Deduction towards PF/ESIC no available if the employee share is not deposited before the due date under the relevant Act: Supreme Court
Finally , the biggest controversy is settled by the Supreme Court in the case of Checkmate Services Pvt Ltd. VS CIT.
The question involved was with respect to the interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961 and whether the appellant assessees are entitled to deduction of amounts deposited by them towards contribution in terms of The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Employees’ Provident Funds Scheme, 1952, The Employees’ State Insurance Act, 1948, The Employees’ State Insurance (Central) Regulations, 1950 or any other provident or superannuation fund.
The Assessing Officers during assessment had ruled that the appellants had belatedly deposited their employees’ contribution towards the EPF and ESI, considering the due dates under the relevant acts and regulations. Consequently, the AO ruled that by virtue of Section 36(1)(va) read with Section 2(24)(x) of the IT Act, such sums received by the appellants constituted “income”. Those amounts could not have been allowed as deductions under Section 36(1)(va) of the IT Act when the payment was made beyond the relevant due date under the respective acts. In other words, as per the AO, as such sums were paid beyond the due dates as prescribed under the respective acts, the right to claim such sums as allowable deduction while computing the income was lost forever.
The assessees’ pleas were unsuccessful before the Income Tax Appellate Tribunal. Ultimately, in the case of the impugned judgment, the Gujarat High Court too rejected its pleas.
It may be noted that there was a division of opinion on the issue amongst the High Courts. The High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favouring the interpretation beneficial to the assesses on the one hand, and the High Courts of Kerala and Gujarat preferring the interpretation in favour of the Revenue on the other.
SC granted special leave to appeal in all these cases.
The scope and effect of the newly inserted Section 36(1)(va) and the newly inserted provisos to Section 43B of the IT Act were elaborated in a Central Board of Direct Taxes (hereinafter, “CBDT”) circular bearing No. 495. The relevant extracts of the circular are as follows:
“Measures of penalising employers who misutilised contributions to the provident fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for welfare of employees 12.1 The existing provisions provide for a deduction in respect of any payment by way of contribution to a provident fund or superannuation fund or any other fund for welfare of employees in the year in which the liability is actually discharged [section 438]. The effect of the amendment brought about by the Finance Act, is that no deduction will be allowed in the assessment of the employer(s) unless such contribution is paid to the fund on or before the “due date”. Due date means the date by which an employer is required to credit the “contribution” to the employee’s account in the relevant fund under the provisions of any law or term of contract of service or otherwise [Explanation to section 36(1 )(va) of the Finance Act]).”
Submission before the courts were as under:
- If the scheme of the IT Act were to be kept in mind, the restrictive condition in Section 36(1)(va) i.e., the stipulation that the employees’ contribution must be paid within the time specified, failing which no deduction was permissible, was in fact intended to be expressly overridden by Section 43B. The philosophy behind Section 43B (which was introduced 01.04.1984) was to ensure actual payment of certain specified and statutory dues, before a particular date. These dues either by way of tax or other levies, (including interest-payment towards loan or contributions deducted by statutes such as EPF Act) were to be made within a specified date under such enactments which cast those obligations. This was only a condition for the grant of deduction. The second proviso to Section 43B had imposed further restrictive condition which was omitted in 2003. Therefore, the non-obstante clause of Section 43B was operative propriae vigore entitling the assessees to claim deduction made by them in respect of contributions to PF authorities provided the entire amounts were paid before the return of income was filed.
- The term ‘sum payable by the assessee as an employer by way of contribution” in Section 43B(b) of the IT Act means both its contribution and the sum collected from the employees as the latter’s contribution.
- The learned Additional Solicitor General (hereinafter, “ASG”), Mr. Balbir Singh, for the Revenue argued that in Alom Extrusions, the issue involved was with respect to the employer’s contribution to PF account. In the present cases, the issue involved was with respect to employees’ contribution to PF account. It was urged that the IT Act differentiated between employees’ contribution and employers’ contribution to PF account. With respect to employers’ contribution, Section 43B was applicable. However, with respect to employees’ contribution, Section 36(1)(va) was applicable, as it was specific and pointed to the kind of contribution, and when it could be made, to qualify as a deductible expense. Both the provisions i.e., Section 43B and Section 36(1)(va) operated in different fields, with respect to different contributions. Consequently, Section 43B was inapplicable and could not override Section 36(1)(va).
The court observations were as under:
- The factual narration reveals two diametrically opposed views in regard to the interpretation of Section 36(1)(va) on the one hand and proviso to Section 43(b) on the other. If one goes by the legislative history of these provisions, what is discernible is that Parliament’s endeavour in introducing Section 43B [which opens with its non-obstante clause] was to primarily ensure that deductions otherwise permissible and hitherto claimed on mercantile basis, were expressly conditioned, in certain cases upon payment. In other words, a mere claim of expenditure in the books was insufficient to entitle deduction. The assessee had to, before the prescribed date, actually pay the amounts – be it towards tax liability, interest or other similar liability spelt out by the provision.
- Section 43B falls in Part-V of the IT Act. What is apparent is that the scheme of the Act is such that Sections 28 to 38 deal with different kinds of deductions, whereas Sections 40 to 43B spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme, Section 40 (which too starts with a nonobstante clause overriding Sections 30-38), deals with what cannot be deducted in computing income under the head “Profits and Gains of Business and Profession”. Likewise, Section 40A(2) opens with a non-obstante clause and spells out what expenses and payments are not deductible in certain circumstances. Section 41 elaborates conditions which apply with respect to certain deductions which are otherwise allowed in respect of loss, expenditure or trading liability etc. If we consider this scheme, Sections 40- 43B, are concerned with and enact different conditions, that the tax adjudicator has to enforce, and the assessee has to comply with, to secure a valid deduction.
- It is evident that the intent of the lawmakers was clear that sums referred to in clause (b) of Section 43B, i.e., “sum payable as an employer, by way of contribution” refers to the contribution by the employer. The reference to “due date” in the second proviso to Section 43B was to have the same meaning as provided in the explanation to Section 36(1)(va). Parliament therefore, through this amendment, sought to provide for identity in treatment of the two kinds of payments: those made as contributions, by the employers, and those amounts credited by the employers, into the provident fund account of employees, received from the latter, as their contribution. Both these contributions had to necessarily be made on or before the due date.
- . The distinction between an employer’s contribution which is its primary liability under law – in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) – unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, 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
- In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. 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. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees 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. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ 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 statutory pay out. They are others’ 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. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction.
- In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed.
The copy of the order is as under: