Small delay in depositing PF & ESI can result into irreparable income tax loss

1. After the decision of Hon. Apex court in Check mate Services Pvt. Ltd. vs. CIT (Civil Appeal No. 2833 of 2016) order dated 12.10.22, the legal position is now settled that the delayed deposit of employees contribution shall be held as deemed income u/s. 2(24) of the income tax act.

2. Relevant provisions of the Income Tax Act:

 

2(24)(x): any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;]”

36(1): The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(va) 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.”

3. Thus, Section 36(1)(va) does not operate in isolation , it is the deeming provision of section 2(24)(x) by virtue of which delayed payment of employees contribution to PF and ESI is held as income of the Assessee Therefore once there is a delay in deposit of Employees Contribution to PF/ESI, it shall be held as deemed income.

4. Therefore, during the relevant assessment year, if the employer did not deposit the entire amount towards employees’ contribution with the PF authorities on or before the due date under the EPF/ESI Act, to the extent there was shortfall in deposit of the employees’ contribution/ESI contribution, the assessee is not entitled to the deduction.

5. The provision of Section 43B ensures 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.

6. 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.