Disallowance u/s 36(1)(va) – unending litigation – finally resolved in Budget 2026 – How to resolve old issues? Food for thought
Summary: The issue concerns the allowability of deductions for employees’ contributions to PF and ESI under Section 36(1)(va) of the Income Tax Act and the interpretation of “due date.” While such contributions are treated as income under Section 2(24)(x), deduction is allowed only if deposited within the due date prescribed under relevant labour laws like EPF and ESI. Disputes arise regarding whether the due date should be linked to the salary month or the actual date of salary disbursement. Tribunal rulings have favored a liberal interpretation, holding that the due date should be counted from the month of actual payment of wages. However, contrary judicial views and the Supreme Court’s earlier ruling created uncertainty. The Supreme Court has now admitted a petition to resolve conflicting interpretations, recognizing two competing views on due date applicability. The issue remains significant for past disputes, with taxpayers advised to pursue appeals, rectification, or other remedies to resolve pending litigation.
The relevant provisions are as extracted below for better understanding of the issue involved:-
Under Income Tax Act, 1961
“Sec. 2. Definitions.— In this Act, unless the context otherwise requires,—
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(24) ‘income’ includes—
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(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;…”
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“Sec. 36. Other deductions.—(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 s. 28—
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(iv) any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head ‘Salaries’ or to the contributions or to the number of members of the fund;”
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(va) any sum received by the assessee from any of his employees to which the provisions of sub-cl. (x) of cl. (24) of s. 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 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 s. 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause.”
Under EPF Scheme:
“CHAPTER VI : DECLARATION, CONTRIBUTION CARDS, AND RETURNS
Rule 38 – Mode of payment of contributions.—(1) The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee’s contribution from his wages which together with his own contribution as well as an administrative charge of such percentage of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix, he shall within fifteen days of the close of every month pay the same to the Fund electronic through internet banking of the State Bank of India or any other Nationalised Bank or through PayGov platform or through scheduled banks in India including private sector banks authorized for collection on account of contributions and administrative charge :
7. In addition to the above, a five-day grace period was allowed to employers in terms of the Manual of Accounting Procedure (Part-I General). However, the grace period was discontinued by circular bearing No. WSU/9(1)(2013)/Settlement/35631 dt. 8th Jan., 2016, made applicable to contributions for January, 2016 onwards.
7. ESI Regulations :
“31. Time for payment of contribution.—An employer who is liable to pay contributions in respect of any employee shall pay those contributions within 21 days of the last day of the calendar month in which the contributions fall due”
A review of the aforesaid provisions indicates as under:-
As per definition of income 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, will be treated as his income.
However, 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 then it will be allowed as deduction u/s 36(1)(va).
Explanation 1 to Section 36(1)(va) says that 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.
This means EPF rules will prevail over the Income Tax Act for the purposes of deduction u/s 36(1)(va).
Rule 38 of EPF Rules deals with mode of payment of contributions. It says that the employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee’s contribution from his wages which together with his own contribution as well as an administrative charge and he shall within fifteen days of the close of every month pay the same to the respective fund.
Going by the above, now suppose an assesse pays wages/salaries for the month of May in July.
Following questions arise in this example:-
a). What should be the due date for grant of deduction u/s 36(1)(va)? Whether it should be June 15 or August 16 (15 being National Holiday).
b).If June 15, going by the definition of income, whether amount liable to be deducted under PF Act can become his income, before it is actually deducted.
c).Whether the format for reporting as per clause 20 of Form 3CD is in compliance with the provisions of relevant statues and rules made there under i.e. There is no column for reporting date of payment of wages/salaries and calculation of due date on the basis thereof. It only talks of month and takes due date on the basis thereof.
d).Whether the tax audit reports on the basis of deficient format are legally valid for making disallowances u/s 36(1)(va).
e) How there can be separate due dates for deposit of employer and employee contribution, when as per Rule 38 of the EPF rules employee contribution has to be deposited along with employer contribution, particularly when there is no mechanism for deposit of employer and employee contribution separately?
f) When there is no enabling provision under the EPF Rules for deposit of employee’s and employers contribution separately, do provisions of Section 36(1)(va) not become redundant?
g). Should, the principles of “Lex Non Cogit Ad Impossiblia” not apply here? Meaning thereby that the law cannot compel a person to do that which he cannot possibly perform.
The aforesaid queries are partially answered by the judgment of Hon’ble ITAT, Calcutta in case of Kanoi Paper & Industries Ltd. vs Asstt. Cit on 28 May, 2001, wherein at para 6 it has been observed as under by the Hon’ble Bench:-
“Clause 38 of the Employees’ Provident Fund Scheme, 1952, fixes the time limit for making payment in respect of contribution to the provident fund to be 15 days from the close of the month concerned. However, the issue here is whether the “month” should be considered to be the month to which the wages relates or the month in which the actual disbursement of the wages is made, we are of the considered opinion that the expression “month” should mean here the month during which the wages/salary is actually disbursed irrespective of month to which the same relates. Thus, the scheme of the government in this regard is that once a deduction is made in respect of the employees’ contribution to the provident fund from the salary/wages of the employee or the employer also makes his contribution, factually at the time of disbursement of the salary the payment in respect of such contribution should be made forthwith. If for some reason or other the payment of salary for a particular month be held up for considerable period of time it cannot be said that the employer would be liable to make payments in respect of the “employer’s” as well as “employees” contribution in respect of wages for such period within a period of 15 days from the close of the month to which the wages relates. On the other hand, in our view, most appropriate interpretation would be that the employer would be at liberty to make payment of the contribution concerned within 15 days (subject however to the further grace period) from the end of the month during which the disbursement of the salary is actually made and the contribution of the, provident fund are, thus, generated, in as much as, the provision relating to the disallowance of such contribution on account of delay is rather an artificial provision. In our view, a liberal approach has got to be made to this issue. Ultimately, therefore, we reverse the order of the lower authorities and direct the assessing officer to examine whether the payments of contribution in the present case were made within 15 days (allowed with further grace period of 5 days) from the close of the respective months during which the disbursement of the salary/wages were actually made. The assessing officer should re-compute the amount disallowable, if any, on the above basis and take appropriate action accordingly”.
The aforesaid judgment has been followed by various benches of ITAT, Delhi in a number of cases.
Hence before it was being said that the ruling in case of CHECKMATE SERVICES PVT. LTD. vs. COMMISSIONER OF INCOME TAX as reported in :(2022) 448 ITR 518 :(2022) 329 CTR 1 :(2023) 290 TAXMAN 19 :(2022) 218 DTR 401 :(2022) 143 taxmann.com 178 on 12.10.2022 has finally settled the matter and is being followed all over India. However, with due regard to the Hon’ble Apex Court, these aspects have not been considered in the aforesaid Ruling. Hence it needs to be reviewed to this extent.
Now the Hon’ble Apex Court in case of has admitted Petition for Special Leave to Appeal (C) No.1532/2026 vide order dated 27.01.2026 with the following observations:-
“Para 5: There are two School of thoughts as regards the interpretation of the words “due date”.
One view is that the employee’s contribution towards PF, ESI received by the assessee – employer is his income under Section 2(24)(x) and if he wants to have it deducted from his income under Section 36(1)(va), he must credit the same to the employee’s account in the relevant fund on or before the due date specified under the relevant PF,ESI Act. This view is supported by various High Courts as mentioned at para 8 thereof.
The other view is that there is no difference between employees and employer contribution to PF, ESI and both would be guided by the provisions of Section 43B of the Act so as to allow deduction in the hands of the assessee – employer if the contributions are deposited on or before the due date of filling of return under Section 139(1) of the Income Tax Act, 1961. This view is supported by various High Courts as mentioned para 10 thereof.
Hence the SLP was admitted for hearing with the following observations:-
Para 11:- In view of the conflicting opinion, as referred to above, we would like to look into this issue.
I request the Ld. Advocates in the aforesaid SLP to bring issued highlighted above to the notice of Hon’ble Apex Court, when this SLP comes for hearing.
Now though the issue has been finally settled by changing meaning of due date in this budget to be due date for filing ITR u/s 139(1). But the issue is how to settle old disputes. In my humble view following actions can be taken in this regard:-
a. Where time for filing appeal has not lapsed, appeal may filed.
b. Where time for filing appeal has lapsed, appeal may filed with application for condonation of delay.
c. Where time for filing appeal has lapsed, however, time for filing rectification is there, rectification application may be filed.
d. Where ITAT has dismissed appeal and six months have not lapsed from the date of receipt of order, MA may be filed.
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