Delayed remittance of Employees’ PF/ESI may be prohibited by applicable law. Section 143(1) modification
Fact and issue of the case
The assessee is in appeal before us with regard to the disallowance of Rs. 16,26,688/- towards employees’ contribution to PF and ESI under Section 36(1)(va) of the the Income Tax Act, 1961 (the Act) by way of the following grounds: – “1. The order of the CIT(A) is wrong, untenable in law, opposed to facts and is liable to set aside. 2. The CIT(A) failed to consider the fact that the proceedings u/s.143(1)(a) permits only prima-facie adjustments and a debatable issue falls outside the ambit of adjustment contemplated u/s.143(1).
The CIT(A) merely placed reliance on the decision of the Hon’ble Supreme Court in Chekamte Services (P) Ltd to hold that the belated employees contribution to PF & ESI has to be disallowed without adverting to specific grounds raised before him pertaining to the assumption of jurisdiction to make such adjustments u/s.143(1)(a).
The CIT(A) failed to appreciate the fact till 12.10.2022 (the day on which the Hon’ble Supreme court passed the order) the disallowance of belated employees contribution was a debatable issue and such adjustments cannot be made u/s.143(1)(a).
The CIT(A) failed to consider the fact that the day on which the impugned intimation was passed (i.e., 11.10.2021) there were divergent views taken by different high courts leaving such issue to be debatable one arid therefore falls outside the scope of adjustments u/s.143(1)(a). 6. The CIT(A) failed to appreciate the fact that the enabling provision having been given effect only from 01.04.2021 by way of amendment of sub-clause (iv) of Sec.143(1). Therefore, adjustment prior to A.Y.2020-21 on account of increase in income is not in accordance with law.”
The learned A.R. submitted as follows:
Appellant filed its ROI on 07.11.2020. It was processed u/s.143(1) and the AO, CPC disallowed a sum of Rs.16,26,688/- vide intimation u/s.143(1) dated 11.01.2021. Aggrieved, an appeal was filed before CIT(A) wherein specific grounds on validity of 143(1) and also on merits was raised. The Ld. CIT(A) relying on the decision of the Hon’ble Supreme Court in the case of Checkmate Services (P) Ltd dismissed the appeal without adverting to the adjustments which fall outside the scope of Sec.143(1) of the IT Act.
It is submitted that the AO, CPC vide his standard communication for proposal dated 23.11.2020 proposed to disallow the belated contribution of employee’s towards PF & ESI on the following counts; (a) Sub-clause (i) of Sec.143(1)(a) on account of arithmetical error;
(b) Sub-clause (ii) of Sec.143(1)(a) on account of incorrect claim which is apparent from any information in the return;
(c) Sub-clause (iv) of Sec.143(1)(a) on account of disallowance of expenditure indicated in the audit report but not taken into account in computing total income;
Observation by the tribunal
The Tribunal in coming the aforesaid conclusion placed reliance on another Coordinate Bench in the case of Kalpesh Synthetics Pvt Ltd Vs. DCIT 195 ITD 142 (Mumbai) wherein the ITAT, Mumbai Bench took the view that where CPC while processing return u/s.143(1)(a) cannot disallow Employee’s contributions (PF/ESI) claimed as deduction by an assessee-employer in respect of employee’s contribution towards PF by invoking section 143(1)(iv)(a). The Tribunal held that the said disallowance was based on observations made by tax auditor in audit report which stated that payments of employee contribution were made by assessee after due date specified under respective acts as judicial decisions have taken the view that said disallowance would not come into play when payment was made well before due date of filing income tax return under section 139(1) and therefore information provided in tax audit report would cease to be relevant and no disallowance can be made during assessment proceedings under section 143(1)(iv)(a).
The decision was rendered by the ITAT Mumbai Bench in the case of Kalpesh Synthetics (P) Ltd. (supra) on 27.4.2022 prior to the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., (supra) and therefore not applicable. The decision rendered by ITAT Mumbai Bench in the case of M/s. P. R. Packaging Services, follows the decision in the case of Kalpesh Synthetics (supra). In paragraph 5 of the order, a reference has been made to the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd., (supra) but has been distinguished on the ground that the said decision was rendered in the context of assessment framed u/s.143(3) of the Act and therefore not relevant for processing returns u/s.143(1) of the Act. If the basis of decision of ITAT Mumbai in the case of Kalpesh Synthetics (supra) is that clause (iv) of Sec.143(1)(a) cannot be invoked to disallow delayed payment of employee’s contribution to ESI and PF made by the assessee beyond the due date as prescribed under the relevant law relating to ESI and PF for deposit of employees share of contribution, by invoking the provisions of section 36(1)(va) of the Act, if the said contributions are paid within the due date for filing return of income u/s.139(1) of the Act, owing to decision of High Court in favour of the assessee and if those decisions of High Courts stand overruled by decision of Supreme Court in the case of Checkmate Services Pvt. Ltd., (supra) with retrospective effect, then the very basis of the decision rendered in the case of Kalpesh Synthetics(supra) no longer survives. Alternatively, the adjustment can be justified on the basis of the provisions of section 143(1)(a)(ii) of the Act which lays down that adjustment can be made to the total income in the event of “an incorrect claim, if such incorrect claim is apparent from any information in the return”. The form of return contains clause with regard to amounts disallowable u/s.36 of the Act. The aforesaid view of ours is also supported by a decision rendered by the ITAT, Bengaluru Bench in the case Itek Packz Vs. ITO ITA No.995/Bang/2022, order dated 28.12.2022. In that decision, the Tribunal, after considering the decision rendered in the case of P R Packaging (supra) held following the decision of Cemetile Industries Vs ITO in ITA No.693/Pun/2022, order dated 23.11.2022 that disallowance can be made under section 143(1)(a) of the Act of employees’ share of ESI and PF paid beyond the due date under the relevant law relating to PF contribution and ESI contribution. The Tribunal has placed reliance on the decision of the Hon’ble Madras High Court in the case of Veerappampalayam Primary Agricultural Cooperative Credit Society Vs. DCIT (2022) 138 taxmann.com 571. The Hon’ble Madras High Court took the view that while processing a return under section 143(1)(a) of the Act, apparent incorrect claim can be disallowed. We are of the view that the decisions cited by the learned Counsel for the assessee proceed on the assumption that the disallowance of employees’ share of PF and ESI paid beyond the due dates under relevant law has been made only under section 143(1)(a)(iv) of the Act, while in the intimation under section 143(1)(a) of the Act, no such basis has been given and therefore the disallowance can be justified even in terms of section 143(1)(a)(ii) of the Act.
Further the decision of the Cuttack Bench of ITAT in the case of Nirkar Security & Consultancy Services (P) Ltd. in ITA No. 98/2022 dated 17.10.2022 have no bearing on the present issue where the Tribunal observed that as per the assessee in certain months the employee’s contribution to PF & ESI has been paid within the grace period provided in the respective Acts and also in certain cases salary has been paid belatedly, consequently, there was a delay in payment of employees’ contribution to PF & ESI. Hence, the issue was restored by the Tribunal to the file of the AO for re-examination. Further, with regard to the claim of assessee that delayed contribution of PF & ESI in respect of employees’ contribution to be allowed as deduction under Section 27(1) of the Act, the Tribunal did not express any view on this issue. Hence, it can be safely said that the Tribunal has not laid down any ratio decendi on the issue before me in its order. Being so, the order in case of Nirkar Security & Consultancy Services (P) Ltd. have no application to the facts of the present case. Accordingly the issue in dispute is decided against the assessee and in favour of Department.01
In the result, the appeal filed by the assessee is dismissed.
Read the full order from heredelayed-1-1
The tribunal has ruled in favour of the assessee and dismiss the appeal.