On many occasions, the taxpayers remit employee’s contribution to the provident fund and ESI after the due date mentioned in the PF and ESI Act, but before filing the return of Income u/s 139(1).
The auditor reports these details in the tax audit report (Form 3CD). However, the taxpayer may claim the deduction for these expenses in the income tax return on the ground that the said amounts were remitted before the due date for filing the income tax return as prescribed under section 139(1).
It has been seen that CPC treats the delayed payment as income u/s 2(24)(x) r.w.s 36(1)(va) of the Act in intimation passed under section 143(1) of the Income Tax Act, 1961. Even rectification application filed before CPC are being rejected. In this context, issue arises is whether employee’s contribution to the provident fund and ESI after the due date specified in the PF and ESI Act, but before filing the return of Income u/s 139(1) is allowable expense or not.
Analysis of Provisions
“Income” has been defined under section 2(24) of the Act. Under section 2(24)(x), it is provided that any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the Employees’ State Insurance Act, 1948 will constitute income. Section 36(1)(va) provides that any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, shall be allowed as deduction if such sum is credited by the assessee in the relevant fund or funds on or before the due date of such relevant fund.
On a literal reading of the above sections, one may argue that if the employees’ contribution to provident fund or any other fund is not made within due date then such amount shall be treated as income of the assessee.
However, the above provisions cannot be read in isolation and should be read alongwith section 43B of the Act. Section 43B of the Act provides additional time to the employer to make payment of contribution to provident fund or any other fund till the ‘due date’ applicable for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred.
Section 43(b) applies on any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees. Section 43(b) applies to any sum payable by the assessee as an employer by way of contribution. So it is important to understand the meaning of term ‘contribution’.
Paragraph 30 of the PF scheme provides for payment of contributions. Paragraph 30(1) states that the employer shall pay both the employer’s contribution and member’s contribution. From paragraph 30(1), it is clear that the word ‘contribution’ is used not only to mean contribution of the employer but also contribution to be made by the employer on behalf of the member employed by him.
Therefore, it appears that the word ‘contribution’ used in clause (b) of section 43B means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section (1) of section 139 is made, the employer is entitled for deduction.
Case Laws in favour of Assessee
The interplay between section 43B and section 36(1)(va) has been dealt in many decisions. Following are the some of the decision which have held in favour of Assessee.
In the case of CIT v Sabari Enterprises [2008] 298 ITR 141 (KAR.) it was held that contributions made by assessee to PF and ESI are allowable deductions even though made beyond stipulated period provided under section 36(1)(va) r.w.s 2(24)(x) if such contributions are paid by assessee on or before due date for furnishing return of income as per section 139(1). The relevant extract of the decision is given below:
“This clause is inserted by the Finance Act with effect from April 1, 1988. The Explanation to this clause is read very carefully. “Due date” has been explained stating that: means the date by which the assessee is required as an employer to credit contribution to the employees’ account in the relevant fund under any Act, rule or order or notification issued thereunder or under any standing order, award, contract of service or otherwise.” Prior to the above clause was inserted to section 36 giving statutory deductions of payment of tax under the provisions of the Act, section 43B(b) was inserted by the Finance Act, 1983, which came into force with effect from April 1, 1984. Therefore, again the provision of section 43B(b) clearly provides that notwithstanding anything contained in the other provisions of the Act including section 36(1) clause (va) of the Act, even prior to the insertion of that clause the assessee is entitled to get statutory benefit of deduction of payment of tax from the Revenue. If that provision is read along with the first proviso of the said section which was inserted by the Finance Act, 1987, which came into effect from April 1, 1988, the letters numbered as clause (a), or clause (c) or clause (d) or clause (e) or clause ( f) are omitted from the above proviso and therefore deduction towards the employees contribution paid can be claimed by the assessee. The Explanation to clause (va) of section 36(1) of the Income-tax Act further makes it very clear that the amount actually paid by the assessee on or before the due date applicable in this case at the time of submitting returns of income under section 139 of the Act to the Revenue in respect of the previous year can be claimed by the assessees for deduction out of their gross income. The above said statutory provisions of the Income-tax Act abundantly makes it clear that, the contention urged on behalf of the Revenue that deduction from out of gross income for payment of tax at the time of submission of returns under section 139 is permissible only if the statutory liability of payment of provident fund or other contribution funds referred to in clause (b) are paid within the due date under the respective statutory enactments by the assessees as contended by learned counsel for the Revenue is not tenable in law and therefore the same cannot be accepted by us.”
Further, the Honourable High Court of Karnataka in the case of Essae Teraoka P Ltd v DCIT 366 ITR 408 held that “19. From bare perusal of sub-para (1) of paragraph 30, it is clear that the word ‘contribution’ is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly.
20. Paragraph 38 of the PF scheme provides for Mode of payment of contributions. As provided in sub-para (1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under the ESI Act within fifteen days of the closure of every month pay. It is clear that the word ‘contribution’ used in clause (b) of section 43B means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section (1) of section 139 is made, the employer is entitled for deduction.”
Similar view was taken by Honourable High Court of Karnataka in the case of CIT v. Spectrum Consultants India (P.) Ltd. [2014] 49 taxmann.com 29 (Karnataka), wherein it was held that the contributions received by the employer from its employees shall be allowed as a deduction if the same is remitted within the due date of filing the return of income prescribed under section 139(1) of the Act. Relevant extract is as follows:
“Section 2(24)(x) makes it clear that the employee’s contribution which the employer deducts from his salary before it is paid into the fund, is treated as the income of the employer, and the employer by contributing can get the deduction. That payment must be made within the due date i.e. the due date prescribed under section 139(1). Though such contributions are not paid within the time prescribed under the relevant Act, if those contributions are paid before the due date prescribed under section 139(1), the employer shall be entitled to the deductions as provided under section 36(1). While extending such benefit, the Parliament has not made any distinction between the employee’s contribution and the employer’s contribution. It is for the simple reason, under the provident fund scheme, an employer has to pay both the contribution and then recover from the salary of the employee. Therefore, there was no substance in this appeal.”
Supreme Court in Rajasthan State Beverages Corpn. Ltd [TS-268-SC-2017] had dismissed Revenue’s SLP against Rajasthan HC ruling holding that deposit of PF & ESI amount on or before the due date of furnishing of the return of income, qualifies for deduction u/s 36 (1)(va)
Other cases, wherein same view is adopted are as follows:
- Bombay HC in Hindustan Organics Chemicals Ltd [TS-423-HC-2014(BOM)] & Ghatge Patil Transports Ltd [TS-637-HC-2014(BOM)], had allowed deduction of employees’ contribution to PF applying Sec 43B.
- In the case of Jaipur Vidyut Vitran Nigam Ltd. [TS-16-HC-2014(RAJ)], HC allowed deduction of employees’ contribution to PF / ESI, when deposited on or before the due date of furnishing tax return u/s 139. Same view is adopted in the case of CIT v. State Bank of Bikaner & Jaipur [2014] 43 taxmann.com 411 (Rajasthan)
- Kichha Sugar Company Ltd. [TS-211-HC-2013(UTT)]
- CIT vs Animil Ltd 41B BCAJ 657.
- Pik Pen Private Ltd 42A BCAJ 25.
- DCIT v. Eastern Power Distribution Company of A.P. Ltd. [2016] 73 taxmann.com 206 (Visakhapatnam – Trib.).
Case Laws in favour of Revenue
The Gujarat HC in the case of Gujarat State Transport Corporation [TS-681-HC-2013(GUJ)] held that employees’ contribution to PF/ESI beyond Sec. 36(1)(va) due date is not eligible for deduction, even if deposited within the due date of filing the return of income as per income tax Act.
Similar view was adopted by Kerala HC in the case of Merchem Ltd. [2015] 61 taxmann.com 119 (Kerala) wherein it was held that belated payment of employees contribution would not be allowed as deduction
Kerala HC in the case of Popular Vehicles & Services Pvt Ltd (2018) 96 taxmann.com 13 (Kerala), further confirmed this view. The HC upheld the ITAT order for AY 2008-09 and denied deduction to assessee-employer for belated payment of employees’ contribution to PF/ESI beyond the PF Act due-date. HC Rejected assessee’s stand that co-ordinate bench ruling requires reconsideration since it misread SC ruling in Alom Extrusions Ltd. The HC held that the two rulings – Alom Extrusions Ltd (applies to employer contribution u/s 43(b)) and Merchem Ltd (employee’s contribution as covered by Section 36(1)(va)) apply in two different fields. The HC also held that Section 43B(b) speaks of sum payable by the employer which is the ’employer’s contribution’, payable by the employer without deduction from employee’s salary, whereas employees contribution though remitted by the employer, it is deducted from the employees salary. On conjoint reading of Sec. 2(24)(x), sec. 36(1)(va) and Sec. 43B(b), HC held that the statute treats the employee’s and employer’s contribution differently. Thus the disallowance were upheld.
Similar view is adopted by Madras HC in the case of Unifac Management Services (India) Private Ltd. (2018) 100 taxmann.com 244 (Madras) wherein HC denied deduction for employees’ contribution to PF / ESI deposited by assessee beyond due date provided under the respective enactment but before due date of filing ROI. The HC Noted distinction in treatment under income-tax Act of employees’ and employer’s contribution. The HC held that employer is holding employees’ contribution in trust and not as a beneficiary. The HC observed that time limits for both payments are mandatory and not directory. Therefore, disallowance was upheld.
Board Circular
Circular no. 22/2015 dated December 17, 2015 – In this circular, CBDT clarified that Sec 43B disallowance should not be made for employer’s contribution to various employees welfare funds like PF, gratuity made beyond ‘due date’ as per relevant Acts but before return filing due-date u/s 139(1). Referring to SC ruling in Alom Extrusions wherein it was held that amendments made to Sec 43B by Finance Act 2003 were curative in nature and were applicable retrospectively from April 1, 1988, the CBDT acknowledged that the issue is well settled and directs that no appeals may henceforth be filed on this ground by the Department and appeals already filed may be withdrawn / not pressed upon. However, CBDT clarified that “this Circular does not apply to claim of deduction relating to employee’s contribution to welfare funds which are governed by Sec 36(1)(va) of the IT Act”. From the Circular, it is clear that as per CBDT, 43B does not apply to employee contributions. Therefore, the Assessee’s have no choice but to file appeal before CIT(A) against the intimation passed by CPC.