ITAT: Employees’ PF/ESI Contributions Paid Late Cannot Claim Deduction Under Income Tax

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed MI2C Business Enterprises Pvt. Ltd’s appeal in a dispute concerning the late deposit of employees’ PF and ESI contributions for Assessment Years 2017-18, 2018-19 and 2019-20. The company had challenged adjustments made by the Central Processing Centre (CPC) under Section 143(1) of the Income-tax Act.

The company argued that both employer and employee contributions to PF and ESI were deposited before the due date for filing the income tax return and therefore should be allowed as deductions. It also contended that such disallowances could not be made during the processing of returns under Section 143(1) because the issue was legally debatable at that time.

The ITAT accepted the company’s argument on the issue of delay in filing the appeals before the Commissioner (Appeals). The Tribunal noted that the CIT(A) had in fact gone into the merits and given the findings and thus the delay was in effect condoned. So the appeals could not have been dismissed on account of delay alone.

However, on the main issue of PF and ESI contributions, the Tribunal ruled in favour of the Income Tax Department. It relied heavily on the Supreme Court judgment in Checkmate Services Pvt. Ltd. v. CIT, which held that employees’ contributions deposited after the due dates prescribed under the PF/ESI laws cannot be allowed as deductions, even if deposited before the income tax return filing date.

The assessee argued that, when the CPC processed the returns, several Delhi High Court judgments such as AIMIL Ltd. in its favour and, therefore, the issue was not rectification-worthy under Section 143(1). The Tribunal dismissed the argument and observed that the law was settled by the subsequent decision of the Supreme Court in Checkmate Services and the earlier contrary decisions stand overruled.

The ITAT also relied on the decision of the Delhi High Court in Woodland (Aero Club) Pvt. Ltd. v. ACIT (2025), which specifically upheld similar disallowances of PF/ESI made during processing under Section 143(1). According to the Tribunal, this judgment is binding on authorities within Delhi and clearly permits such adjustments.

The company further argued that Checkmate Services was a scrutiny assessment under section 143(3) and, hence, should not be applicable to summary processing under section 143(1). The Tribunal held that the Delhi High Court in Woodland had already clarified that the PF/ESI disallowances can be made even while processing returns under Section 143(1).

The assessee also pointed out that some recent High Court and Tribunal decisions have taken a favourable view for the taxpayers. The ITAT accepted that there were conflicting rulings but held that it was bound by the ruling of the Delhi High Court in Woodland which supported the Revenue’s view.

The Tribunal also rejected the argument that the matter was not settled in view of the fact that a Special Leave Petition against Woodland had been admitted by the Supreme Court. The ITAT observed that the admission of an SLP does not dilute the binding nature of the judgement of the Delhi High Court by itself.

The company also took benefit of provisions of the new Income-tax Act, 2025, which allow deduction of employee PF/ESI contributions if deposited before the due date of filing the return. The Tribunal held that this change is prospective from 1 April 2026 and cannot be applied to earlier years of assessment. It observed that if Parliament intended the amendment to apply retrospectively, it would have expressly said so.

On another important issue, the assessee argued that PF/ESI due dates should be calculated from the month in which salaries were actually paid rather than the month to which the salaries related. The Tribunal rejected this interpretation. It held that under the PF law, contributions must be deposited within 15 days from the end of the month in which the salary becomes due. Accepting the company’s interpretation, the Tribunal said, would allow employers to delay salary payments and defeat the welfare purpose of PF legislation.

The Tribunal also noted that the company’s own tax auditor had reported delays in depositing PF/ESI contributions in Clause 20(b) of the Tax Audit Report. The CPC merely relied on this information while making the adjustments during return processing.

As a result, the ITAT upheld the disallowance of employees’ PF and ESI contributions under Section 36(1)(va) read with Section 2(24)(x) and dismissed most of the grounds raised by the company. While the Tribunal allowed the ground relating to condonation of delay, it ultimately confirmed the PF/ESI additions for all three assessment years.