Direct Tax Alert

BACKGROUND

As per section 36(1)(va) read with section 2(24)(x) of the Income-tax Act, 1961 (IT Act), an employee’s contribution to Provident Fund (PF) is deductible if the same is paid on or before the due date. There were conflicting judicial views on the due date which was laid to rest by India’s Apex Court (SC) in the case of Checkmate Services (P.) Ltd.¹ wherein it was held that employee's contributions if not paid within the due date specified under the relevant Act were not allowable under section 36(1)(va) of the IT Act. Consequentially, section 36(1)(va) of the IT Act was amended to provide that the provisions of section 43B of the Act would not apply to the provisions of Section 36(1)(va) of the Act.
A question may arise as to whether the applicability of SC’s decision will be limited to the pending proceedings, or it may also extend to intimation under section 143(1) of the IT Act. In this regard, recently, the Ahmedabad Tax Tribunal² had an occasion to examine whether the principle laid down by the Hon’ble Supreme Court decision is applicable to all the proceedings under the IT Act.

We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• For the Fiscal Year (FY) 2018-19, the taxpayer filed its tax return declaring a total income of INR 164.65mn with a refund claim of INR 73.28mn. The return was processed by the Centralised Processing Centre (CPC) on 31 March 2021 and an intimation under Section 143(1) of the IT Act was sent by email on 1 April 2021.

• While processing the tax return, CPC made an adjustment of INR 58.74mn on account of the delay in the deposit of employees’ contribution to PF and Employee’s State Insurance (ESI) as mentioned in the tax audit report filed by the taxpayer.

• The taxpayer preferred an appeal before the First Appellate Authority against this adjustment which was decided in favour of the tax authorities.

• Aggrieved, the taxpayer preferred an appeal before the Ahmedabad Bench of Income Tax Appellate Tribunal (Ahmedabad Tax Tribunal).  Before the Ahmedabad Tax Tribunal, the taxpayer also raised certain additional legal grounds challenging the validity of intimation issued under section 143(1) of the IT Act.

AHMEDABAD TAX TRIBUNAL RULING

The Hon’ble Ahmedabad Tax Tribunal, while confirming the impugned adjustment, made the following observations:

Re. Applicability of SC’s Ruling on proceedings other than scrutiny proceedings

• SC in taxpayer’s own case had held that there is a marked distinction between the nature and character of the employer’s contribution under section 36(1)(iv) of the IT Act and the employee’s contribution under section 36(1)(va) of the IT Act. In the case of section 36(1)(iv) of the IT Act, the employer's liability is to be paid out of its income whereas the second is deemed to be an income, by definition, since it is the deduction from the employee's income and held in trust by the employer. This distinction has to be considered while interpreting the obligation of the taxpayer under section 43B of the IT Act. If the same is not deposited as per the mandate of section 36(1)(va) of the IT Act, a deduction would not be available to the taxpayer.

• The objection raised by the taxpayer that the decision of SC’s decision was applicable only in the case of scrutiny assessment and no adjustment can be made on the basis of this decision while processing the return of income under Section 143(1) of the IT Act, is devoid of any merits.

• The decision of SC is declaration of law which is applicable to all proceedings whether it is scrutiny assessment under Section 143(3) of the IT Act or processing tax return under Section 143(1) of the IT Act. The rationale for the decision is binding in respect of all the proceedings.

• Reference was made to the decision of the Co-ordinate Bench of Ahmedabad Tax Tribunal in the case of Corrtech International Pvt. Ltd.³ wherein similar adjustment was upheld in respect of employees’ contributions to PF & ESI while processing the tax return.

Re. Allowability of interest and penalty for late deposit of PF & ESI as business expenditure under section 37 of the IT Act

• The contentions of the taxpayer that the late deposit of employees’ contribution to PF & ESI including interest and penalty are normal business expenditure and may be allowed under section 37 of the IT Act are totally out of context and do not emerge from the adjustment as made while processing the tax return.

• The CPC had disallowed late payment of employees’ contributions to various funds as referred to in Section 36(1)(va) of the IT Act based on the defaults as reported by the Auditor in Tax Audit Report.

• If the taxpayer opined that deposit of employees’ contributions in PF & ESI is a business expenditure allowable under Section 37 of the IT Act, it should have made such a claim in the tax return. However, such a claim was neither made in the tax return nor certified by the Auditor. Therefore, it could not have been allowed while processing the tax return.

Re. Admission of additional legal grounds raised before the Tribunal

• Reliance placed by the tax authorities on SC’s decision in the case of National Thermal Power Co. Ltd⁴ wherein it was held that the Tax Tribunal has jurisdiction to examine a question of law which arises from facts as found by the authorities below is accepted. The Court further held that the question of law may be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of a taxpayer.

• As far as the correct assessment of the tax liability in this case is concerned, the issue involved is already settled by the SC’s decision in taxpayer’s own case and the grounds taken by the taxpayer on the merits of the case stand dismissed.

• Nevertheless, since the issue of limitation and natural justice, while processing the tax return, has been raised on legal grounds, the additional grounds will be considered on merits as well.

Re. Intimation being barred by limitation

• The intimation under section 143(1) of the IT Act, was computer generated on 31 March 2021 and did not contain any signature. This intimation was communicated to the taxpayer vide email dated 1 April 2021 and the email was digitally signed by the authorised officer of the CPC. The taxpayer placed reliance on the date of the signature. However, 1 April 2021 was not the date of intimation but was only the date of communication of the intimation through email.

• From the DIN number and the date appearing on the intimation, it is evident that the tax return for FY 2018-19 was processed on 31 March 2021, which was within the limitation period.

• Further, reliance is placed on order⁶ issued by the Secretary to the Government of India whereby the time limit for processing the tax return for FY 2017-18, 2018-19 and 2019-20 with refund claim was extended till 31 January 2024.

• Since the tax return of the taxpayer for FY 2018-19 was made with a refund claim, the extended time limit till 31 January 2024 was squarely applicable for processing the taxpayer’s tax return.

• Therefore, even if the intimation was communicated on 1 April 2021, this intimation under Section 143(1)(a) of the IT Act can’t be considered as barred by limitation as the CBDT had subsequently extended the time limit for processing the return till 31 January 2024.

Re. Mentioning the exact type of adjustment in intimation

• It is an undisputed fact that any incorrect claim which is apparent from any information in the tax return, the same is liable for adjustment while processing the return

• From the intimation sheet as sent by the CPC, the adjustment of INR 58.74mn was categorically indicated at Sl. No. 14 of the Annexure. In fact, this annexure contained details of all the claims made by the taxpayer in the return of income and the computation as made by the CPC under Section 143(1) of the IT Act and the variance, if any, is also indicated in respect of each item. Therefore, the nature of adjustment as made by the CPC was very much reflected in the intimation. Further, the nature/type of adjustment was also mentioned in the prior intimation sent to the taxpayer by the CPC.

BDO IN INDIA COMMENTS

The Ahmedabad Tax Tribunal has clarified the position that decision of the Hon’ble Supreme Court in the case of Checkmate Services Private Limited is declaration of law which is applicable to all proceedings whether it is scrutiny assessment under Section 143(3) of the IT Act or the proceeding of processing tax return under Section 143(1) of the IT Act.
 
It is pertinent to note that in the past, other tax tribunals had differing views on adjustment under section 143(1) of the IT Act. The Jaipur Tax Tribunal in case of Paris Elysees India Private Limited⁶ has held that the addition of an employee's contribution to the PF & ESI under Section 36(1)(va) of the IT Act through adjustment under Section 143(1) if the IT Act is not permissible. However, the Mumbai Tax Tribunal in the case of PR Packaging Services⁷ has held that disallowing the employees’ contribution to PF while processing the tax return under section 143(1) of the IT Act is against the provisions of the IT Act as it would not fall within the ambit of prima facie adjustments.