The Income Tax Appellate Tribunal, Delhi, has clarified a critical aspect of deductibility under Section 36(1)(va) of the Income Tax Act, 1961, holding that the due date for depositing employees' contributions to Provident Fund and ESI is determined by the month in which the salary liability arises, not the month in which it is disbursed. This ruling reinforces the statutory intent behind timely welfare fund deposits and rejects creative interpretations that delay compliance.
Background & Facts
The Dispute
The appellant, Shri Ram Dayal Bansal, proprietor of M/s Bansal Associates, is a civil contractor engaged in works contracts for government departments. For Assessment Year 2018-19, the Assessing Officer (AO) disallowed two amounts totaling Rs. 54,69,258/-: Rs. 44,90,343/- on account of Sales Tax/VAT debited to the Profit & Loss Account, and Rs. 97,915/- as employees' contributions to EPF and ESI paid after the statutory due dates under Section 36(1)(va). The Commissioner of Income Tax (Appeals) confirmed these disallowances. The appellant appealed to the Income Tax Appellate Tribunal (ITAT), Delhi.
Key Facts
- The assessee filed its return for A.Y. 2018-19 on 16.08.2018 declaring income of Rs. 1,70,81,700/-.
- The case was selected for scrutiny on 23.09.2019 under Section 143(2) on the limited issue of "Contract Receipts or Fees".
- The AO passed the assessment order on 11.03.2021 under Section 143(3), increasing the total income to Rs. 2,16,69,958/-.
- The disallowance of Rs. 44,90,343/- comprised:
- Work Contract Tax (WCT) of Rs. 33,85,666/- paid under Delhi VAT Composition Scheme for April - June 2017 (pre-GST period)
- Write-off of Rs. 11,04,677/- for irrecoverable VAT refund claims from earlier years
- The disallowance of Rs. 97,915/- pertained to employees' contributions to EPF and ESI deposited after the statutory due dates under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees' State Insurance Act, 1948.
- The appellant submitted VAT returns, challans, and ledger accounts evidencing payment and write-off.
- The appellant argued that PF/ESI contributions were paid before the due date of filing the return under Section 139(1) and should therefore be allowable.
Procedural History
- 16.08.2018: Return filed for A.Y. 2018-19
- 23.09.2019: Scrutiny notice issued under Section 143(2)
- 11.03.2021: AO assessment order passed
- 06.06.2025: CIT(A) order confirming disallowances
- 14.06.2025: Appeal filed before ITAT Delhi (ITA No. 1336/Del/2026)
- 02.06.2026: Hearing held
- 15.06.2026: Judgment pronounced
The Parties' Positions
For the Appellant
- Argued that WCT of Rs. 33,85,666/- was a statutory business expenditure under Section 37(1), paid under the Delhi VAT Composition Scheme, and supported by challans and returns.
- Contended that the write-off of Rs. 11,04,677/- for unrecoverable VAT refunds was a genuine business loss, allowable under Section 36(1)(vii) as a bad debt, following T.R.F. Ltd. v. CIT.
- Asserted that PF/ESI contributions of Rs. 97,915/- were paid before the due date of filing the return under Section 139(1), and thus should be deductible under Section 36(1)(va), relying on pre-2022 judicial precedents including CIT v. AIMIL Ltd. and Insta Exhibitions Pvt. Ltd.
- Proposed an alternative interpretation: the due date for PF/ESI deposit should be reckoned from the month of actual salary disbursement, not the month for which salary is due.
- Claimed that the Finance Act 2026’s new Section 29(1)(e) was curative and should apply retrospectively.
For the Revenue
- Supported the AO and CIT(A) orders, arguing that the WCT was disallowed due to lack of proof of payment (though later conceded payment was established).
- Opposed the VAT refund write-off, calling it a prior period adjustment.
- Maintained that PF/ESI contributions were paid after the statutory due dates under the respective welfare laws, and therefore disallowable under Section 36(1)(va).
- Relied on the Supreme Court’s decision in Checkmate Services P. Ltd. v. CIT [2022] to uphold the disallowance.
- Rejected the retrospective application of the Finance Act 2026 amendment, stating it was prospective only.
Relief Sought
The appellant sought:
- Allowance of Rs. 44,90,343/- as deduction under Section 37(1) and Section 36(1)(vii)
- Reversal of disallowance of Rs. 97,915/- under Section 36(1)(va)
- Deletion of the entire disallowance and consequential relief
The Legal Issue
The central question was whether Section 36(1)(va) of the Income Tax Act, 1961, requires the employer to deposit employees' contributions to Provident Fund and ESI within fifteen days of the close of the month in which the salary liability arises, or whether the due date may be reckoned from the month in which the salary is actually disbursed.
Arguments Presented
For the Appellant
The appellant relied on CIT v. AIMIL Ltd. and ITAT decisions from 2021 to argue that deposits made before the return filing date under Section 139(1) were sufficient for deduction. It further contended that the Finance Act 2026’s Section 29(1)(e), which permits deduction if payment is made before the return filing date, was clarificatory and should apply retrospectively to A.Y. 2018-19. The appellant also argued that the due date under Section 38(1) of the EPF Act should be interpreted as fifteen days after the month of salary disbursement, not the month of liability.
For the Respondent
The Revenue relied on the Supreme Court’s binding decision in Checkmate Services P. Ltd. v. CIT [2022], which held that Section 36(1)(va) mandates deposit within the statutory due date under the EPF/ESI Acts, irrespective of the return filing deadline. It argued that the Finance Act 2026 amendment was not retrospective and could not override the settled law. The Revenue also emphasized that the appellant’s interpretation would undermine the welfare objective of timely fund deposits.
The Court's Analysis
The Tribunal first addressed the disallowance of Rs. 44,90,343/-. It found that the WCT of Rs. 33,85,666/- was paid under the Delhi VAT Composition Scheme and was a statutory business expenditure incurred wholly and exclusively for the purpose of business. The Tribunal accepted the evidence of payment through challans and returns and allowed the deduction under Section 37(1). Similarly, the write-off of Rs. 11,04,677/- for irrecoverable VAT refunds was held to be a genuine bad debt, allowable under Section 36(1)(vii), following T.R.F. Ltd. v. CIT.
"It is enough if bad debt is written off as irrecoverable in accounts of assessee."
Regarding the PF/ESI disallowance of Rs. 97,915/-, the Tribunal rejected the appellant’s interpretation. It held that Section 38(1) of the EPF Act clearly mandates deposit "within fifteen days of the close of every month" - meaning the month in which the salary liability arises, not the month of disbursement. The Tribunal emphasized that the welfare objective of the law would be defeated if employers could delay salary disbursement to extend the deposit deadline.
"If the interpretation of the assessee... is adopted, the same will go against the employees' welfare as in that situation, the employers would be free to delay the disbursal of salary... and claim deduction... with impunity."
The Tribunal further noted that the Auditor’s Tax Audit Report corroborated the AO’s position. It held that the Checkmate Services precedent was binding and that the Finance Act 2026 amendment was prospective only, as the legislature did not express any intent for retrospective application.
The Verdict
The appeal was partly allowed. The disallowance of Rs. 44,90,343/- (WCT and VAT refund write-off) was deleted. The disallowance of Rs. 97,915/- for delayed PF/ESI contributions was upheld. The total income for A.Y. 2018-19 stands revised to Rs. 2,06,90,843/-. The appellant is directed to pay costs of Rs. 10,000/- to the Revenue.
What This Means For Similar Cases
Due Date for PF/ESI Deposits Is Fixed by Liability Month
- Practitioners must now calculate the due date for PF/ESI deposits based on the month for which salary is payable, not the month it is disbursed.
- Delaying salary disbursement to extend the deposit deadline will not save the deduction under Section 36(1)(va).
- Employers must ensure deposits are made by the 15th of the month following the salary liability month (e.g., April salary due → deposit by 15.05).
Pre-Checkmate Precedents Are No Longer Valid
- Judgments like CIT v. AIMIL Ltd. and Insta Exhibitions Pvt. Ltd. are overruled for A.Y. 2018-19 and later.
- The Supreme Court’s Checkmate Services ruling is now the binding authority for all assessment years prior to A.Y. 2021-22.
- Relying on return filing deadlines for deduction is no longer tenable.
Finance Act 2026 Amendment Is Prospective Only
- The new Section 29(1)(e) applies only from A.Y. 2026-27 onwards.
- No retrospective relief is available for A.Y. 2018-19 to 2025-26.
- Taxpayers must plan compliance based on statutory due dates, not legislative amendments.
