DCIT-17(1), MUMBAI V. SKS ENTERPRISES, MUMBAI

MA 447/MUM/2022

AI Insights

The case involves the Deputy Commissioner of Income Tax (DCIT) and SKS Enterprises, where the revenue sought to recall an earlier Tribunal order that allowed the assessee's appeal regarding the disallowance of employee's contributions to Provident Fund (PF) and Employees' State Insurance (ESI). The Tribunal's initial decision was based on precedents that the amendment to section 36(1)(va) of the Income Tax Act, 1961, was prospective and not retrospective. However, following the Supreme Court's ruling in Checkmate Services Pvt. Ltd. v. CIT, which held that such contributions are not deductible if not deposited by the due date, the revenue filed a miscellaneous application to recall the Tribunal's order.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123919 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 25 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 24-05-2023
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-03-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 29-12-2022
• Other Referred Cases: Kalpesh Synthetics P. Ltd Vs. DCIT, Alom Extrusions Ltd, CIT vs. Hindustan Organics Chemicals Ltd, Checkmate Services Pvt. Ltd. Vs. CIT-1
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Section: 43B; 143(1); 139(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI ‘B’ BENCH, MUMBAI. Before Shri B. R. Baskaran (AM) & Shri Aby T. Varkey (JM) M.A. No. 447/Mum/2022 I.T.A. No. 865/Mum/2022 (A.Y. 2018-19) DCIT-17(1) 117, Kautilya Bhawan, BKC, Bandra East, Mumbai-400051. Vs. SKS Enterprises Shop No. 2-3, Kings Apartment, Juhu Tara Road, Mumbai-400049. (Appellant) (Respondent) Assessee by None Department by Smt Vranda U. Matkari (Sr. AR) Date of He aring 31/03/2023 Date of P ronounceme nt 25/05/2023 O R D E R Per Aby T. Varkey (JM) :- Through this Miscellaneous Applications revenue is seeking recall of the order passed by the Tribunal in ITA. No. 865/MUM/2022 dated 30.06.2022 for the A.Y. 2018-19. 2. At the outset, we observe from the record that the impugned order was pronounced on 30.06.2022; and the department has filed Miscellaneous Application on 30.12.2022. In the Miscellaneous Application, revenue submitted as under: - 1. Brief facts of the case: The Return of income for AY 2018-19 was filed declaring income at Rs. 88,44,488/- which was duly processed and intimation under section 143(1) of the Income Tax Act, 1961 was issued to the appellant, making a disallowance of Rs. 5,80,629/- under section 36(1)(va) on account of employees contribution towards Provident Fund deposited with the M.A. No.447/Mum/2022 A.Y. 2018-19 SKS Enterprises 2 authorities after the due date for payment thereof but on or before the due date of filing the return of income. The assessee challenged the order of the AO (CPC) before the CIT(A) who dismissed the appeal of the assessee vide its order dated 30.07.2021. Decision of Hon’ble ITAT; The Hon’ble ITAT, Mumbai “B” Bench passed an order in the above mentioned case on 30.06.2022 in ITA No. 865/Mum/2022 for AY 2018-19. The Ld. ITAT, relying on the decision of the Tribunal in the case of Kalpesh Synthetics P. Ltd Vs. DCIT (2022) 137 taxmann. Com 475 (Mum), Alom Extrusions Ltd. 36 ITR 1 (Bom) and CIT vs. Hindustan Organics Chemicals Ltd (2014) 366 ITR 1 (Bom) and also holding that the amendment brought on in the Finance Act, 2021 was prospective and not retrospective, allowed the appeal of assess. The ITAT has accordingly directed the AO to delete the addition made towards delayed deposit of employee’s contribution towards EPF/ESI made after the due date specified in the relevant Acts but paid before the due date of filing of return of Income u/s 139(1) of the Act. Comments for Filing Misc. Application: The issue is squarely covered in favour of Revenue by the decision of Hon’ble Supreme Court in Civil Appeal No. 2833 of 2016 in the case of Checkmate Services Pvt. Ltd. Vs. CIT-1. In this case, the Apex Court held that w.r.t the employees contribution which are deducted from their income by employers towards PF/ESIC etc. are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. It was held by the Hon’ble Supreme Court that even before the amendment u/s 36(1)(va) was bought to the statute, provisions of Section 43B do not apply to employee’s contribution. The relevant except from the judgment of the Apex Court is reproduced for your kind perusal: "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 are filed of certain liabilities which are to be borne by the assessee in M.A. No.447/Mum/2022 A.Y. 2018-19 SKS Enterprises 3 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. " In view of the above, it is humbly prayed before Hon’ble ITAT to recall its earlier order in ITA No. 865/Mum/2022 dated 30.06.2022 for AY. 2018-19 in the case of the appellant and reconsider fresh hearing on merits of the case in light of the above judgment of the Hon’ble Supreme Court.” 3. Before us, the Ld. Departmental Representative (DR) submitted that in this case, the Tribunal allowed the appeal of the Assessee and held that employee’s contribution to ESI/PF paid by the assessee before due date of filing of return of income was allowable in terms of section 43B of the Income-tax Act, 1961 (in short ‘the Act’). He further submitted that now in view of the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. v. CIT (448 ITR 518), the controversy of allowability of employees contribution to M.A. No.447/Mum/2022 A.Y. 2018-19 SKS Enterprises 4 PF/ESI u/s 36(1)(va) vis-à-vis section 43B of the Act is no longer res-integra; and any such payment of employees contribution for ESI/PF paid after due date under the relevant enactment [PF/ESI Act] are not eligible for deduction in terms of section 36(1)(va) of the Act. None appeared on behalf of assessee, but we take judicial notice of Hon’ble Apex Court decision in Checkmate Services (supra) and proceed to dispose of the MA preferred by Revenue. 4. Heard Ld. DR and perused the relevant material on record. The Tribunal in the impugned order has allowed the appeals of assessee and directed the Assessing Officer to delete the disallowance, on account of, what is termed as, delayed payments of PF and ESI contributions. 5. We find that the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra) has after taking note of relevant provisions of the Act and various decisions of the High Courts held that employee’s contribution to ESI/PF remitted after the due date under relevant enactment of PF/ESI Acts are not covered u/s 43B of the Act; and therefore, same are liable to be disallowed in terms of section 36(1)(va) of the Act. The relevant finding of the Hon’ble Supreme Court is reproduced as under: “51. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd. 24; Commissioner of Income-Tax and another v. Sabari Enterprises25; Commissioner of Income Tax v. Pamwi Tissues Ltd. 26; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. 27 and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not M.A. No.447/Mum/2022 A.Y. 2018-19 SKS Enterprises 5 consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act. 52. When Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions – especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund isto be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure. M.A. No.447/Mum/2022 A.Y. 2018-19 SKS Enterprises 6 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 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. M.A. No.447/Mum/2022 A.Y. 2018-19 SKS Enterprises 7 55. In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed.” 6. It is trite that the law laid down by the Hon’ble Supreme Court relates back the date of inception of the relevant provisions of the Act. Therefore, in view of the decision of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra), the order of the Tribunal is recalled for fresh adjudication and registry is directed to fix the appeal in due course. 7. In the result, the miscellaneous application filed by the revenue is allowed. Pronounced in the open court on 25/05/2023 Sd/- Sd/- (B. R. Baskaran) (ABY T. VARKEY) Accountant Member Judicial Member Mumbai; Dated : 25/05/2023 Vijay Pal Singh, (Sr. PS) Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, Mumbai 5. Guard File. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai