Delay in payment of Employee Contribution to PF/ESI, etc. – In dilemma to claim or not?

Delay in payment of Employee Contribution to PF/ESI, etc. – In dilemma to claim or not?

Section 2(24)(x) of the Income tax Act 1961 (‘Act’) while defining Income, includes the sum received by taxpayer/employer from employees as contribution towards PF, ESI or any other welfare schemes/fund. Once such sum is treated as Income in hands of taxpayer/employer, it is the responsibility of taxpayer/employer to pay/credit the sum to the employees account in the relevant fund on or before the due date, in order to avail deduction in accordance with the provisions contained in section 36(1)(va) of the Act.

Explanation to section 36(1)(va) defines due date as the date prescribed in the relevant Act – ESI, PF Acts (etc.), for making payment of such contributions.

However, section 43B of the Act, allows deduction of employer contribution towards such funds if paid on or before the date of filing return under the Income tax Act. Otherwise, it can be claimed in the further years in the year of making payment.

Eventually any delay in payment of contributions toward such funds/acts, may put the employer in dilemma – whether to claim or not, especially with respect to employees.

This issue has been dealt by Courts/Appellate Authorities several times in past. Let’s have a look on the rulings pronounced by the Hon’ble Court and Appellate authorities of Delhi on the issue of deductibility of employee contribution.

AIMIL Ltd. (321 ITR 508/188 Taxman 265), Delhi High Court

It was held that – If the employees contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in Vinay Cement.

CIT v. P.M. Electronics Ltd., (313 ITR 161), Delhi High Court

It was held that – If the payments are made before the due date of filing the return, no such disallowance can be made under section 43B.

ACIT Vs. Ranbaxy Laboratories Ltd (20 taxmann.com 334), Delhi ITAT

It was held that – Contribution to Employees State Insurance is allowable as deduction if the same is paid before the due date of filing the return.

Universal Precision Screws VS ACIT (69 taxmann.com 368), Delhi ITAT

In this case, reliance was placed on the decision of Hon’ble High Court in case of AIMIL Ltd. and held that employees share of contribution shall be allowed if paid before the due date of filing the return of income under section 139(1) of the Act.

Rajasthan State Beverages Corporation Ltd (84 taxmann.com 185), Supreme Court

In this case, HC held that – Amount claimed on payment of PF and ESI having been deposited on or before due date of filing of returns, could not be disallowed under section 43B or under section 36(1)(va) of the Act. On further appeal by the Revenue Authorities, the Supreme Court has dismissed the SLP filed.

Above decisions favor the assesse/employer in allowing deduction of employee contribution paid beyond the date prescribed under respective Act(s), but before the due date of filing of return of income.

Bharat Hotels Limited (410 ITR 417), Delhi High Court

It was held that – Where assesse deducted PF/ESI from salaries payable to employees and deposited same with Government within time allowed (as per relevant Act) including grace period specified (if any), assesse can claim deduction of same. However, any payment beyond such prescribed time, would not allow the assesse/employer to claim deduction of same.

There was a lot of uneasiness among Delhi taxpayers and professionals, after the judgement of Court whereby they affirmed the revenue stand of disallowance of employee contribution under section 36(1)(va) on account of late deposit (beyond prescribed due dates). Before relying on such ruling, one should consider the fact that whether this judgement have precedence value, as:

• It has not considered earlier judgment of coordinate judgement of Hon’ble Delhi HC which are in favor of assesse,
• It pertain to A.Y. 2000-01 prior to amendment in section 43B by Finance Act 2003, deleting 2^nd proviso,
• It is not expressive, not founded on reasons,
• Point of law or particular question of law was not consciously determined

After the decision in case of Bharat Hotels, the Hon’ble High Court has passed another decision reiterating its earlier position of allowing deduction of employee contribution paid beyond the date prescribed under respective Act(s), but before the due date of filing of return of income.

Pro Interactive Services (India) Pvt. Ltd. (ITA No. 983/2018), Delhi High Court

It was held that – disallowance to be deleted where assessee/employer had paid the employees contribution to PF and ESI before the due date of furnishing of return u/s 139(1) of the Act. Further reliance was placed on the decisions passed in case of CIT Vs. AIMIL Ltd. and CIT Vs. Vinay Cement Ltd.

Views

• Intention behind the introduction of section 2(24)(x) and 36(1)(va) was not to cover each and every case of late deposit but only those where the employer misutilised the fund and not in genuine cases.
• Perusal of PF Scheme, made it clear that the word ‘contribution’ is used not only to mean the contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly.
• Section 43B also deals with other items of expenditure and allow deduction despite of the fact that payment is made beyond prescribed due dates. Following same concept, employee contribution should be treated at par and allowed as deduction on payment basis in line with other provisions of section 43B.

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(The author is a practicing Chartered Accountant based in Delhi and can be reached at nak.agg102@gmail.com)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied without written permission of the author.