Disallowance of belated deposit of Employees’ contribution of PF/ESI u/s 43B even if deposited before due date of ITR filing -Supreme Court settles the law
ABCAUS Case Law Citation
ABCAUS 3614 (2023) (10) SC
Important Case Laws relied upon by parties
Allied Motors (P) Ltd. v Commissioner of Income Tax, (1997) 3SCC 472.
Sagun Foundry Pvt Ltd v. Commissioner of Income Tax, ITA/87/2006.
Commissioner of Income Tax v. Alom Extrusions Ltd., (2010) 1SCC 489.
Commissioner of Income Tax V. State Bank of Bikaner, (2014) 363ITR 70.
Essae Teraoka Pvt. Ltd. v. Deputy Commissioner of Income Tax, (2014) 366ITR 408.
Commissioner of Income Tax v. Nipso Polyfabriks Ltd., (2013) 350ITR 327.
Commissioner of Income Tax v. Merchem Ltd., ITA No. 402/2009.
A Full Bench of Hon’ble Supreme Court has held that belated deposit of employees’ contribution are not deductible under section 43B.
Deductibility of belatedly deposit of Employees contribution have been a bone of contention. And there has been a division of opinion on the issue. While the High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favoured the assesses on the one hand, and the High Courts of Kerala and Gujarat interpreted in favour of the Revenue. Noticeably, Hon’ble Supreme Court had granted special leave to appeal in all these cases.
In all the cases, appellants had belatedly deposited their employees’ contribution towards belatedly after the due dates prescribed under the relevant acts and regulations. Consequently, the Assessing Officers (AO) ruled that by virtue of Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act 1961 (the Act), sums received by the appellants constituted “income” and could not have been allowed as deductions under Section 36(1)(va) of the Act when the payment was made beyond the relevant due date under the respective acts.
The Hon’ble Supreme Court inter alia studied in details the provisions of Finance Act 2003, Finance Act 2021, section 43B of the Act, PF Scheme and Regulations under the ESI Act and CBDT Circulars (372/1983, 495/2087).
The Hon’ble Supreme Court observed that as held by it, one of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with.
The Hon’ble Supreme Court noted that all the High Courts favouring the assessee principally relied upon omission of second proviso to Section 43B(b). However, the primary consideration in all the judgments was that they adopted the approach indicated in the ruling in Alom Extrusions in which the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act were not considered.
The Hon’ble Supreme Court opined that when Parliament introduced Section 43B, what was on the statute book, was only employer’s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. The memorandum introducing the Finance Bill clearly stated that the provisions–especially second proviso to Section 43B was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods.
The Apex Court pointed out that the intention of the legislature to retain the separate character of both employees and employer’s contribution is evident from the use of different language.
The Hon’ble Supreme Court stated that the significance of the provisions of section 2(24)(x) is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)).
Their Lordships explained the important distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)). On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given.
The Hon’ble Supreme Court stated that there is 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 employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.
The Hon’ble Supreme Court opined that the opening non-obstante clause in Section 43B 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. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assesses are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed.
However, the above relaxation cannot apply in the case of employee’s contribution which are held in trust by way of deduction from income of employees, held the Apex Court.
ABCAUS Note:
Recently, in Budget 2021-22, amendments were made in section 36(1)(va) and section 43B to disallow belated deposit of employee’s contribution. The amendments were made to take effect from 1st April, 2021 and apply to the AY 2021-22 and subsequent assessment years. However, with the Apex Court settling the law, now belated deposit of employees contribution has become non deductible even before AY 2021-22.
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