Section 43B applicable to both employee and employer contributions. No disallowance u/s 36(1)(va) if paid before ITR due date. Allahabad HC

Section 43B applicable to both employee and employer contributions. No disallowance can be made u/s 36(1)(va) if paid before ITR due date. Allahabad High Court

CBDT in view of the decision of the Hon’ble Supreme Court in Alom Extrusions Ltd. has vide circular no. 22 of 2015 dated 17/12/2015 clarified that the settled position is that if the assessee deposits any sum payable by it by way of tax, duty, cess or fee by whatever name called under any law for the time being in force, or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, on or before the ‘due date’ applicable in his case for furnishing the return of income under section 139(1) or Income Tax Act, 1961 (‘the Act’) no disallowance can be made under section 43B of the Act.

However, it was further clarified that the 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 Act.

Assessing Officers based on the said circular are making distinction between the employers and employees contribution and are making disallowance u/s 36(1)(va) read with section 2(24)(x) even if the contribution received from employees is deposited before the due date for filing of Income Tax Return.

However, in a recent judgment, the Allahabad High Court has held that section 43B applicable to both employee and employer contributions.

ABCAUS Case Law Citation:
ABCAUS 1153 (2017) (03) HC

Question for determination:
Although the appeal was admitted on six substantial questions of law, the assessee pressed only the following three questions:

1. Whether on the facts and in the circumstances of the case, the second proviso to the Section 43-B of the Income Tax Act, 1962 does not override the first proviso to the said section and hence the deduction in respect of employer’s contribution to provident fund and ESI was admissible to the Assessee/appellant under the first proviso of Section 43-B itself? 

2. Whether the omission of the second proviso to Section 43-B vide Finance Act, 2003 with effect from 01.04.2004, is curative in nature and has retrospective effect and the Assessee/appellant is eligible to claim deduction being employer’s contribution to provident fund and ESI in the Assessment Year 2001-02 in view of such amendment?

3. Whether the provisions of Section 36 and Section 43-B are mutually exclusive and the Assessee/appellant is legally entitled to claim deduction of employees’ contribution to provident fund and ESI u/s 43-B as amended vide Finance Act, 2003, even if the said deduction was not admissible under Section 36(1) (va) of the Income Tax Act, 1962?” 

Brief Facts of the Case:
The assessee was a private limited company. It deposited contribution of employer and employees towards Provident Fund and Employees State Insurance (”ESI’), beyond due date, prescribed under relevant labour welfare statutes but well before due date of filing Income Tax Return under Section 139(1) of the Act 1961, for previous year. The details of deposits are given as under:- 

The Assessing Officer (‘AO’) completed assessment after disallowing deduction towards (i) employees’ contribution to Provident Fund and ESI under Section 36(1)(va) and (ii) employers’ contribution to Provident Fund and ESI u/s 43B.

Against the assessment order passed under Section 143(3), the assessee preferred an appeal before Commissioner of Income Tax (Appeals) (‘CIT (A)’) who dismissed it. The Tribunal also rejected the appeal of the assessee.

Despite the issue covered by judgment in Alom Extrusions Ltd. it was submitted to the Hon’ble High Court that various High Courts have taken divergent views on the question, whether Section 43B can be read alongwith Section 36(1)(va) or both have independent, distinct and separate field of operation.

Observations made by the High Court:
The Hon’ble High Court observed that section 43B was inserted w.e.f. 01.04.1984 to allow deductions provided payments are actually made before filing of return as per due date under Section 139(1) of Act 1961. ‘Income’ defined under Section 2(24) of Act, 1961, includes ‘profits and gains’.  Under Section 2(24)(x), any sum received by Assessee from his employees as contribution to any provident fund/superannuation fund or any fund set up under Employees State Insurance Act, 1948, or any other fund for welfare of such employees, constitute ‘income’. In respect to such contributions deduction was allowed under Section 36(1)(va) when contributions received by employer is deposited within time prescribed, under relevant labour welfare statute.

The Hon’ble Court explained the rationale of the amendment made as

Prior to 01.04.1984, deduction for contributions and indirect taxes could be claimed as ‘business expense’, by merely making a provision to that effect in his books of account. To curb this practice, Section 43B was inserted w.e.f. 01.04.1984 whereby mercantile system of accounting with regard to tax, duty and contributions to welfare funds stood discontinued making deductions on on cash basis.

W.e.f. 01.04.1988, Section 43B was again amended and a Proviso was inserted. It provided, inter alia, in the context of any sum payable by Assessee (employer) by way of tax, duty, cess or fee, if such an Assessee (employer) pays such tax, duty, cess or fee even after closing of accounting year but before date of filing of Return under Section 139(1) of Act, 1961, assessee would be entitled to deduction under Section 43B on actual payment basis and such deduction would be admissible for the accounting year.

This proviso, however, was not made applicable to contributions made by Assessee (Employer) to labour welfare funds. By Finance Act, 1988, w.e.f. 01.04.1988, Second Proviso came to be inserted. Second Proviso was further amended by Finance Act, 1989 w.e.f. 01.04.1989.

From the above provisions, now Assessee (employer) became entitled to deduction only if contribution stood credited on or before due date, given in Labour Welfare Statutes. However, Second Proviso again created certain difficulties. In many of the Companies, Financial Year ended on 31st March, did not coincide with accounting period of Labour Welfare Statutes. In many cases, time to make contribution of funds ended after due date of filing of Returns. On the representation of Industries, again Parliament, vide Finance Act, 2003, w.e.f. 01.04.2004, made amendment by deleting Second Proviso and amending First Proviso. 

On the question whether  employees contribution is disallowable or not with reference to Section 36(1)(va) read with Section 43B, the Hon’ble High Court examined the judgment of various High Courts rendered after considering Supreme Court judgment in Alom Extrusions Ltd.  as under: 

The Hon’ble High Court also examined the Supreme Court judgment in Alom Extrusions Ltd. with respect to the question whether it could be confined only in respect to employers’ contribution or is applicable to both ‘contributions’, whether by employer or employee. The Hon’ble High Court observed as under:

The question, whether benefit under Section 43B, as a result of amendment of Finance Act, 2003, is retrospective or not, came to be considered in Commissioner of Income-Tax Vs Alom Extrusions Ltd. (supra). Court considered the intent, purpose and object in the historical back drop of insertion of Section 43B and its progress by way of various amendments. Referring Section 2(24)(x) it said, income is defined under Section 2(24) which includes profits and gains. Further in clause (x) of Section 2(24) any sum received by Assessee from employees as ‘contributions’ to any provident fund/superannuation fund or any fund set up under Act 1948, or any other fund for welfare of such employees constitute ‘income’. This is the reason why every Assessee/Employer was entitled to deduction even prior to April, 1, 1984, keeping books on mercantile system of accounting, as a business expenditure, by making provision in his books of account in that regard. Assessee was capable of keeping money with him and just by mentioning in accounts, was able to claim deduction as business expenses. Section 43B was inserted to check this practice and it resulted in discontinuing mercantile system of accounting with regard to tax, contributions etc. With induction of Section 43B an Assessee could claim deduction on actual payment basis. By Finance Act, 1988 Parliament inserted first proviso w.e.f. 01.04.1988 which inter alia provides that any sum payable by Assessee by way of tax, duty, cess or fee, if payment is made after closing of accounting year but before date of filing of Return under Section 139(1), Assessee would be entitled to deduction on actual payment basis. This proviso did not include within its ambit, contributions under labour welfare statutes. By Finance Act, 1988, Second Proviso thus Second proviso was further amended by Finance Act, 1989 w.e.f. 01.04.1989. 

Court held that Assessee/employer thus would be entitled to deduction only if contribution stands credited on or before due date given in the Act 1952 or Act 1948. Second proviso created difficulties, inasmuch as under Act, 1981, due date was after the date of filing of returns and thus industries made representations to the Ministry of Finance. Court, looking to the history of amendments held, it is evident that Section 43B, when enacted in 1984, commences with a non obstante clause. The underlying object being to disallow deductions claimed merely by making a book entry based on the mercantile system of accounting. At the same time, Section 43B made it mandatory for the Department to grant deduction in computing income under Section 28 in the year in which tax, duty, cess etc. is actually paid. Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under Provident Fund Act, Municipal Corporation Act (Octroi) and other Tax laws. Therefore, by way of First Proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax duty cess or fee is paid before the date of filing of the return under Act 1961, Assessee would than be entitled to deduction. This relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer should not sit on the collected contributions and deprive workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds. But when implementation problems were pointed out for different due dates, uniformity was brought about in first proviso by Finance Act, 2003. Hence, amendment made by Finance Act 2003 in Section 43B is retrospective, being curative in nature and apply from 01.04.1988. In the result when contribution had been paid, prior to filing of return under Section 139(1), Assessee/employer would be entitled for deduction and since deletion of Second Proviso and amendment of First Proviso is curative and apply retrospectively w.e.f. 01.04.1988. 

From the aforesaid judgment, we find that irrespective of the fact that deduction in respect of sum payable by employer contribution was involved, but Court did not restrict observations, findings and declaration of law to that context but looking to the objective and purpose of insertion of Section 43B applied it to both the contributions. It also observed clearly that Section 43B is with a non-obstante clause and therefore over ride even if, anything otherwise is contained in Section 36 or any provision of Act 1961. 

In view of the above, the Court opined that the law laid down by High Courts of Karnataka, Rajasthan, Punjab & Haryana, Delhi, Bombay and Himachal Pradesh have rightly applied Section 43B in respect to both contributions i.e. employer and employee. The Court expressed its respectable dissent with the contrary view taken by the Gujarat High Court which was followed by Kerala High Court.

Held:
The appeal of the assessee was allowed. Judgment of Tribunal taking otherwise view was set aside. 

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