M/S Diversified Services vs Income Tax Officer, Ward 5(2)(3)
2023 Latest Caselaw 2561 Guj

      C/TAXAP/1/2023                                         ORDER DATED: 28/03/2023




            IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

                           R/TAX APPEAL NO. 1 of 2023
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                           M/S DIVERSIFIED SERVICES
                                    Versus
                        INCOME TAX OFFICER, WARD 5(2)(3)
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Appearance:
MR PRIYAM M SHAH(12095) for the Appellant(s) No. 1
MR. JAIMIN R DAVE(7022) for the Appellant(s) No. 1
for the Opponent(s) No. 1
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 CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA
       and
       HONOURABLE MR. JUSTICE NIRAL R. MEHTA

                                  Date : 28/03/2023

                             ORAL ORDER

(PER : HONOURABLE MR. JUSTICE N.V.ANJARIA)

Heard learned advocate Mr.Jaimin Dave for the appellant.

2. Preferred under Section 260A of the Income Tax Act, 1961, the present Tax Appeal arises out of order dated 17.5.2022 of Income Tax Appellate Tribunal, Ahmedabad "SMC" Bench in ITA No.55 of 2022 in respect of Assessment Year 2019-20.

2.1 The appellant has framed and proposed following questions of law as substantial questions of law for this Appeal, urging to admit the Appeal for consideration of the said questions, reproduced below,

"(a) Whether the Income Tax Appellate Tribunal erred in law and in facts in not appreciating that payment of

C/TAXAP/1/2023 ORDER DATED: 28/03/2023

employee's contribution to PF/ESI having already been done by the appellant before due date of filing of return, the same ought to have been allowed as deduction under Section 36(1)(va) read with Section 43B of the IT Act?

(b) Whether the Income Tax Appellate Tribunal erred in law and in facts in not appreciating that jurisdiction under Section 143(1)(a) of the IT Act is limited in nature and when different High Courts have taken different view on allowance of deduction under Section 36(1)(va) read with Section 43B of the IT Act with respect to payment of employee's contribution to PF/ESI having already been done by the appellant before due date of filing of return, the same cannot be termed as apparently incorrect claims from the information in the return?

(c) Whether the Income Tax Appellate Tribunal erred in law and in facts in holding that amendment made Section 36(1)(va) and Section 43B of the Income Tax Act vide Finance Act, 2021 (No.13 of 2021) is applicable retrospectively?

3. Stating the basic facts in the background of which the aforesaid questions are proposed to be claiming to be substantial questions of law, the appellant is a firm engaged in providing manpower. The appellant has been depositing provident fund (PF) and Employee State Insurance (ESI) regularly, as per its case. For the Assessment Year 2019-20, the appellant filed return of income on 30.9.2019 declaring total income of Rs.56,640/-. The return was processed under Section 143(1) on 6.3.2020. While processing the return, the Assessing Officer made addition in the income of the appellant

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on the count of delayed deposit of employees' contribution of the PF and ESI, total amounting to Rs.8,85,284/-.

3.1 The appellant preferred Appeal before the Commissioner of Income Tax (Appeals) which by order dated 7.12.2021 upheld the view of the Centralized Processing Center which had added the income as above. The Appeal was dismissed on 7.12.2021. When the appellant approached the Income Tax Appellate Tribunal, the Tribunal confirmed the order of the appellate authority as per its judgment dated 17.5.2022, impugned in the present Appeal.

4. The case of the appellant was that once the contribution amount was paid even if with delay, the same could not have been charged as income of the appellant since the amount was not retained by the appellant for its benefit. It was also the contention that the income tax authority including the appellate tribunal erred in appreciating the scope of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961 introduced in the Finance Act, 2021.

4.1 On the other hand, the stand of the department was that in light of Section 36(1) read with Section 43B of the Act, the direction in respect of the employees' contribution should be allowed only the amount is paid within the rates prescribed in the relevant welfare funds. It has been the case of the department that once there is a delay in payment of the contribution beyond the rates prescribed in the concerned statutory funds, the same would cease to be allowable as deduction and is liable to be treated as income.

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5. In course of hearing of the Appeal, learned advocate for the appellant was fair to invite attention of the Court to the decision of the Supreme Court in Checkmate Services (P) Ltd. v. Commissioner of Income Tax-1, [(2022) 448 ITR 518 (SC)]. The Supreme Court in the context of provisions of Section 36(1)(va) read with Section 2(24)(x) and Section 43B of the Income Tax Act, 1961, addressed the aspect whether there was marked difference between the nature and character of assessee - employer's contribution and amounts retained by assessee from out of employee's income by way of deduction, in which one was in the nature of liability to be paid by the employer and the second was deemed income as per Section 2(24)(x) of the Act to be treated as held in trust by the employer - assessee. It was held that the non obstante clause in Section 43B would not apply in case of amounts which were held in trust as was the case in employee's contribution which was deducted from their income and was not part of employer's income.

5.1. The Supreme Court analysed the relevant provisions in Para.30 to 34 and after noticing the attendant decisions, proceeded to observe, thus,

"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

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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 Commissioner of Income-Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi High Court). 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." (Para.52)

5.1.1 It was further stated,

"... 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 is to 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

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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." (Para.52)

5.1.2 The distinction between employers' contribution and liability to deposit the amount issued by it was explained as under :

"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."

(Para.53)

5.1.3 The Supreme Court finally held,

"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

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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. (Para.54)

5.1.4 It was added to observe,

"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." (Para.54)

6. In view of the law emerging from the decision of the

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Supreme Court in Checkmate Services (P) Ltd. (Supra), the contentions and the questions raised by the appellant could be said to be no longer res integra. The law as holding the field operates against the appellant.

6.1 Thus, no question of law much less any substantial question of law arises for consideration in this Appeal.

7. The Appeal is liable to be dismissed. It is accordingly dismissed summarily.

(N.V.ANJARIA, J)

(NIRAL R. MEHTA,J) V.J. SATWARA