Delhi High Court to examine constitutional validity of Section 2(24)(x) r.w.s. 36((1)(va) denying deduction on late deposit of PF/ESI

 

In the writ petition filed before the Delhi High Court, these provisions have been challenged contending inter-alia,
1. That provisions are violative of Article 14 in as much as there is manifest arbitrariness whereby by provision of section 2(24)(x) first artificially creates an income in the hands of an employer and then under section 36(1)(va) denies deduction of the amount so deducted and deposited for delay of even a single second. Thus, even a slightest delay straight away leads to mandatory penalization by way of denial of complete deduction and in substance these provisions create an income in the hands of an employer which in fact is not there.

2. The employer who deposits the amount after one day’s delay is treated on the same footing as those who deposit the amount after 1000 days. The provisions thus treat unequals as equal.

3. The provisions also do not take into account circumstances of force majeure which may prevent a bonafide employer from depositing dues in time. There is no carve out for situations of force majeure/genuine/bonafide cases.

4. The PF and ESI enactment itself, safeguard the interest of the employees appropriately, by providing for interest and penal implications in case of delay in depositing the employee contributions beyond the due date prescribed. Further, it also provides for levy of damages which increase progressively as the period of delay increases. Now, to provide for mandatory penalization of the employers under the Income Tax Act, by way of denial of deduction for all times to come, even for a single second delay, despite the amount having been deposited with the Government, is manifestly arbitrary and it leads to taxation of arbitrary income and not real income.

5. Further, the provision also violates Article 19(1)(g) as mandatory penalization for even one day’s delay, which may be beyond the control of the employer, is arbitrary and excessive.

6. As regards the Revenue’s contention that the judgment of the Supreme Court in the case of Checkmate Services (P) Ltd. has settled the issue, it was contended that the Supreme Court had only interpreted the law and the Supreme Court in the said case has not dealt with the issue of constitutional validity and thus, the said judgment has no application.

Since the issue raised is that of constitutional validity of the provisions itself, the Court has issued notice and asked the Revenue as well as Union of India to file a reply by way of Counter affidavit within four weeks. The Hon’ble Court has listed the matter for further hearing on 07.04.2026.