It was held that if the employees contribution is not deposited by the due date prescribed under the relevant Act and is deposited late, the employer not only pays interest on such delayed payment but could incur penalties also. Those Acts permit the employer to make deposit with some delays. Therefore, these amounts could not be disallowed under section 43B if the payment is made before the due date prescribed for filing the return. Precedent could be found in CIT Vs. Vinay Cement Ltd (2007) 213 CTR (SC) 268.
Background and facts of the case:-Under the Indian Tax Law (ITL), any sum received by a taxpayer from its employees as contributions to any of the SSS is treated as income of the taxpayer. The taxpayer is eligible for deduction of such sums if it deposits them to the relevant SSS before the statutory due date.
Under a separate provision of the ITL, the employer’s contributions are allowed as deduction on actual payment made on or before the due date of filing ROl. Prior to tax year 2003-04, the employer’s contributions were also required to be paid before the statutory due date for being allowed as deduction. However, in view of the amendment by Finance Act 2003, effective from tax year 2003-04, these sums are currently allowed as deduction if paid on or before the due date of filing ROl.
Dismissing the Special Leave Petition (SLP) of the Tax Authority in the case of CIT Vs Vinay Cement Ltd. (213 CTR 268) (Vinay Cement ruling), the Supreme Court (SC) held, by a short decision, that the employer’s contributions paid before the due date of filing ROl are allowable even prior to tax year 2003- 04 (Refer Note 1).
The present ruling relates to tax year 2002- 03 i.e. before the amendment by Finance Act 2003. The Taxpayer deposited its employees’ and employer’s contributions after the statutory due date but before the due date of filing ROl. The Tax Authority denied the deduction in respect of both the contributions.
The Taxpayer appealed to the first appellate authority who deleted the addition. The Tax Authority appealed to the Income Tax Appellate Tribunal (ITAT) which dismissed the Tax Authority’s appeal.
Being aggrieved by the ITAT’s order, the Tax Authority appealed further to the High Court. The question of law admitted by the High Court was restricted to deductibility of the employees’ contributions.
Contentions of the Tax Authority:-A distinction should be made between payments representing the employees’ and the employer’s contributions. The employees’ contributions are recovered from salaries/ wages and, thus, represent money held in trust by the taxpayers for the employees. For this reason, the ITL provides for a rigorous condition for grant of deduction of such amounts and requires that such sums should be paid on or before the statutory due date.
In the present case, since the Taxpayer did not pay the employees’ contributions before the statutory due date, it is not entitled to deduction of the said sums.
The Vinay Cements ruling is relevant in the context of the employer’s contributions alone and cannot be applied to the employees’ contribution.
Contentions of the Taxpayer :- In view of the Vinay Cements ruling, the employees’ contributions are also allowable as deduction if paid on or before the due date of filing ROl, although such payments are paid after the statutory due date.
Ruling of the HC:- The scheme of the ITL, insofar as the employees’ contributions are concerned, is that the recovery from the employees is treated as income and the deposit is allowed as deduction, subject to actual payment.
The SC, in the Vinay Cements ruling, specifically observed that the taxpayer is entitled to deduction even during the pre-amended period if the sums are deposited before the due date of filing ROl. The dismissal of the SLP, by providing reasons, amounts to an affirmation of the view taken by the underlying High Court in favour of the taxpayer against which the SLP was preferred by the Tax Authority.
The Vinay Cements ruling is discussed and followed by the two Delhi HC rulings in the case of CIT v Dharmendra Sharma [297 ITR 320] and CIT Vs P.M. Electronics Ltd. [ITA No. 475/2007 dated 3 November 2008]. In view thereof, the amendment by Finance Act 2003 permitting deduction for sums paid beyond the statutory due date but before the due date of filing ROl needs to be construed as having retrospective effect.
If the employees’ contributions are not deposited by the statutory due date, the employer is required to pay interest and penalty under the relevant statutes. Therefore, it can be inferred that the statutes governing the relevant SSS permit the employer to make the deposit with some delays. For tax purposes, the taxpayer can get the benefit if the actual payment is made before ROl is filed in terms of the Vinay Cements ruling.
Comments :-The law relating to deductibility of the employer’s contributions to SSS was liberalised from tax year 2003-04 and such contributions are allowed as deduction if paid prior to the due date of filing ROl. However, the issue pertaining to deductibility of the employees’ contributions has been a subject matter of debate in view of separate provisions applicable to such contributions. Generally, it is advisable for taxpayers to pay both the employees’ and the employer’s contributions within the statutory due date to secure tax deduction. The present ruling provides relief to those taxpayers who paid the employees’ contributions before the due date of filing ROl, although such payments may be beyond the statutory due date.
1. In a separate detailed decision in the case of Alom Extrusions Ltd. [2009-TIOL-125-SC-IT], the SC held that the amendment by Finance Act 2003 was curative in nature and was introduced with a view to rationalise the tax deduction for the employer’s contributions. The SC held that the amendment applied to all prior years.