It is commonly seen that the assessees who have filed Income Tax Return along with Tax Audit Report are receiving notices from the Income Tax Department for making adjustment on the ground that payment of the employee’s contribution to specified funds made beyond the due date specified in the respective law and therefore would attract the disallowance under section 36(1)(va) of the Income Tax Act, 1961(hereinafter referred to as the “Act”).

The tax Auditors are required to report the details of contribution towards Provident Fund (hereinafter referred to as “PF”) and Employees State Insurance (hereinafter referred to as “ESI”). The tax audit report specifies the due date of its deposit under the prescribed statute and the actual date of deposits.

It is generally seen that on the verification of the said tax audit report, if the AO finds that the assessee had deposited sums towards PF and ESI after the due date as prescribed under the provisions of the respective Acts, he disallows the same under section 36(1)(va) of the Act without considering the fact that the same was deposited before the due date for filing the return of income for the relevant year.

In this regard, it is submitted that if the assessee has deposited the said amount after the due date prescribed under the statutory provisions of the respective enactments but well before the due date of filing the return of income under section 139(1) of the Act for the relevant year the same should be allowable.

Legal Analysis

Attention of is invited to section 2(24)(x) of the Act which reads as under,

Definitions.

2.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;”

(Emphasis Added)

Attention is further invited to section 43B of the Act, relevant extracts of which read as under,

 “Certain deductions to be only on actual payment.

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of,

(a)……..,

(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

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 :

 Provided 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”

(Emphasis Added)

Further, the relevant provisions of section 36(1)(iv) and 36(1)(va) of the Act read as under,

 Other deductions.

36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(iv) any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund …

 (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 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 thereunder or under any standing order, award, contract of service or otherwise;”

(Emphasis Added)

On perusal of the above provisions, it could be seen that employees’ contribution towards PF/ESI is considered to be income in the hands of the employer under section 2(24)(x) of the Act and simultaneously, the employer can claim deduction of the said sum under section 36(1)(va) of the Act. However, on account of overriding provisions of section 43B(b) of the Act, the same is allowable on payment basis. The first proviso to section 43B of the Act provides that if an assessee pays PF/ESI on or before the due date applicable in his case for furnishing the return of income under section 139(1) of the Act, then, the same is allowable under section 43B of the Act.

In this regard it is pertinent to note that the erstwhile second proviso to section 43B of the Act was provided that PF/ESI was to be allowed in the event the same was deposited within the due date as prescribed in the respective legislature. However, the said proviso was deleted by the Finance Act, 2003 w.e.f. 01-04-2004. The said second proviso to section 43B of the Act, as applicable prior to 01-04-2004, is reproduced below for the ready reference,

“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.”

(Emphasis Added)

Thus, after the deletion of the above proviso, i.e. w.e.f. 01-04-2004, the restriction as provided in erstwhile second proviso to section 43B of the Act is no longer valid. In such a situation, post 01-04-2004 the assessee can claim deduction in respect of any sum referred to in section 43(b) of the Act under the first proviso to section 43B of the Act on payment basis i.e. if the same is paid on or before the due date of filing the return of income under section 139(1) of the Act the same is allowable.

As the said proviso was causing lot of problem to the Industry, the Govt. pursuant to the Report of the Kelkar Committee, deleted the said proviso with effect from 1-4-2004 as discussed by the Hon’ble Apex Court in the case of CIT -vs.- Alom Extrusions Ltd. (2009) 319 ITR 306 (SC). The amendment was carried out to mitigate the difficulties caused to the employer under section 43B of the Act. It was made clear that 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.

Contention that employees’ contribution is not covered under section 43(b) is not tenable

The moot answer to the question of allowability of employees’ contribution revolves around the interpretation of the words “any sum payable by the assessee as an employer by way of contribution to any provident fund or…” If it is to be read as only employer’s contribution, then the contention of the AO is absolutely right and the contribution made after the date prescribed in the respective Act is not allowable. On the contrary, if the contribution also includes employees’ contribution then all the contributions made prior to the due date of filling return is allowable and the due date of the respective Act becomes irrelevant.

In order to find out, what actually the term, ‘contribution’ is, it is necessary to look into the provisions of Section 29 of The Provident Fund Act r.w. para 29 of The Employees’ Provident Funds Scheme, 1952. Similarly one needs to look into the laws regarding the Superannuation fund and Gratuity fund also. The said provisions provides that the contributions payable by the employer under the scheme shall be @ 10% of the basic wages, dearness allowance and the contribution payable by the employee shall be equal to the contribution payable by the employer in respect of such employee. However, the employer shall, in the first instance, pay both the contribution payable by himself i.e. the employer’s contribution as well as the employee’s contribution and thereafter the employer is entitled to recover by means of deduction from the employee the contribution which he has paid as employee’s contribution. Therefore, in law, the payment of contribution by the employer to the fund under the scheme means both employer’s contribution and employee’s contribution. Whether the employer deducts the employee’s contribution from the salary or not, in law, the employer is liable to pay the said amount.

Therefore, it can be said that in law, the payment of contribution by the employer to the fund under the scheme means both employer’s contribution and employee’s contribution. While extending such benefit, the Parliament has not made any distinction between the employee’s contribution and the employer’s contribution. 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. Therefore, the contribution includes both employees’ contribution as well as employer’s contribution and thereby, it can be said if the assessee had deposited all its contributions towards PF/ESI well before the due date of filing the return of income for the relevant year, the same is allowable under the first proviso to section 43B of the Act on payment basis.

Further, it is to be noted that 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 respective Act. The respective statutes permit the employer to make late deposit with some delays, subject to the aforesaid consequences. In so far as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the due date of filing of return of income.

The employer’s contribution means both employer’s contribution as well as employees’ contribution because the employer is statutorily responsible to deposit both employees and employers contribution before the respective authorities and therefore the due date referred to in section 36(1)(va) of the Act must be read in conjunction with section 43B of the Act and accordingly, employees contribution to PF and ESI if deposited before the due date of filing the return of income under section 139(1) of the Act for the relevant year the same would be allowable under section 43B of the Act.

Judicial Analysis

There are various decisions wherein the issue before the Hon’ble High Courts were, whether the addition by the AO on account of employees Contribution to ESI and PF by invoking the provision of Section 36(1)(va) read with section 2(24)(x) of the Act was correct or not. In the case, where the assessee had not deposited employees’ contribution to PF and ESI within the due date prescribed in the provisions of the respective Acts but the same were deposited before the due date of filing the return of income under section 139(1) of the Act. The Hon’ble High Court has held that the employees’ Contribution to PF and ESI deposited on or before the due date of filing the return of income under section 139(1) of the Act is allowable as deduction by invoking the provisions of section 43B(b) of the Act. While deciding the issue the Hon’ble High Courts have placed reliance on the decision of the Apex Court in the case of CIT -vs.- Alom Extrusions Ltd. (2009) 319 ITR 306 (SC)

In the case of CIT -vs.- Spectrum Consultants India (P.) Ltd. (2014) 49 taxmann.com 29 (Kar.) wherein the Hon’ble Karnataka High Court in respect of allowance of belated deposit of Provident Fund held that,

Therefore, in law, the payment of contribution by the employer to the fund under the scheme means both employer’s contribution and employee’s contribution. Whether he deducts the employee’s contribution from the salary or not, in law, he is liable to pay the said amount. Therefore, s. 2(24)(x) of the IT Act makes it clear that the employees 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. That payment must be made within the due date i.e. the due date prescribed under s. 139(1) of the Act. Because it was causing lot of problem as discussed in the judgment of the apex Court (Alom Extrusions Ltd.), on a representation made by the industry, subsequent amendment was carried out to mitigate the difficulties caused to the employer under s. 43B of the Act. 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 s. 139(1) of the Act, the employer shall be entitled to the deductions as provided under s. 36(1) of the Act. While extending such benefit, the Parliament has not made any distinction between the employee’s contribution and the employer’s contribution. 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. Therefore, in view of the aforesaid judgment, we do not find any substance in this appeal.”

(Emphasis Added)

Further, in the case of EssaeTeraoka Pvt. Ltd. -vs.- DCIT (2014) 43 taxmann.com 33 (Kar.) the Hon’ble Karnataka High Court, relying on the decision in the case of Spectrum Consultants India (P.) Ltd (supra), held that where employer did not deposit PF/ESI contribution within due date as contemplated under PF/ESI Scheme/Act, but deposited it before due date of filing of return of income under section 139(1) of the Act the assessee would be entitled to deduction. The Hon’ble Karnataka High Court held,

Paragraph-38 of the PF Scheme provides for Mode of payment of contributions. As provided in sub-para(1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under the ESI Act within fifteen days of the closure of every month pay. It is clear that the word “contribution” used in Clause(b) of Section 43B of the IT Act means the contribution of the employer and the employee. That being so, 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.”

(Emphasis Added)

In the case of R. Batliboi & Co -vs.- ACIT (2018) 100 taxmann.com 328 (Cal.), relying on the decision in the case of Alom Extrusions Ltd. (supra), Vijay Shree Ltd. (supra) and Sabari Enterprises (supra), the Hon’ble Calcutta High Court held that employees contribution to PF being deposited before the due date of filing the return of income under section 139(1) of the Act for the relevant year, the same was allowable. In this case the fact was that the assessee deposited PF after expiry of the due date prescribed in the PF Act but before the due date of filing the return of income for the relevant year.

Further, in the case of Peerless General Finance & Investment Covs.- CIT (2018) 100 taxmann.com 41 (Cal.) the Hon’ble Jurisdictional High Court, relying on Alom Extrusions Ltd. (supra) and Vijay Shree Ltd. (supra), held that where assessee paid employees contribution to PF beyond due date as per the PF Act but before the due date of filing the return of income under section 139(1) of the Act, the same was allowable under section 43B of the Act. The Hon’ble Jurisdictional High Court held that,

Reliance is further placed on the decision in the case of CIT -vs.- AIMIL Ltd. (2010) 188 Taxman 265 (Del.) wherein, relying on the decision in the case of CIT -vs.- Vinay Cement Ltd. (2007) 213 CTR 268 (SC), it was held that if employees contribution to PF is not deposited by the due date prescribed under the relevant Acts and is deposited within the due date of filing the return of income the same is allowable as deduction. The Hon’ble High Court held that,

“17. We may only add that 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. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in Vinay Cement Ltd.’s case (supra).”

(Emphasis Added)

 In the case of CIT -vs.- Kichha Sugar Co. Ltd. (2013) 35 taxmann.com 54 (Uttarakhand), the Hon’ble High Court held that employees contribution towards PF if paid before due date of filing return is allowable deduction. The Hon’ble High Court held that,

 “Therefore, the due date referred to in section 36(1)(va) of the Act must be read in conjunction with section 43B(b) of the Act and a reading of the same would make it amply clear that the due date as mentioned in Section 36(1)(va), is the due date as mentioned in section 43B(b) i.e. payment/contribution made to the Provident Fund Authority any time before filing the return for the year in which the liability to pay accrued alongwith evidence to establish payment thereof. The Assessing Officer proceeded on the basis that “due date”, as mentioned in section 36(1)(va) of the Act, is the due date fixed by the Provident Fund Authority, whereas in the matter of culling out the meaning of the word “due date”, as mentioned in the said section, the Assessing Officer was required to take note of Section 43B(b) of the Act and by not taking note of the provisions contained therein committed gross error……”

(Emphasis Added)

Further, the Hon’ble Rajasthan High Court in the case of CIT -vs.- State Bank of Bikaner and Jodhpur (2014) 43 taxmann.com 411 (Raj.) held that where EPF,GPF,CPF etc. are paid after the due date under respective Act but before the due date of filing of the return of income under section 139(1) of the Act the same cannot be disallowed under section 43B or under section 36(1)(va) of the Act. While deciding the issue the Hon’ble High Court placed reliance on the decision in the case of Kichha Sugar Co. Ltd. (supra).

Similar view has been taken by various High Courts in the following cases:

  • CIT -vs.- Spectrum Consultants India (P.) Ltd. (2014) 49 taxmann.com 29 (Kar.)
  • CIT -vs.- Rajasthan State Ganganagar Sugar Mills Ltd. (2017) 393 ITR 421 (Raj.)
  • CIT -vs.- Nuchem Ltd. (2015) 59 taxmann.com 455 (P&H)
  • CIT -vs.- SPL Industries Ltd (2011) 9 taxmann.com 195 (Del.)
  • CIT -vs.- Nipso Polyfabriks Ltd (2013) 350 ITR 327 (HP)
  • Sagun Foundry (P.) Ltd. -vs.- CIT (2017) 78 taxmann.com 47 (All.)
  • Essae Teraoka (P.) Ltd. -vs.- DCIT (2014) 366 ITR 408 (Kar.)

Conculsion

Applying the ratio of the above decisions, it can be stated that when the assessee has deposited PF/ESI before the due date of filing the return of income for the relevant year, the same would be clearly allowable.

Hope it helps!!

In case of any further clarifications, please comment below or mail at agarwalnitesh03@gmail.com. Assured reply may be expected within 1-2 days.

Limitation: The views expressed herein above are based on facts/assumptions as indicated above. No assurance is given that the revenue/judicial authorities will concur with the above views. The views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. No responsibility is assumed to update the views consequent to such changes. The views should not be considered as a legal opinion. Copying the same without my consent is not permitted.

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