Applicable prospectively (w.e.f. 1 April 2021)
We note that the Finance Bill, 2021 has brought in an amendment which disallows the employees’ contribution made in PF and ESI if not made within the due date as prescribed by the respective statutes (PF and ESI Act).
For ready reference, we reproduce the Explanation-2 to Section 36(1)(va) as under:
“Section 36(1)(va)
Explanation-2 – For the removal of doubts, it is hereby clarified that the provisions of Section 43B shall not apply and shall be deemed never to have been applied for the purpose of determining the ‘due date’ under this clause’’
Analysis of the amendment made:
We find that this amendment has been brought in the Act to provide certainty about the applicability of Section 43B in respect of belated payment of employees’ contribution. In order to test whether the amendment brought in later is retrospective or not one has to apply the test as laid by the Hon’ble Supreme Court in the case of M/s Snowtex Investment Ltd. (supra) wherein the Hon’ble Supreme court took note of the law laid down on this issue by the Constitution Bench in M/s Vatika Township Ltd and held that the intent of the Parliament/legislature need to be looked into for ascertaining whether the amendment should be retrospective or not.
In Vatika Township Ltd. (supra) the Hon’ble Supreme Court held that the notes on clauses appended to the Finance Bill will throw light as to the legislative intent; because it has to be borne in mind that Parliament/legislature is aware of three concepts before an amendment is brought in, which can be discerned from reading of the “Notes on Clauses” to the Bill which are (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. So, when we adjudicate whether the view of Ld CIT(A) that the explanation 2 brought in by Finance Act, 2021 is retrospective, let us look at the “Notes on Clauses and the relevant clauses 8 & 9 of the Finance Bill, 2021 (supra) pertaining to the issue in hand which in clear and unambiguous terms spells out the intention of Parliament that the amendment shall take effect from 1st April, 2021 and therefore will accordingly apply to Assessment Year 2021-22 and subsequent years.
Latest ITAT Ruling:
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that the employees' contribution to PF and ESI should be remitted before the due date for it to be allowable under Section 43B of the Income Tax Act.
The two-member bench of George George K (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) relied on the decision of the Supreme Court in the case of Checkmate Services (P.) Ltd. v. CIT, in which it was held that Section 43B(b) does not cover employees' contributions to PF, ESI, etc. deducted by employers from salaries of employees and that employees' contributions have to be deposited within the due date under Section 36(1)(va), i.e. due dates under the relevant employee welfare legislation like the PF Act, ESI Act, etc. failing which the same would be treated as income in the hands of the employer under Section 2(24)
The assessee/appellant was served with an intimation under Section 143(1) by assessing the total income at Rs. 1,49,85,533. The reasons for the difference between the returned income and the assessed income under Section 143(1) were due to the disallowance of the late remittance of employees' contributions to PF and ESI.
The assessee preferred an appeal before the CIT (A). The CIT(A) noticed the difference between employer and employee contributions to PF and ESI and held that only the employer's contribution to PF and ESI is entitled to a deduction if it is paid prior to the due date of filing the return of income.
The assessee submitted that the payment of employees' contributions to PF and ESI, though belated, was made before the due date of filing the return of income under section 139(1) of the Income Tax Act and was otherwise allowable under section 43B.
The ITAT upheld the order of the CIT {A) and dismissed the appeal of the assessee.
Case Title: M/s. Technocon Constructions & Infrastructure Private Limited Versus DCIT
Citation: ITA No.985/Bang/2022 Asst. Year 2018-2019
Date: 15.11.2022
Other Similar Judgements on the matter:
1. PBN Constructions (P) Ltd Vs ACIT (ITAT Kolkata)
Appeal Number: I.T.A. No. 235/Kol/2021 (Date of Judgement/Order: 24/05/2022) (Related Assessment Year: 2018-19)
Summary of the case:
ITAT direct the A.O. to delete the addition and hold that the Amendment brought in Finance Act 2021 w.e.f. 01.04.2021 by inserting an Explanation to section 36(1) (va) and section 43B of the Act is prospective in nature and would apply from AY 2021-22 onwards.
2. Flying Fabrication v. DCIT - [2021] 133 taxmann.com 84 (ITAT Delhi)
The assessee was engaged in providing security/labor/manpower services. For the Assessment Year 2018-19 & 2019-20, it had received notice for disallowance under section 36(1) (va) on account of delay in deposit of employee’s contribution towards PF/ESI.
The Co-ordinating bench has passed a series of the judgment holding that payment of employee’s contribution, if made before the due date of filing of the return, then same is an allowable deduction. The amendment brought by the Finance Act, 2021 in the provision of section 36(1) (va) and Section 43B by inserting Explanation 2 is perspective and cannot be held as retrospective in nature.
Accordingly, no disallowance can be made in the assessment year before the assessment year 2021-22.
Our Comment on the matter:
Deductibility of employees’ contribution to PF and other employees’ welfare funds, deposited before the due date for filing the return of income but beyond the due date prescribed under the relevant statute has been a subject matter of litigation.
This ruling & all other similar rulings affirms the view that deduction for the same should be available and that the amendment brought in by FA 2021, disallowing such payments beyond the due date under the relevant statute is prospective in nature (w.e.f. AY 2021-22).
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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