Unravelling the Controversy: Section 36(1)(va) of the Income Tax Act,1961 and the Tussle Between Retrospectivity and Perspectivity
Section 36(1)(va) of the Income Tax Act, 1961, has been at the centre of a legal puzzle regarding its applicability to assessment years preceding 1.4.2021. This article explores the intricacies of Section 36(1)(va) and its comparison with Section 43B, shedding light on the perplexing debates surrounding retrospectivity and perspectivity.
Understanding Section 36(1)(va) and Section 43B:
Section 36(1)(va) of the Income Tax Act, 1961, pertains to the treatment of certain payments as income if the specified conditions are not complied with. This section primarily deals with the timely deposit of deduction of employee’s contribution to the provident fund, superannuation fund, or any other fund set up for the welfare of employees. It mandates that if the employer fails to credit the specified amount to the relevant fund by the due date, such unpaid amount shall be deemed as the income of the employer for the previous year in which the due date falls.
On the other hand, Section 43B of the Income Tax Act addresses certain deductions that are allowable on a payment basis. It stipulates that certain expenses or liabilities, such as taxes, interest, or employee contributions to provident funds, can only be claimed as deductions if they are paid before the due date of filing the income tax return for the relevant assessment year.
Now, let’s explore the two explanations provided in Section 36(1)(va):
Explanation 1 (Inserted by the Finance Act,1987 w.e.f. 1.4.88): This explanation defines “due date” as mentioned under any Act, rule, order, or notification issued thereunder. The term “under any Act” created ambiguity, leading to conflicting court judgments. Various High Court rulings suggested that the due date in Section 36(1)(va) should be extended and read in conjunction with the due date mentioned in Section 43B of the Act.
Explanation 2 (Inserted by the Finance Act,2021 w.e.f. 1.4.2021):A clarification was introduced by way of Explanation 2 to Section 36(1)(va) through the Finance Act 2021. This amendment aimed to resolve the confusion regarding the interpretation of the term “due date.” The explanation states that the due date referred to in Section 36(1)(va) shall be the due date specified in the relevant Act for filing the return of income.
Explanation 1, inserted in 1987, created confusion by defining “due date” as per any Act, leading to conflicting court judgments. The lack of clarity led to various High Court rulings, with some asserting an extension of the due date mentioned in Section 43B. To address this, Explanation 2 was introduced in the Finance Bill 2021, emphasizing the due date specified in the relevant Act for filing the return of income.
Checkmate Services Pvt. Ltd vs Commissioner of Income Tax [2022 SCC OnLine SC 1423] and the Apex Court’s Perspective:
In the case of Checkmate Services Pvt. Limited, the Apex court attempted to provide clarity on the interpretation of the due date under Section 36(1)(va). The court concluded that the due date, as per this section, is the one specified under specific labour acts and cannot be extended or read in conjunction with the due date mentioned in Section 43B of the Income Tax Act.
Despite the Checkmate Services Pvt. Limited ruling, the issue remained unsettled, and decisions by various forums continued to contribute to the ongoing debate. An important ruling by the Income Tax Appellate Tribunal (ITAT) in the case of Crescent Roadways Private Limited (TS-510-ITAT-2021(HYD)) shed light on the matter.
The ITAT Hyderabad, in its decision, emphasized that the legislature had incorporated necessary amendments in both Sections 36(1)(va) and 43B through the Finance Act, 2021. The CBDT (Central Board of Direct Taxes) had also issued a Memorandum of Explanation, clarifying that these amendments applied with effect from 1.4.2021 only.
The ITAT Hyderabad ruling highlighted that the legislative amendments aimed at disallowing employers’ contribution under Section 43B as opposed to employees’ contribution under Section 36(1)(va). However, considering the explicit clarification that the amendments were applicable only prospectively from 1.4.2021, the ITAT held that any disallowance made prior to this date was not sustainable in light of the latest developments.
The Hon’ble Delhi High court in the case of Pr. Commissioner of Income Tax -7 versus TV Today Network Ltd. 2022 LiveLaw (Del) 769) has held that the amendment to Section 36(1)(va), vide the Finance Act, 2021, is ‘for removal of doubts’ and hence, it cannot be presumed to be retrospective since it alters the law as it earlier stood.
The Legal Principle of “Lex prospicit non respicit” and Vatika Township Private Limited Case:
The principle of law “lex prospicit non respicit,” which means “law looks forward not backward,” plays a crucial role in the interpretation of taxation provisions, particularly in deciding whether amendments or inclusions should be applied retrospectively or prospectively. This principle underscores the general legal notion that laws are presumed to be prospective in their operation unless there is explicit language or intention in the statute to make them retrospective.
The Five-judge bench of the Apex court addressed the issue of retrospectivity and prospectivity of taxation provisions in the case of Commissioner of Income Tax (Central-I), New Delhi vs. Vatika Township Private Limited ((2015) 1 SCC1). The court established that any amendment or inclusion of a new provision in the context of income tax, to the extent it is against the assessee, cannot be applied retrospectively. This decision solidified the principle that taxation laws are generally construed to operate prospectively, ensuring fairness and predictability for taxpayers.
It’s noteworthy to highlight that the three-judge bench decision in the case of Checkmate Services Pvt Ltd (supra) did not take into account this established legal proposition. The Vatika Township Private Limited ruling, being a judgment by a larger bench, holds significant precedential value. The inconsistency between these decisions adds to the complexity surrounding the interpretation of taxation provisions and whether they should be applied retrospectively or prospectively.
Conclusion and Ongoing Debate:
The controversy over the retrospective or prospective applicability of Explanation 2 to Section 36(1)(va) remains unresolved. As the legal community grapples with these conflicting decisions, it underscores the need for clarity and uniformity in interpreting taxation provisions. Future legal developments and judgments are anticipated to provide further guidance on the nuanced interplay between taxation laws, retrospectivity, and prospectivity.
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