This article is covering the tax impact of Contribution to Provident Fund by Employer and Employee in the hands of employer. Here we are discussing section 36(1)(iv), 36(1)(v), 36(1)(va), Section 43B, etc. Further also discussing some case laws on this topic.
According to section 36(1)(iv) any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund shall be allowed as a deduction in computing the income referred to in section 28 (income under PGBP).
Under section 43B(b) Notwithstanding anything contained in any other provision of this Act, any sum payable by the assessee as an employer by way of contribution to any provident fund or any other fund for the welfare of employees shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him .
Proviso to the section 43B states 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.
Thus it is clear that employer’s contribution to recognized provident fund shall be allowed as a deduction in the same year if it is paid before the due date specified under section 139(1). However if it is paid after the due date specified under section 139(1), then it will be allowed as a deduction in the year under which it is actually paid.
The due date for the above given in the Employees provident fund Act 1952 is 15th day of the following month in which wages or salary is paid to the employee. The income tax act gives an advantage to the employer by extending the due date of contribution to provident fund for the purpose of computing income under section 28. However the due date for other purpose (other than computing income) remains the same and interest and penalty will be levied accordingly.
According to section 2(24)(x) income 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 (34 of 1948), or any other fund for the welfare of such employees ;
Further under section 36(1)(v) deduction shall be allowed for 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 to the above states that 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;
Employees contribution to provident fund will be deemed as an income of employer as per section 2 (24)(x) and shall be allowed as a deduction only when it is credited by assessee to the employee’s account in the provident fund before the due date specified under employees provident fund act,1952 i.e 15th day of the following month in wages or salary are paid. So if the assesse fail to do so before the due date, then he would not be able to take the deduction of the above under any other section and will be taxed for the income which is of someone else and which is already taxable under someone’s hand (Employees contribution is taxable in the hands of employees as it is actually the salary from which contribution is made, though deduction of the same can be taken under section 80C subject to 1,50,000).Thus employer have to pay tax, interest and penalty in addition to contribution to employees provident fund from the salary of employees. Practically employees do not give any contribution to the employer. Employer pays the salary to the employee only after deducting their contribution to provident fund. Thus, according to this view as and when salary is paid to the employees it can be deemed that the sum is received from the employees towards contribution to provident fund and hence shall be deemed as an income under section 2(24)(x). And when it is duly paid in its relevant fund before due date, then deduction can be taken of the same.
Note: According to this view if the employees contribution is not paid before due date and paid after it, then deduction of same cannot be taken under any other section and hence it will be the employer’s income for that financial year.
However an another view is also possible of the above. According to this view employer does not pay the employees contribution to the employee and retain it with himself and therefore it can be said that it is the employers contribution instead and also it gets covered under section 43B . It can also be said that once employee’s contribution comes in the hands of employer and deemed as an income under section 2(24)(x) , then the difference between the employees contribution and employers contribution vanishes and what remains is the contribution to provident fund and hence it will also be covered under section 43B. Thus according to this view, employer can take the deduction of the same under section 43B if fails to take the same under section 36(1)(va).
The employee’s contribution to provident fund is a big point of litigation under the income tax act. There are various case laws supporting both of the point of views.
√ The Rajasthan High Court in the case of Jaipur Vidyut Vitran Nigam Ltd has held that since the entire amount was deposited by the taxpayer on or before the due date of filing of the return of income under section 139 of the act, the employee’s contribution cannot be disallowed either under section 43B or under section 36(1)(va) of the act .
√ On the other hand the Gujarat High Court in the decision of Gujarat State Road Transport Corporation has dealt with the Supreme Court and other High Courts decisions and held that employee’s contribution deposited by an employer is not allowed as business deduction under section 36(1)(va) of the act if it is deposited beyond the due date specified under the PF laws but before due date of filing of return.
The tax audit report have separate clauses for Employers and Employees contribution to provident fund. Employees contribution is covered under section clause 20 of the Tax Audit Report whereas employers contribution is covered under clause 26 of the same. The different clause in the tax audit report and separate mention of both under the income tax act points out that the treatment of the two are not the same under the income tax act and therefore indicating that the employees contribution is to be deposited before the due date under the employees provident fund act if deduction is to be taken of the same. However if the assessee takes the deduction of employees contribution to provident fund even if deposited after the due date under the provident fund act in his income tax return, the same will be definitely a matter of scrutiny assessment.
The Employee’s Contribution to PF is the part of a salary of employee and therefore should be deposited timely whereas some relief is granted for employer’s contribution as the employer’s contribution is an additional benefit that the employee gets from employer. However the same is also regulated through Provident Fund Act, 1952 and various interest and penalty is imposed for late depositing of contribution to PF.
Parag Rathi is the Author of this article. He is a CA Final student and 10th All India Ranker in CPT .The Author can be reached at firstname.lastname@example.org
Disclaimer: The views expressed in this article are personal and doesn’t constitute professional advice or a formal recommendation. The author doesn’t accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided herein above.
(Republished with Amendments)