Delayed Payment of Employees’ Contribution to PF not allowable U/s 43B

Brief of the Case:

It was held in the case of CIT v/s South India Corporation Ltd. by Kerla High Court That the assessee is not entitled to claim deduction of the belated payments to the Provident Fund in view of the section 36(1)(va) and 43B of the Income tax Act.

Brief facts of the case:

The assessee has paid Provident fund amount of Rs. 7,69,232/- after the prescribed due date. The department took the stand that the assessee is not entitled to deduction on the ground that the payment has not been made on the due date as defined in the Section 36(1)(va) of the Act.

Question of Law:

Whether delayed payment of employees’ contribution to the respective fund is allowed as deduction in light of the section 36(1)(va) and section 43B read with the decision reported in 227 ITR 446 Hitech India Pvt. Ltd V/s Union of India and others?

Contention of the Assessee:

It was contended by assessee in the case referred supra, that U/s 145 of the act, chargeability of tax is based on the method of accounting and in these cases the assessee has followed the mercantile method of accounting and thus, though payment is not made within the due date, the same must be allowed as deduction. It was also contended that there is no rational basis to treat the situation mentioned in cls. (a), (c) and (d) different from the one mentioned in cls.(b) and that the proviso (1) and (2) to Sec. 43B are discriminatory and provisions are bad for double jeopardy.

Contention of the Revenue:

It was held in the case of Hitech India Private Limited V/s Union of India and others

“ the intention of legislature in introducing section 43B read with explanation to S.36(1)(va), is to encourage payment of dues to the exchequer before the due dates. The IT department is not levying any penalty or any prosecution. It is not disputed that U/s 14B of the EPF act and Sec. 85 and 86 of the ESIC act the defaulters are liable for damages and penalty. These welfare legislations are enacted with an avowed objective of advancing the cause of employees. It has socio-economic prospectivity. It has been noticed that a few employers have been dishonestly misappropriating the deductions made from the salaries of workers towards provident fund and are defaulting in contributing their matching share too. So to check such malpractice parliament enacted the above provisions. Therefore, the provision cannot be said to be expropriatory.

Section 43B of the Income Tax Act,1961, for the assessment year 1992-93 reads as under:

Notwithstanding anything contained in any other provisions of the act, a deduction Sudame otherwise allowable under this act in respect of-

1. 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
2. Any sum payable by the assessee as an employer by way of contribution to any provident fund or gratuity fund or any other fund for the welfare of the employees
3. Any sum payable as bonus or commission to employees for services rendered
4. Any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a state financial corporation or a state industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing
5. Any sum payable by the assessee as interest on any loan or borrowing from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advances
6. Any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee

Shall be allowed as deduction only in the previous year in which such sum is actually paid. This is irrespective of the previous year in which the liability to pay such sum was incurred by the assessee.

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 realized within fifteen days from the due date.

Now, a combined reading of this provisions state that if the assessee (employer) credits any sum received by him from employees in respect of any fund before the due date mentioned for that respective fund, then he can claim deduction of such amount in computing his business income.

Further as per Section 2(24)(x) of the Income Tax Act which reads as under:

“Income” includes-…

(x) any sum received by assessee from his employee as contribution to any provident fund or any fund set up under the provisions of the Employees’ State Insurance Act,1948, or any other fund for the welfare of employees

Thus, it is clear that the employees contribution received by the employer would be “income” in his hands and would be allowed as deduction subject to conditions of Section 36(1)(va) of the act.

It was further held by revenue that there is not substance in the contention of Ld. Counsel for the petitioners that this would result in double jeopardy as the provisions deals with different aspects and different benefits. Indeed, interpretation of the impugned provisions gives effect to the real intention of Parliament.

Held by Hon’ble High Court of Kerala:

It was held by the High court that the assessee is not entitled to claim deduction of the belated payments to the Provident Fund in view of the Section 36(1)(va) of the Act, in light of the law laid in Hitech (india) Pvt. Ltd. V/s Union of India  and others.

NF