The Pune Income Tax Appellate Tribunal (ITAT) has upheld the Revenue’s suo motu rectification under Section 154 to disallow delayed Employee State Insurance (ESI) and Provident Fund (PF) payments, following the Supreme Court ruling in Checkmate Services (P) Ltd. & Ors. v. CIT & Ors. The case pertains to the assessment year 2013-14, where the assessee had declared a total income of Rs. 45,93,760/-. During the assessment under Section 143(3), the Revenue made an ad hoc disallowance of expenditure towards staff welfare and petrol sales promotion.
Subsequently, the Revenue initiated rectification proceedings under Section 154, seeking to disallow an expenditure of Rs. 13,04,591/- due to the delay in payments of ESI and PF beyond the prescribed due date. The assessee objected to the disallowance, arguing that although the payments were made after the due date prescribed under the relevant statute, they were made before the due date of filing the income tax return under Section 139(1). The assessee contended that no disallowance could be made under Section 36(1)(va). However, the Revenue rejected the objection and passed a rectification order under Section 154, disallowing the expenditure of Rs. 13,04,591/- for the late payment of ESI or PF, citing contravention of Section 36(1)(va) read with Section 2(24)(x).
The Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the assessee’s appeal, and the ITAT upheld the decision. The ITAT relied on a coordinate bench ruling in Cemetile Industries v. ITO & Others and the Supreme Court ruling in Checkmate Services. It observed that the disallowance arising from the audit report’s indication of delayed remittance of employees’ contribution to PF fell under clause (iv) of Section 143(1) for prima facie adjustment. Additionally, it noted that the Supreme Court had made it clear in Checkmate Services that the amount of Rs. 13,04,591/- was not deposited before the due date mentioned in the relevant statutes. The ITAT emphasized that once the Supreme Court has declared a law under Article 141 of the Constitution of India, it becomes the law of the land and is applicable from the inception of the relevant provision.
Furthermore, the ITAT referred to the Madras High Court ruling in Appellate Assistant Commissioner v. N. Kuppanna Gounder and observed that the law declared by the Supreme Court on the issue of the allowability of employee’s contribution is applicable from the inception of Section 36(1). On the issue of the validity of rectification proceedings under Section 154, the ITAT concluded that the Revenue rightly invoked the rectification power as the law declared by the Supreme Court in Checkmate Services was already existing at the time of the rectification order. It relied on the Supreme Court ruling in CIT v. Model Mills Nagpur Ltd., stating that rectification applications can be moved to give effect to the law laid down by the High Court. Additionally, it cited the Andhra Pradesh High Court ruling in B.V.K. Seshavataram v. CIT, which held that subsequent interpretation of the law by the Supreme Court would constitute a mistake apparent from the record to initiate rectification proceedings under Section 154.
Consequently, the ITAT upheld the rectification order disallowing Rs. 13,04,591/- on account of the employee’s contribution towards ESI/PF paid beyond the due date mentioned in the respective statutes by the assessee. The decision was in favor of the revenue. The judgment was delivered on 26.05.2023 in the case of Shivamm Industries v. DCIT [TS-285-ITAT-2023(PUN)].
