आदेश / ORDER
Aggrieved by the order dated 28/12/2022 passed by the learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi ("Ld. CIT(A)"), in the case of Sudhakar Rao Dondapati ("the assessee") for the assessment year 2018-19, assessee preferred this appeal.
2. Brief facts of the case are that the assessee is an individual engaged in the business of providing security services. For the assessment year 2018-19, the assessee has filed an original return of income on 31/10/2018 declaring total income of Rs. 14,92,290/- under the normal provisions of the of the Income Tax Act, 1961 (for short "the Act"). The assessee had received the adjustment notice under section 143(1)(a)(iv) of the Act from the learned Assessing Officer,
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proposing addition of Rs. 8,63,537/- of the amount received from employees as contribution to the provident fund/super annuation fund/fund set up under ESI Act not credited to the employees account on or before the due date as per section 36(1)(va) of the Act. In this regard, the assessee has furnished response online to the proposed adjustment referring to the judgments passed by the Hon'ble High Court of Rajasthan in the case of Rajasthan State Beverages Corporation Limited, requesting to consider the same as allowable expenditure and also requested to drop the proposed adjustment. Finally, learned Assessing Officer has made the adjustment of the amount under section 36(1)(va) of the Act of Rs. 8,63,537/- and processed the return under section 143(1) of the Act by raising a demand of Rs. 2,58,058/-. The amount relating to the employees contribution to provident fund and ESI was paid in the same financial year or before the due date of filing the return of income. Aggrieved, the assessee has filed this appeal before the learned CIT(A) against the disallowance of employees' contribution to PF/ESIC of Rs. 8,63,537/- in terms of Section 43B read with section 36(1)(va) of the Act.
3. Learned CIT(A) after considering the facts of the case, relying on the decision of the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd., Vs. CIT, [2022] 143 taxmann.com 178 (SC), dismissed the appeal of assessee.
4. Aggrieved by the order of the learned CIT(A), assessee filed an appeal before the ITAT. Learned AR stated that inasmuch as the assessee credited the amounts to the Government account within the previous year and well before the due date of filing of return of income prescribed under section 139(1) of the Act, there is no justification in disallowing the same.
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5. Learned DR placed heavy reliance on the authorities below. To justify the conclusions reached by the learned CIT(A) that the assessee is not entitled to claim the deduction in respect of the delayed remittance of the employees' contribution of PF and ESI, he placed reliance on the decision reported in Checkmate Services Pvt. Ltd., Vs. CIT, [2022] 143 taxmann.com 178 (SC). He, however, fairly brought it to the notice of the Bench that subsequently there are two decisions rendered by different Co-ordinate Benches of this Tribunal in the case of M/s. PR Packaging Service Vs. ACIT in ITA No.2376/Mum/2022 (AY.2019-20) and M/s. Electrical India Vs. ADIT, CPC in ITA No.789/Chny/2022, (AY.2019-20) wherein contrary views are taken in case where the disallowance under section 36(iv)(a) was made while processing the return under section 143(1) of the Act. He submitted that as has been held in P.V. George v. State of Kerala, (2007) 3 SCC 557, the law declared by the Hon'ble Supreme Court will always be retrospective effect, if not otherwise stated to be so specifically.
6. I have heard the rival submissions. In the case of M/s. PR Packaging Service (supra), the Bench while referring the provisions under section 143(1)(a)(iv) of the Act, in the light of the view taken by the Tribunal in the case of Kalpesh Synthetics Pvt Ltd vs DCIT reported in 195 ITD 142 (Mum), was of the opinion that the said clause (iv) would come into operation when the Tax Auditor had suggested for a disallowance of expense or increase in income, but the same had not been carried out by the assessee while filing the return of income; and that if the tax auditor had not stated to disallow Employees Contribution to Provident Fund wherever it is remitted beyond the due date under the respective Act,
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the action of the CPC in disallowing the employees' contribution to Provident Fund while processing the return under section 143(1) of the Act is against the provisions of the Act as it would not fall within the ambit of prima facie adjustments. On the premise, the addition made on account of delayed remission of employees' contribution of PF and ESI was directed to be deleted.
7. In M/s.Electrical India Vs. ADIT, CPC in ITA No.789/Chny/2022, AY.2019-20 Chennai Bench of the Tribunal held that where the assessee failed to credit the sums received from the employees towards PF and ESI contribution within the date by which the assessee was required to deposit the same is in direct conflict with the claim made by the assessee seeking deduction under section 36(1)(va) of the Act and, therefore, falls within the ambit of section 143(1)(a)(ii) of the Act and, therefore, any addition made on account of disallowance by invoking the provisions under section 36(1)(va) of the Act cannot be interfered with.
8. Under section 2(24)(x) of the Act, the 'income' includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees State Insurance Act, 1948 (34 of 1948) or any other fund for the welfare of the employees. It, therefore, goes without saying that this deemed income has to be treated as the income of the assessee, the moment such amount comes to the possession of the assessee. It is open for the assessee to claim deduction of the same under section 36(1)(va) of the Act by complying with the said provision. Explanation-1 added by amendment by way of Finance Act, 2021 with effect from 01/04/2021 explains the term 'due date' and it does not
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impact any rights, liabilities and disabilities created by the provision. Such provisions which will only explain certain terms of the existing provision do not create any new rights or liabilities but only the rights and liabilities that were created by the provisions stood explain by the explanation, and, therefore, such explanations will take effect from the date of the provision itself.
9. In Checkmate Services Pvt. Ltd., (supra), the Hon'ble Apex Court dealt with the impact of the provisions under section 36(1)(va) of the Act in depth and while holding the issue against the assessee, held that,-
53. The distinction between an employer's contribution which is its primary liability under law - in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers' income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) - unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts - the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees' income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.
54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. 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
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are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees' contributions- which are deducted from their income. They are not part of the assessee employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' 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. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction.
10. This decision of the Hon'ble Apex Court declaring the law under the provision under section 36(1)(va) of the Act will take the retrospective effect, if not otherwise stated to be so specifically. In the decision, nothing contrary is indicated for any prospective effect only. It is, therefore clear that the law under section 36(1)(va) of the Act in the light of the Explanation-1 as declared by the Hon'ble Apex Court in the case of Checkmate Services Pvt. Ltd. (supra), shall be taken to have effect from the enactment of the provision by way of Finance Act, 1987 with effect from 01/04/1988. No other inference is possible.
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11. Further, a useful reference could be made to the relevant portions of section 143 of the Act which read thus,-
143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—
(a) the total income or loss shall be computed after making the following adjustments, namely:— … … …
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return; … … …
(iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;
12. The above provisions indicate that while processing the return of income that was filed under section 139 or section 142(1) of the Act and computing the total income or loss, the adjustment need not be confined to the disallowance of expenditure or increase in income, indicated in the audit report, but not taken into account in the total income under clause (iv), but law permits such adjustment could also be in respect of an incorrect claim which is apparent from the information in the return under clause (ii).
13. With the law declared by the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra), any claim for deduction under section 36(1)(va) of the Act wherein the assessee fails to credit the sums received from the employees to which the provisions under section 2(24)(x) of the Act are applicable, preferred by the assessee would be patently an incorrect claim and the adjustment in that respect at the stage of 143(1) of the Act process is perfectly justified.
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14. With this view of the matter, I am of the considered opinion that there is nothing illegality or irregularity in making the disallowance under section 36(1)(va) of the Act in the order passed under section 143(1) of the Act and, therefore, I hold that the learned CIT(A) rightly upheld the same. No interference is warranted and the appeal is, accordingly, liable to be dismissed.
15. In the result, appeal of the assessee is dismissed. Order pronounced in the open court on this the 21stday of March, 2023
Sd/-
(LALIET KUMAR)
JUDICIAL MEMBER
Hyderabad, Dated: 21/03/2023
TNMM
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Copy forwarded to:
1. Sudhakar Rao Dondapati, C/o. M. Anandam & Co., Chartered Accountants, Flat No. 7A, Surya Towers, S.P.Road, Secunderabad.
2. Income Tax Officer, Ward-13(3), Hyderabad.
3. DR, ITAT, Hyderabad.
4. GUARD FILE
TRUE COPY
ASSISTANT REGISTRAR
ITAT, HYDERABAD
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