PF contributions deposited late? Can the income tax department impose a penalty on your employer? ITAT clarifies
The Ahmedabad tribunal ruled that disallowing employees’ PF and ESI contributions for delayed deposits does not, by itself, establish misreporting of income under Section 270A of the Income-tax Act.
The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has deleted a penalty of ₹4.42 lakh imposed on an Ahmedabad-based company for allegedly misreporting its income after it claimed employees’ contributions towards Provident Fund (PF) and Employees’ State Insurance (ESI) as expenses.
In the case of Nascent Info Technologies Pvt. Ltd. v. Income Tax Officer, ITA No. 2906/AHD/2026, the tribunal held on 23 October 2026 that a disallowance of a tax claim does not automatically amount to misreporting of income. The tax department must establish that the taxpayer’s conduct falls within the specific categories of misreporting prescribed under Section 270A(9) of the Income-tax Act, 1961.
Why did the income tax department impose a ₹4.42 lakh penalty?
Nascent Info Technologies filed its income tax return for assessment year 2017-18, declaring a total income of ₹6.14 crore.
During scrutiny assessment, the assessing officer found that the company had deposited employees’ PF and ESI contributions of ₹7.16 lakh beyond the due dates prescribed under the respective welfare laws.
The officer consequently disallowed the entire amount and increased the company’s taxable income to ₹6.21 crore.
Subsequently, the income tax department initiated penalty proceedings under Section 270A, alleging that the company had misreported its income. It imposed a penalty of ₹4,42,866 through an order dated 20 March 2025.
The company challenged the penalty before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC). However, the appellate authority upheld the penalty, prompting the company to approach the ITAT.
What did the company argue before the ITAT?
The company challenged the penalty, arguing that the disallowance of employees’ PF and ESI contributions could not automatically be treated as misreporting of income.
It relied on judicial precedents to contend that every addition or disallowance made during assessment proceedings does not necessarily justify a penalty.
The tribunal examined the company’s arguments and referred to an earlier decision by its co-ordinate bench in Hiro Mulchand Tanwani v. ITO, ITA No. 110/Ahd/2026, dated 15 May 2026.
In that case, the tribunal had held that a mere disallowance of a claim does not automatically constitute misreporting under Section 270A. The tax department must establish that the case falls within one of the specific circumstances listed under Section 270A(9).
Why did the ITAT delete the penalty?
The tribunal observed that the tax department had imposed the penalty because the company claimed employees’ PF and ESI contributions that were subsequently disallowed due to delayed deposits.
However, the material available on record did not establish that the company’s conduct fell within any of the categories of misreporting specified under Section 270A(9).
The tribunal held that merely disallowing the claim was insufficient to justify a penalty for misreporting.
It consequently set aside the order of the CIT(A) and deleted the entire penalty of ₹4,42,866.
The tribunal allowed the company’s appeal on this ground. It did not separately adjudicate the remaining grounds because they had become academic following its decision.
What does the ruling mean for employers and taxpayers?
The ruling highlights an important distinction between an income-tax disallowance and a penalty for misreporting.
Employers claiming employees’ PF and ESI contributions must ensure that these amounts are deposited within the prescribed statutory deadlines. Delayed deposits can result in disallowance under the income-tax provisions.
However, such a disallowance does not automatically establish misreporting of income attracting a higher penalty under Section 270A.
Under this provision, a penalty for under-reporting is generally 50% of the tax payable on the under-reported income. Where the under-reporting results from misreporting, the penalty increases to 200% of the tax payable on that income.
The tribunal’s ruling does not waive PF or ESI payment deadlines or cancel the underlying disallowance. It establishes that the income tax department must independently demonstrate the conditions for imposing a misreporting penalty.
Employers should therefore maintain proper records of employee contributions, deposit dates and statutory filings, while carefully examining the grounds cited in any income-tax penalty notice.
