Covid-19 Lockdown Delays in PF/ESI Deposit Do Not Justify Disallowance Under Section 36(1)(va): ITAT Chandigarh

Case Overview

Background and Factual Matrix

Ethos Limited, the assessee-company, had filed its income tax return for Assessment Year 2021-22 on 15.03.2022, declaring total income of Rs. 9,92,93,920/-. The return was taken up for processing under Section 143(1) by the Centralised Processing Centre (CPC), which proceeded to make additions on three distinct issues.

The first and most significant addition pertained to employees' contributions towards Provident Fund (PF) and Employees' State Insurance (ESI) amounting to Rs. 18,73,058/-. The CPC invoked Section 36(1)(va) of the Income Tax Act, 1961, on the ground that these contributions had been remitted to the government account beyond the due dates prescribed under the respective labour statutes.

The second addition of Rs. 7,39,787/- was made under Section 41, with the CPC drawing a comparison between the figures reported in the Income Tax Return and those disclosed by the Tax Auditor in the audit report, noting an apparent inconsistency.

A third addition of Rs. 3,201/- was made under Section 43B, which the assessee subsequently paid and did not press further.

The Additional Commissioner of Income Tax (Appeals), Madurai, through its order dated 21.06.2024 passed under Section 250 of the Income Tax Act, 1961, confirmed the aforesaid additions, prompting the assessee to approach the ITAT Chandigarh.

Grounds Raised Before ITAT Chandigarh

The assessee raised multiple grounds of appeal, the principal ones being:

• The CPC lacked the jurisdiction and authority to carry out the adjustment under Section 36(1)(va) while processing the return under Section 143(1), particularly since the proposed adjustment did not feature in the Show Cause Notice issued prior to processing.
• The delayed deposit of PF and ESI contributions occurred exclusively during the peak Covid-19 lockdown period, and the Employees' Provident Fund Organisation (EPFO) had itself granted relief from levy of penal damages for delayed deposits during the lockdown period by issuing a specific circular.
• Given that the EPFO had condoned the delay under labour law, no disallowance was warranted under the Income Tax Act, 1961.
• The addition under Section 41 amounted to double taxation since the amount of Rs. 7,39,787/- representing remission or cessation of trading liability had already been included in the return under the head "Provision/liabilities no longer required written back" at Serial No. 14(XI) of Part A-P&L Ind-AS of ITR-6.
• The application of sub-rule (3) of Rule 6G of the Income Tax Rules, 1962 was alleged to be inapplicable to the facts of the present case.
• The impugned orders were also challenged on the ground of violation of principles of natural justice, as the assessee was not afforded a reasonable opportunity of being heard.

Issue 1: Delayed Deposit of Employees' PF and ESI Contributions — Section 36(1)(va)

Position of the CIT(A)

The CIT(A) declined to grant relief on the PF/ESI issue, observing that from AY 2021-22 onwards, assessees are given an opportunity to file a revised audit report upon receipt of intimation from the CPC regarding any discrepancy. Since the assessee neither filed a revised audit report nor produced evidence to demonstrate that the dates reported by the auditors were incorrect, the CIT(A) dismissed this ground.

Assessee's Arguments Before the Tribunal

Before the Tribunal, the assessee's counsel drew the Bench's attention to the fact that the delayed deposits occurred strictly during the period when the Covid-19 pandemic was at its peak and the entire country was under a complete lockdown. The delay ranged from merely one day to one month, and the amounts were deposited into the government account at the first available opportunity after banking operations resumed post-lockdown.