Deduction us 36(1)(va) is not allowed if Employees Contribution to PF is not paid within specified due date : ITAT Bangalore

While filing income tax returns for assessees having income from businesses, it is mandatory to follow certain guidelines as specified in the respective applicable acts. Business expenditures will be disallowed if such conditions are not fulfilled. One of such conditions is specified in the Section 36(1)(va) where any amount collected from the employers towards ESI, PF etc is eligible for deductions only if it is received from the employees. The condition is that the said amount so received shall be deposited in the respective welfare account within the due date. The same will be treated like income from by the Income Tax Department if employers do not deposit the same within the due date.

ITAT Bangalore has ordered in one of such case where such deduction was disallowed due to non-fulfilment of this condition.

Issues Involved:
Assessee Trimbak Patil is a proprietor of a labour contract business and he had defaulted in making payments of statutory dues of PF and ESI within time. The AO disallowed certain expenses on the grounds that these were mandatory payments needed to be deposited in the specific funds within due date specified in the respective acts. Whether AO is correct in doing the same?

Facts of the case explained:
Assessee had declared an income of Rs.14,04,220/- in the ITR filed for AY 2018-18 on 31.10.2018. The assessing officer disallowed expenses of Rs.78,42,360/- making total income of the assessee at Rs.92,46,580/-. This disallowance was made on the basis of default in making payments of ESI and PF in the respective funds within due date specified in such respective acts. Aggrieved by the orders of AO and subsequently by rejection orders of CIT(A) the assessee applied to Tribunal.

The court took note for AY 2018-19 and AY 2019-20 that assessee had not complied with mentioned provisions in this case. Assessee in his submissions to the tribunal contended that assessee is a labour contractor and there is no primary liability on him to collect and remit the employees’ contribution directly to the fund in view of the express provision of the PF and ESI Act. Further, it was contended that assessee had not made a claim of deduction under section 36(1)(va) of the Act. Therefore, there is no question of making a disallowance by the AO.

Court took the note of the fact that such contentions made by assessee were not made before the AO and CIT(A). Later on ITAT mentioned the Hon’ble Apex Court judgment in the case of Checkmate Services Pvt. Ltd., (supra) will squarely apply in this case also. The Hon’ble Apex Court in the aforesaid judgment has categorically held that if the employees’ contributions are not paid within the due dates specified under the respective Acts, assessee will not be entitled to deduction under section 36(1)(va) of the Act.

In the interest of justice and equity, tribunal ordered that the above contentions of the assessee need to be adjudicated by the CIT(A) (since there needs to be examination of factual aspects). Accordingly, the matter was restored to CIT(A).

In the given case the tribunal mainly focused on the judgement of the apex court where it was clearly stated that such expenses are to be paid within due dates of such specific acts otherwise the same is liable to be disallowed and added to the income of the assessee. However, based on the examination of certain factual contents of the case it was ordered that CIT(A) re-examine the case and assessee to help the revenue.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.

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