Philippe Raymond Godet Vs ACIT (ITAT Bangalore)
PF Withdrawn Before Five Years: Employee’s Own Contribution Cannot Be Taxed Again
Summary: Withdrawal from a recognised provident fund before completing five years of continuous service may result in the loss of exemption under section 10(12). But does that make the entire withdrawal taxable, including the amount the employee contributed from his own salary? The Bengaluru ITAT has held that the employee’s contribution must be identified and excluded from taxable income after verification.
The assessee, a salaried employee, withdrew ₹49,69,708 from his provident fund before completing five years of service. The Assessing Officer added the entire withdrawal to his income on the ground that the exemption was unavailable. In appeal, the assessee distinguished his own contribution from the employer’s contribution and the interest components. The CIT(A), however, treated ₹32,57,829, which the assessee said represented his own contribution, as interest on the employee’s contribution and upheld its taxation under section 56.
Before the Tribunal, the assessee confined his challenge to this ₹32,57,829. He accepted that the employer’s contribution and the interest components, aggregating ₹17,11,879, were taxable. His argument was that the return of money he had himself contributed to the fund could not be taxed as income merely because the withdrawal was premature.
The Tribunal agreed with the principle. Relying on a Delhi Bench decision, it observed that a payment received from the provident fund to the extent it represents the assessee’s own contribution cannot be treated as taxable income. It therefore restored the matter to the Assessing Officer to verify the composition of the withdrawal and exclude the verified employee’s contribution. The appeal was allowed for statistical purposes; the Tribunal did not itself determine the final amount to be excluded.
Author’s comment: The important distinction is between loss of exemption on premature withdrawal and taxation of the employee’s own capital. The ruling does not grant blanket exemption to a premature PF withdrawal. It requires a component-wise examination, supported by the PF statement, so that the employee’s contribution is not taxed again while the other components receive their proper tax treatment. The order describes the claim under section 10(12) somewhat inconsistently; its operative finding rests on verification and exclusion of the employee’s own contribution, rather than on allowing section 10(12) exemption for the whole withdrawal.
Cases Discussed
- Delhi Co-ordinate Bench of the Tribunal in ITA No. 3552/Del/2016 — followed on the principle that PF refund representing the assessee’s own contribution cannot be treated as taxable income and should be excluded after verification.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by the assessee against the order of Ld. The Commissioner of Income Tax, Appeal vide DIN: ITBA/APL/S/250/2025-26/1084009180(1) dated 23-Dec-2025 for the Assessment Year 2016-17, arising out of the Order passed under section 143(3) of the Act, dated 22.12.2018.
2. Briefly stated, the facts of the case are assessee, being a salaried employee, filed his original return of income on 06.08.2016 admitting a total income of Rs.1,41,78,890/-. The return was summarily processed under section 143(1) of the Act and subsequently selected for complete scrutiny under CASS for examination of “exempt income, large foreign remittance and foreign bank account”. Thereafter, notice under section 143(2) of the Act was issued on 04.09.2019. Further, notice under section 142(1) of the Act dated 01.10.2018 was issued and served on the assessee. The learned AO, after verification of the details of the return of income filed by the assessee, noticed that assessee has filed 2 revised returns for the same Assessment Year as detailed below:
| Sl No. | Return filed on | Salary income declared in Rs. | House property income in Rs. | Income from Other Sources in Rs. | Total income declared in Rs. | Relief claimed u/s 90 | Refund claimed |
|---|---|---|---|---|---|---|---|
| 1 | 05/08/2016 | 14053153 | 159933 | 122811 | 14178890 | 55350 | Nil |
| 2 | 02/01/2017 | 13472733 | 159933 | 12811 | 137484470 | 55350 | 17350 |
| 3 | 28/03/2018 | 10730947 | 176510 | 588670 | 1148912 | 61088 | 873530 |
3. The learned AO observed that assessee was reducing the income each and every time when he filed the revised return. Thereafter, the learned AO proceeded to issue a show cause notice on 19.12.2018 for which the assessee filed his reply. Considering the reply furnished by the assessee, the learned AO noticed that assessee has claimed exempt / deduction in respect of amount withdrawn from his PF account amounting to Rs.49,69,708/-. The learned AO found that amount withdrawn from PF account is not exempt since assessee has not completed 5 years of continuous service and therefore added the same to the total income of the assessee.
4. On being aggrieved by the Order of the learned AO, assessee carried the matter before the learned CIT(A). Assessee made similar submissions before the learned CIT(A) and stated that the employer contribution, the interest on employer’s contribution and the interest on employee’s contribution be considered as profits in lieu of salary as per provisions of section 17(3)(ii) of the Act. However, he also submitted before the learned CIT(A) that employee’s contribution is exempt under section 10(12) of the Act. Considering the submission made by the assessee, the learned CIT(A) erroneously treated Rs.32,57,829/- as interest on employee’s contribution as, which is actually ‘Employees Contribution’ and held it as taxable under section 56 of the Act. The learned CIT(A) thereby dismissed the appeal of the assessee.
5. On being aggrieved by the Order of the learned CIT(A), assessee is in appeal before us by raising various grounds. The only issue contested by the assessee is with respect to addition of amount of Rs.32,57,829/- being the employee’s contribution to PF was erroneously upheld by the learned CIT(A) as taxable. On this issue, the learned AR submitted that any payment due to or received by an assessee from employer or from a former employer or PF or other fund to the extent which does not consist of contribution by the employer is exempted in the hands of the assessee. The learned AR further submitted that section 10(12) of the Act exemption is not available to the assessee since he has withdrawn before 5 years, however, section 17(3)(ii) of the Act applies to tax employer’s contribution and interest on employer’s contribution as ‘profit in lieu of salary’. He further submitted that the learned CIT(A) has erroneously treated the amount of Rs.32,57,829/- being the employee’s contribution to PF as interest to employee’s contribution to PF while dismissing the appeal of the assessee. He, therefore, prayed that employee’s contribution amounting to Rs.32,57,829/- shall be treated as exempt income.
6. Per contra, the learned DR relied on the orders of the lower authorities and prayed that the issue may be remitted back to the AO for factual examination.
7. We have heard the rival contentions and perused the material available on record. It is an undisputed fact that assessee has withdrawn from the recognized PF before completing 5 years of continuous service with the employer. The submission of the assessee is that an amount of Rs.17,11,879/- comprising of employer’s contribution and interest on employer’s as well as interest on employee’s contribution shall be taxable, but, however, the employee’s contribution is exempt under section 10(12) of the Act. Under similar circumstances, the Delhi Co-ordinate Bench of the Tribunal in ITA No.3552/Del/2016 has clearly held as follows:
“7. We have considered the rival contentions. The assessee has been pleading before the authorities below that the amount of Rs.4,20,476 is members contribution. Therefore, on refund it is not taxable. The Ld. CIT(A) rejected the claim of the assessee because there is no provision under the 1.T. Act. However, Ld. Counsel for the assessee, referred to the provisions of Section 17(3)(u) of the I.T. Act which supports the explanation of the assessee that any payment from P.F. to the extent of which consist of contribution by the assessee is not taxable. Therefore, authorities below should have consider the issue in the light of above provisions. It is therefore, clear that if assessee received any payment from the P.F. which is contribution by the assessee, therefore, it, cannot be a taxable income. However the assessee remain ex-parte before the A.O. and the Ld. CIT(A) also has not given detailed findings on this issue as to how much is the contribution of the assessee and how much amount have been refunded by the P.F. authorities. Therefore, to that extent, the orders of the authorities below are set aside and the matter is restored to the file of the A.O. with a direction to verify the P.F. refund to the assessee which is contributed by the assessee and after verification, the same may be excluded from the income of the assessee. The A.O. shall give reasonable sufficient opportunity of being heard to the assessee in this regard.”
8. Respectfully following the decision of the Delhi Co-ordinate Bench of the Tribunal and based on identical facts in the instant case, we have no hesitation to set aside the matter by restoring it to the file of AO with a direction to verify the PF withdrawal by the assessee, which comprises contribution by the assessee and after verification, the same may be excluded from the income of the assessee. The learned AO shall also provide reasonable opportunity of being heard to the assessee. Accordingly, the grounds raised by the assessee are allowed statistically.
9. In the result, appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page.
