2025 (6) TMI 705 - AT - Income Tax

Addition u/s 36(1)(va) - delayed deposit of employees contributions to Provident Fund (PF) and Employees State Insurance (ESI) - assessee submitted when the payment of PF and ESI was delayed the period of peak covid - HELD THAT - We find that despite the fact that the Hon ble Supreme Court has given a very clear and categorical findings in the case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) has also gone into the element of the intention of the assessee in delaying the payment of ESI and PF into government account beyond the due date. Here in this case the delay ranges from 1 day to 1 month and that also during the period of peak Covid when the entire country was under complete lock down so in our considered opinion the assessee has got benefit of this account. DR relied on the order of the CIT(A) as the assessee has deposited both PF and ESI in the government account immediately after the resumption of work by the banks after lockdown therefore in our opinion the assessee is not to be penalised and addition thus made u/s 36(1)(va) made by the CPC while pressing the return of income u/s 143(1) and the confirmation of the same addition by the ld. CIT(A) is accordingly deleted. Addition u/s 41 - comparing the figures of the relevant column of ITR with that reported by the Tax Auditor - CIT(A) has directed the AO to verify the claim of the assessee whether this amount is included in the total amount as claimed by the assessee or not but the assessee has preferred appeal on the ground that the ld. CIT(A) could not remand this matter to the AO but the fact is that even during proceedings before us the assessee could not bring on record anything showing that the amount as claimed remission and cessation of certain trading liability was part included in the disallowance as shown in the ITR therefore we are inclined to remand this issue to the file of the ld. AO to verify the claim of the assessee and delete the double addition after proper verification and examination of relevant documents. Accordingly the assessee s appeal on this ground is allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the addition of Rs. 18,73,058/- under Section 36(1)(va) of the Income Tax Act, 1961, on account of delayed deposit of employees' contributions to Provident Fund (PF) and Employees' State Insurance (ESI) despite the delay being due to COVID-19 lockdown and subsequent waivers by the EPFO, was justified.

2. Whether the Assessing Officer (AO) had jurisdiction and power to make the addition under Section 36(1)(va) at the stage of processing under Section 143(1), without issuing a proper show cause notice.

3. Whether the addition of Rs. 7,39,787/- under Section 41 on account of remission or cessation of certain trading liabilities was rightly upheld, considering the assessee's claim that this amount was already disclosed and taxed in the Income Tax Return (ITR).

4. Whether the remand of the issue relating to Section 41 addition by the Commissioner of Income Tax (Appeals) (CIT(A)) to the AO was appropriate.

5. Whether the application of sub-rule (3) of Rule 6G of the Income Tax Rules, 1962, was correct in the facts of the case.

6. Whether the impugned orders passed by the AO and CIT(A) were valid in light of the principles of natural justice, specifically regarding the opportunity of being heard.

Issue 1: Addition under Section 36(1)(va) for delayed deposit of PF and ESI contributions

The relevant legal framework includes Section 36(1)(va) of the Income Tax Act, which disallows deduction for any sum payable by the assessee by way of employees' contribution to PF, ESI, etc., if such sum is not deposited within the due date prescribed under the respective labour laws. The Supreme Court's decision in Checkmate Services (P) Ltd. v. CIT (2022) 143 taxmann.com 178 (SC) was relied upon, which emphasized the element of intention behind delay and the necessity of timely deposit to avoid disallowance.

The Tribunal noted that the delay in deposit ranged from one day to one month and occurred during the peak of the COVID-19 pandemic when nationwide lockdowns were imposed. The Employees' Provident Fund Organisation (EPFO) had issued a circular dated 15.05.2020, waiving penal damages and interest for delayed deposits during the lockdown period. The Tribunal also referred to recent decisions by Mumbai and Delhi Benches of the Income Tax Appellate Tribunal, which held that delays occurring during the lockdown period, with EPFO's waiver, should not attract disallowance under Section 36(1)(va).

The Tribunal found that the delay was caused by exceptional circumstances beyond the assessee's control and that the assessee deposited the contributions at the earliest opportunity after lockdown restrictions eased. The Tribunal observed that the AO's addition was made during processing under Section 143(1) without issuing a show cause notice on this specific ground, which was a procedural lapse. The CIT(A) had upheld the addition on the basis that the assessee failed to file a revised audit report correcting the mistake, but the Tribunal disagreed, emphasizing the factual context of the delay.

Applying the law to the facts, the Tribunal concluded that the delay was condoned by the EPFO and that the intention to withhold employees' contributions was absent. Therefore, disallowance under Section 36(1)(va) was unwarranted. The Tribunal deleted the addition accordingly.

Issue 2: Jurisdiction of AO to make addition under Section 36(1)(va) at processing stage without show cause notice

The assessee contended that the AO (CPC) lacked power to make the addition under Section 36(1)(va) while passing the order under Section 143(1) as no show cause notice was issued on this point. The Tribunal noted that the addition was made during processing based on the audit report but without prior opportunity to the assessee to respond specifically to this addition.

The Tribunal implicitly recognized the procedural infirmity by noting the absence of a show cause notice and the fact that the issue was not raised in the SCN issued by the AO. This procedural lapse contributed to the Tribunal's decision to delete the addition, reinforcing the principle that the AO must afford reasonable opportunity before making substantive additions.

Issue 3: Addition under Section 41 on remission or cessation of trading liability

Section 41 deals with income chargeable to tax where any trading liability or expenditure is remitted or waived. The AO made an addition of Rs. 7,39,787/- on the basis of a discrepancy between the amount reported in the ITR and the audit report.

The assessee argued that the amount was already included in the ITR under the head "Provision/liabilities no longer required written back" and had been taxed accordingly. The CIT(A) found that the AO had made the addition without considering the assessee's submission and directed the AO to verify whether the amount was included in the total income declared by the assessee.

The Tribunal noted that the assessee failed to produce conclusive evidence before it to establish that the amount was already included in the declared income. Therefore, the Tribunal remanded the issue back to the AO for verification and directed the AO to delete the double addition if the claim was substantiated.

This approach reflects the principle of ensuring no double taxation while allowing the AO to conduct a proper examination of the facts and documents.

Issue 4: Remand of Section 41 addition by CIT(A)

The assessee challenged the remand on the ground that the CIT(A) erred in remanding the matter to the AO. However, the Tribunal upheld the remand as appropriate given the lack of conclusive evidence before the appellate authorities and the need for factual verification by the AO.

The Tribunal's acceptance of the remand aligns with the procedural fairness and proper adjudication of tax disputes, ensuring that the AO examines the relevant documents and facts before confirming or deleting the addition.

Issue 5: Application of sub-rule (3) of Rule 6G of the Income Tax Rules, 1962

The assessee contended that the CIT(A) erred in applying sub-rule (3) of Rule 6G, which was inapplicable to the facts. However, the Tribunal's order does not elaborate extensively on this issue, indicating it was not a determinative factor in the final decision. No detailed analysis or ruling was recorded on this point, suggesting it was either subsumed in other issues or found non-prejudicial.

Issue 6: Violation of principles of natural justice due to denial of reasonable opportunity

The assessee alleged that the impugned orders were passed without affording reasonable opportunity of being heard. The Tribunal's observations regarding the absence of a show cause notice before the addition under Section 36(1)(va) implicitly support this contention.

While the Tribunal did not explicitly quash the orders on this ground alone, the deletion of the addition under Section 36(1)(va) partly rests on the procedural irregularity of not providing the assessee an opportunity to respond. This underscores the importance of adherence to natural justice in tax proceedings.

Significant Holdings:

"In our considered opinion the assessee has got benefit of this account."

"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...there is no mischief on the part of the assessee in holding the employees contribution for long periods."

"The addition under Section 36(1)(va) made by the CPC while processing the return of income u/s 143(1) and the confirmation of the same addition by the ld. CIT(A) is accordingly deleted."

"The issue relating to addition under Section 41 is remanded to the AO for verification of the claim of the assessee and deletion of double addition after proper examination."

The Tribunal established the core principle that disallowance under Section 36(1)(va) requires consideration of the intention behind delay and that exceptional circumstances such as a government-mandated lockdown and official waivers by EPFO must be taken into account. Procedural fairness, including issuance of show cause notices before making additions, is mandatory. The Tribunal also reinforced that double taxation must be avoided, and factual verification by the AO is essential before confirming additions under Section 41.