No deduction u/s 36(1)(va) for delayed deposit of the employees contribution towards ESI & PF

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No deduction u/s 36(1)(va) for delayed deposit of the employees contribution towards ESI & PF

The Delhi ITAT has recently held that no deduction is permissible u/s 36(1)(va) for delayed deposit of the employees contribution towards ESI & PF. Though the Income Tax Act has been amended by the FA-2021 which is in line with the opinion now expressed by Delhi ITAT, still the judgement would be relevant to all the old cases.
The copy of the complete order is as under:
ITAT Delhi 
in the case of
Vedvan Consultants Pvt. Ltd. Vs DCIT
ITA No. 1312/Del/2020
Order Dated 26/08/2021
The present appeal has been filed by the assessee against the order of ld. CIT(A)-9, New Delhi dated 12.02.2020.
  1. The solitary ground is directed against the addition of Rs.94,33,788/- u/s 36(1)(va) of the Income Tax Act, 1961. Brief facts as noted from the impugned order are that an addition u/s 36(1)(va) has been made by the DCIT, CPC, Bangalore on account of delay in depositing the ESI and EPF. The copy of tax audit report which is part of the income tax return filed by the assessee and it can be found that the amount has been paid beyond the due date as prescribed in the ESI & PF Act under the IT Act. However, there is no dispute that it is deposited before the due date of filing of return for the assessment year 2018-19.
  2. The issue at hand regarding allowability of deduction on account of deposit of employee’s contribution to provident fund and ESI. The ld. CIT (A) held that the same have not paid before the due date are not eligible for claim of deduction.
  3. Before us, the ld. AR relied on a plethora of case laws which have been mentioned at page nos. 4 & 5 of the order of the ld. CIT (A) and canvassed relying on the provisions of Section 43B.
  4. We have gone through the provisions of the Section 36(1)(va) and Section 43B, cases cited and also the judgments on this issue.
To mention a few,
MADRAS HIGH COURT : October 23, 2018
M/S. UNIFAC MANAGEMENT SERVICES (INDIA) PRIVATE LTD.
VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX,
CORPORATION CIRCLE 3 (2) , CHENNAI
The scope of Section 43B and Section 36(1)(va) are different and thus, there is no question of reading both provisions together to consider as to whether the assessee is entitled to deduction in respect of the sum belatedly paid towards such contribution, especially when such sum is, admittedly, a sum received by the assessee/employer from his employee. Therefore, for considering such question, application of Section 36(1)(va) r.w.s. 2(24)(x) alone is the proper course and any other interpretation would only defeat the object and scope of both the provisions viz., 43B and 36(1)(va).
Accordingly, the writ petition fails and the same is dismissed.
KERALA HIGH COURT : [2015] 378 ITR 443 : September 8, 2015
THE COMMISSIONER OF INCOME TAX, COCHIN VERSUS M/S MERCHEM LIMITED
The distinction drawn to credit the amount of the employer and the employee was with a clear objective and there is no illegality or other legal infirmity in classifying the contributions of employees and employer in the matter of crediting the same to the appropriate statutory authorities.
Considering section 36(1)(va) of the Income Tax Act as it stands, with respect to any sum received by the assessee from any of his employees to which the provisions of clause (x) of sub-section (24) of section 2 applies, assessee shall not be entitled to deduction of such amount in computing the income referred to in section 28 if such sum is not credited by the assessee to the employees’ account in the relevant fund or funds on or before the due date as per explanation to section 36(1)(va) of the Act.
BOMBAY HIGH COURT: [2014] 368 ITR 749 (Bom): October 14, 2014
THE COMMISSIONER OF INCOME TAX VERSUS GHATGE PATIL TRANSPORTS LTD.
The employer assessee would be entitled to deduction only if the contribution to the employee’s welfare fund stood credited on or before the due date and not otherwise – following the decision in Commissioner of Income Tax V/s. Alom Extrusions Ltd. [SUPREME COURT] – both employees’ and employer’s contributions are covered under the amendment to Section 43B of I.T. Act – the Tribunal was right in holding that payments are subject to benefits of Section 43B
6. Decision of the Hon’ble Supreme Court relied upon by the assessee cited as CIT vs. Alom Extrusions Ltd. (supra) is not applicable to the facts and circumstances of the case because Hon’ble Supreme Court has decided the issue in Alom Extrusions Ltd. case qua employers contribution as per section 43B(b) of the Act and not qua employees contribution u/s 36(1)(va) of the Act.
7. Clause (24) of section 2 of the Income Tax Act, 1961 (The Act) provides an inclusive definition of the income. Sub-clause (x) to the said clause provides that income to include any sum received by the assessee from his employees as contribution to any provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees. Section 36 of the Act pertains to the other deductions. Sub-section (1) of the said section provides for various deductions allowed while computing the income under the head ‘Profits and gains of business or profession.’ Clause (va) of the said sub-section provides for deduction of any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date. Explanation to the said clause provides that, for the purposes of this clause, “due date to mean the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued there-under or under any standing order, award, contract of service or otherwise.
8. Section 43B specifies the list of deductions that are admissible under the Act only upon their actual payment. Employer’s contribution is covered in clause (b) of section 43B. According to it, if any sum towards employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date for furnishing the return of the income under sub-section (1) of section 139, assessee would be entitled to deduction under section 43B and such deduction would be admissible for the accounting year. This provision does not cover employee contribution referred to in clause (va) of sub-section (1) of section 36 of the Act.
9. Section 36(1)(va) and section 43B(b) operate in different fields, i.e., former takes care of employee’s contribution and later the employer’s contribution. Therefore, an assessee is entitled to get benefit of deduction under section 43B as provided under the proviso thereto only with regard to portion of amount paid by the employer to contributory fund. So far as the employee’s contribution is concerned, the assessee is entitled to get deduction of amounts as provided under section 36(1)(va) only if amounts so received from the employee is credited in specified account within due date as provided under relevant statute (CIT v. Merchem Ltd. 61 com 119).
10. The section 43B of the Act covers only employer’s contribution and does not cover employees’ contribution, sometimes they have been applied to the provision of section 43B on employees’ contribution as well and allowed the deduction to employer even if the employees’ contribution is deposited by the due date of filing Income Tax Return (ITR) as mentioned under section 139(1).
11. To provide clarity and certainty on non applicability of section 43B on employees’ contribution to specified funds, the Budget 2021 has proposed to amend the provisions of section 36(1)(va) and section 43B as under:
(a) amend section 36(1)(va) of the Act by inserting another explanation 2 to the said clause to clarify that the provision of section 43B does not apply and deemed to never have been applied for the purposes of determining the due date under this clause; and
(b) amend section 43B of the Act by inserting Explanation 5 to the said section to clarify that the provisions of the said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 applies.
12. The language of newly proposed explanation 2 to section 36(1)(va) and explanation 5 to section 43B makes it clear that the amendment is retrospective.
13. The rational of the amendment was explained by the Memorandum to the Finance Bill, 2021 as below:
“There is a distinction between employer contribution and employee’s contribution towards welfare fund. It may be noted that employee’s contribution towards welfare funds is a mechanism to ensure the compliance by the employers of the labour welfare laws. Hence, it needs to be stressed that the employer’s contribution towards welfare funds such as ESI and PF needs to be clearly distinguished from the employee’s contribution towards welfare funds. Employee’s contribution is employee own money and the employer deposits this contribution on behalf of the employee in fiduciary capacity. By late deposit of employee contribution, the employers get unjustly enriched by keeping the money belonging to the employees. Clause (va) of sub-section (1) of Section 36 of the Act was inserted to the Act vide Finance Act 1987 as a measures of penalizing employers who mis-utilize employee’s contributions.
14. From the above, it can be said that the law is now made clear that employees’ contribution to specified fund will not be allowed as deduction if there is delay in deposits as per the due dates mentioned in the respective legislation.
15. Decision of the Hon’ble Supreme Court relied upon by the assessee cited as CIT vs. Alom Extrusions Ltd. (supra) is not applicable to the facts and circumstances of the case because Hon’ble Supreme Court has decided the issue in Alom Extrusions Ltd. case qua employers contribution as per section 43B(b) of the Act and not qua employees contribution u/s 36(1)(va) of the Act.
16. We have also gone through the orders of the Co-ordinate Bench of ITAT in the case of Eagle Trans Shipping & Logistics (India) (P.) Ltd. Vs ACIT in ITA No. 324/Del/2017 order dated 25.07.2019 which was relied on the judgment of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Bharat Hotels Ltd. 410 ITR 417, it held,
“9. When we examine the issue in controversy in the light of the provisions contained u/s 36(1)(va) of the Act, it is apparently clear that the assessee would be entitled for deductions qua the sum received from any office employee to which provisions under sub- section (x) of clause (24) of section 2 is applied only, if such sum is credited by the assessee to the employees account in the relevant fund or funds on or before the due date. Due date is further defined in the Explanation, which means, the date by which the assessee is required as an employer to credit employees contribution to the employees account in the relevant fund under any Act or rule or order or notification issued thereunder or any standing order or award or service or otherwise. Meaning thereby, in case, employer fails to deposit the entire amount towards employees contribution on account of PF & ESI with concerned department on or before the due date under PF & ESI, the assessee shall not be entitled for deduction to that extent.
  1. Decision of the Hon’ble Supreme Court relied upon by the assessee cited as CIT vs. Alom Extrusions Ltd. (supra) is not applicable to the facts and circumstances of the case because Hon’ble Supreme Court has decided the issue in Alom Extrusions Ltd. case qua employers contribution as per section 43B(b) of the Act and not qua employees contribution u/s 36(1)(va) of the Act.
  2. Hon’ble jurisdictional High Court in case of CIT vs. Bharat Hotels Ltd. (2019) 410 ITR 417 (Delhi) (supra) decided the identical issue qua delayed deposit of employees contribution on account of PF & ESI against the assessee by holding that assessee would be entitled to deduction in terms of section 36(1)(va) of the Act to the extent if the employees contribution on account of PF & ESI is deposited on or before the due date, and the employees contribution on account of PF & ESI deposited beyond the stipulated period would not make the assessee company entitled to claim deduction from its return. For ready perusal, operative part of the judgment of CIT vs. Bharat Hotels Ltd. (supra) is extracted as under:-
“7. The issue here concerns the interplay of Section 2(24)(x) of the Act read with Section 36(1)(va) of the Act alongside provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (especially Regulation 38 of the Employees’ Provident Funds Scheme, 1952) and the provisions of the Employees’ State Insurance Act, 1948. The AO had brought to tax amounts which were deducted by the employer/assessee from the salaries and wages payable to its employees, as part of their contributions. It is not in dispute that the employer’s right to claim deductions under the main part of Section 43-B of the Act is not an issue. The question the AO had to then decide was whether the amounts deducted from the salaries of the employees which had to be deposited within the stipulated time (in terms of notification/circular dated 19.03.1964 which was modified on 24.10.1973), as far as the EPF contribution went and the period of three weeks as far as the ESI contributions went. The AO made a tabular analysis with respect to the contributions deducted and actually deposited. The cumulative effect of notifications under the Employees’ Provident Funds Act, 1952 and the Employees State Insurance Act, 1948 was that in respect of the EPF Scheme contributions the deductions were to be deposited within 15 days of the succeeding wage period with a grace period of 5 days; for ESI contributions the deposit with the concerned statutory authority had to be made within three weeks of the succeeding wage month/period. The CIT in this case confirmed the additions – made by the AO based on the entire amounts that were disallowed. The ITAT however granted complete relief.
  1. Having regard to the specific provisions of the Employees’ Provident Funds Act and ESI Act as well as the concerned notifications which granted a grace period of 5 days (which appears to have been late withdrawn recently on 08.01.2016), we are of the opinion that the ITAT’s decision in this case was not correct. The assessee undoubtedly was entitled to claim the benefit and properly treat such amounts as having been duly deposited, which were in fact deposited within the period prescribed (i.e. 15 + 5 days in the case of EPF and 21 days + any other grace, period in terms of the extent notification). As far as the amounts constituting deductions from employees’ salaries towards their contributions, which were made beyond such stipulated period, obviously the assessee was not entitled to claim the deduction from its returns.
12. In view of this discussion, the Revenue’s appeal is partly allowed. The AO is directed to examine the contributions made with reference to the dates when they were actually made and grant relief to such of them which qualified for such relief in terms of the prevailing provisions and notifications. We also clarify that the assessee would be entitled to deduction in terms of Section 36(1)(va) of the Act.”
13. In view of what has been discussed above and following the decision rendered by the Hon’ble jurisdictional High Court in case of CIT vs. Bharat Hotels Ltd. (supra), we are of the considered view that the assessee company is not entitled for deduction of Rs.4,29,110/- u/s 36(1)(va) of the Act claimed on account of depositing the employees contribution towards ESI & PF as per provisions contained u/s 2(24)(x) read with section 36(1)(va) after due date which is evident from table extracted in preceding para no.5. So, the case laws relied upon by the ld. AR for the assessee is not applicable to the facts and circumstances of the case. Consequently, finding no illegality or perversity in the impugned order passed by the ld. CIT (A), appeal filed by the assessee is hereby dismissed.”
17. Hence, keeping in view the order of the Co-ordinate Bench of the Tribunal and the order of the Hon’ble Jurisdictional High Court of Delhi, we hereby affirm the order of the ld. CIT (A).
18. In the result, the appeal of the assessee is dismissed. Order Pronounced in the Open Court on 26/08/2021.

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