Omaxe World Street Private Limited vs ACIT on Disallowance of Expenditure Towards Employees Contribution: Case Analysis ITA 1741/DEL/2022

In a notable judgment dated August 23, 2023, the Income Tax Appellate Tribunal, Delhi Bench ‘E’, dismissed the appeal filed by Omaxe World Street Pvt. Ltd. against the Assistant Commissioner of Income Tax, Circle-2(1), Delhi concerning the Assessment Year 2017-18. This case, bearing I.T.A. No. 1741/DEL/2022, has garnered attention due to its implications on the treatment of employees’ contributions to ESIC/PF under the Income Tax Act, 1961.

The genesis of the dispute traces back to the assessment order dated December 18, 2019, passed by the Assessing Officer under Section 143(3) of the Act. The contention revolves around the disallowance of expenditure claimed by the appellant on account of late deposits of employees’ contribution to PF/ESIC. The Assessing Officer, leveraging the ruling in the case of Checkmate Services Pvt. Ltd. vs. CIT (2022), added an amount of ₹1,65,347 to the returned income of the assessee on these grounds.

The core of the appeal laid in the interpretation of Sections 36(1)(va) and 43B of the Income Tax Act, with the appellant contesting the CIT(A)’s decision which was in favor of the revenue authority. The appellate ruling, endorsed by the tribunal, hinged on the precedent set by the Supreme Court in Checkmate Services (supra), distinguishing between employees’ and employer’s contributions to PF/ESIC for taxability purposes.

Judicial discourse on this matter elucidates that while employer’s contributions are covered under Section 43B allowing deductions upon actual payment, employees’ contributions, once deducted by the employer from employees’ salaries, enter a different legal regime. The Supreme Court opined that the delayed deposit of such contributions, beyond the due dates as prescribed under the relevant Acts, attracts tax liability and is not permissible as a deduction under Section 36(1)(va). This principle was vigorously defended by the Respondent’s counsel, leading to the affirmation of the tax authority’s position by the tribunal.

The judgment brings to light the nuanced distinctions within the Income Tax Act concerning the treatment of PF/ESIC contributions and underscores the stringent view taken by the judiciary on compliance with the timely deposit of employees’ contributions. The appellate tribunal, aligning with this view, found no merit in the appellant’s case, thereby dismissing the appeal.

This detailed analysis elaborates on the legislative intent, judicial interpretations, and practical ramifications concerning the disallowance of employees’ contributions to ESIC/PF. It serves as a critical resource for taxpayers, practitioners, and scholars interested in the dynamics of tax law and compliance requirements within the realm of employee welfare contributions.

In conclusion, the case of Omaxe World Street Pvt. Ltd. vs. ACIT serves as a precedent underscoring the importance of adhering to statutory deadlines for depositing employees’ contributions to PF/ESIC. The Tribunal’s decision, affirming the legal position that belated deposits cannot enjoy the tax exemption, sets a clear directive for corporate compliance in employee benefit schemes under the Income Tax Act, 1961.

Order pronounced by the bench comprised of Shri Saktijit Dey, Vice President, and Shri Pradip Kumar Kedia, Accountant Member, marked a significant juncture in the interpretation of tax laws relating to employee contributions towards statutory funds.

Omaxe World Street Private Limited vs ACIT on Disallowance of Expenditure Towards Employees Contribution: Case Analysis ITA 1741/DEL/2022