2023 (4) TMI 1412 - AT - Income Tax

Disallowance of deduction claimed being delayed payment of Employees Contribution to Provident Fund (PF) and Employees State Insurance (ESI) - HELD THAT - We unable to accept such contention of the assessee in view of the binding ratio laid down in case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT wherein it has been held that unless employees contribution to PF and ESI are deposited within the due date prescribed under the relevant statute governing such payments the amount in question has to be treated as income of the assessee in terms of section 36(1)(va) read with section 2(24)(x) of the Act. Therefore the disallowance has to be upheld. In so far as the contention of learned counsel for the assessee that such adjustment is not contemplated under Section 143(1)(a) (iv) we are unable to accept the contention in view of the decision of Savleen Kour 2023 (2) TMI 51 - ITAT DELHI Contention of the assessee that the deduction is otherwise allowable under Section 37(1) - No merit in such submission. In case of BBG Metal Syndicate Pvt. Ltd. 2022 (11) TMI 1428 - ITAT CUTTACK while considering such submission has not expressed any opinion and has simply restored the issue to the file of the Assessing Officer. Therefore the decision cited cannot be regarded to be a precedent for laying down the ratio that the payment made can be allowed as deduction under Section 37(1) of the Act. In so far as learned counsel s contention that the due date should be calculated with reference to the due date for payment of salary direct the AO to factually verify the date of payment of employees contribution to PF and ESI and in case they are found to have been paid within the due date prescribed under the PF and ESI Act or within the grace period if any under these Acts then deduction can be allowed Appeal is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the deduction claimed by the assessee for delayed payment of employees' contribution to Provident Fund (PF) and Employees State Insurance (ESI) can be disallowed under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act.

- Whether such disallowance can be effected by way of adjustment under Section 143(1)(a)(iv) of the Act during processing of return of income.

- Whether the deduction for employees' contribution to PF and ESI is allowable under the residuary provision of Section 37(1) of the Act.

- The proper date for determining the due date for payment of employees' contribution to PF and ESI, i.e., whether it should be reckoned with reference to the due date for payment of salary or the statutory due date prescribed under the relevant PF and ESI Acts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of deduction for delayed payment of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 2(24)(x)

The legal framework governing this issue is Section 36(1)(va) of the Income Tax Act, which disallows deduction for any sum payable by the assessee as employees' contribution to PF and ESI if such sum is not deposited within the due date prescribed under the relevant statute. Section 2(24)(x) defines such sum as income in the hands of the assessee if not deposited timely.

The Court relied heavily on the binding precedent set by the Supreme Court in Checkmate Services P. Ltd. - CIT-I, which unequivocally held that unless the employees' contribution to PF and ESI is deposited within the due date prescribed under the governing statutes, the amount must be treated as income of the assessee and deduction disallowed accordingly.

The assessee's argument that deduction should be allowed if payment is made before the due date of filing the return was rejected, as it is inconsistent with the statutory mandate and the Supreme Court's ruling. The Court emphasized that the due date prescribed under the PF and ESI Acts is the determinative factor, not the income tax return filing date.

Thus, the Court upheld the disallowance of deduction claimed for the delayed payment of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 2(24)(x).

Issue 2: Validity of disallowance by adjustment under Section 143(1)(a)(iv) of the Act

The assessee contended that the disallowance could not be made by way of adjustment under Section 143(1)(a)(iv) of the Act, as the issue was not covered under this provision.

The Court referred to the decision of the Co-ordinate Bench in Savleen Kour Vs. ITO, which upheld the validity of such adjustment under Section 143(1)(a)(iv). This provision allows the Assessing Officer to make certain adjustments during processing of the return if the facts are apparent from the return or other documents.

Accordingly, the Court found no merit in the assessee's contention and held that the disallowance could validly be made by adjustment under Section 143(1)(a)(iv).

Issue 3: Allowability of deduction under Section 37(1) of the Act

The assessee alternatively argued that the deduction for delayed payment of employees' contribution to PF and ESI should be allowed under the residuary provision of Section 37(1), which permits deduction of any expenditure not expressly disallowed elsewhere, if incurred wholly and exclusively for business purposes.

The Court examined the Co-ordinate Bench decision in BBG Metal Syndicate Pvt. Ltd. vs DCIT, cited by the assessee, which did not lay down any conclusive ratio permitting deduction under Section 37(1) but merely remanded the issue to the Assessing Officer for fresh consideration.

Given the absence of authoritative precedent supporting the assessee's contention, and the express statutory disallowance under Section 36(1)(va), the Court rejected the argument that Section 37(1) could override the specific provisions disallowing deduction for delayed payment.

Issue 4: Determination of due date for payment of employees' contribution to PF and ESI

The assessee submitted that the due date for payment of employees' contribution to PF and ESI should be reckoned with reference to the due date for payment of salary.

The Court directed the Assessing Officer to verify the actual date of payment of employees' contribution to PF and ESI and determine whether such payments were made within the due date prescribed under the PF and ESI Acts or within any applicable grace period. If found to be timely, the deduction should be allowed.

This approach aligns with the statutory scheme, which fixes specific due dates for deposit of statutory contributions, independent of salary payment dates.

3. SIGNIFICANT HOLDINGS

"Unless employees contribution to PF and ESI are deposited within the due date prescribed under the relevant statute governing such payments, the amount in question has to be treated as income of the assessee in terms of section 36(1)(va) read with section 2(24)(x) of the Act."

"Disallowance can be validly made by way of adjustment under Section 143(1)(a)(iv) of the Act."

"The residuary provision under Section 37(1) cannot be invoked to allow deduction for delayed payment of employees' contribution to PF and ESI where specific provisions under Section 36(1)(va) apply."

"The due date for payment of employees' contribution to PF and ESI must be determined with reference to the due date prescribed under the respective PF and ESI Acts, and not with reference to the salary payment date."

Final determination: The disallowance of deduction claimed for delayed payment of employees' contribution to PF and ESI under Section 36(1)(va) read with Section 2(24)(x) is upheld. The validity of such disallowance by adjustment under Section 143(1)(a)(iv) is affirmed. The alternative claim under Section 37(1) is rejected. The Assessing Officer is directed to verify factual dates of payment and allow deduction if payments were made within the prescribed due dates or grace period.