Most of us
are under an impression that depositing Provident Fund and ESI although is a
regular monthly exercise but a small delay cannot impact any Income Tax
Perspective since we can claim deduction of such PF and ESI Contribution if it
is deposited before the Due date of Filing Income Tax Return under Income Tax
Act, 1961. But, now the Hon’ble Supreme Court has held that this is not the
Case and that’s why you should read on to avoid any tax loss problem.
Cutting
things short before detailed discussion, the Hon’ble Apex Court in case CHECKMATE SERVICES P.
LTD. VERSUS COMMISSIONER OF INCOME TAX-1 vide Order dated October 12, 2022
has held that Employee Contribution (Not Employer’s Contribution) ought
to be deposited within the Due Date as provided by respective PF & ESI
Act’s otherwise No Deduction can be claimed for such contributions and the
same will be added to Assessee’s Income for the respective Assessment year even
if it is then subsequently deposited before the Due Date of Filing of Income
Tax Return.
- Detailed Discussion
In the above appeal before Hon’ble Supreme Court, the common question
involved is with respect to the interpretation of Section 36(1)(va) and Section
43B of the Income Tax Act, 1961 (hereinafter, “IT Act”), and whether the
appellant assessees are entitled to deduction of amounts deposited by them
towards contribution in terms of The Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952 (hereinafter, “EPF Act”), The Employees’
Provident Funds Scheme, 1952 (hereinafter, “EPF Scheme”), The Employees’ State
Insurance Act, 1948 (hereinafter, “ESI Act”), The Employees’ State Insurance
(Central) Regulations, 1950 (hereinafter, “ESI Regulations”) or any other
provident or superannuation fund.
- Adjudication Proceedings
The Assessing Officers (hereinafter, “AO”) had ruled that the appellants
had belatedly deposited their employees’ contribution towards the EPF and ESI,
considering the due dates under the relevant acts and regulations.
Consequently, the AO ruled that by virtue of Section 36(1)(va) read with
Section 2(24)(x) of the IT Act, such sums received by the appellants
constituted “income”. Those amounts could not have been allowed as deductions
under Section 36(1)(va) of the IT Act when the payment was made beyond the
relevant due date under the respective acts. In other words, as per the AO, as
such sums were paid beyond the due dates as prescribed under the respective
acts, the right to claim such sums as allowable deduction while computing the INCOME
WAS LOST FOREVER.
- Opposite Judgments by Several
High Courts on this Issue
High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi
favouring the interpretation beneficial to the assesses on the one hand, and
the High Courts of Kerala and Gujarat preferring the interpretation in favour
of the Revenue on the other.
- Relevant Statutory Provisions
1.
Section (24) "income"
includes --
***
(x) 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 provisions of the Employees' State Insurance Act, 1948 (34 of 1948),
or any other fund for the welfare of such employees;…” Inserted by
the Finance Act, 1987 (11 of 1987), w.e.f. 01.04.1988
- Section 36: Other Deductions
Clause (va)
(va) 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,
if such sum is credited by the assessee to the employee's account in the
relevant fund or funds on or before the DUE DATE.
Explanation 1. -For the purposes of this clause, "DUE
DATE" means the date by which the assessee is required as an employer
to credit an employee's contribution to the employee's account in the relevant
fund under any Act. rule, order or notification issued thereunder or under any
standing order, award, contract of service or otherwise.”
Explanation 2.-For the removal of doubts, it is hereby clarified
that The Provisions Of Section 43b Shall Not Apply and shall be deemed
never to have been applied for the purposes of determining the "due
date" under this clause.” Explanation 2 inserted by Act No. 13 of
2021, w.e.f. 01.04.2021
- Section 43B - Certain deductions
to be only on actual payment
Notwithstanding anything contained in any other provision of this
Act, a deduction otherwise allowable under this Act in respect of--
***
(b) 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, or
***
shall be allowed (irrespective of the previous year in which the
liability to pay such sum was incurred by the assessee according to the method
of accounting regularly employed by him) only in computing the income referred
to in section 28 of that previous year in which such sum is actually paid by
him:
Provided that nothing contained in this section shall apply in
relation to any sum which is actually paid by the assessee on or before the due
date applicable in his case 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 as aforesaid and the evidence of such
payment is furnished by the assessee along with such return. Second
proviso w.e.f. 1989
By Section 9 of the Finance Act, 1989, the following second
proviso in Section 43B was added:
"Provided further that no deduction shall, in respect of any
sum referred to in clause (b), be allowed unless such sum has actually been
paid in cash or by issue of a cheque or draft or by any other mode on or
before the due date as defined in the Explanation below clause (va) of
sub-section (1) of section 36, and where such payment has been made
otherwise than in cash, the sum has been realised within fifteen days from the
due date."
By Section 21 of the Finance Act, 2003, the above second proviso
was omitted.
Thereafter, by Finance Act, 2021 the following Explanation 5 was
added, w.e.f. 01.04.2021:
“Explanation 5.-For the removal of doubts, it is hereby clarified
that the provisions of this section shall not apply and shall be deemed
never to have been applied to a sum received by the assessee from any of his
employees to which the provisions of sub-clause (x) of clause (24) of section 2
applies.”
Author’s Note :- Hence the Law was
clarified that 43B shall not apply to Employee Contribution portion w.e.f
1.4.2021 but the above appeal is addressing this question in period prior to
1.4.2021 in accordance with provisions before 1.4.2021
- Respective Time Limits under
PF & ESI Acts
As per Section 38 of EPF Scheme employer shall within fifteen
days of the close of every month pay the same to the Fund electronic
through internet banking of the State Bank of India or any other Nationalised
Bank or through PayGov platform or through scheduled banks in India including
private sector banks authorized for collection on account of contributions and
administrative charge
As per ESI Regulation 31. Time for payment of contribution - An
employer who is liable to pay contributions in respect of any employee shall
pay those contributions within 21 days of the last day of the calendar
month in which the contributions fall due
- Appellant’s Contention as to
Why Deduction should be allowed even if deposited till the Date of ITR
- Fact that the law as existing
prior to the omission of the second proviso to Section 43B restricted
deductions in respect of ANY SUMS PAYABLE BY AN EMPLOYER AS CONTRIBUTION to the PF / superannuation
fund etc. for employees’ welfare unless they were paid within the
specified due date.
- Under the EPF Act and ESI
Act, the employer was liable to MAKE A COMPOSITE PAYMENT. The
liability comprised of the employer’s contribution and the contribution
collected from the employee. If this were to be kept in mind, the deletion
of the second proviso to Section 43B, and the opening non-obstante clause
in Section 43B had to be given full meaning. As a consequence, under
Section 43B, at the time of paying the employers’ contribution, the employer
is under legal obligation to pay not only its contribution but also that
of the employee, as a single payment to the PF authority under the
governing law. The insistence upon payment of actual payment of employees’
contribution in Explanation to Section 36(1)(va) was expressly overridden
by the non obstante clause.
- If the scheme of the IT Act
were to be kept in mind, the restrictive condition in Section 36(1)(va)
i.e., the stipulation that the employees’ contribution must be paid within
the time specified, failing which no deduction was permissible, was in
fact intended to be expressly overridden by Section 43B. The
philosophy behind Section 43B (which was introduced 01.04.1984) was to
ensure actual payment of certain specified and statutory dues, before a
particular date. These dues either by way of tax or other levies,
(including interest-payment towards loan or contributions deducted by
statutes such as EPF Act) were to be made within a specified date under
such enactments which cast those obligations.
- Revenue’s Contention as to
Why Deduction should not be allowed if deposited after Due Date of Act
- Income Tax Act differentiated between employees' contribution and employers' contribution to PF account. With respect to employers’ contribution, Section 43B was applicable. However, with respect to employees' contribution, Section 36(1)(va) was applicable, as it was specific and pointed to the kind of contribution, and when it could be made, to qualify as a deductible expense. Both the provisions i.e., Section 43B and Section 36(1)(va) operated in different fields, with respect to different contributions. Consequently, Section 43B was inapplicable and could not override Section 36(1)(va).
- It was urged that but for the
above interpretation there was no rationale to bring within the fold of
“income” – by Section 2(24)(x) – employee's contribution received by the
employer and providing a deduction by Section 36 (1)(va) and permitting
the deduction only if that contribution were paid in accordance with the
statute governing the fund (EPF/ESI Act). The second proviso to Section
43B then underwent a cosmetic change and later was deleted. There was also
a new proviso added under Section 43B for permitting deduction on
contributions paid before the returns were filed.
- The Revenue further contended
that in terms of provisions of
Section 36(1)(va) with respect to any sum received by the assessee from
any of its employees to which provision of Section 2 (24 (x) applied,
if credited by the assessee to the employees’ account in the relevant fund
or funds on or before the due date, the assessee was entitled to the
deduction. It was submitted that even the Explanation to Section 36(1)
(va) made it clear that for the purpose of that provision, “due date”
meant the date by which the assessee, as an employer, had to credit the
employees' contribution to the employees’ account in the relevant fund
under any law or rule or regulation issued thereunder or under any
standing order, etc. Therefore, during the relevant assessment year, if
the employer did not deposit the entire amount towards employees'
contribution with the PF authorities on or before the due date under the
EPF/ESI Act, to the extent there was shortfall in deposit of the
employees' contribution/ESI contribution, the assessee was not entitled to
the deduction.
- Supreme Court Ruling
- When Parliament introduced Section 43B, what was
on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there
was no question of employee’s contribution being considered as part of the
employer’s earning. On the application of the original principles of law
it could have been treated only as receipts not amounting to income.
- That Parliament intended to
retain the separate character of
these two amounts, is evident from the use of different language.
Section 2(24)(x) too, deems amount received from the employees (whether
the amount is received from the employee or by way of deduction authorized
by the statute) as income - it
is the character of the amount that is important, i.e., not income earned.
Thus, amounts retained by the employer from out of the employee’s
income by way of deduction etc. were treated as income in the hands of the
employer.
- The distinction between an
employer’s contribution which is its primary liability under law – in
terms of Section 36(1)(iv), and its liability to deposit amounts received
by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former
forms part of the employers’ income, and the later retains its character
as an income (albeit deemed), by virtue of Section 2(24)(x) - unless the
conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e.,
depositing such amount received or deducted from the employee on or before
the due date. In other words, there is a marked distinction between the nature
and character of the two amounts – the employer’s liability is to be paid
out of its income whereas the second is deemed an income, by definition,
since it is the deduction from the employees’ income and held in trust by
the employer. This marked distinction has to be borne while interpreting
the obligation of every assessee under Section 43B.
- The non-obstante clause has
to be understood in the context of the entire provision of Section 43B
which is to ensure timely payment before the returns are filed, of certain
liabilities which are to be borne by the assessee in the form of tax,
interest payment and other statutory liability. In the case of these
liabilities, what constitutes the due date is defined by the statute.
Nevertheless, the assessees are given some leeway in that as long as
deposits are made beyond the due date, but before the date of filing the
return, the deduction is allowed. That, however, cannot apply in the
case of amounts which are held in trust, as it is in the case of
employees’ contributions- which are deducted from their income. They are
not part of the assessee employer’s income, nor are they heads of
deduction per se in the form of statutory pay out. They are others’
income, monies, only deemed to be income, with the object of ensuring that
they are paid within the due date specified in the particular law. They have to be deposited in
terms of such welfare enactments. It is upon deposit, in terms of those
enactments and on or before the due dates mandated by such concerned law,
that the amount which is otherwise retained, and deemed an income, is
treated as a deduction.
Author’s Remarks :- Undoubtedly, the Hon’ble Supreme Court has
delivered its final Verdict to close the dichotomous issue it was. This will
impact the Assessee’s with demand being held correct for delay in depositing
Employee portion of Contribution. Further,
this verdict also highlights how seriously the courts consider default of
monies not deposited if they are third party monies being held with you in
trust to be deposited by due dates like Employee contributions and even TDS
deducted.
About CA Ankit Gulgulia (Jain)
0 Comments:
Post a Comment