Disallowance of Employee Contribution to PF- Analysis of Case Laws

Disallowance of Employees’ Contribution to PF- Section 43B(b) r.w.s. 36(1)(va)

Legal Controversies:

Article on

1) Disallowance Of Employees’ Contribution To Provident Fund Or Superannuation Fund Or Gratuity Fund Or Any Other Fund For The Welfare Of Employees. Section 43B(b) r.w.s. 36(1)(va) of the Act.

2) Tax Audit Report in Form 3CD

3) Validity of Adjustment u/s 143(1)(a)(iv) by CPC

4) Mockery of Judicial Discipline

Executive Summary- Disallowance of the Employees’ Contribution (by the employer assessee) to Provident Fund etc for belated payment  u/s 36(1)(va)

Important for Tax Audit u/s 44AB & Form 3CD

An assessee who is liable to audit u/s 44AB and who is also covered by the labour law provisions to contribute to Provident Fund or Superannuation Fund or Gratuity Fund or any Other Fund for the Welfare Of Employees faces the problems of disallowance of the Employees’ Contribution (by the employer assessee) if the payment is not made by the due dates as prescribed under explanation to section 36(1)(va) which is 15^th (21^st) day of the next month for different payment. Once disallowed he may or may not get the deduction u/s 43B(b) on payment basis if paid before the due date for filing of return of income u/s 139(1).

The problem is heightened when the tax auditor has to highlight every case of delay in payment in item 20 in Form 3CD. Once this delay is reported in the form 3CD by the Tax auditor, the CPC raises a demand by disallowing the total amount which has been belatedly paid by the assessee. This demand is raised by the CPC while processing the Return of Income u/s 143(1)(a)(iv) i.e. after making the adjustments for disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return. Once that is done then it can’t be rectified u/s 154 because it is not a mistake apparent from record because it is a highly debatable issue not covered u/s 154. In this situation the assessee will have to go in appeal before the CIT(A) who would decide the matter whether late payment of PF contribution should be allowed u/s 43B(b) or not.

The issue became highly debatable when the restriction applied on the payment of Employers’ Contribution by 2^nd proviso to section 43B was delated by the Finance Act 2003 and some changes were also made in the 1^st proviso. The Supreme Court held such amendment to the proviso were held to be retrospectively effective w.e.f. from 1st April, 1988 and not AY 2003-04 in the case of Alom Extrusions Limited [2009] 319 ITR 306. It is worth mentioning here that the only issue before the Supreme Court was whether the amendments were effective retrospectively i.e. from 1^st April 1988 or from AY 2003-04 prospectively. The question of disallowance of employees’ contribution u/s 36(1)(va) was not there before the Supreme Court for its judgement and no decision was given by the SC on this issue.

What followed thereafter is not less than a tax nightmare. Different State High Courts started giving different interpretation to the said decision of the SC. However the controversy relating to the payment of the Employers’ Contribution has been solved by the Act itself u/s 43B(b) by expressly providing that employers’ contribution to PF will be allowed as deduction even if paid belatedly but before the due date of filing of the return of income u/s 139(1).

Thereafter the controversy that still remains is pertaining to the allowance of the Employees’ Contribution to PF on payment basis u/s 43B(b).

Different High Courts of the States are of differing views on it. While one section holds that such belated payment cannot  be allowed due to the restriction in explanation to section 36(1)(va) which deals with the issue of belated payment of employees’ contribution while the other section holds that it can be allowed u/s 43B(b) because the amended proviso which applied retrospectively covers both types of contributions i.e. Employees’ Contribution & Employers’ Contribution also. This can be summarized as under: i.e. Employees’ Contribution only 

1	Gujarat High Court	Not Allowed
2	Karnataka High Court	Allowed
3	Calcutta High Court	Allowed
4	Bombay High Court	Generally allowed but 1 dissenting decision
5	Madras High court	Allowed & Disallowed both
6	Delhi High Court	Allowed
7	Rajasthan High Court	Allowed
8	Kerala high Court	Not Allowed
9	Punjab & Har High Court	Allowed
10	Madhya Pradesh High Court	No Clarity
11	Patna High Court	Allowed
12	Allahabad High Court	Allowed
13	Gauhati High Court	Allowed

In the case of Rajasthan there was a chance to settle this controversy when the Revenue filed appeal before the Supreme Court but as the luck will have it, the Revenue had to withdraw this appeal due to revised higher monetary limit of tax effect for filing appeal before the Supreme Court.

“Case disposed off.  Dismissed as withdrawn- 9^th January 2020” Reported on 27^th April 2020.

So we are again back to square one with the controversy because the SC did not decide the case on merit.

So whether the deduction will be allowed or disallowed can be answered only after knowing the High Court in whose jurisdiction the assessee has the place of business. Moreover the following orders were passed subject to the final order of the Supreme Court on these questions.

1) Rajasthan Renewable Energy Corp. Ltd .- August 6, 2019 (Raj HC)

Contribution towards provident fund – HELD THAT:- It is not in dispute that this Court in Commissioner of Income Tax vs. M/s. State Bank of Bikaner and Jaipur [2014) Rajasthan High Court] binds and covers the dispute against the revenue. However, the learned counsel for the revenue informs that the Special leave to Petition filed by the revenue against the aforesaid judgement is pending before the Supreme Court. Even though these questions with respect to interpretation of Section 43B of the Act were answered against the revenue, but they are subject to the final order of the Supreme Court on these questions.

2) Shailendra Garg, C/O Garment Craft India (P) Ltd. February 15, 2018 (Raj HC)

Delayed payment of PF & ESI contribution – ITAT deleted the addition – Held that:- As decided in State Bank of Bikaner and Jaipur [2014 (5) TMI 222 – RAJASTHAN HIGH COURT] where the PF and/or EPF, CPF, GPF etc., if paid after the due date under respective Act but before filing of the return of income u/s 139(1), cannot be disallowed u/s 43B or u/s 36(1)(va) of the IT Act – this controversy is pending before the Supreme Court hence, the issues are decided subject to SLP.

Emerging situations:

When the Supreme Court disposes off the above decisions of the Rajasthan High Court on merit then there are chances that the SC directs that  the order is only curative or declarative in nature and therefore it would apply retrospectively from 1st April, 1988. ( as decided in the Alom Extrusions Limited November 25, 2009). If that be the case then it may open a pandora’s box and following situations may emerge (Depending upon whether the order is in favour of the assessee or against the assessee)

1) The order of the SC will apply only prospectively; No Issue

2) If the order is in favour of the assessee and it will apply retrospectively from 1st April, 1988 then all those cases which were determined in favour of the assessee will sustain.-No Issue

3) If the order is against the assessee and that it apply retrospectively from 1st April, 1988 then all those cases which were determined in favour of the assessee will fail. :-This will require amendments to the orders already passed by the High Courts since 1^st April 1988 retrospectively and recalculation of the demand/refund.

( and vice versa)

It will therefore be in the interest of the equity that the Legislature amend section 36(1)(va) and Section 43B of the Act providing expressly whether employees’ contribution will be allowed u/s 43B or that the employees’ contribution will not be allowed u/s 43B ; and that the amendments shall apply only prospectively.

Tax Auditors u/s 44AB should take extra precaution while filling item no. 20 of the Form 3CD. If a delay is indicated then you are surely going to get a demand u/s 143(1)(a)(iv).

The exercise of jurisdiction by the CPC based on the Form 3CD is also questionable because the Tax Auditor only indicates the factual due dates and dates of payment of the contribution. The Form 3CD nowhere indicates the amount of the adjustments for disallowance of expenditure but not taken into account in computing the total income in the return. This is the exercise to be done by the assessee himself while filling the Return of Income wherein proper space has been provided for such adjustments under the head Income from Business or Profession.

Main Article begins here

Income from Business or Profession is required to be computed in accordance with the provisions contained in Part D:  Profits and gains of business or profession encompassing section 28 to Sec 44DB of the Income Tax Act 1961 (The Act).

“Income” has been defined under Section 2(24)

“Section 2(24)(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 Employees’ State Insurance Act, 1948, or any other fund for welfare of such employees.”

Section 36 of the Act provides for deduction in computing the income referred to in section 28. The relevant provisions applicable are Section 36(1)(va). As per sub-section 36(1)(va), assessee shall be entitled to the deduction in computing the income referred to in section 28 with respect to any sum received by the assessee from 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 employees’ accounts in the relevant fund or funds on or before the “Due Date”.

As per explanation to section 36(1)(va) for the purpose of the said clause, “Due Date” means the date by which the assessee is required as an employer to credit the employees’ contribution to the employees account in the relevant fund under the Act, Rule, Order or Notification issued thereunder or under any Standing Order, Award, Contract or Service or otherwise. Section 36(1)(va) reads as under:

Another provision which is required to be considered in this respect is Section 43B of the Act, which stood prior to the amendment of section 43B of the Act vide Finance Act, 2003 and after the amendment to Section 43B of the Act by Finance Act, 2003. Section 43B of the Act prior to the amendment of Section 43B of the Act vide Finance Act, 2003 reads as under :

Certain deductions to be only on actual payment. 01-04-84

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, 

(c) ……………………………………………

(d) ………………………………………………..

(da) …..…………………………………………..

(e) …………………………………………….

(f) …………………………………………….

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 :

First Proviso

Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) or clause (e) or clause (f), 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:

Second Proviso

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.”

The second proviso had the effect that  the deduction u/s 43B(b)i.e. employers’ contribution,  would be available only under section 36(1)(va) if paid as per due

dates prescribed u/s 36(1)(va) and not under section 43B i.e. paid before the date of filing of return u/s 139(1)

After amendment by Finance Act, 2003

By the Finance Act, 2003, Second Proviso to section 43B of the Act came to be deleted and even the first proviso to section 43B of the Act came to be amended. The first proviso to section 43B of the Act, after its amendment by the Finance Act, 2003 reads as under :-

“Provided that nothing contained in this section 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.”

In other words, after 1st April, 2004, two changes were made, namely, deletion of the second proviso and further amendment in the first proviso, quoted above. By the Finance Act, 2003, the amendment made in the first proviso equated in terms of the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to Employees’ Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from 1st April, 2004.

Considering the aforesaid provisions of the Act, as per section 2(24)(x), 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 shall be treated as an ‘Income’. Section 36 of the Act deals with the deductions in computing the income referred to in section 28 and as per section 36(1)(va) such sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 apply, the assessee shall be entitled to deduction of such amount in computing the income referred to in section 28 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” i.e. date by which the assessee is required as an employer to credit the employee’s contribution to the employee’s account in the relevant fund, in the present case, the provident fund and ESI Fund under the Provident Fund Act and ESI Act.

The history of section 43B is quite marred by legal controversy as to the applicability of the provision of Sec 43B which was caused by the introduction of Finance Act, 2003, which is made applicable by the Parliament with effect from 1st April, 2004. The controversy was whether the amendment made by the Finance Act 2003 w.e.f 1st April, 2004 was curative or declarative in nature, i.e.  would it apply retrospectively or only prospectively. The Supreme Court held that this amendment was only curative and therefore it would apply retrospectively from 1st April, 1988.  .

Thus the Supreme Court adjudicated that the 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 shall be allowed as deduction u/s 43B(b)retrospectively from 1st April, 1988even if paid late but paid before filing of the return of income u/s 139(1).

However controversies erupted due to different interpretations of section 43B(b) read with section 36(1)(va) adopted by some High Courts. One group of High Courts is of the view that it would cover the payment of contribution of both the employee and employers also such that if the contribution of employee paid after the prescribed Due Date will also be eligible for deduction u/s 43B(b) if the contribution is paid before the due date for filing of return of income for that previous year.

The Second  group of High Courts is of the view that the decision of the SC will apply only to the contribution of the employer paid u/s 43B(b) and not to the contribution of the employee wherein the due date shall be as per the provision of section 36(1)(va)and therefore to be disallowedif not paid upto 15^th(21^st) day of next month. The grace period of 5 days provided for payment has since been withdrawn w.e.f.  08-01-2016

In resolving these controversies the judgment of the Supreme Court Dated.- November 25, 2009, M/S. ALOM EXTRUSIONS LIMITED[2009] 319 ITR 306 (SC) is invariably quoted whether rightly or wrongly,  by all appellate authorities below the SC. (Obiter dictum) As per the definition of “income” as per section 2(24)(x), 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 the such employees is to be treated as income and on fulfilling the condition as mentioned under section 36(1) (va), the assessee shall be entitled to deduction with respect to such employees’ contribution. Section 2(24)(x) refers to any sum received by the assessee from his employees as contribution and does not refer to employer’s contribution. Under the circumstances and so long as and with respect to any sum received by the assessee from any of his employees to which provisions of sub-clause (x) of sub-section 24 of section 2 applies, assessee shall not be entitled to deduction of such sum in computing the income referred to in section 28 unless and until such sum is credited by the assessee to the employees’ account in the relevant fund or funds on or before the due date as mentioned in explanation to section 36(1)(va). Therefore, with respect to the employees contribution received by the assessee if the assessee has not credited the said sum to the employees’ account in the relevant fund or funds on or before the due date mentioned in explanation to section 36(1) (va), the assessee shall not be entitled to deductions of such amount in computing the income referred to in section 28 of the Act. However, it is required to be noted that as such there is no corresponding amendment in section 36(1)(va). Deletion of Second Proviso to section 43B vide Finance Act 2003 would be with respect to section 43B and with respect to any sum mentioned in section 43(B) (a to f) and in the present case, employer’s contribution as mentioned in section 43B(b). Therefore, deletion of Second Proviso to section 43B and amendment in first proviso to section 43B by Finance Act, 2003 is required to be confined to section 43B alone and deletion of second proviso to section 43B vide amendment pursuant to the Finance Act, 2003 cannot be made applicable with respect to section 36(1)(va) of the Act. While the controversy regarding the disallowance of employers’ contribution u/s 43B(b) is now fully settled by the Act itself wherein it has been provided that with respect to employer’s contribution as mentioned in clause (b) of section 43B, if any sum towards employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of the income under sub-section (1) of section 139, assessee would be entitled to deduction under section 43B on actual payment and such deduction would be admissible for the accounting year. This provision is effective retrospectively w.e.f. 1-4-1988 However the controversy still remain about the allowability of the  employees’ contribution as mentioned in section 36(1)(va),wherein it is provided that assessee shall be entitled to the deduction of such sum towards the employee’s contribution if the same is deposited in the accounts of the concerned employees and in the concerned fund such as Provident Fund, ESI Contribution Fund, etc. provided the said sum is credited by the assessee to the employees’ accounts in the relevant fund or funds on or before the ‘due date’ under the Provident Fund Act, ESI Act, Rule, Order or Notification issued thereunder or under any Standing Order, Award, Contract or Service or otherwise. It is argued by the department that the Finance Act 2003 amended the provision of section 43B(b) which is applicable to Employers’ Contribution only and that there is no amendment in section 36(1) (va) as applicable to the payment of employees’ contribution, and even explanation to section 36(1)(va) is not deleted and is still on the statute and is required to be complied with. Merely because with respect to employer’s contribution Second Proviso to section 43B was amended it cannot be said that section 36(1)(va) is also amended and/or explanation to section 36(1)(va) has been deleted and/or amended. The ratio Decidendi  of the said case : The Finance Act 2003 as amended with respect to section 43B(b) is applicable retrospectively. There is  no amendment in section 36(1) (va) as applicable to the payment of employees’ contribution.

Let us consider various judgments given by different High Courts in this respect i.e. whether section 43B(b) also includes the contributions of the employees or not. Since the legal position respecting employers’ contribution is fully settled by the Act itself u/s 43B(b) , the following write up deals only with the legal position respecting employees’ contribution u/s 36(1)(va) r.w.s. 43B.

Employees’ Contribution To Provident Fund Or Superannuation Fund Or Gratuity Fund Or Any Other Fund For The Welfare Of Employees

Gujarat State Road Transport Corporation (Guj. HC –December 26, 2013) Employees’ Contribution

This is the lead case in the State of Gujarat which is invariably always quoted by the Gujarat High Court

Employees’ contribution with the PF etc. No Deduction if deposited later than due date as per section 36(1) (va). The assessee did not deposit the amount of employees’ contribution with the PF Department / DSI Department within due date under the PF Act and/or ESI Act

There is no amendment in Section 36(1)(va) of the Income Tax Act and considering section 36(1)(va) of the Income Tax Act as it stands, with respect to any sum received by the assessee from any of his employees to which the provisions of clause (x) of sub-section (24) of section 2 applies, assessee shall not be entitled to deduction of such amount in computing the income referred to in section 28 if such sum is not credited by the assessee to the employees’ account in the relevant fund or funds on or before the due date as per explanation to section 36(1)(va) of the Act – By deleting Second Proviso to section 43B by Finance Act, 2003, it cannot be said that Section 36(1) (va) is amended and/or explanation below clause (va) of sub-section (1) of section 36 is deleted, which is with respect to employees’ contribution – Decision in Alom Extrusions Ltd. (2009 – Supreme Court ), distinguished –Decided against the assessee..

Noble Detective & Security Services Pvt. Ltd. (Guj. HC – December 12, 2014) Employees’ Contribution

Disallowance of belated payment of PF and ESIC Sec 36(1)(va) and Sec 43B(b) Held that:- in the case Gujarat State Road Transport Corporation, [2014  Gujarat High Court] this Court held that any sum received by the assessee-employer from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees shall be treated as an “income”. Under Section 36(1)(va), the assessee shall be entitled to the deduction in computing the income referred to in section 28 with respect to any sum received by the assessee from 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 employees’ accounts in the relevant fund or funds on or before the “due date”. As per the Explanation to section 36(1)(va) for the purpose of clause (x), “due date” means the date by which the assessee is required as an employer to credit the employees’ contribution to the employees account in the relevant fund under the Act, rule, order or notification issued thereunder or under any standing order, award, contract or service or otherwise.Decided against the assessee.

GUJARAT HIGH COURT

The Gujarat High Court has been taking a consistent ground on the disallowance of employees’ contribution to PF and ESIC Fund etc. in accordance with the ratio laid down in Gujarat State Road Transport Corporation (Guj. HC -December 26, 2013). The following case laws explain the legal position.

Judgements of the Gujarat High Court on disallowance of the employees’ contribution to Provident Fund and ESIC etc. u/s 36(1)(va) if not made within the time prescribed by explanation to the said section i.e. with 15 (21) days of the next month.

Guj HC :All Against the assessees

SN	Case Law	Date
1	Amoli Organics (P) Ltd. (Partly)	November 11, 2013
2	Checkmate Services Pvt Ltd.	October 14, 2014
3	Bilag Industries Ltd. (Partly)	March 19, 2014
4	Max Vigil Security Pvt. Ltd	December 3, 2019
5	M/S RMP Bearing Ltd.	August 6, 2019
6	Aakash Oilfield Services Pvt Ltd	July 16, 2019
7	Talent Anywhere Services Pvt. Ltd.	June 18, 2019
8	Deco Mica Limited	1-10-2018
9	Satellite Engineering Ltd.  (Partly)	September 8, 2015
10	Chetan Coach BuildersPvt Ltd	December 4, 2014
11	Sequel Logistics Private Limited	February 3, 2020
12	Noble Detective & SecurityServices Pvt. Ltd.	December 12, 2014

KARNATAKA HIGH COURT

The stand of the Karnataka High Court is just opposite the stand taken by the Gujarat High Court. According to Karnataka High Court :-by itself it is not sufficient to hold that the employer is not entitled for deduction as contemplated under Section 36(1)(va) of the IT Act r/w Section 43-B of the IT Act – The word “contribution” is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly. The word “contribution” used in Clause(b) of Section 43-B of the IT Act means the contribution of the employer and the employee both and if the contribution is made on or before the due date for furnishing the return of income under sub-section(1) of Section 139 of the IT Act is made, the employer is entitled for deduction – thus, the assessee is entitled for deduction. Whether he deducts the employee’s contribution from the salary or not, in law, he is liable to pay the said amount –thus, Section 2(24)(x) of the Act makes it clear that the employee’s contribution which the employer deducts from his salary before it is paid into the fund, is treated as the income of the employer, and the employer by contributing can get the deduction.

The payment must be made within the due date i.e. the due date prescribed under Section 139(1) of the Act – Relying upon Commissioner of Income Tax Versus M/s. Alom Extrusions Limited [2009 -SUPREME COURT] – Though such contributions are not paid within the time prescribed under the relevant act, if those contributions are paid before the due date prescribed under Section 139(1) of the Act, the employer shall be entitled to the deductions as provided under Section 36(1) of the Act – it is for the simple reason, under the provident fund scheme, an employer has to pay both the contribution and then recover from the salary of the employee. The amendment to the second proviso to the Sec 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, is  curative in nature and is required to be applied retrospectively with effect from 1st April, 1988 therefore the amount paid by the Employees’ Contribution beyond due date is deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. The following case laws establish the position of law in Karnataka that deduction for employees’ contribution to PF, EPF etc is allowed u/s 36(1)(va) even if paid within the due date i.e. the due date prescribed under Section 139(1) of the Act.

KAR HC: All in favour of the assessees

1) M/S EssaeTeraoka Pvt Ltd  February 4, 2014

2) Magus Customers Dialog Pvt. Ltd. January 5, 2015

3) Spectrum Consultants India Pvt Ltd December 9, 2013

4) Sabari Enterprises .- July 3, 2007

CALCUTTA HIGH COURT

In Calcutta also the position is same as that of Karnataka High Court. Therefore the Employees’ Contribution to ESI and PF by the assessee can’t be disallowed by invoking the provision of Section 36(1)(va) read with Section 2(24)(x) of the Act.As such the amount paid by way of the Employees’ Contribution beyond due date is deductible by invoking the aforesaid amended provisions of Section 43B of the Act.

Thus the contribution of employees and the contribution of employers both are allowed as deduction u/s 43B(b) provided they are made before the due date prescribed under Section 139(1) of the Act,

All in favour of the assessees

1) Phillips Carbon Black Limited October 30, 2014

2) Vijay Shree LimitedSeptember 6, 2011

BOMBAY HIGH COURT

According to Bombay High Court Employer-assessee would be entitled to deduction only if the contribution to the employee’s welfare fund stands credited on or before the due date and not otherwise. Due date here means the due date prescribed under Section 139(1) of the Act. The amendment provided by Finance Act, 2003 put on par the benefit of deductions of tax, duty, cess and fee on the one hand with contributions to various Employees’ Welfare Funds on the other. All this was considered by the Hon’ble Supreme Court in the case of Alom Extrusions Ltd. [2009 SUPREME COURT]. Accordingly the decision of the Supreme Court in Alom Extrusions Ltd. applies to employees’ contribution also under section 43B of the Act.

In favour of the assessees except 1 which is against the assessee

1) Pranav Agro Industries Ltd. Official Liquidator, High Court, Mumbai- November 13, 2017

2) Hindustan Organics Chemicals Ltd.- May 7, 2015

3) Ghatge Patil Transports Ltd.October 14, 2014

4) Pamwi Tissues Ltd.February 4, 2008: Against the assessee

There is one dissenting judgement by the Bombay High Court concerning the Employers’ contribution. In this case a substantial question of law was raised regarding the correct interpretation of sections 43B, 2(24)(x) read with section 36(1)(va) and as to the claim of deductions as claimed by the assessee in respect of the PF, EPF and ESIC contributions especially in the facts and circumstances of the case and in law.”

It was held that in so far as provident fund dues are concerned the amendment by Finance Act 2003 is made applicable from the assessment year 2004-05. The section as it stood earlier was that the Employers’ contribution to provident fund if not paid within the due date the employer was not entitled to deduction u/s 43B(b). The court did not have the occasion to consider the Supreme Court judgement in the case of Alom Extrusions Ltd which decided otherwise.

This decision is against the law as set by the Supreme Court in the case of Alom Extrusions Ltd. which, according to the SC, applies to employers’ contribution retrospectively with effect from 1st April, 1988 and not prospectively w.e.f. A Y 2004-05. This is not a good law and is liable to be struck down when considered against the Supreme Court judgement in the case of Alom Extrusions Ltd.

MADRAS HIGH COURT

The decisions of the Madras High Court on disallowance of Employees’ Contribution is not consistent.In the opinion of the HC any sum paid towards Employees’ Provident Fund and ESI beyond the due date, but prior to filing of return is not allowable. “Employees” and “Employers” cannot be brought under the same scope and ambit of Section 43B to claim deduction. The scope of Section 43B and Section 36(1)(va) are different and thus, there is no question of reading both provisions together to consider as to whether the assessee is entitled to deduction in respect of the sum belatedly paid towards such contribution, especially when such sum is, admittedly, a sum received by the assessee/employer from his employee. Therefore, for considering such question, application of Section 36(1)(va) r.w.s. 2(24)(x) alone is the proper course and any other interpretation would only defeat the object and scope of both the provisions viz., 43B and 36(1)(va)Ref (Gujarat State Road Transport Corporation)

Again a contradictory judgement has been rendered by the HC in the case of Sundaram Business Services Ltdwherein it has held

“We find that the Tribunal has rightly relied on the decision of the Supreme Court in the case of CIT Vs. Alom Extrusions Ltd. reported in 319 ITR 306, whereby the Supreme Court held that omission of Second Proviso to Section 43B and Amendment to First Proviso by Finance Act, 2003 are curative in nature and are effective retrospectively with effect from 01.4.1988 and the date of insertion of First Proviso. The Delhi High Court in the case of CIT Vs. Amil Ltd. reported in 321 ITR 508 held that if the assessee had deposited Employees contributiontowards provident fund and ESI after due date as prescribed under the relevant Act, but before the due date of filing of return under the Income Tax Act, no disallowance could be made in view of the provisions of Section 43B as amended by Finance Act, 2003.”

Since we are considering only employees’ contribution whether allowable u/s 43B or not, decision in favour means allowable u/s 43B and decision against means not allowable u/s 43B

Madras HC : Judgements

1	Sharp Detective Pvt LtdFebruary 25, 2019: Not clear whether in respect of employers’ or employees’ contribution . Remanded back .
2	UNIFAC Management Services (India) Private Ltd October 23, 2018 Employee’s Contribution Disallowed u/s 36(1)(va) – Against the assessee.
3	Rambal Private Ltd- June 13, 2018. Not clear whether in respect of employers’ or employees’ contribution.
4	Sundaram Business Services Ltd.- December 12, 2017- in favour of the assessee.
5	Industrial Security & Intelligence India Pvt. Ltd 24th July 2015 in favour of the assessee.

DELHI HIGH COURT

Addition on account of late deposit of PF, ESI and professional tax – due date – applicability of provisions of Section 36(l)(va) and Section 2(24)(x) ignored – The payment by the employer towards the employees’ contributionof the Provident Fund made before the date of filing of the return by the Assessee is allowed as deduction because it is within the ‘due date’ for the purpose of Section 36 (1) (va) of the Income Tax Act, 1961 read with Section 43B thereof. As soon as employees contribution towards provident fund or ESI is received by the assessee by way of deduction or otherwise from the salary / wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows therefrom that if the assessee does not deposit this contribution with provident fund/ESI authorities, it will be taxed as income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of Section 36(1)(va) of the Act. Section 43B (b), however, stipulates that such deduction would be permissible only on actual payment. – the payments are made before the due date of filing the return, no such disallowance can be made under Section 43B.

In one of the case under Delhi Court the AO found that in Form No. 3CD the tax auditor had given and certified the details of contribution deducted from the employees’ salary towards the Provident Fund (PF) and the contribution under the Employees State Insurance (ESI). The assessee had not fulfilled its obligation of depositing the Provident Fund contribution deducted from the employees’ salary as well as its own contribution within the due date as stipulated under the statute. – Held that: – that as soon as employees contribution towards provident fund or ESI is received by the assessee by way of deduction or otherwise from the salary / wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows therefrom that if the assessee does not deposit this contribution with provident fund/ESI authorities, it will be taxed as income at the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of Section 36(1)(va) of the Act. Section 43B (b), however, stipulates that such deduction would be permissible only on actual payment. – the payments are made before the due date of filing the return, no such disallowance can be made under Section 43B

If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences.

Thus in the following decisions the employees’ contribution was allowed as deduction u/s 43B when paid before the due date for filing of return of income u/s 139(1). No disallowance were made u/s 36(1)(va).

Del HC: All In favour of the assessee

1) Planman HR Pvt. Ltd., September 11, 2017

2) Modi Rubber Ltd.August 4, 2015

3) SPL Industries Ltd.July 7, 2010

4) AIMIL Limited, December 23, 2009

5) Dharmendra Sharma November 28, 2007

RAJASTHAN HIGH COURT

The legislature brought in the statute Section 43B(b) to curb the activities of such tax payers who did not discharge their statutory liability of payment of dues – to put a check on the claims/deductions having been made, the provision was brought in to curb the activities – the explanation appended to Section 36(1)(va) of the Act further envisage that the amount actually paid by the assessee on or before the due date admissible at the time of submitting return of the income u/s 139 of the Act in respect of the previous year can be claimed by the assessee for deduction out of their gross total income

Sec.43B starts with a notwithstanding clause & would thus override Sec.36(1) (va) and if read in isolation Sec. 43B would become obsolete.

Till the provision was brought in as the due amounts on one pretext or the other were not being deposited by the assessees though substantial benefits had been obtained by them in the shape of the amount having been claimed as a deduction but the amounts were not deposited – the amounts can be paid later on subject to payment of interest and other consequences and to get benefit under the Income Tax Act. An assessee ought to actually deposit the entire amount as also to adduce evidence regarding such deposit on or before the return of income u/s 139(1) of the Act – thus, where the PF and/or EPF, CPF, GPF etc., if paid after the due date under respective Act but before filing of the return of income u/s 139(1), cannot be disallowed u/s 43B or u/s 36(1)(va) of the IT Act.

It is pertinent to note that the sec 43B(b) refers to ‘sum payable by the assessee as an employer by way of contribution’ to any provident fund, superannuation fund or gratuity fund or any other fund for the welfare of the employees. Under the relevant statutes, both the employer’s contribution and employee’s contribution is required to be paid by the employer before the due date and therefore, the expression ‘sum payable by the assessee as an employer by way of contribution’ as used in Section 43B (b) cannot be given restricted meaning so as to include within its ambit, only the employer’s contribution and not the both the employer’s contribution and the employee’s contribution. Thusthe provisions as incorporated in Section 43B (b) allowing deduction in respect of any sum payable by the assessee as an employer by way of contribution to provident fund etc. include both the employer’s contribution and the employee’ scontribution, if the same is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of the 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 alongwith such return.

It is to be noticed that Section 43B, a non obstante clause, shall be operative irrespective of other provisions of the Act in respect of the deductions specified, which are otherwise allowable under the Act. As per clause (b) of Section 43B read with proviso to Section 43B, 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 the employees shall be an allowable deduction if such sum is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of the income under sub-section (1) of Section 139 in respect of previous year in which liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee alongwith such return.

Raj HC: All in favour of the assessee

1. Rajasthan Renewable Energy Corp. LTD August 6, 2019

2. Shailendra Garg February 15, 2018

3. Jaipur Vidyut Vitran Nigam Limited September 12, 2017

4. Om Metals Infra Projects Ltd. August 22, 2017

5. Principal Officer JVV NL May 26, 2017

6. CO Mewar Palace Organization Pvt. Ltd. January 5, 2017

7. State Bank Of Bikaner & Jaipur And Jaipur January 6, 2014

8. Udaipur DugdhUtpadakSahakari Sangh Ltd. May 13, 2013

9. Udaipur Distillery Co Ltd. October 15, 2003

10. Rajasthan State Ganganagar Sugar Mills Ltd. May 26, 2016.

The Revenue filed an appeal in case re Rajasthan State Ganganagar Sugar Mills Ltdbefore the Supreme Court and it was expected that this controversy will eventually end with the judgement of the Supreme Court. But as the luck will have it, the Revenue had to withdraw this appeal due to revised higher monetary limit of tax effect for filing appeal before the Supreme Court.

“Case disposed off.  Dismissed as withdrawn- 9^th January 2020” Reported on 27^th April 2020.

So we are again back to square one with the controversy because the SC did not decide the case on merit.

KERALA HIGH COURT

The view of the Kerala High Court onDelayed payment of employees contribution to PF and ESIC is that the gist of the finding and declaration of the law is to the effect that the law laid down by the Supreme Court could be claimed only in respect of Employer’s contribution and not applicable in the case of Employee’s contribution. This vital distinction has been carved out by the Division Bench of this Court in [2015 KERALA HIGH COURT]. The court is in full agreement with the view expressed by the Division Bench holding that the delayed Employees’ Contribution requires to be disallowed u/s 36(1)(va)

If the intention of a particular provision of a statute can be gathered from the language used by the legislation, then we are bound to abide by the language used therein in order to ascertain the intention. We are also of the opinion that there was a clear logic behind Sec.36(1)(va) and Explanation thereto since the Legislature intended that the amount received towards contribution of the employee was money belonging to the employee and the assessee was not entitled to utilise the said fund and enrich himself. So also, both the provisions supra will co-exist harmoniously without disturbing each other. Therefore, the distinction drawn to credit the amount of the employer and the employee was with a clear objective and there is no illegality or other legal infirmity in classifying the contributions of employees and employer in the matter of crediting the same to the appropriate statutory authorities.

In view of the matter the assessee is not entitled to get deduction of the contributions received from the employees if not paid on or before the due dates as prescribed by section 36(1)(va) of the Act. There is no amendment in section 36(1)(va) of the Income Tax Act and considering section 36(1)(va) of the Income Tax Act as it stands, with respect to any sum received by the assessee from any of his employees to which the provisions of clause (x) of sub-section (24) of section 2 applies, assessee shall not be entitled to deduction of such amount in computing the income referred to in section 28 if such sum is not credited by the assessee to the employees’ account in the relevant fund or funds on or before the due date as per explanation to section 36(1)(va) of the Act – By deleting Second Proviso to section 43B by Finance Act, 2003, it cannot be said that Section 36(1) (va) is amended and/or explanation below clause (va) of sub-section (1) of section 36 is deleted, which is with respect to employees’ contribution

Kerala High CourtAll against the assessee

1) Kerala State Warehousing Corporation July 11, 2019

2) Apollo Tyres Ltd. February 25, 2019

3) Kalyan Silks Trichur (P) Ltd. October 16, 2017

4) Merchem Limited September 8, 2015

PUNJAB AND HARYANA HIGH COURT

The view of the Punjab and Haryana High Court is that following the decision in case of Alom Extrusions Limited (2009 – SUPREME COURT) no addition can be made u/s 36(1)(va) on account of late payment of employee’s contribution to PF & ESI as the same had been deposited prior to the filing of the return u/s 139 (1)

In Favour of the assessee

1) Lakhani Rubber Udyog P. Limited September 22, 2015

2) Kamal Family Trust.- October 8, 2012

MADHYA PRADESH HIGH COURT

There is no specific case which deals with the disallowance of delayed deposit of employees’ contribution to PF and ESI.

However in the case of BS. PATEL  November 16, 2007 the HC took a totally contrary view of the of the judgement by the Supreme Court in Allied Motors’ case  which dealt with the delayed deposit of employers’ contribution to PF  and ESI. It was held in this case that that omission of second proviso to Section 43B and amendment to first proviso by Finance Act, 2003 are curative in nature and are effective retrospectively, i.e., with effect from 1.4.1988 i.e., the date of insertion of first proviso.

However in this case the HC held that the first proviso to section 43B to be retrospective in operation while the deletion of the second proviso was prospective in operation. This is not the correct interpretation of the law by Supreme Court in Allied Motors’ case and needs to be revisited.  

PATNA HIGH COURT

The view of the Patna High Court in respect of delayed payment of employees’ contribution is that the amounts credited after the due dates of payment under the relevant Acts but much before the date of filing of the return under the Income Tax Act, the assessee would clearly be entitled to the deduction of the same from the income. .

In favour of the assessee

1) Bihar State Warehousing Corporation Ltd. March 16, 2016

2) Alken Laboratories Ltd, March 31, 2015

ALLAHABAD HIGH COURT

Question before the HC :Entitlement to claim deduction of employees’ contribution to provident fund and ESI under Section 43-B – Whether the provisions of Section 36 and Section 43-B are mutually exclusive and the Assessee/appellant is legally entitled to claim deduction of employees’ contribution to provident fund and ESI under Section 43-B as amended vide Finance Act, 2003, even if the said deduction was not admissible under Section 36(1) (va) of the Income Tax Act, 1962? –

Held that:- By way of 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 Act 1961, Assessee would then be entitled to deduction. This relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer should not sit on the collected contributions and deprive workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds. But when implementation problems were pointed out for different due dates, uniformity was brought about in first proviso by Finance Act, 2003. Hence, amendment made by Finance Act 2003 in Section 43B is retrospective, being curative in nature and apply from 01.04.1988. In the result when contribution had been paid, prior to filing of return under Section 139(1), Assessee/employer would be entitled for deduction and since deletion of Second Proviso and amendment of First Proviso is curative and apply retrospectively w.e.f. 01.04.1988.

Irrespective of the fact that deduction in respect of sum payable by employer contribution was involved, but Court did not restrict observations, findings and declaration of law to that context but looking to the objective and purpose of insertion of Section 43B applied it to both the contributions. It also observed clearly that Section 43B is with a non-obstante clause and therefore over ride even if, anything otherwise is contained in Section 36 or any provision of Act 1961.

Section 43B is rightly applied in respect to both contributions i.e. employer and employee –

Decided in favour of Assessee.

1) Manoj Kumar Singh Prop. M/S. Expert Industrial SS. Indi March 12, 2012

2) Sagun Foundry Private LimitedDecember 21, 2016

GAUHATI HIGH COURT

George Williamson (Assam) Limited. Dated.- June 26, 2006 In favour of the assessee

Held that if the contributions towards provident fund, etc., paid before the date of filing of the return u/s 139(1) by the assessees-Entitled for the deduction u/s 43B r.w.s. 36(1)(va)

Scope of addition under section 143(1)(a)

Of late the CPC is making additions to the returned income of assessee u/s 143(1)(a)(iv)  on account of late deposit of employee contribution to PF and ESI  while processing the return of income. Section 143(1)(a)(iv) provides that where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142 then such return shall be processed and the total income or loss shall be computed after making the adjustments for disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return.

(Form 3CD)

20. (b) Details of contributions received from employees for various funds as referred to in section 36(1)(va):

Serial number	Nature of fund	Sum received from employees	Due date for payment	The actual amount paid	The actual date of payment to the concerned authorities

A cursory look at the above table shows that the auditor is required to report only the facts of the due date of the payment and the actual date of the payment. Nowhere the auditor is required to indicate the amount of disallowance of expenditure on the above counts. Therefore when the CPC makes the adjustment by disallowing the late payment then it can be said that the revenue is wrong in invoking the provision of section 143(1)(a)(iv) of the Income Tax Act on the fallacy of presumption that the auditor has disallowed the employee contribution to EPF /ESI. Moreover, there are contradictory judgements of the State High Courts and therefore the issue is highly debatable and as such the CPC is not authorised to disallow all claims of late payment. The question of jurisdiction is very much important here but the same is being ignored.

The Mockery of Judicial Discipline and binding effect of Judicial Precedent

1) The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. If this healthy rule is not followed, the result will only be undue harassment to assessee and chaos in administration of tax laws.

2) The doctrine of judicial discipline obligates each quasi-judicial authority to follow the decision of jurisdictional higher authority and in the absence of the same even decision of a non jurisdictional authority must be followed.

3) The department once having accepted the principles laid down in the earlier case cannot be permitted to take a contra stand in the subsequent cases.

4) The Courts of co-ordinate jurisdiction, should have consistent opinions in respect of an identical set of facts or on question of law.

The Binding Effect of the Judicial Precedent:

1) What is binding as a judicial precedent is ‘ratio decidendi’ viz., the general reasons upon which the decision has been made.

2) The Law declared by the Supreme Court shall be binding on all Courts within the territory of India. The decision of the Supreme Court in taxation matters amount to a declaration of law.

3) A subordinate court is bound by the enunciation of law made by the superior courts.

4) In Income tax matters which are governed by an All India Statute, when there is a decision of a High Court interpreting a statutory provision, it would be a wise judicial policy and practice not to take a different view, except under exceptional circumstances and that too, by a speaking order.

5) The decision of Jurisdictional High Court decision, even if not correct, is binding on the Revenue authorities within the State.

6) Though legally judgment of another High Court is not a binding precedent, judicial comity or judicial discipline is invoked by court that in respect of interpretation of Central Statutes a decision of another High Court should be followed though judge may have a different view.

7) In State of Orissa v. M. D. Illyas [2006] 1 SCC 275 the Supreme Court has held that a decision is a precedent on its own facts and that for a judgment to be a precedent it must contain the three basic postulates. A finding of material facts, direct and inferential. An inferential finding of fact is the inference which the judge draws from the direct or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the individual effect of the above.

Having said that let us observe whether the Doctrine of Judicial Discipline or the binding effect of a Judicial Precedent is discernible from the above judgments w.r.t the disallowance of employees’ contribution to PF, ESIC etc. u/s 36(1)(va) and the allowance of the same u/s 43B. Clearly Not

When the Judiciary itself is not on the same page re interpretation of the law then what can the government expect from an assessee to follow the law in letter & spirit.

Disclaimer:

The above write up is the strict personal opinion of the author meant only for academic uses and not for any professional use. The author owes no responsibility  to anyone if he suffers on account of following-up of this write up. The readers are advised to obtain expert professional opinion before they act upon this write up for any professional purpose.