Employee Contribution To PF/ESI Before ITR Filing Eligible For Income Tax Deduction: ITAT

The single member bench of Vice President, N.V.Vasudevan in the light of the decision of the Karnataka High Court in the case of M/s Essae Teraoka (P.) Ltd vs DCIT observed that employee's contribution under section 36(1)(va) of the Income Tax Act would also be covered under section 43B and therefore if the share of the employee's share of contribution is made on or before due date for furnishing the return of income under section 139(1), then the assessee would be entitled to claim deduction.

The assessee/ appellant is a Private Limited Company. The assessee filed return of income for AY 2018-19 declaring its total income as NIL. In an intimation issued the Centralised Processing Centre (CPC) added a sum representing employees' share of contribution to ESI to the extent not paid on or before the due date as mentioned in Section 36(1)(va) of the Income Tax Act 1961.

It was the case of the assessee that employees' share of ESI has been paid before the due date for filing of return under section 139(1) of the Act.

According to the CIT(A), by virtue of newly inserted Explanation 2 to clause (va) of sub-section (1) of the section 36, the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the "due date" under the said clause.

The CIT(A) also held that Section 43B of the Income-tax Act relates to allowing certain deductions only on actual payments. Clause (b) of the said section provides that any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall be allowed only in computing the income referred to in section 28 of that previous year, in which such sum is actually paid by him. Proviso to the said section provides that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

By virtue of insertion of Explanation 5, the provisions of the section 43B shall not apply and shall be deemed never to have been applied to asum received by the assessee from any of his employees to which the provisions of subclause (x) of clause (24) of section 2 applies.

The CIT(A) held that the amendment to section 36(1)(va) by insertion of explanation 2 and the amendment to section 43B by insertion to explanation 5 by the Finance Bill 2021 was only declaratory / clarificatory in nature and there therefore was applicable with retrospective effect by necessary intendment of deeming nature expressly stated therein. The CIT(A) upheld the addition made by the AO.

The issue raised was whether the amendment to the provisions to section 43B and 36(1)(va) of the Act by the Finance Act, 2021, has to be construed as retrospective and applicable for the period prior to 01.04.2021 also.

The ITAT noted that there is no dispute that the assessee made payment of the Employees share of PF/ESI on or before the due date for filing return of income for AY 2017-18 under section 139(1) of the Act.

The Tribunal held that the explanatory memorandum to the Finance Act, 2021 proposing amendment in section 36(1)(va) as well as section 43B is applicable only from 01.04.2021. These provisions impose a liability on an assessee and therefore cannot be construed as applicable with retrospective effect unless the legislature specifically says so.

Case Title: M/s. B. R. S. Precision Manufacturing Private Limited Versus DCIT

Citation: ITA No.620/Bang/2021

Date: 23.12.2021

Counsel for Appellant: None

Counsel for Respondent: Standing Counsel Ganesh R. Ghale

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