Flying Fabrication vs ITO – Appeal on PF and ESI Deduction Disallowance Allowed (ITA 1545/DEL/2022)

Flying Fabrication vs ITO – A Landmark Ruling on PF and ESI Deduction Disallowance (ITA 1545/DEL/2022)

In the Income Tax Appellate Tribunal Delhi, the case between Flying Fabrication, New Delhi, and the Income Tax Officer, Ward 1(4), Gurgaon, annotated under ITA No. 1545/Del/2022, was a pivotal moment for understanding the implications of delayed payments towards employee Provident Fund (PF) and Employee State Insurance (ESI) on tax deductions under the income tax laws of India. The assessment in question was for the year 2017-18, putting a spotlight on the treatment of employee contributions to PF and ESI for deduction under section 36(1)(va) of the Income Tax Act.

Background

The appellant, Flying Fabrication, faced denial of PF and ESI deductions by the National Faceless Appeal Centre (NFAC), Delhi, on grounds that the payments were not made within the statutory deadlines, leading to a disallowance of Rs.87,92,801. The crux of the dispute lay in whether such delayed payments, made before the due date of filing the return under section 139(1) of the act, qualified for deductions.

Judgment and Its Implications

The tribunal’s order was passed by a bench comprising of Shri G.S. Pannu, Hon’ble President, and Shri Saktijit Dey, Judicial Member. The bench, after careful consideration of precedents and statutory provisions, concluded that the assessee’s appeal deserved to be allowed. It was observed that the payments, albeit delayed as per the relevant statutes, were made before the deadline for filing income tax returns, thus qualifying for deductions. This was in line with the Coordinate Bench’s decisions and aligned with the legislative intent to not unduly penalize taxpayers for administrative delays, as long as contributions were made before the return filing due date.

The decision hinged on the interpretation of section 36(1)(va) read with section 2(24)(x) and its relationship with section 43B of the Act, which does not apply to employee contributions made before the due date of filing the income tax return. This landmark ruling set a precedent, emphasizing the importance of the payment timeline over the date of deduction for contributions towards employee welfare funds.

Conclusion

The case reiterates the principle that compliance with tax laws involves not just adherence to statutory deadlines but also understanding their interplay with administrative provisions. For businesses, this ruling offers clarity on managing their payroll deductions and contributions towards employee welfare funds, underlining the significance of timely compliance and its implications on allowable deductions.

The case of Flying Fabrication vs ITO marks an important milestone in the understanding and application of tax deductions related to delayed payments of PF and ESI contributions, providing much-needed relief and guidance to taxpayers navigating through the complexities of income tax provisions.

Flying Fabrication vs ITO – Appeal on PF and ESI Deduction Disallowance Allowed (ITA 1545/DEL/2022)