Gnosis Pharmaceuticals Pvt Ltd.’s Appeal Against Disallowance of EPF and ESI Contributions for AY 2019-20

Gnosis Pharmaceuticals Pvt Ltd.’s Appeal Against Disallowance of EPF and ESI Contributions for AY 2019-20

In a significant tax litigation, Gnosis Pharmaceuticals Pvt Ltd., based in Delhi, contested the disallowance made by the Income Tax Department regarding the delayed payment of employee contributions towards the Employees’ Provident Fund (EPF) and Employee’s State Insurance (ESI) for the assessment year 2019-20. The case, bearing number ITA 1715/DEL/2022, was brought before the Income Tax Appellate Tribunal (ITAT) Delhi Bench ‘G’.

Background of the Case

The dispute arose from an order dated 05.03.2020 passed by the Income Tax Officer (ITO), Ward 10(2), Delhi, under Section 143(1) of the Income Tax Act, 1961. The assessment order disallowed a sum of Rs.9,91,347/- on account of delayed payment of the employees’ contribution towards PF and ESI. Gnosis Pharmaceuticals argued against this order, leading to an appeal before the ITAT.

Judgment of the Tribunal

The ITAT, in its final judgment delivered by members Shri Chandra Mohan Garg (Judicial) and Shri Pradip Kumar Kedia (Accountant), allowed the appeal in favor of Gnosis Pharmaceuticals. The tribunal carefully examined the legislative interpretations, precedents, and the amendments introduced by the Finance Act, 2021, concluding that the disallowance made by the AO was not justified. The crux of the judgment hinged on the principle that if the contributions towards EPF and ESI were made before the filing of the return of income, they should not be disallowed.

The tribunal also noted that the legislative intent was not to penalize employers for delayed contributions by treating the belated payments as deemed income under the Act. Furthermore, they observed that the amendment brought by the Finance Act of 2021, which seeks to tighten the rules around the deduction for employees’ contributions, was not applicable for the assessment year in question as it would take effect from the subsequent assessment year 2021-22.

Significance of the Decision

The decision is a landmark one for employers facing similar disallowances under Section 143(1) of the Income Tax Act. It reaffirms the judiciary’s stance that the genuine delays in depositing employees’ contributions towards PF and ESI do not warrant disallowances if such contributions are deposited before the filing of the income tax return. The judgment also clarifies the application of amendments introduced by the Finance Act, 2021, giving relief to many businesses apprehensive about the retrospective application of the law.

Conclusion

In its conclusion, the tribunal underlined the importance of adhering to the deadline for depositing employees’ contributions to avail tax benefits. However, it has also provided a safety net for employers who miss this deadline but ensure compliance before the filing of their income tax returns. This judgment not only favors Gnosis Pharmaceuticals but also sets a precedent for similar cases, ensuring a balanced approach between compliance enforcement and providing reasonable leeway to taxpayers.

Order Pronounced in Open Court

The final judgment was pronounced in the open court on September 21, 2022, by both the Judicial and Accountant members, marking a significant resolution to the dispute between Gnosis Pharmaceuticals Pvt Ltd. and the Income Tax Department for the assessment year 2019-20. This case highlights the intricacies of tax laws and the continued role of judicial forums in interpreting legislative intent for practical applications.

Gnosis Pharmaceuticals Pvt Ltd.’s Appeal Against Disallowance of EPF and ESI Contributions for AY 2019-20