ITAT Mumbai Analyses COVID-19 Lockdown PF/ESI Delay and Other Disallowances in Diamour Jewels Pvt. Ltd. Vs CPC

Background of the Appeal

The assessee, Diamour Jewels Pvt. Ltd., approached the Income Tax Appellate Tribunal, Mumbai Bench, challenging the order passed by the Ld. CIT(A), Chandigarh in appeal against the intimation issued by the Centralised Processing Centre, Bengaluru (CPC) under Section 143(1) of the Income Tax Act 1961 for Assessment Year 2021-22.

  • Return of income was filed on 07.02.2022 declaring total income of Rs. 1,96,51,570/-.
  • CPC, while processing the return u/s Section 143(1), made various adjustments including:
    • Disallowance of employees’ contribution to PF/ESI u/s Section 36(1)(va)
    • Disallowance of interest on delayed payment of TDS
    • Addition on account of alleged unproved purchases
    • Disallowance of loss on fixed assets due to flash flood
    • Denial of TDS credit relating to mobilization advance

The appeal before the Tribunal primarily revolved around these grounds.

Key Grounds Raised by the Assessee

The assessee challenged, inter alia:

  1. Disallowance of Rs. 6,46,040/- (correct figure being Rs. 6,26,351/-) u/s Section 36(1)(va) towards belated remittance of employees’ PF and ESI contribution for the COVID-19 lockdown period.
  2. Non-consideration of Employees’ Provident Fund Organisation (EPFO) circular dated 15.05.2020 (Ref. No. C-I/Misc/2020-21/Vol.1/1112) granting waiver of penal damages for delayed deposit during lockdown.
  3. Alleged breach of principles of natural justice in passing the order on 12.04.2024 despite a later compliance date being mentioned in the notice u/s Section 250.
  4. Disallowance of interest on late payment of TDS u/s Section 201(1A).
  5. Addition on account of unproved purchases where notices u/s Section 133(6) remained unresponded.
  6. Disallowance of loss on fixed assets washed away in flash floods in Uttarakhand.
  7. Denial of TDS credit of Rs. 24,20,916/- on mobilization advance.

The Tribunal considered each of these issues in detail.

Issue 1: Delay in Employees’ PF/ESI Contribution During COVID-19 Lockdown

Factual Matrix

  • The disallowance u/s Section 36(1)(va) pertained to delayed payment of employees’ contribution to PF and ESI for April 2020 and May 2020.
  • Statutory due dates under the relevant welfare enactments were:
    • For April 2020 – 15.05.2020
    • For May 2020 – 15.06.2020
  • Due to the strict nationwide COVID-19 lockdown and severe operational constraints, the assessee deposited the employees’ share only in June 2020, immediately after relaxation in banking and business activity.
  • Challans on record evidenced payments on 15.06.2020 and 16.06.2020 through ICICI Bank, with specific EPFO and ESIC receipts reflecting successful transactions for the relevant wage months.

For all other months in the year, there was no delay in remittance of employees’ contribution.

CIT(A)’s View

The Ld. CIT(A) relied entirely on the Supreme Court’s decision in Checkmate Services P. Ltd. v. CIT [2022] 143 taxmann.com 178 (SC), holding that:

  • If employees’ contribution to PF/ESI is not deposited within the due date under the respective Acts, deduction u/s Section 36(1)(va) is not permissible, irrespective of subsequent deposit before the due date u/s Section 139(1).

Accordingly, the appeal was dismissed on this point.

Assessee’s Contention Before ITAT

The assessee placed strong reliance on the EPFO Circular dated 15.05.2020 (Ref. No. C-I/Misc/2020-21/Vol.I/1112), issued during the COVID-19 crisis, which:

  • Recognised the severe operational and financial hardship faced by establishments.
  • Provided relief from levy of penal damages u/s Section 14B of the EPF & MP Act, 1952, for delay in deposit of PF dues during the lockdown period.
  • Clarified that delays during lockdown would not be treated as arising from any culpable state of mind (no mens rea on part of the employer).

On this basis, the assessee argued that:

  • Where the very welfare legislation governing the PF contributions waives penal consequences for delays during lockdown, the same delay should not be treated as fatal for deduction u/s Section 36(1)(va) of the Income Tax Act 1961.

Revenue’s Response

The Departmental Representative contended that: