CA Gaurav Pahuja
Background
While the issue regarding the deduction of employer’s contribution made after due date, in funds set up for welfare of employees is well settled now, the practice of disallowing the claim of the assessee employer on account of delayed deposit of employee’s contribution is continued by the Income Tax Department since long in view of the provisions of Section 36(1)(va) r.w.s. 2(24)(x) of the Act along with CBDT Circular No. 22/2015 dated 17.12.2015 wherein it was stated that the circular did not apply to claim of deduction relating to employee’s contribution to welfare funds which are governed by Section 36(1)(va) of the I.T. Act. Hence, the practice of disallowing the claim of the assessee employer regarding the employee’s contribution made after due date is continued without considering the other relevant provisions of the Income Tax Act, 1961 (the “Act”) which ought to have been given due importance. In this article, the author has dealt with those other relevant provisions of the Act which are ignored altogether by the revenue while dealing with the claim of the assessee employer.
Before dealing with those other relevant provisions of the Act, it is necessary to have an understanding of the provisions of Section 36(1)(va) of the Act, which is generally relied upon by the revenue and, therefore, relevant portion is reproduced herein below for the sake of ready reference:
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—
…………..
…………..
[(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;]
A plain reading of the aforesaid Section suggests that it deals with the employee’s contribution with respect to a fund covered u/s 2(24)(x) of the Act and that the same shall be allowed if deposited before the due date as provided under respective Act by which the fund is being governed. The revenue on the interpretation based on the plain reading, disallows the claim of the assessee. At the same time, it places reliance on the CBDT Circular No. 22/2015 dated 17.12.2015 wherein reference was made to the judgment of Apex Court in the case of Commissioner vs. Alom Extrusions Ltd (2009) 185 Taxman 416 (SC) and accordingly, it was clarified in the circular that if the assessee deposits any sum payable by it by way of tax, duty, cess or fee by whatever name called under any law for the time being in force or 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 on or before the “due date” applicable in his case for furnishing the return of income under section 139(1) of the Act, no disallowance can be made under Section 43B of the Act.
Apparently, the aforesaid CBDT Circular dealt with the Employer’s Contribution only and was issued with the intention of clarifying the allow- ability of assessee’s claim to the extent it related to employer’s contribution in cases where it is paid on or before the due date of filing return of income and hence, the subject of the said Circular i.e. “Allow ability of employer’s contribution to funds for the welfare of employees in terms of Section 43B(b) of Income Tax Act.” and therefore, it did not dealt with the deduction on account of employee’s contribution specifically.
However, presently, the issue related to the deduction of the employer assessee’s claim regarding the payment of employee’s contribution after due date as prescribed under relevant Act and not employer’s contribution, is being discussed, and hence, the applicability of aforesaid CBDT Circular is very negligible in the present situation. Further, it is worth mentioning that in the case of Commissioner vs. Alom Extrusions Ltd (Supra), the question raised before the Apex Court was whether the omission of the second proviso to Section 43B of the Act by the Finance Act, 2003 operated with effect from 1st April 2004 or whether it operated retrospectively with effect from 1st April 1988?
Furthermore, the Apex Court after referring to the scheme of the Income Tax Act, 1961, concluded that the omission of second proviso to Section 43B by the Finance Act 2003 was curative in nature and thus, was applicable retrospectively from 01.04.1988. Needless to mention, that the omission of second proviso and few changes in first proviso to Section 43B resulted in relief to the employer assessee’s and had the effect of bringing the contributions to welfare funds at par with the other tax, duty & cess etc.
In view of the above facts, reliance generally placed upon by the revenue on the applicability of the aforesaid CBDT Circular for determining the allow- ability of “employee’s contribution” where it is paid after due date, is highly objectionable and lead the revenue to conclude the matter against the legislative intent for the reasons/ justifications stated herein below:
1. The revenue simply ignores the provisions of Section 43B of the Act and does not even refer to it. It is worth mentioning that the provisions of Section 43B are having an overriding effect on the other provisions of the Act and thus, starts with a non-obstante clause as rightly observed by the Apex Court in the case of Commissioner vs. Alom Extrusions Ltd (Supra). The relevant portion ofSection 43B is reproduced herein below for the sake of ready reference:
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) 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, 1[or]
………..
………..
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.
Explanation [1].—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in Section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.]
………..
………..
………..
It is apparent that Clause (b), refers to “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”. However, it does not specifically states whether it talks about the employee’s contribution or employer’s contribution or both the contributions and hence, raising the question about the applicability of the said clause. Further, the issue raised before the Apex Court in Alom Extrusions Ltd (Supra) was neither related to the fact that whether the term “contribution” as referred to in Clause (b) of Section 43B covers the “employee’s contribution” or “employer’s contribution” or both? nor it was regarding the allow ability of employee’s contribution where it was deposited after due date as prescribed by Section 36(1)(va) of the Act.
Moreover, it is undisputable that Section 43B is having overriding effect due to the fact that it starts with a non-obstante clause. To be more precise, Section 43B overrides the provisions of Section 36(1)(va) too among other Sections of the Act.
The Allahabad High Court in the case of Sagun Foundry Private Limited vs. Commissioner of Income Tax, Kanpur (ITA 87 of 2006) faced the following question of law:
“(6) Whether the provisions of Section 36 and Section 43B are mutually exclusive and the Assessee/appellant is legally entitled to claim deduction of employees’ contribution to provident fund and ESI amounting to Rs. 2,84,261/under Section 43B 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?”
The aforesaid question was answered in affirmative i.e. in favour of the assessee, by the Hon’ble High Court referring to the judgment pronounced by the Karnataka High Court in the case of Essae Teraoka P. Ltd. Vs Deputy Commissioner of Income Tax, (2014) 366 ITR 408 wherein the question was raised as to “whether Tribunal was justified in affirming finding of Assessing Officer and denying Assessee’s claim of deduction of employees contribution to PF/ESI alleging that the payment was not made by appellant in accordance with the provisions of Section 36(1)(va) of Act 1961.” and that Court had held as follows:
“In short, this provision states, notwithstanding anything contained in any other provision contained in this Act, a deduction otherwise allowable in this Act in respect of any sum payable by the assessee as an employer by way of contribution to any fund such as provident fund shall be allowed if it is paid on or before the due date as contemplated under Section 139(1) of the Income Tax Act. This provision has nothing to do with the consequences, provided for under the PF Act/PF Scheme/ESI Act, for not depositing the “contribution” on or before the due dates therein.”
It also said that the word “contribution” used in clause (b) of Section 43B of Act 1961 means the contribution of employer and employee, both, and that being so, if contribution is deposited on or before due date for furnishing Return of income under subsection (1) of Section 139 of Act 1961, employer is entitled for deduction.
Like-wise, Allahabad High Court referred to the judgment of Punjab & Haryana High Court in Commissioner of Income Tax Vs Hemla Embroidery Mills (P.) Ltd., (supra) wherein Punjab & Haryana High Court not only followed Commissioner of Income Tax Vs Alom Extrusions Ltd. (supra) but also its own earlier judgment in Commissioner of Income Tax Vs Rai Agro Industries Ltd., (2011) 334 ITR 122, to hold that Section 43B shall apply to both ‘contributions’ i.e. employers’ and employees’.
Similarly, Allahabad High Court observed the judgments of following Hon’ble High Courts in different cases mentioned below with regard to the same matter:
I. High Court of Rajasthan in Commissioner of Income Tax Vs Udaipur Dugdh Utpadak Sahakari Sangh Ltd., (2014) 366 ITR 163,
II. High Court of Himachal Pradesh in Commissioner of Income Tax Vs Nipso Ployfabriks Ltd., (2013) 350 ITR 327
III. Karnataka High Court in Commissioner of Income Tax Vs Sabri Enterprises, (2008) 298 ITR 141.
IV. Bombay High Court in Commissioner of Income Tax Vs Ghatge Patil Transports Ltd., (2014) 368 ITR 749.
Accordingly, it was concluded by the Allahabad High Court, that the aforesaid High Courts have rightly applied Section 43B with respect to both contributions i.e. employer and employee.
In view of the above, it is clear that Section 43B of the Act is having overriding effect on the other provisions of the Act including Section 36(1)(va). Further, Clause (b) of Section 43B covers the contribution of employer as well as employee. Hence, it can be safely concluded that even if an assessee deposits employee’s contribution after the due date prescribed by the ESI Act but before the due date of filing return as per Section 139(1) of the Act, the assessee is entitled to deduction in the same previous year.
2. If at all, the contention of the revenue is accepted that the assessee is not entitled to deduction, in case of delayed deposit of employee’s contribution of ESI assuming that Section43B of the Act covers only employer’s contribution, it will tantamount to denial of deduction for all the times i.e. not even in subsequent year when the assessee actually makes the payment on the hypothetical assumption that Section 43B of the Act covers only employer’s contribution and thus, employee’s contribution is outside the purview of Clause (b) of Section 43B, and therefore, employee’s contribution is governed by the provisions of Section 36(1)(va) only which provides for deduction only if the employee’s contribution is paid within the due date prescribed by the relevant Act. Thus, once the deduction is denied by virtue of Section 36(1)(va) of the Act, it will never be allowed in future although payment is made thereafter. The Apex Court noted this fact in its judgment in the case of Commissioner vs. Alom Extrusions Ltd (Supra).
3. The Apex Court in the case of Commissioner of Income Tax, Bangalore vs. J.H. Gotla, reported in [1985] 156 I.T.R. 323, held that
“We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.”
The aforesaid observation of Apex Court also supports the contention of the assessee that the deduction of employee’s contribution should be allowed even if payment is made for employee’s ESI contribution after due date prescribed by relevant Act but before the due date of filing return u/s 139(1) of the Act by virtue of application of Section 43B of the Act as strict literal construction of the provision will not differentiate between the situation where contribution is made after due date and where contribution is not made at all by the assessee employer.
Hence, it is clear that Clause (b) of Section 43B permits the deduction of employer’s contribution as well as employee’s contribution in computing the income of the previous year in which such sum is actually paid by the employer by virtue of overriding effect of Section 43B of the Act.
Very informative.
Keep it up.