Case Law Details
Chase Security Vs ITO (ITAT Bangalore)
Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of Income Tax Act, 1961.The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee’s contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer’s claim for deduction permanently forever u/s.36(1 )(va).
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal by the assessee directed against the order dated 29.04.2021 by the NFAC, Delhi relating to Assessment Year 2018-19.
2. The only issue that arises for consideration in this appeal is as to whether the Revenue authorities were justified in disallowing payment made to ESI/PF being employees’ share of contribution under section 36(1)(va) of the Income Tax Act, 1961 (hereinafter called ‘the Act’).
3. In this regard, it is pertinent to note that the employee provident Fund and Miscellaneous Provisions Act, 1952 was promulgated to provide for such institution of provident funds, pension fund and deposit-linked insurance fund for employees in factories and other establishments. It aims to build adequate retirement corpus for the salaried class of employees. The fund includes contributions from the employer and employee both, calculated in the prescribed manner under the relevant Act. As per Employee’s Provident Fund Scheme, 1952, the contribution towards provident fund has to be deposited within fifteen days of close of every month. Similar provisions are contained in the Employees State Insurance Act, 1948. The ESI Act 1948, encompasses certain health related eventualities that the workers are generally exposed to; such as sickness, maternity, temporary or permanent disablement, Occupational disease or death due to employment injury, resulting in loss of wages or earning capacity-total or partial. Social security provision made in the Act to counterbalance or negate the resulting physical or financial distress in such contingencies, are thus, aimed at upholding human dignity in times of crises through protection from deprivation, destitution and social degradation while enabling the society the retention and continuity of a socially useful and productive manpower. E.S.I. Scheme being contributory in nature, all the employees in the factories or establishments to which the Act applies shall be insured in a manner provided by the Act. The contribution payable to the Corporation in respect of an employee shall comprise of employer’s contribution and employee’s contribution at a specified rate.
4. The employer is under statutory obligation to deduct the employee’s contribution from the salary/wages etc. payable/paid to an employee every month and deposit the same on or before 15th of the succeeding month in the specified fund, irrespective of whether the salary, wages etc. have been actually paid or not. Therefore, the amount deducted from the employees is held in a fiduciary capacity by the employer and has to be deposited within the prescribed due date under the respective specified fund. Therefore, it is the first treated as income in the hands of the employer in computing its profits & gains of business and profession under the Income Tax Act and thereafter it is allowed as business deduction only if it has been paid within prescribed due date.
5. The employer’s contribution, on the other hand, is a statutory obligation on the part of the employer to contribute from their own funds to the retirement corpus of the employees and is therefore, in the nature of direct business expenditure. Thus, considering nature of expenditure, the employees’ contribution and employer’s contribution stand on totally different footings and hence cannot be treated at par under the provisions of the income Tax Act, 1961.
6. Under the Income Tax Act, 1961, any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees is first treated as “Income” in the hands of the assessee-employer as per sub-clause (x) of Clause (24) of Section 2, which reads as under.
In this Act, unless the context otherwise requires. (24) “income” includes_
(x) 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:”
The employees’ contributing which is so treated as “income” of the Employer u/s 2(24)(x), is allowed as a “Deduction” under Section 36(1)(va) of the Income Tax Act, 1961 while computing the income under the head ‘Profits and Gains of the business or profession’ only if it has been deposited by the Employer within the due dates prescribed under the relevant Acts or Funds Clause (va) of Sub-section 1 of Section 36, which provides for such deduction, reads as under:
Other deductions
36. (1) The deduction provided for in the following clauses shall be allowed in respect of the matter dealt with therein, in computing the income referred to in Section 28-
(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 purpose 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 thereunder or under any standing order, award, contract of service or otherwise:”
7. Thus, the provisions regarding deduction towards employees’ contribution of PF/ESI in the hands of the employer u/s. 36 of the Act are very clear. When it is specifically covered under section 36 (1)(va), it cannot be considered under any other provisions of the Act including section 37 or section 43B, as it may be appreciated from the discussion to follow. Thus, while tax, duty, cess, fee etc., coming under clause (a) of section 43B were allowed in the same accounting year if paid on or before the due date for filing of return u/s 139(1) as per First Proviso, Employers’ contribution to the employee welfare funds like PF/ESI etc coming under clause (b) were allowed only if paid within the prescribed due date under respective welfare fund schemes as per Second Proviso of Section 43B till 2003.
8. This difference between tax, duty, cess and fee under clause (a) of section 43B and Employer’s contributions to various Employee’s Welfare Funds under Clause (b) has been taken away through the amendments in Finance Act, 2003.The due date for payment of employer’s contribution was also now connected with due date for filing of return of income u/s 139(1) of Income Tax Act, at par with other payments mentioned in clause (a) of section 43B. Thus, in Finance Act, 2003, two changes were made in section 43B as under:
(i) Deletion of the second proviso to section 43B
(ii) Further amendment in the first proviso with effect from 1st April, 2004 as under:-
“Provided that nothing contained in this section shall apply in relation to any sum which 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.”
9. Thereafter, a question arose as to whether this amendment brought by Finance Act, 2003 to the first and second proviso of section 43B was prospective or retrospective? This question has been decided by the Hon’ble Apex Court in the case of CIT v. Alom Extrusions Ltd. 92009) 319 ITR 306/185 Taxman 416, wherein after considering the legislative intent and purpose, it has been held that amendment as enacted by the Finance Act 2003 led to equating tax, duty, cess, and fee with contributions to welfare funds and that though the amendments were with effect from 1st April 2004, they retrospective in nature and would operate from 1st April, 1988.
10. Thus, it is very much clear that these changes in due dates for payments were brought about these amendments only in respect of the employer’s contribution as covered u/s 43B and was given retrospective benefit by virtue of the decision of the Hon’ble Apex Court in the case of Alom Extrusions Ltd. However, it can be noticed that due dates for payment of employee’s contribution covered u/s 36(1)(va) and its inclusion as income in the hands of the employer under section 2(24)(x) remains unchanged since the beginning and it never came up for consideration of the Hon’ble Supreme Court in the case of Alom Extrusions Ltd.
11. The distinction between the two contributions i.e. employer’s contribution and employee contribution was further elucidated by the CBDT’s Circular No. 22/2015 dated 17th December, 2015, wherein it was clarified that no disallowance shall be made for employer’s share of contribution referred to in clause (b) section 43B which is deposited before ‘due date’ of filing of return of Income u/s 13 9(1) of the Income Tax Act, It was also categorically clarified therein that the said Circular does not apply to claim of deduction relation to employee’s contribution to welfare funds which are governed by section 36(1) (va) of the IT Act.
12. Thus, from the above elaborate discussion it is quite clear that Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of Income Tax Act, 1961.The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee’s contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer’s claim for deduction permanently forever u/s.36(1)(va). On the other hand, delay in payment of employer’s contribution is visited with deferment of deduction on payment basis u/s.43B and is therefore not lost totally. This legal distinction between employees’ contribution and employer’s contribution under the Act was duly recognised by the Courts also. In the following judicial pronouncement wherein the aforesaid distinction has been accepted viz., CIT v. Gujarat State Road Transport Corpn. [2014] 41 taxmann.com 100/ 366 ITR 170/223 Taxman 398 (Guj.), CIT v. Merchant Ltd. [2015] 61 taxmann.com 119/235 Taxman 29 1/378 ITR 443 (Ker.).
13. Some judicial pronouncements are to the effect that employees contribution paid belatedly but within due date prescribed u/s.139(1) of the Act should be allowed as deduction on payment basis u/s 43B at par with employers’ contribution to PF/ESI. The following are such judicial pronouncements;
CIT vs. Aimil Ltd. [2010] 188 Taxman 265/321 ITR 508 (Delhi HC) Pr. CIT vs. Plamman HR (P) Ltd., [IT Appeal No. 170 of 2018, dated 12.02.2018 (Delhi HC) CIT v. NipsoPloyfabriks Ltd. [2013 350 ITR 327 (HP) Sagun Foundry (P) Ltd. V. CIT (2017) 78 taxmann.com 47 (all) CIT vs. Udaipur Dugh Utpadak Sahkari Sangh Ltd., [2014] 366 ITR 163/[2013] 217 Taxman 64 (Mag.)/35 taxmannn.com 616 (Raj.) CIT v. Sabari Enterprises [2008] 298 ITR 141 (Kar) CIT vs. Hemla Embroidery Mills (P.) Ltd. [2014] 366 ITR 167/{2013} 217 Taxman 207/37 taxmann.com 160 (Punj & Har.) CIT v. Ghatge Patil Transports Ltd. [2014] 368 ITR 749/[2015] 53 taxmann.com 141/228 Taxman 340 Bihar State Warehousing Corpn. Ltd. vs. CIT [2016] 368 ITR 410 (Patna) CIT vs. Vijay Shree Ltd. [2014] 43 taxmann.com 396/224 Taxmann 12 (Cal.) (Mag.) CIT v. Industrial Security & Intelligence India Pvt. Ltd. [Tax Case (Appeal) Nos. 585 and 586 of 2015 & M.P. No. 1 of 2015, dated 24.7.2015 Gauhati High Court in the case of CIT vs. George Williamson (Assam) Ltd. [2006] 284 ITR 619 (Gauhati).
14. In so far as the disallowance of employee share of PF is concerned, the CIT(A) referred to the amendment made to section 36(1)(va) and 43B of the Act by the Finance Act, 2021. The Finance Act, 2021 has amended section 36, sub-section (1), in clause (va), by inserting Explanation-2 which reads thus:
“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;’.”
15. In view of the conflicting views, the finance Act, 2021 amended section 43B by inserting Explantion-5 thereto which reads thus:
“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.”
By virtue of newly inserted Explanation 2 to clause (va) of sub-section (1) of the said section, 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 the said clause. By virtue of insertion of Explanation 5 to Sec.43B, the provisions of the said 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 subclause (x) of clause (24) of section 2 applies. The position after 1.4.2021is therefore clear by virtue of the aforesaid statutory amedments.
16. In so far as the question whether the employees contribution to Provident Fund and Employees State Insurance which the employer deducts and pays over to the concerned authorities beyond the date prescribed for payment of such contribution but nevertheless the contribution has been paid within the due date prescribed for filing return of income u/s.139(1) of the Income Tax Act, 1961, can be allowed as deduction by applying the second proviso to Sec.43B of the Act, prior to 1.4.2021 was a controversy as the aforesaid amendments were not retrospective Amendments. The said issue (period prior to 1.4.2021) was subject matter of appeal before Hon’ble Supreme Court in the case of CHECKMATE SERVICES PVT LTD VS CIT-1 in CIVIL APPEAL 2833/2016. The Hon’ble Supreme Court vide its judgment dated 12 October 2022 decided the issue on allow ability/treatment of ‘delayed’ Employee PF Contribution payment in hands of assessee under provisions of Income Tax Act. The Hon’ble Supreme Court upheld the view of the Hon’ble Gujarat and Kerala High Court in CIT v. Gujarat State Road Transport Corpn. [2014] 41 taxmann.com 100/ 366 ITR 170/223 Taxman 398 (Guj.), CIT v. Merchant Ltd. [2015] 61 taxmann.com 119/235 Taxman 29 1/378 ITR 443 (Ker.) which was to the effect that Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of Income Tax Act, 196 1.The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee’s contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer’s claim for deduction permanently forever u/s.36(1)(va). On the other hand, delay in payment of employer’s contribution is visited with deferment of deduction on payment basis u/s.43B and is therefore not lost totally.
“52. When Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions – especially second proviso to Section 43B – was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income – it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1 )(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained – and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.
53. The distinction between an employer’s contribution which is its primary liability under law – in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) – unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due In other words, 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.
54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non obstante clause has to be understood in the context of the entire provision of 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. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.
55. 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.
17. In view of the law laid down by the Hon’ble Supreme Court, we hold that Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of Income Tax Act, 1961.The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee’s contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer’s claim for deduction permanently forever u/s.3 6(1 )(va).
18. Consequently, the issue is decided in favour of the Revenue. The appeal is accordingly dismissed.
19. In the result, appeal of the assessee is dismissed.
