CHECKMATE SERVICES P. LTD VS. COMMISSIONER OF INCOME TAX
Brief Summary of Supreme Court’s Judgement in Checkmate Services P. LTD. (Disallowance for Late deposit of Employee’s Contribution of EPF/ESI )
Question Decided
Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961 (IT Act), and whether the appellant assessee(s) are entitled to deduction of amounts deposited by them towards contribution in terms of The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act), The Employees’ Provident Funds Scheme, 1952 (EPF Scheme), The Employees’ State Insurance Act, 1948 (ESI Act), The Employees’ State Ins CHECKMATE SERVICES P. LTD VERSUS COMMISSIONER OF INCOME TAX.
Question Decided
Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961 (hereinafter, “IT Act”), and whether the appellant assessee(s) 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.
Department’s Contention
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.
• Relevant Provisions of Law under Consideration
> Section 2(24)(x)- Definition of Income
> Section 36(1)(iv)- Other deductions- Reference to EPF & ESI being deductible from Income.
> Section 36(1)(va)- 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.
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- Explanation 1- Definition of “Due Date”.
- Explanation 2- Provisions of section 43B shall not apply for the purposes of determining the “due date” under this clause. (inserted by Finance Act, 2021 w.e.f. 01-04-2021)
> Section 43B- Certain deductions to be only on actual payment.
> Section 43B(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.
> Relevant sections of EPF & ESI for clarification on due date for EPF & ESI dues.
Assessee’s Contention
Assessee quoted Commissioner of Income Tax v. Alom Extrusions Ltd. (SC case, 2010). The court rejected the Revenue’s appeal and held that the omission of the second proviso to Section 43B (by Finance Act, 2003) was curative and therefore operated retrospectively & court took note of the 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.
It was argued that the Parliament was alive to the fact that both explanation to Section 36(1)(va) and second proviso to Section 43B were brought in together in 1989. Therefore, the deletion of the latter i.e., second proviso to Section 43B (in Finance Act, 2003) was intended to give relief to the assesse(s).
Lastly, it was submitted that the scheme of the IT Act was such that business income or its deductions were spelt out under Section 36, and Section 37 was a residual deduction clause whereby expenditures other than those falling within Sections 28-36, expressly laid out for commercial or business purposes, were allowed as deductions. 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. This was only a condition for the grant of deduction.
The second proviso to Section 43B had imposed further restrictive condition which was omitted in 2003.
It was highlighted that the contribution payable by the employer was a composite amount (under both EPF & ESI Acts).
Mr. Kapoor urged this court to adopt an interpretation that would be pragmatic and in consonance with fairness. So long as the assessee concerned deposited PF and other dues before the date of filing the return, no fiscal consequence of it being taxed should take place. Counsel submitted that deposit after due date would be visited with fine or other adverse consequences under the relevant statute.
Revenue’s Contention
- Revenue argued that in Alom Extrusions, the issue involved was with respect to the employer’s contribution to PF account whereas in present case issue relates to employee’s contribution.
- With respect to employers’ contribution, Section 43B was applicable. However, with respect to employees’ contribution, Section 36(1)(va) was applicable. 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).
- 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 otherwise not. 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.
- It was further submitted that Section 43B which was applicable to employers’ contribution and not to employee’s contribution.
- It was argued therefore, that when the assessee did not deposit the employees’ contribution in the PF account before the due date provided under the EPF/ESI Act, the assessee was disentitled to deduction under Section 36. Even though the assessee might have deposited the employees’ contribution on or before the due date of filing of the return under Section 139 of the IT Act.
- The difference in language between Sections 36 and 43B was because the two provisions had differing objectives. Whereas Section 36 dealt with deductions that were not covered in the previous provisions, Section 36(1)(va), with its Explanations, was directly concerned with the meaning of “due date” which was the date by which the assessee was required as an employer “to credit an employee’s contribution to the employee’s account in the relevant fund under any Act.” On the other hand, Section 43B was introduced to ensure that sums that could otherwise be treated as deductions, particularly, those shown as payable, based on the mercantile method of accounting, would not be eligible to such treatment, unless those payments were actually made when they fell due: such as tax dues, statutory or interest liabilities.
- It was urged that Section 43B spoke of sum payable by the employer or the ‘employer’s contribution’, payable by the employer without deduction from the salary of the employee. Employees’ contribution was remitted to the fund by the employer, and they were deducted from the employees’ salary. Such deduction was statutorily enabled.
Analysis & Conclusion
Parliament treated contributions under Section 36(1)(va) differently from those under Section 36(1)(iv). The latter (hereinafter, “employers’ contribution”) is described as “sum paid by the assessee as an employer by way of contribution towards a recognized provident fund”.
However, the phraseology of Section 36(1)(va) differs from Section 36(1)(iv). It enacts that “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.” The essential character of an employees’ contribution, i.e., that it is part of the employees’ income, held in trust by the employer is underlined by the condition that it has to be deposited on or before the due date.
There was a statutory classification, under the IT Act, between the two. It is evident that the intent of the lawmakers was clear that sums referred to in clause (b) of Section 43B, i.e., “sum payable as an employer, by way of contribution” refers to the contribution by the employer.
There is no doubt that in Alom Extrusions, this court did consider the impact of deletion of second proviso to Section 43B, which mandated that unless the amount of employers’ contribution was deposited with the authorities, the deduction otherwise permissible in law, would not be available. This court was of the opinion that the omission was curative, and that as long as the employer deposited the dues, before filing the return of income tax, the deduction was available. A reading of the judgment in Alom Extrusions, would reveal that this court, did not consider Sections 2(24)(x) and 36(1)(va). Furthermore, the separate provisions in Section 36(1) for employers’ contribution and employees’ contribution, too went unnoticed.
One of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with.20 This rule is in line with the general principle that taxing statutes are to be construed strictly, and that there is no room for equitable considerations. The deductions are to be granted only when the conditions which govern them are strictly complied with.
The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd.24; Commissioner of Income-Tax and another v. Sabari Enterprises25; Commissioner of Income Tax v. Pamwi Tissues Ltd.26; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd.27 and Nipso Polyfabriks (supra) would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act.
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.
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.
In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed.
(JUDGEMENT IN FAVOUR OF REVENUE DEPARTMENT)
Judgement By- UDAY UMESH LALIT (CJI)
S. RAVINDRA BHAT (J)
SUDHANSHU DHULIA (J)
Date of Judgement- 12/10/2022
Place of Judgement- New Delhi
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