Scope of Prima Facie Disallowance while processing the ITR u/s 143(1) Inherently Limited: ITAT

Anil Kumar Sharma vs. Circle-44(1)
(Order was pronounced in the open Court on 07/06/2022)

The assessee paid and deposited the employee’s contribution in Employee’s Provident Fund (EPF) and Employee’s State Insurance Scheme (ESI) before the due date of filing of return of income stipulated under Section 139(1) of the Act, although the assessee has remitted the payment belatedly and beyond the due dates specified in respective Acts. It was thus contended that where the assessee has complied with the obligation of payment towards the employee’s contribution before the due date, the deductions are allowable u/s.36(1)(va) of the Act as held in several judicial pronouncements including the decision of Hon’ble Delhi High court in the case of Pr.CIT vs. Pro Interactive Service (India) Pvt. Ltd. ITA No.983/2018. The Assessing Officer has made the impugned addition on the ground that the assessee has deposited the employee’s contribution towards Provident Fund and ESI amounting to Rs. 19,19,534 after the due date as prescribed under the relevant Act/ Rules in breach of Explanation 5 to Section 43B of the Act. The Assessing Officer accordingly resorted to the additions under Section 36(1)(va) read with Section 2(24)(x) of the Act.

Appeal Before CIT(A): In the appeal before the CIT(A), the authority disallowed Rs. 19,19,534 on account of a delayed payment of employee’s contribution towards EPF and ESI.

Appeal before ITAT: The tribunal observed that said issue had been decided in favour of the assessee by the Hon’ble Delhi High Court in the case of Pr.CIT vs. Pro Interactive Service (India) Pvt. Ltd. ITA No.983/2018. The extract of the judgment is reproduced as under:

“The legislative intent was /is to ensure that the amount paid is allowed as an expenditure only when payment is actually made. We do not think that the legislative intent and objective is to treat belated payment of Employee’s Provident Fund (EPF) and Employee’s State Insurance Scheme (ESI) as deemed income of the employer under Section 2(24)(x) of the Act.”

Also, the plea of the assessee that delayed payment of employee’s contribution to PF/ESIC is not disallowable as the amendments to Section 36(1)(va) and Section 43B effected by Finance Act, 2021 were applicable prospectively in relation to Assessment Year 2021-22 and subsequent years was taken in account by the Tribunal. Therefore, the claim of deduction of the contribution could not be denied to the assessee in Assessment Year 2017-18 in question on the basis of amendments made by the Finance Act, 2021. Hence, the action of revenue was set aside and cancelled.

The addition of Rs. 19,19,534 has been made while processing the return of income under Section 143(1) of the Act. The claim of the assessee for allowability of employee’s contribution to PF/ESIC under Section 36(1)(va) r.w.s. 2(24)(x) of the Act is backed by Kalpesh Synthetics (P.) Ltd. vs. DCIT (2022) 137 taxmann.com 475 (Mum. Trib) observed that the scope of prima facie disallowance under Section 143(1) is inherently very limited and hence such adjustments cannot fall in this category. Hence the appeal of the assessee was allowed.

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