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| Supreme Court favors Revenue for deductibility of delayed contribution to Provident Fund |
Deductibility of employee‘s contribution to Provident Fund collected by the employer and deposited beyond the due date specified in the relevant statutes but before the filing of the return of income has been a matter of litigation resulting from contrary decisions of various High Courts. While several High Courts have ruled that the delayed contribution shall be allowed as a deduction under Section 43B of the Income-tax Act, 1961 (the Act) so long as the contribution has been made before the filing of the return of income, the Gujarat High Court and Kerala High Court have ruled against it.
Given the contrary rulings on the issue, an explanation was introduced to Section 36(1)(va), clarifying that the due date for depositing the contribution collected by the employer shall not be or never has been the due date mentioned in Section 43B of the Act. Accordingly, the government clarified its position that the deduction of employee’s contribution to the Provident Fund is not covered by Section 43B and if the contribution is deposited beyond the due date specified in the relevant statutes, it results in a permanent disallowance. The amendment is effective from 1 April 2021.
The amendment kept the question of deductibility of the contribution open for years prior to 1 April 2021.
The Hon‘ble Supreme Court (SC), in a recent decision1, has ruled in favor of Revenue and held that the employee’s contribution paid beyond the due dates shall not be allowed as a deduction as per the provisions of Section 36(1)(va) of the Act and the provisions of Section 43B of the Act do not apply.
| Facts of the case and the question of law |
The Appellant Company had delayed the deposit of the employee‘s Provident Fund contribution and ESI contribution to the fund beyond the due dates under the relevant statutes. The Appellant had made the payment prior to the due date of filing its return of income and, thus, claimed a deduction of the amount under Section 43B of the Act.
The Assessing officer (AO) disallowed the amount as per the provisions of Section 36(1)(va) read with Section 2(24)(x) of the Act, holding that the amount constituted income.
The Appellant filed an appeal before the ITAT, which decided the matter in favor of the Revenue. Thereafter, an appeal was preferred before the High Court, which also rejected its pleas and upheld the disallowance made by the AO.
- The Appellant relied upon the SC‘s decision in the case of Commissioner of Income Tax v. Alom Extrusions Ltd.2 In this case, the Court had taken note of the omission of the second proviso to Section 43B of the Act.
- Furthermore, it was argued that Section 43B started with a non-obstante clause which was deemed sufficient to override other provisions, including Section 36(1)(va) of the Act.
- The Learned Additional Solicitor General (ASG) pointed out that in the case of Alom Extrusions, the issue involved was with respect to employer‘s contribution, while this case pertained to employee‘s contribution to the Provident Fund account. He urged that the Act differentiated between the employer’s and employee‘s contribution to the Provident Fund account.
- He further argued that employee’s contribution was remitted to the fund by the employer, and they were deducted from the employee‘s salary. While deduction from the employee‘s salary and remittance to the fund was the employer‘s responsibility, however, that did not change the basic nature of the employee‘s contribution.
- Section 36 deals with deductions not covered in the previous provisions subject to specified conditions mentioned therein. The deletion of the second proviso to Section 43B could not result in Section 43B overriding the conditions imposed for obtaining deduction, specifically that was part of Section 36.
- The Act specifically provided for the employee‘s contribution collected by the employer to be his income as per Section 2(24)(x). A similar clause was never required for employer‘s contribution. When the second proviso to Section 43B was deleted, Section 2(24)(x) and Section 36(1)(va) were retained with the result that Section 43B continued to apply only to employer‘s contribution.
- The Act specifically provided for the employee‘s contribution collected by the employer to be his income as per Section 2(24)(x). A similar clause was never required for employer‘s contribution. When the second proviso to Section 43B was deleted, Section 2(24)(x) and Section 36(1)(va) were retained with the result that Section 43B continued to apply only to employer‘s contribution.
- Amendment to the definition of income in Section 2(24) by insertion of clause (x) is a significant amendment because the Parliament intended that amounts not earned by the assessee but received by it, - were to be treated as income. Since employee‘s contributions to the fund deducted from their salary were not receipts that belonged to the assessee but were held by it as trustees, Section 36(1)(va) was inserted specifically to ensure that if these receipts were deposited in the EPF/ESI accounts of the employees concerned, they could be treated as deductions. The significance of these provisions is that, on the one hand, it brought into the fold of “income” amounts that were receipts or deductions from employee‘s income; at the same time, payment within the prescribed time – by way of contribution of the employee’s share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)).
- Referring to its earlier decision in the case of Alom Extrutions, the Court observed that it considered the impact of deletion of the second proviso to Section 43B. It, however, did not consider the impact of Sections 2(24)(x) and 36(1)(va) of the Act. Furthermore, the separate provisions in Section 36(1) for employer‘s and employee‘s contributions also went unnoticed. The High Courts, which have ruled in favor of the assessee‘s in their decisions, have mainly adopted the approach indicated in the ruling in Alom Extrusions.
- Referring to various judicial precedents, the Court affirmed that one of the rules of interpretation of a tax statute is that if a deduction or exemption is available in compliance with certain conditions, the conditions are to be strictly complied with. In this context, it observed a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income, whereas the second is deemed an income, by definition, since it is the deduction from the employee‘s income and held in trust by the employer. The SC held that the marked distinction had to be borne while interpreting the obligation of every assessee under Section 43B.
- The non-obstante clause has to be understood in the context of the entire provision of Section 43B, which is to ensure timely payment before the returns are filed of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability.
The extended timeline until the due date of return of income, however, cannot apply in the case of amounts that are held in trust, as it is in the case of employee‘s contributions- which are deducted from their income. They are not part of the assessee employer‘s income, nor are they heads of deduction per se in the form of a statutory payout. They are other‘s income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law.
Upon deposit, on or before the due dates as per the relevant statutes, the amount which is otherwise retained and deemed an income is treated as a deduction.
1 Checkmate Services Private Ltd. Vs CIT – I [2022] 143 taxmann.com 178 (SC)[12-10-2022]
2 Commissioner of Income Tax v. Alom Extrusions Ltd., (2010) 1 SCC 489.
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Our Comments
This decision of the SC overturns several High Court rulings as well as impacts assessees who have relied on the favorable High Court decisions to claim a deduction of the contribution paid beyond the due date. While the explanation inserted by Finance Act 2021 in Section 36(1)(va) has settled the tax position post 1 April 2021, assessees continue to litigate deductibility of the amounts for years prior to the amendment.
This decision settles the tax position in favor of the Revenue for the past years, requiring assessees to evaluate their past claims and navigate the penal consequences.
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