Analysis of Issue of late deposit of ESI and EPF by Assessees us 36(1)(va) of Income Tax Act, 1961

1. Provision of Section 36(1)

(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.

2. Section 2 (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;

3. Provision of Section 43B

Section 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, 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.

4. Judicial Pronouncements

a) In favour of assessee:

There are several judgments which favored the assessees. Some judicial pronouncements have been provided below:

i) Hon’ble High Court of Punjab & Haryana in the case of CIT vs. Hemla Embroydery Mills (p.) Ltd. held as under: “The second proviso to section 43B of the Income-tax Act, 1961, omitted by the Finance Act, 2003, with effect from April 1, 2004, was clarificatory in nature and was to operate retrospectively. Thus, the assessee, for the assessment year 2003-04, was entitled to deduction in respect of the employer’s and employees’ contributions to the employees’ State Insurance and provident fund as the contributions had been deposited prior to the filing of the return under section 139(1).”

ii) Hon’ble High Court of Punjab & Haryana in the case of CIT vs. Nipso Polyfabriks Ltd. [2013] 350 ITR 327 wherein it has been held as under: “The deletion of the second proviso to section 43B which specifically made a reference to section 36(l)(va) was curative in nature and, hence, would apply with retrospective effect from April 1, 1988. The second proviso to section 43B(b) specifically referred to the due date under section 36(l)(va) of the Act and as such, it cannot be urged that the provisions of section 43B and section 36(1)(va) should not be read together. The law was enacted to ensure that the payment of the contributions towards the provident funds, the ESI funds or other such welfare schemes must be made before furnishing the return of income under sub-section (1) of section 139. On a conjoint reading of section 36(l)(va) and section 43B it is obvious that earlier section 43B made reference to the due date as prescribed under section 36(1 )(va). There was a conflict between the first and the second provisos and the second proviso was deleted. The benefit of this amendment must be extended to the employees’ contribution also.”

iv) Hon’bel Supreme Court in Commr. of Income Tax vs M/S Alom Extructions Limited (2009) ruled in favour of assessee and allowed the benefit of Section 43B if the payment of contributions made on or before the date of filing of return.

b) In favour of Department:

i) Hon’ble Gujarat High Court in the case of CIT Vs. State Road Transport Corporation reported at (2014) held that Section 43B which permits a deduction for payments made upto the due date for filing the ROI applies only to the employer’s contribution to the provident fund etc. It does not apply to the employees’ contribution. The employees’ contribution received by the employer-assessee is deemed to be income in the assessee’s hands u/s 2(24)(x) and 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 s. 36(1)(va), the assessee shall not be entitled to deductions of such amount in computing the income referred to in s. 28 of the Act

5. Insertion of Explanation for removal of doubts w.e.f 1-4-2021

Explanation 1 & 2 has been inserted to the clause (va) of sub section 1 of Section 36 by the Act No. 13 of 2021, w.e.f. 1-4-2021

Explanation 1.—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.

Explanation 2.—For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause;

6. Reasoning behind the above amendment as given by memorandum explaining the provisions of Finance Bill, 2021 are as follows:

“Employee‘s contribution towards welfare funds is a mechanism to ensure the compliance by the employers of the labour welfare laws. Hence, it needs to be stressed that the employer‘s contribution towards welfare funds such as ESI and PF needs to be clearly distinguished from the employee‘s contribution towards welfare funds. Employee‘s contribution is employee own money and the employer deposits this contribution on behalf of the employee in fiduciary capacity. By late deposit of employee contribution, the employers get unjustly enriched by keeping the money belonging to the employees. Clause (va) of sub-section (1) of Section 36 of the Act was inserted to the Act vide Finance Act 1987 as a measures of penalizing employers who mis-utilize employee‘s contributions.”

7. Analysis:

The abovementioned provisions remained issue of litigation between assessees and the Income Tax Department. The department sought to disallow the late payments of ESI and EPF beyond the due date as mentioned in the respective ESI & EPF regulations viz. every 15th of the next month. However, assessees continue to contend that the Employees’ Contribution towards Provident Fund and ESI been deposited with in the time limit prescribed under section 139(1) of the Act, which is allowable as per the provisions of 43B of the Act.

The legislature expressed its intent by insertion of the aforesaid explanations (See para 5 above)

It is evident from the explanation that the as far as employees contribution to ESI & PF is concerned, provisions of section 43B shall not apply. The plain reading of both the sections 36(1) (va) and Section 43B suggest that earlier section relate to “employee’s contribution” and later section to “employer’s contribution”. A literal interpretation suggest that as far as employee’s contribution as collected by employer is concerned, by virtue of the above explanation 1 & explanation 2, the payment has to be made by the due date as specified in the relevant (ESI/EPF) Acts and section 43B shall not apply. However, as far as employers’ contribution is concerned, section 43B apply and if the employer’s part of contribution is paid on or before the due date as prescribed u/s 139(1), it will be allowed as deduction.

8. Conclusion:

The recent insertion of explanations have made the judicial pronouncements favouring the assesses as irrelevant as far as part of employee’s contribution is concerned.

Therefore, in present scenario,

– Employee’s contribution to be be paid by 15th of next month;

– Employer’s contribution still covered under section 43B, if paid by the due date of filing ITR, shall be allowed for deduction.

However, in my opinion, the payments under labour welfare legislations (ESI/EPF) should be made by due date as required under the relevant act (viz. 15th of next month) as in case of non payment, employer shall be liable for interest & damages and may also face criminal prosecution for non compliance from the department concerned. Even also, there may be practical difficulties in making payment in part as after generation of online ECR challan on portal, total amount due including both employees’ as well as employer’s contribution, has to be paid in one go.

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Disclaimer: The contents of this document are solely for informational and educational purposes. It does not constitute professional or legal advice or a formal recommendation. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

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