate order which is therefore upheld. Decided against assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether interest paid on delay in depositing employees' contribution to Provident Fund (PF) is a compensatory expenditure allowable as a deduction under section 37(1) of the Income-tax Act, 1961 ("the Act"), or whether it is a penal payment disallowable as expenditure.

(b) Whether the principle of consistency requires allowance of the interest expenditure in the Assessment Year (AY) 2023-24 when a similar disallowance was deleted by the Assessing Officer (AO) in AY 2022-23.

(c) Whether the disallowance of interest on the ground that the interest is of the same nature as the principal sum (which is disallowed) is legally sustainable and supported by judicial precedents.

(d) The interpretation and application of provisions of sections 36(1)(va), 2(24)(x), 37(1), and 43B of the Act, especially in light of recent Supreme Court pronouncements, regarding deductibility of employees' contribution to PF and interest on delayed payment thereof.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Deductibility of interest on delay in depositing employees' PF contribution under section 37(1)

Legal framework and precedents: Section 37(1) allows deduction of any expenditure "wholly and exclusively" laid out for business or profession, except those prohibited by law as per Explanation 1. Interest on delayed payment of statutory dues is examined on the nature of the principal amount. The Supreme Court in Bharat Commerce & Industries Ltd. vs. CIT held that interest on late payment of income tax is not deductible as the principal (income tax) itself is not deductible. Similarly, East India Pharmaceutical Works Ltd. and Smt. Padmavati Jaikrishna decisions reinforce this principle. Section 36(1)(va) disallows deduction of employees' contribution to PF if not deposited by the due date, and section 2(24)(x) treats such unpaid amounts as income of the employer.

Court's interpretation and reasoning: The Court noted that the interest paid on delayed PF employees' contribution must be viewed in light of the principal sum's nature. Since the principal sum (employees' contribution not deposited on time) is disallowed under section 36(1)(va) and treated as income under section 2(24)(x), the interest thereon is also not deductible. The interest is not compensatory but penal, intended to penalize delay and ensure timely remittance. The Court emphasized that section 37 is a residual provision and does not override specific prohibitions under sections 36(1)(va) and 2(24)(x).

Key evidence and findings: The Tax Audit Report disclosed interest on delayed PF contribution of Rs. 3,43,35,543/-. The assessee claimed this as business expenditure under section 37(1). The Centralized Processing Centre (CPC) disallowed the claim due to inconsistency with the Tax Audit Report and legal provisions. The CIT(A) upheld the disallowance relying on Supreme Court precedents and statutory provisions.

Application of law to facts: The Court applied the principle that since the principal employees' contribution was not deductible due to statutory prohibition, the interest on delayed payment, being of the same nature, cannot be allowed as deduction. The Court rejected the contention that the interest was compensatory and allowable under section 37(1).

Treatment of competing arguments: The assessee argued that the interest was compensatory and wholly for business purposes, supported by earlier judicial pronouncements and that prior year disallowance was deleted. The Court rejected these contentions, emphasizing the legislative intent to treat employees' contribution as trust money and disallow deductions if not timely deposited, as clarified by the Supreme Court in Checkmate Services Pvt Ltd v. CIT.

Conclusion: Interest on delayed payment of employees' PF contribution is not deductible under section 37(1) as it is penal in nature and linked to a principal sum that is itself disallowed under section 36(1)(va).

Issue (b): Applicability of principle of consistency based on prior year treatment

Legal framework and precedents: The principle of consistency requires similar treatment of similar facts and law across assessment years unless there is a change in law or facts. However, this principle cannot override statutory provisions or binding judicial decisions.

Court's interpretation and reasoning: The Court observed that in AY 2022-23, the AO deleted the addition made by CPC, but that order was prior to the Supreme Court's clarificatory ruling in Checkmate Services. The current year disallowance aligns with settled law and statutory amendments clarifying the non-deductibility of delayed employees' contribution and related interest.

Key evidence and findings: The assessee relied on the deletion of similar disallowance in AY 2022-23. The Court noted that the prior year order was based on earlier, unsettled law and could not bind the current year decision, especially after the apex court's ruling.

Application of law to facts: The Court held that the principle of consistency does not apply where there is a change in law or judicial interpretation. Since the law was clarified by the Supreme Court in 2022, the disallowance in AY 2023-24 is justified.

Treatment of competing arguments: The assessee's plea for consistency was rejected as it conflicted with the legislative and judicial clarification.

Conclusion: The principle of consistency does not mandate allowance of interest deduction in AY 2023-24 when the law has changed or been clarified by binding precedent.

Issue (c): Validity of disallowance on the ground that interest is of the same nature as principal

Legal framework and precedents: The Supreme Court in Bharat Commerce & Industries Ltd. held that interest on a non-deductible principal amount is also non-deductible. Section 36(1)(va) and Explanation 1 to section 37 reinforce this principle.

Court's interpretation and reasoning: The Court agreed with the CIT(A) that since the principal sum (employees' contribution not deposited timely) is disallowed, the interest thereon cannot be treated differently. The interest partakes the nature of the principal and is thus disallowable.

Key evidence and findings: The assessee's claim of interest being compensatory was found to be inconsistent with statutory provisions and judicial precedents.

Application of law to facts: The Court applied the principle that interest on a disallowed principal sum is also disallowed.

Treatment of competing arguments: The assessee's argument that the disallowance was arbitrary and unsupported by judicial pronouncements was rejected in light of authoritative Supreme Court decisions.

Conclusion: The disallowance of interest on the same grounds as the principal sum is legally sound and supported by binding precedents.

Issue (d): Interpretation of sections 36(1)(va), 2(24)(x), 37(1), and 43B in light of recent Supreme Court ruling

Legal framework and precedents: The Supreme Court in Checkmate Services Pvt Ltd v. CIT clarified the distinction between employer's and employees' contributions to PF. Employer's contribution is deductible under section 43B on payment basis, whereas employees' contribution is deemed income under section 2(24)(x) and deductible only if deposited by the due date under section 36(1)(va). Section 37(1) allows deduction of business expenditure not covered under sections 30 to 36 and not prohibited by law. Explanation 1 to section 37 excludes expenditure incurred for offences or prohibited acts.

Court's interpretation and reasoning: The Court reiterated that employees' contribution is not the employer's income but held in trust and is deemed income if not deposited timely. The deduction under section 36(1)(va) is allowed only if payment is made by the due date. The extended timeline under section 43B for employer's contribution does not apply to employees' contribution. Interest on delayed payment is a statutory levy to penalize delay and ensure timely remittance, thus disallowable under Explanation 1 to section 37.

Key evidence and findings: The Court relied heavily on the Supreme Court's detailed analysis in Checkmate Services, which resolved earlier controversies and legislative intent behind these provisions.

Application of law to facts: The Court found that the assessee's claim for deduction of interest paid on delayed employees' contribution was contrary to the settled legal position and legislative intent.

Treatment of competing arguments: The assessee's reliance on earlier case law and the principle of compensatory nature was rejected in light of the apex court's clarification and statutory provisions.

Conclusion: The statutory framework and Supreme Court rulings conclusively establish non-deductibility of employees' contribution and related interest if not deposited by the due date, and such interest is not allowable under section 37(1).

3. SIGNIFICANT HOLDINGS

"The interest paid on delayed Provident Fund payments had to take its nature from the principal in terms of provisions of Section 36(1)(va)... if the principal sum was not deductible, the interest thereon partakes the nature of the principal."

"Explanation 1 to section 37 of the Act prohibits deduction of any expenditure incurred for a purpose that is an offence or prohibited by law... allowing deduction of such interest on account of delayed payment of employees' contribution would undermine the legislative intent behind section 36(1)(va) of the Act which prioritise timely remittance of workers dues to safeguard their social security."

"The marked distinction had to be borne while interpreting the obligation of every assessee under section 43B... The extended timeline until the 'due date' of return of income, however, cannot apply in the case of amounts that are held in trust, as it is in the case of employee's contributions which are deducted from their income."

"Amount received from the employees... is deemed to be the income of the employer... Deduction under section 36(1)(va) of the Act can be claimed on payment of employees' share to the relevant fund within the prescribed time as per the respective Act."

Core principles established include:

• Employees' contribution to PF is deemed income of the employer and deductible only if deposited by the due date under section 36(1)(va).
• Interest on delayed payment of employees' contribution is penal in nature and not deductible under section 37(1).
• Deduction under section 37(1) excludes expenditure incurred for offences or prohibited acts as per Explanation 1.
• The principle of consistency does not override statutory provisions or binding judicial decisions.
• The extended payment timelines under section 43B for employer's contribution do not apply to employees' contribution.

Final determinations:

All grounds of appeal by the assessee challenging the disallowance of interest on delayed employees' PF contribution were dismissed. The appellate order disallowing the interest expenditure was upheld.