Contribution towards Provident Fund is one of the area, which requires due consideration of Auditor while conducting Tax Audit. In industry, there are some confusions regarding the treatment of Contribution towards Provident Fund. Through this Article, I am trying to interpret the intent of the Act with regard to these provisions.
Employer’s Contribution
As per section 36(1)(iv) Deduction shall be allowed in respect of any sum paid by the employer by way of contribution towards a Recognized Provident Fund subject to limits prescribed in the recognition of the provident fund accorded by the Chief Commissioner or Commissioner of Income Tax.
Analysis
Employer’s contribution towards provident fund is allowable as deduction subject to the following conditions:
- First condition is that, provident fund should be recognized. Thus, the employer will not get deduction in respect of contribution towards unrecognized provident fund.
- Further, the deduction is subject to the conditions laid down under Section 43B.
As per the provisions of Section 43B, any sum payable by assessee as an employer by way of contribution towards provident fund shall be allowed as deduction only in the previous year in which such sum is actually paid by him. However, if such sum is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) in respect of previous year in which liability to pay such sum was incurred by the assessee, then deduction shall be allowed in the previous year in which liability was incurred.
Below illustration will further clarify the above provisions:
Illustration: Employer’s contribution towards PF for the month of October, 2019 is Rs. 10,000. The due date for depositing the same is 15th November, 2019 under the PF Act. Assuming due date for filing the return for the said assessee is 30th September, 2020.
Case 1: Employer deposits the PF on 12th November, 2019-
Deduction for the same will be allowed in A.Y. 2020-21.
Case 2: Employer deposits the PF on 20th November, 2019-
Deduction for the same will be allowed in A.Y. 2020-21.
Case 3: Employer deposits the PF on 25th September, 2020-
Deduction for the same will be allowed in A.Y. 2020-21.
Case 4: Employer deposits the PF on 18th October, 2020-
Deduction for the same will be allowed in A.Y. 2021-22.
Employee’s Contribution
As per section 36(1)(va) Deduction shall be allowed for any sum received by the assessee from his employees as their contribution towards provident fund, if such sum is credited by the assessee to the employees account in the provident fund on or before the due date.
For the purpose of this section Due Date means the date of depositing PF as prescribed under PF Act.
Further as per section 2(24)(x) Income includes any sum received by the assessee from his employees as their contribution to provident fund.
Analysis
Employee’s contribution towards provident fund is allowable as deduction, subject to the following conditions:
- Deduction shall be allowed if payment is made before the due date prescribed under PF Act i .e. 15th of the following month. However, as per the Guidance Note on Tax Audit issued by ICAI, the deduction under section 36(1)(va) shall be allowed even if the payment is made within the grace period falling after the due PF Act prescribes 5 grace days for depositing PF. Thus the deduction under section 36(1)(va) shall be allowed even if PF is deposited by 20th of the following month.
- Deduction shall not be allowed if PF is deposited after 20th of the following month.
- Provision of section 43B does not apply to employee’s contribution towards provident fund. Below illustration will further clarify the above provisions:
Illustration: Employee’s contribution towards PF for the month of October, 2019 is Rs 10,000. The due date for depositing the same is 15th November, 2019 under PF Act. Assuming due date for filing the return for the said assessee is 30th September, 2020.
Case 1: Employer deposits the PF on 12th November, 2019-
Deduction for the same shall be allowed in A.Y. 2020-21.
Case 2: Employer deposits the PF on 20th November, 2019-
Deduction for the same shall be allowed in A.Y. 2020-21 as per the Guidance Note on Tax Audit issued by ICAI.
Case 3: Employer deposits the PF on 25th September, 2020-
Deduction for the same shall not be allowed.
However, few High Courts have given identical judgments which are contrary to the above provisions of the act. I am quoting relevant extract of Delhi High Court Judgment in the case of CIT vs. AIMIL LIMITED for the reader’s reference.
“If the employee’s contribution is not deposited by the due date prescribed under the relevant acts and is deposited late, the employer not only pays interest on delayed payments but can incur penalties also, for which specific provisions are made in the provident fund act. Therefore, the act permits the employer to make the deposit with some delay, subject to aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before due date of filing the return under section 139(1).”
Below illustration will further clarify the above provision:
Illustration: Employee’s contribution to PF for the month of October, 2019 is Rs 10,000. The due date for depositing the same is 15th November, 2019 under PF Act. Assuming due date for filling the return for the said assessee is 30th September, 2020.
Case 1: Employer deposits the PF on 25th September, 2020-
Deduction for the same shall be allowed in A.Y. 2020-21 in the light of Delhi High Court Judgment in the case of CIT vs. AIM IL Limited.
Case 2: Employer deposits the PF on 18th October, 2020-
Deduction for the same shall not be allowed as the provision of section 43B does not apply to employee’s contribution towards PF.
Thus, we can still claim deduction for employee’s contribution to PF if the same is deposited before the due date of filing the return (CIT vs. AIMIL LIMITED). However, deduction cannot be claimed if the employee’s contribution to PF is deposited after due date of filing the return as the provisions of section 43B does not apply to employee’s contribution towards PF.
(Submitted by – Tarun Kumar (B.Com, CA-Final) Mobile: +91-888-282-8112 Email-ID: tktarun786@gmail.com)
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Republished with Amendments
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Dear Readers,
Allowability of employee’s contribution to provident Fund is debatable issue.
Rajasthan High Court in the case of Jaipur Vidyut Nigam Ltd and Delhi high court in the case of AIMIL Ltd have held that assessee can claim deduction for employee’s contribution to PF even if the same is deposited before the due date of filing of return.
It is pertinent to note that Gujarat high court in the case of Gujarat State Road Transport Corporation held that employee’s contribution to provident fund deposited beyond the due date prescribed under section 36(1) (va) of the Income-tax Act, 1961 would not be eligible for deduction under section 43B of the Act, even if deposited before the due date of filing the tax return.
Thus there are contrary decisions by various high courts.
Recently the CBDT has issued Circular No. 22/2015 dated 17th December, 2015 clarifying that any sum payable by the assessee as an employer by way of contribution to any provident fund, 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 he made under section 43B of the Act.
It is clarified that this Circular does not apply to claim of deduction relating to employee’s contribution to welfare funds which are governed by section 36(1) (va) of the IT Act.
Now it is the time for the government to put an end to this litigation and settle down the law for the treatment of employee’s contribution to Provident Fund.
Dear Readers,
It is for your updation that recently, in the case of Gujarat State Road Transport Corporation the Gujarat High Court (HC) held that the employees’ contribution to the EPF deposited beyond the due date prescribed under section 36(1)(va) of the Income-tax Act, 1961 would not be eligible for deduction under section 43B of the Act, even if deposited before the due date of filing the tax return.
The allowability of the employees’ contribution to the EPF which is deposited beyond the due date in accordance with relevant statute, but before the due date of filing the tax return, is a litigious issue, with Courts divided in their verdict.
This decision is in contrary to the view expressed by Delhi high court in the case of CIT vs. AIMIL LIMITED. Where it was held that the employees contribution to provident fund, deducted from the salaries of the employees of the assessee, shall be allowed as deduction from the income of the employer assessee, if the same is deposited by the employer assessee with the provident fund authority on or before the due date of filing the return for the relevant previous year.
So it is worthwhile to note here that, when there are two contrary decisions, one of jurisdictional High Court and another of the other High Court, then the decision of the jurisdictional High Court is binding on the department and not the decision of another High Court.
Dear Priyanka
As per section 36(1)(va) Deduction shall be allowed for any sum received by the assessee from his employees as their contribution towards provident fund, if such sum is credited by the assessee to the employees account in the provident fund on or before the due date.
i.e. Such sum has to be deposited by employer in employees account opened with PF department on or before due date of depositing PF as prescribed under PF Act. Deduction shall not be allowed to employer if amount is deposited in Fixed Deposit account.
Interest and penalties will also be levied under the relevant provisions of The PF Act.
what if employee’s contribution towards providentfund is deducted and deposited in fixed deposit account? Please Discuss
Mr. Surinder thanks for your feedback. As said by you employee’s contribution is allowed as deduction only if it is paid to PF department on or before due date under PF Act.
But in practice most of assesses are taking deduction for the same even if paid before due date of filing the return u/s 139(1). As per my opinion view taken by assesses is correct as it is supported by various court judgments.
For your information you can refer the below court judgments in the similar cases. Decisions were given in favour of assesses by courts.
• Decision of honorable Delhi high court in the case of CIT vs. AIMIL Limited.
• Decision of honorable Rajasthan high court in the case of CIT vs. Jaipur Vidyut Vitran Nigam Ltd.
We have to acknowledge the Surinder’s contribution to the aritcle. I wish he will check up if there are any amendments to his presentation in the recent past.
The author has messed up with the citation.
First, let us discuss Employee’s Contribution. The employee’s contribution, if paid after due date (including grace days) under EPF&MP Act, is still not allowed as deduction under Section 36(1)(va). The payment to the EPFO for employer’s contribution as well as employees’s contribution is made at one go. The factual position is that employee’s contribution is an income of employer under section 2(24)(x) and its deduction under Section 36(1)(va) is allowed only if it is paid to EPFO on or before due date (including grace days) under EPF&MP Act.
Now, let us discuss Employer’s Contribution. The employer’s contribution is allowed as deduction under Section 36(1)(iv) only if it is recognised provident fund. Section 43B has put another rider on its deduction i.e. it shall be allowed as deduction in the year of payment with an exception that if is paid before due date of filing return under Section 139(1), it shall be allowed as deduction in the year of accrual and not in the year of payment. 🙂
The date will be date of salary due and not disbursed.
The due date of deposit of pf will be counted from date of credit of salary or date of payment of salary. Please discuss.