2025 (7) TMI 366 - AT - Income Tax

Disallowance u/s. 36(1)(va) r.w.s. 2(24)(x) - delayed payment of employees contribution towards PF - judicial debate on whether delayed employee contributions to PF and ESI could be allowed as deductions under Section 43B provided they were paid before the due date of filing the return of income (ROI) - HELD THAT - In Checkmate Services case 2022 (10) TMI 617 - SUPREME COURT (LB) the Supreme Court provided much needed clarity on the interpretation of Sections 43B and 36(1)(va) of the Act. The Hon ble Apex Court held that employee contributions to PF and ESI are governed exclusively by Section 36(1)(va) of the Act and not by Section 43B of the Act. The court emphasized that employee contributions must be deposited within the due dates specified under the relevant statutes. Failure to do so would result in disallowance of the deduction even if the payment was made before the due date for filing the ROI. We need to remind ourselves that this is exactly the case in the present appeal. The judgment reinforced the distinction between employer and employee contributions. While an employer s contributions could be governed by section 43B of the Act employees contributions are strictly u/s 36(1)(va) of the Act. This ruling overturned many High Court decisions that allowed deductions for delayed employee contributions u/s 43B of the Act setting a precedent for stricter compliance. The court focused on the basic principle that whenever a special law exists for any particular situation it would be covered under the special law and not the general law. The Latin phrase of the same being lex specialis derogat legi generali . Thus as special provisions were existing in the Act by virtue of 36(1)(va) for the employee contributions thereby they would prevail over general provisions of Section 43B of the Act. Most importantly the Supreme Court s decision in Checkmate Services (supra) raised concerns regarding its retrospective application. But it is a settled position that the Supreme Court case laws have a retrospective effect on the interpretation of statutes meaning that they apply to past events as well as future ones unless the judgment itself explicitly states it should only apply prospectively. It is a settled position that the Hon ble Supreme Court s role is to interpret existing laws and its decisions are seen as clarifying the true meaning of those laws not creating new ones. Therefore the Court s interpretation has to be considered to be the correct interpretation of law as it existed from the outset making it applicable retrospectively. Amendments to sections 36(1)(va) and 43B of the Act were introduced with effect from AY 2021-22 only whereas this case pertains to AY 2020-21 - Hon ble Apex Court was aware of these amendments as we can see from para 5 of the Checkmate (supra) order. Therefore the said judgement considers the impact of such amendments and it is not for us to take any view other than the ratio decidendi of the Checkmate (supra) judgement. Also the cases of P R Packaging 2022 (12) TMI 841 - ITAT MUMBAI and ANI Integrated Services Ltd 2024 (7) TMI 881 - ITAT MUMBAI both are seen to put forth a proposition which may not be consistent with the law as laid down in Checkmate Services case (supra) considering that the case of P R Packaging (supra) was cited before the Hon ble Bombay High Court and probably did not find favour with the Hon ble Bench. Arguments advanced by the Ld. AR pertained to the Checkmate Services case (supra) being pronounced after the date of the Ld. AO s order rendering it as a debatable issue beyond the pale of section 154 - We draw sustenance from the order of Saurashtra Kutch Stock Exchange Ltd 2003 (3) TMI 70 - GUJARAT HIGH COURT held that a mistake apparent from record should be self-evident should not be a debatable issue but this test might break down because judicial opinions differ and what is a mistake apparent from the record cannot be defined precisely and must be left to be determined judicially on the facts of each case.The power of rectification is to be exercised to remove an error or correct a mistake and not for disturbing finality the fundamental principle being that power of rectification is for justice and fair play. Appeal of assessee is dismissed.

Summary

The core legal questions considered in this appeal revolve around the disallowance of employees' contribution to Provident Fund (PF) paid beyond the prescribed due date and the jurisdiction of the Assessing Officer (AO) under section 154 and section 143(1) of the Income Tax Act, 1961 ("the Act") to make such adjustments. Specifically, the issues are:

1. Whether the delayed payment of employees' PF contribution beyond the due date prescribed under the PF Act is allowable as a deduction under section 36(1)(va) read with section 2(24)(x) of the Act.

2. Whether the AO had jurisdiction under section 154 of the Act to rectify the return of income (ROI) accepted under section 143(1) by disallowing the said amount, especially considering that the rectification order pre-dated the Supreme Court judgment in Checkmate Services Pvt. Ltd.

3. Whether the amendments introduced by the Finance Act, 2021 to sections 36(1)(va) and 43B of the Act, applicable from AY 2021-22, could be applied retrospectively to AY 2020-21.

4. Whether payment of employees' contribution before the due date of filing the ROI under section 139(1) of the Act qualifies for deduction, despite being paid after the due date prescribed under the PF Act.

Issue-wise Detailed Analysis

1. Allowability of Delayed Employees' PF Contribution under Section 36(1)(va)

The legal framework centers on sections 36(1)(va) and 43B of the Act. Section 36(1)(va) mandates that employees' contributions to PF and ESI must be deposited within the due dates specified under the respective statutes to be allowed as a deduction. Section 43B deals with certain specified payments being allowed only on actual payment basis.

Prior to the Supreme Court's decision in Checkmate Services Pvt. Ltd., there was judicial divergence on whether delayed payments made before the due date of filing ROI could be allowed as deduction under section 43B. Several High Courts had allowed such deductions, treating the payment deadline under section 139(1) as relevant.

The Supreme Court in Checkmate Services clarified that employee contributions fall exclusively under section 36(1)(va) and not section 43B, emphasizing strict adherence to the due dates prescribed under the PF/ESI Acts. The Court held that delayed payments beyond the statutory due dates cannot be allowed as deduction, even if paid before the ROI filing deadline.

The Court applied the principle of "lex specialis derogat legi generali," holding that the specific provisions of section 36(1)(va) override the general provisions of section 43B in this context.

The Tribunal relied on this apex court ruling, affirming that the delayed payment of employees' PF contribution beyond the statutory due date attracts disallowance under section 36(1)(va), irrespective of payment before ROI filing.

2. Jurisdiction of Assessing Officer under Section 154 and Section 143(1)

The appellant contended that the rectification order under section 154 was beyond the AO's jurisdiction as it pertained to a debatable issue and was made prior to the Supreme Court's decision in Checkmate Services. The appellant argued that adjustments under section 143(1) are limited to prima facie incorrect claims and do not extend to substantive legal controversies.

However, the Tribunal referred to settled principles established in cases such as Saurashtra Kutch Stock Exchange Ltd., which hold that a subsequent judicial decision clarifying the law retrospectively reveals a "mistake apparent from the record" that can be rectified under section 154. The Tribunal emphasized that the Supreme Court's interpretation is deemed to have been the law from the outset, and the AO's rectification order is valid even if passed before the apex court ruling.

Further, the Tribunal noted that the issue was not merely debatable but had been conclusively settled by the Supreme Court, and the rectification was based on information available in the tax audit report regarding belated payments.

The Tribunal also rejected the argument that section 143(1) limits adjustments to only prima facie incorrect claims, citing precedents where disallowance of incorrect claims based on audit reports has been upheld under section 143(1)(a).

3. Applicability of Amendments Introduced by Finance Act, 2021

The appellant argued that amendments to sections 36(1)(va) and 43B introduced by Finance Act, 2021, effective from AY 2021-22, could not be applied retrospectively to AY 2020-21. The Tribunal observed that the Supreme Court in Checkmate Services was aware of these amendments and considered their impact. The Court's ruling is an interpretation of the law as it existed, and the amendments do not alter the retrospective applicability of the legal principles.

The Tribunal further noted that several judgments relied upon by the appellant predated the Checkmate Services decision and were superseded by it.

4. Payment Before Due Date of Filing Return under Section 139(1)

The appellant contended that since the employees' contributions were deposited before the due date of filing ROI under section 139(1), the expenditure should be allowed. The Tribunal, following the Supreme Court's ruling, held that the relevant date for determining allowability is the due date prescribed under the PF/ESI Acts, not the due date for filing the ROI.

Thus, payment after the statutory due date for PF contributions but before ROI filing does not qualify for deduction under section 36(1)(va).

Treatment of Competing Arguments

The appellant's reliance on earlier High Court decisions and tribunal rulings allowing deduction for delayed payments was addressed by the Tribunal through the binding precedent of the Supreme Court in Checkmate Services. The Tribunal emphasized the principle of retrospective effect of Supreme Court decisions and the doctrine of lex specialis.

The appellant's contention regarding the limited scope of section 143(1) adjustments was rejected based on judicial precedents that allow rectification of incorrect claims disclosed in the return or audit report.

The Tribunal also dismissed the argument that the rectification order was premature, as the Supreme Court's judgment clarified the law retrospectively, rendering the rectification valid.

Significant Holdings

"The Hon'ble Apex Court held that employee contributions to PF and ESI are governed exclusively by Section 36(1)(va) of the Act, and not by Section 43B of the Act. The court emphasized that employee contributions must be deposited within the due dates specified under the relevant statutes. Failure to do so would result in disallowance of the deduction, even if the payment was made before the due date for filing the ROI."

"The principle of lex specialis derogat legi generali applies, whereby the special provisions of section 36(1)(va) prevail over the general provisions of section 43B in relation to employee contributions."

"It is a settled position that the Supreme Court's decisions have retrospective effect on the interpretation of statutes, meaning they apply to past events as well as future ones, unless explicitly stated otherwise."

"A subsequent judicial decision clarifying the law retrospectively reveals a 'mistake apparent from the record' which can be rectified under section 154 of the Act."

"Adjustments under section 143(1)(a) can be made based on information contained in the tax audit report regarding incorrect claims, including belated payments of employees' contributions attracting disallowance under section 36(1)(va)."

"Payment of employees' contribution after the due date prescribed under the PF/ESI Acts but before the due date of filing the ROI does not qualify for deduction under section 36(1)(va)."

Accordingly, the Tribunal upheld the disallowance of Rs. 2,25,91,254 under section 36(1)(va) for delayed employees' PF contribution and dismissed the appeal.