Tax implication on delay deposit of PF/ESIC Contribution:

In the intimation processed u/s 143(1) of Income Tax Act, 1961, the Centralize Processing Center makes addition of income as per the amount reported in certain clauses of Tax Audit Report. Assessee is left with no choice but to go for appeal with higher authorities.  We have noticed that the disallowance includes along various other things, the delay in payment of Contribution to PF and ESIC.

In this article, we have tried to provide the brief about the arguments in favour of assessee. Please note that, at the end, we have separately discuss about the situation post amendment by Finance Act 2021.

Based on the reporting of the details under clause 20(b) of the Tax Audit Report, the CPC has disallowed the amounts where there was delay in payment as compared to the due date under the respective law.  We can take an example: –

Particulars	Amount
Total Contribution of ESIC	1,000,000
Total Contribution of PF	3,000,000
Subtotal	4,000,000
Paid within due date	500,000
Paid after Due date	3,500,000
Total Disallowed under Intimation u/s 143(1)	3,500,000

To understand tax implication on such delay payment, we will need to understand the provision of section 36(1)(va), Section 43B and certain decisions pronounced by the Tribunal/Court.

Quote: Extract of Section 36(1)(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.—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 there-under or under any standing order, award, contract of service or otherwise;

Unquote

Quote: Extract of Section 43B

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a)  any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(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

……….

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.

Unquote

*** words “referred to in clause (a) or clause (c) or clause (d) or clause (e) or clause (f)” were omitted by the Finance Act, 2003, w.e.f. 1-4-2004

Extract of Second Proviso to Section 43B omitted by the Finance Act, 2003, w.e.f. 1-4-2004. Prior to its omission, the second proviso, as substituted by the Finance Act, 1989, w.e.f. 1-4-1989, read as under:

Quote:

“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.”

Unquote:

i). As per the decision of Supreme Court in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306/185 Taxman 416 provisions of section 43B covers both, payment of employers’ contribution and employee’s contribution.

ii). Further, Section 43B made it mandatory for the revenue department to grant deduction in computing the income under section 28 in the year in which tax, duty, cess, etc. is actually paid. However, Parliament took cognizance of the fact that the accounting year of a company did not always tally with the due dates under certain statutes and, therefore, by way of the first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the return under the Income Tax Act, the assessee would be entitled to deduction. This did not apply to contributions to labour welfare funds. However, in First Proviso, the Words “referred to in clause (a) or clause (c) or clause (d) or clause (e) or clause (f)” were omitted by the Finance Act, 2003, w.e.f. 1-4-2004. Further, Second Proviso was deleted by the said Finance Act. Accordingly, it brought uniformity by equating tax, duty, cess and fee with contributions to welfare funds like employees’ provident fund, superannuation Fund and other welfare funds. Further deletion of second proviso clearly indicated that the benefit of section 43B is available for such contribution of employee welfare funds, ESIC, PF etc.

iii). Accordingly, contribution to ESIC and PF made by assessee must get the benefit of provisions of section 43B of the Act as the payment has been made before filing of tax return.

iv). Further, Bombay High Court decision in the case of Commissioner of Income-tax, (Central), Pune v. Ghatge Patil Transports Ltd [2015] 53 taxmann.com 141 (Bombay) it was held that both the employees’ and employer’s contributions are covered under the amendment to Section 43B of the Act and payments thereof are subject to benefits of Section 43B.

v). Further, Mumbai Tribunal decision in the case of High Volt Electricals (P.) Ltd. v. Assistant Commissioner of Income Tax, Palghar Circle, Ward(2) [2018] 98 taxmann.com 471 (Mumbai – Trib.) wherein the assessee deposited amount towards employees’ contribution to Provident Fund beyond stipulated date contemplated under Provident Fund Act but before ‘due date’ applicable in its case for furnishing ‘return of income’ under sub-section (1) of section 139. It was held that in view of amended provisions of section 43B, amount so deposited could not be disallowed by invoking provisions of section 36(1)(va), read with section 2(24)(x).

Accordingly, considering all the above points, it can be argued that the disallowance to be deleted.  There should not be an intentional delay of payment or mens-rea.  The fair and just treatment in law is deserved by each assessee. The decision of Maneka Gandhi vs The Union of India (SC) also lays down the principle of reasonable and kind law and procedure.

Finance Act 2021, has made the following amendments:

Extract of Finance Act, 2021

Quote:

In section 36 of the Income-tax Act, in sub-section (1), in clause (va), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:––

‘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;’

In section 43B of the Income-tax Act, after Explanation 4, the following Explanation shall be inserted, namely:-

“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.”.

Unquote:

It can be noticed that there is a distinction between employer contribution and employee’s contribution towards welfare fund.  Based on the above amendment in Section 36 and 43B a clear message given by the Hon’ble Finance Minister that Government do not wish to allow employers to use the money deducted from the salary of employees.  Accordingly, amount of employee’s contribution must get deposited within the dates specified under the respective Act to remain eligible for the deductions u/s 36.   The Employer’s contribution is not covered under Section 36 as well as in the newly inserted Explanation 2 to section 43B. Accordingly, it may continue to enjoy the benefit of section 43B.

The wordings of the captioned Explanation indicate that the clarification is retrospective in nature. However, in the Memorandum of Budget, it has been mentioned that the said amendment will apply from assessment year 2021-22 and onwards.  Accordingly, there still exist a grey area as to whether existing litigation will get the benefit of various Tribunal/Court Rulings or benefits will be denied due to such an amendment.

It will be really very interesting to know what position CIT(A) is taking for the cases pending for earlier years and whether the matter will still go up to Tribunal and High Court to get relief after this amendment.

The information contained herein is of a general nature and is not meant to address the circumstances of any particular person. Although we try to provide accurate information, there can be no guarantee that such information is accurate as of the date it is received or in the future. We take no responsibility of any loss or damage that may cause due to reliance on this information.  One must not take any action/decision based on such information without appropriate professional advice after a detailed study of a particular case.

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(Author: Utkarsh Mehta, Practicing Chartered Accountant can be contacted at cautkarsh.mehta@gmail.com @ +91 9833884464)

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