Disallowance on account of delay in depositing employees contribution to ESI & PF not sustainable

The ITAT held in the case of M/s Anup Service Station vs DCIT, CPC, Bengaluru that if the assessee has deposited the employees’ share of contribution to PF & ESI before the due date of filing of return u/s 139(1) of the Income Tax Act (Act), then no disallowance u/s 36(1)(VA) should be made for the period prior to 01.04.2021.

The assessee had appealed against the order passed by CIT(A), National Faceless Appeal Centre, Delhi stating the disallowance u/s 36(1)(va) on account of delay in depositing the employees’ contribution to ESI and PF for the A.Y. 2018-19 and 2019-20. Ld. AR of the assessee submitted that the assessee has paid employees’ contribution to PF and ESI before the due date of filing of return u/s 139(1) of the Act, the same cannot be held as a disallowable deduction. On the other hand, ld. Sr. DR contended that once the assessee failed to deposit employees’ contribution to PF and ESI before the due date prescribed in the ESI & PF Act, the orders of Ld. CIT(A) do not call for any interference.

The ITAT in its order stated that the assessee has deposited the employees’ share of contribution to PF & ESI before the due date of filing of return u/s. 139(1) of the Act, then no disallowance u/s. 36(1)(va) can be made. It has further been held that the amendment to the provisions of section 43B and 36(1)(va) of the Act by the Finance Act, 2021 has to be construed as prospective and applicable for the period after 01.04.2021. It is held that this provision imposes a liability on the assessee and therefore, cannot be construed as applicable with retrospective effect since the legislature has not specifically said so. Since the assessee in the instant case has admittedly deposited the employee’s contribution to PF & ESI before the due date of filing of return of income, therefore, the ITAT held that the ld. CIT(A) was not justified in sustaining the disallowance.

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