Employees’ contribution to PF and ESI made prior to filing of Income Tax Return allowable as Deduction

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) held that the payment towards employees’ contribution to PF and ESI provided that the payments were made prior to the due date of filing of the return of income is allowable as deduction under section 37 of the Income Tax Act, 1961.

The assessee filed its income tax return for the assessment year 2019-2020, declaring income of Rs.34,94,637. The assessee was served with an intimation u/s 143(1) of the I.T. Act determining total income at Rs.48,65,612. The reason for the difference between the returned income and the income determined u/s 143(1) of the I.T. Act was the disallowance of sum of Rs.13,90,975 being late remittance of employees’ contribution to PF and ESI under the respective Acts.

Aggrieved by the orders of the lower authorities rejecting the claim of deduction, the assessee approached the Tribunal for relief.

While disposing the second appeal ITAT Vice President N.V.Vasudevan and Accountant Member Shri Chandra Poojari observed that the Bangalore Bench of the Tribunal in the case of M/s. Shakuntala Agarbathi Company Vs. DCIT dealt with a similar issue wherein by following the dictum laid down by the Hon’ble jurisdictional High Court in the case of Essae Teraoka Pvt. Ltd Vs. DCIT (supra)¸ had held that the assessee would be entitled to deduction of employees’ contribution to PF and ESI provided that the payments were made prior to the due date of filing of the return of income u/s 139(1) of the I.T.Act. It was further held by the ITAT that amendment by Finance Act, 2021, to section 36[1][va] and 43B of the Act is not clarificatory.

Following the above ruling, the Tribunal held that “therefore, the amended provisions of section 43B as well as 36(1)(va) of the I.T.Act are not applicable for the assessment year under consideration. By following the binding decision of the Hon’ble jurisdictional High Court in the case of Essae Teraoka Pvt. Ltd Vs. DCIT (supra), the employees’ contribution paid by the assessee before the due date of filing of return of income u/s 139(1) of the I.T. Act is an allowable deduction. Accordingly, we decide this issue in favour of the assessee and the disallowance made by the Assessing Officer is deleted.”