Section 43B and PF Contribution – Controversy snowballed

CA Anuja Garg

Background

Section 43B of the Income-tax Act, 1961 (“the Act”) allows certain expenses on the basis of actual payment made within the stipulated time period, i.e. before the due date of filing return of income. In other words, deduction of such expenses is allowed in the year of actual payment and not in the year in which the liability to pay the same gets incurred. Following are the expenses which the said section covers by way of six clauses:

a. Any tax, duty, cess or fee under any law;

b. Contribution made by employer to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees;

c. Bonus or commission to employees;

d. Interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation;

e. Interest on any loan or advances from a scheduled bank;

f. Sum payable by the assessee as an employer by way of leave-encashment.

Out of the aforesaid, clause (b) covering contributions of employer towards provident fund, superannuation fund or gratuity fund has always been a minefield of litigation due to conflicting decisions of Tribunals/Courts, since the said section does not cover contributions made by the employees towards provident fund, superannuation fund or gratuity fund which are dealt with by section 36(1)(va) of the Act. Section 36(1)(va), on the contrary, mandates deposit of such contributions before the due date stipulated in the respective statutes governing such contributions. This is where the dispute has stepped in. The recent contradictory judgmentsof Rajasthan High Court in the case of CIT v. Jaipur Vidyut Vitran Nigam Ltd: ITA No. 278/2011 and Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corp: ITA No. 637/2013 on the issue whether employees’ provident fund/ESI contribution is covered by section 43B of the have again sparked off this smoldering controversy. The present article seeks to address this simmering controversy in light of the judgments that have been pronounced till date on the subject.

Section 43B of the Actwas inserted by the Finance Act 1983, with effect from 1.04.1984. The objective behind the introduction ofsection 43B was explained in Circular No.372 dated 08-12-1983, which is reproduced hereunder:

“Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees’ State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid. To curb this practice, the Finance Act has inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or 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 shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee”.  

A bare perusal of the aforesaid circular will make it patently clear that the intention of the legislature was to ensure that the employers do not withhold the remittance of statutory liabilities, viz. excise duty, contributions to provident fund/ employees’ state insurance scheme since the liability gets accounted for in the books of accounts on mercantile basis and thus, deduction of the same could be claimed even though actual remittance had not been made. To plug this loophole, the legislature inserted section 43B in the Act. It is to be observed that the said sectionstarts with a non-obstante clause by way of the expression – “notwithstanding anything contained in any provision of this Act”. Thus certain deductions covered by this section are available only on actual payment of the sums by the taxpayer, irrespective of the method of accounting being followed.

Amendment made by the Finance Act, 2003 and the present scenario

Prior to the amendment made by the Finance Act, 2003, employer‘s contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund.The first proviso gave extended time for making payment and allowance of deduction for the preceding financial year. It covered all the payments except clause (b) viz. employer’s contribution to provident fund or superannuation fund or gratuity fund.

Thespecific reference to various clauses of section 43B was omitted by the Finance Act, 2003 and hence from assessment year 2004-05, all payments covered by section 43B, if made before the “due date” specified in section 139(1), satisfied the eligibility for deduction. The second proviso which provided that the contribution of the employer to provident fund or superannuation fund or gratuity fund etc. to be paid on or before the “due date” mentioned in section 36(1)(va) was omitted by the Finance Act, 2003. Hence, from the assessment year 2004-05, employers’ contribution to the welfare funds of the employees is eligible for deduction even if remitted belatedly, although contribution from employees, however, still remains covered by section 36(1)(va) of the Act.

In other words, section 43B, as it stands presently, covers only employer’s contribution to gratuity fund or superannuation fund or provident fund, meant for the welfare of employees. Employees’ contribution (by way of deduction from their salary) is treated as income of the employer under section 2(24)(x) of the Act. If the payment is delayed in terms of section 36(1)(va), the deduction gets denied and the amount recovered from employees’ salary is chargeable to tax as income of the employer.

Controversy

In the aforesaid backdrop, the Courts have, time and again, rendered conflicting views on whether the employees’ contribution to provident fund and other funds stands covered by section 43B of the Act and whether deduction at all should be allowed if the same is deposited before the due date of filing of return of income.

The view that section 43B is a general provision which merely bars deduction of specified sums, unless they are actually paid and whereas provisions of section 36(1)(va) specifically deal with deduction in respect of payment of employees’ contribution to provident fund and other funds; therefore, the provisions of section 36(1)(va), being special provisions enacted to deal with specific matter would prevail over the general provisions of section 43B has been upheld in the catena of judgments mentioned hereinbelow –

• JCIT v. ITC Ltd: 299 ITR (AT) 341 (Kol-Trib);
• DCIT v. Ashika Stock Broking Ltd.: 44 SOT 556 (Kol-Trib);
• South Eastern Coalfields Ltd. v. JCIT: 85 ITD 608 (Nag-Trib);
• ITO v. LKP Securities Ltd.: ITA No. 638/2012 (Mum-Trib)

The decision of the Gujarat High Court in the case of Gujarat State Road Transport Corp. (mentioned supra) is a recent addition to this list in which the High Court observed as follows:

“Merely because Second Proviso to Section 43B of the Act in which there was a reference to due date as defined in explanation below clause (va) of sub-section (1) of section 36, it cannot be held that even section 36(1)(va) is amended and/or even explanation below clause (va) of sub-section (1) of section 36 is also deleted. It can be said that there was a reference toexplanation below clause (va) of sub-section (1) of section 36 in second proviso of section 43B (which has been deleted by Finance Act, 2003), only for the purpose of defining due date as per explanation below clause (va) of sub-section (1) of section 36. Therefore, by deleting Second Proviso to section43B by Finance Act, 2003, it cannot be said that Section 36(1)(va) is amended and/or explanation below clause (va) of subsection (1) of section 36 is deleted, which is with respect to employees’ contribution.

……….xxx…………xxx………..

In view of the above and for the reasons stated above, and considering section 36(1)(va) of the Income Tax Act, 1961 read with sub-clause (x) of clause 24 of section 2, it is held that with respect to the sum received by the assessee from any of his employees to which provisions of sub-clause (x)of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees’ account in the relevant fund or funds on or before the “due date” mentioned in explanation to section36(1)(va).”

The Courts, however, in the catena of judgments listed below, have taken a contrary view that section 43B covers employees’ contribution as well and the same should be allowed if deposited before the due date of filing of return of income:

• CIT v. Jaipur VidyutVitran Nigam Ltd: ITA No. 278/2011 (Raj.)
• CIT v. Sabari Enterprises: 298 ITR 141 (Kar.)
• CIT v. Kichha Sugar Company Ltd.: 356 ITR 351 (Uttarakhand)
• CIT v. AIMIL Ltd.: 321 ITR 508 (Del)
• CIT v. NipsoPolyfabriks Ltd.: 350 ITR 327 (HP)
• CIT v. Alembic Glass Industries Ltd: 279 ITR 331 (Guj.)
• CIT v. Hemla Embroidery Mills (P) Ltd.: 37 Taxmann 160 (P&H)
• CIT v. Udaipur DugdhUtpadakSahakariSangh Ltd.:35 Taxmann 616 (Raj.)

The Karnataka High Court, in the case of CIT v. Spectrum Consultants India Pvt. Ltd: WA No. 4077/2013, recently had an occasion to pronounce its judgment on this matter, wherein the High Court, ruling in favour of the assessee, held that the word “contribution” should be interpreted in view of the relevant provisions of the PF Act, which means contribution from employer as well as from the employees.

Thus, in view of the conflicting judicial precedents mentioned supra, it is pertinent to observe as to whether this means that the provisions of section 36(1)(va) are otiose and redundant. To clarify this, it is imperative to analyze the provisions of section 36(1)(va) as well.

The said section contemplates that any sum covered under section 2(24)(x) of the Act would be allowed as a deduction, only if the same is deposited in the relevant fund on or before the due date.Reference, in this context, is made to section 2(24)(x) of the Act, since section 36(1)(va) is applicable in respect of sums covered under the former section.

Section 2(24) of the Act provides an inclusive definition of “income”. Clause (x) of the said section includes 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 or any other fund for the welfare of such employees in the definition of “income”. The said clause was inserted by the Finance Act, 1987 with effect from 01.04.1988 to prevent assessee employers from mis-utilizing the contributions to provident and other funds deducted from the salary of the employees. Circular No. 495 dated 22.09.1987 which explains the intent of the legislature for the amendments made vide Finance Act, 1987 reads as –

12.2 In addition, contribution of the employees to the various funds which are deducted by the employer from the salaries or wages of the employees will be taxed as income [insertion of new sub-clause (x) in clause (24) of section 2] of the employer, if such contribution is not credited by employer in the account of the employee in the relevant fund by the “due date”. Where such income is not chargeable to tax under the head “Profits and gains of business or profession”, it will be assessed under the head “Income from other sources”.

Thus, the legislative intent was not to bring contributions made by employees’ towards provident and other funds within the ambit of the definition of income, but to penalize the assessee-employers in cases where such contribution is not deposited in the respective funds in time. That apart, even otherwise, such contributions can never be brought within the scope of income, since such sums are not earned by the assessee employer; the same are received by the employer in a fiduciary capacity for remitting such sum in the respective fund for the retirement benefits of the employees. The Supreme Court, in the case of CIT v. G.R. Karthikeyan: 201 ITR 866, has held that the word “income” should be given its natural and grammatical meaning. Therefore, any sum of money received as a trustee on behalf of another person for remitting the same, cannot,by any stretch of imagination, be considered as income.

Therefore, it is for such reason that the Explanation to section 36(1)(va) of the Act defines “due date” as  – ‘the date by which the assessee is required as an employer…’. In other words, it means that the due date for depositing such contribution would be the date by which the employer is obliged to deposit such contributions which invariably gets covered by the due date mentioned in section 43B of the Act.

Furthermore, the amendment to section 43B of the Act, extending the availability of deduction to PF/ESI contributions if deposited within the due date of filing the return of income was carried out with the very purpose of mitigating the difficulties caused to employers under section 43B of the Act.

The intent of enacting a special provision for employees’ contribution was only to ensure that the employer acts reasonably in respect of the moneys received from the employees’ and there is no failure to deposit such contributions or else the same would result in penalizing the assessee-employer by way of bringing such contributions to tax as income of the employer.

The aforesaid issue, however, does not remain free from doubt. The evolving jurisprudence can be settled only by the dictum of the apex Court.

(Author is working as Senior Executive – Corporate Tax with Wipro Limited at Bangalore)