Section 43B provides for allowance of certain statutory payments by an assessee only if the said payments are done before due date for filing of tax return. One of the raging controversy and constant fight between taxpayer and tax department is about allowance of employees contribution deposited by the assessee. The simple reason is the presence of another provision under section 36(1)(va) which is specific to the allowance of deposit of contribution of PF , ESI etc. by the employers. Under sec. 36(1)(va) , if the employee’s contribution not deposited within the due date fixed under the PF or ESI scheme as the case maybe, the amount can not be claimed deduction. However, under section 43B , the time limit is upto the due date of filing of tax return. So ,the tussle is : taxpayer says the employees contribution allowance is covered under section 43B whereas the tax department maintains that it ( allowance of employees contribution) is covered only under section 36(1)(va) .
This post is discussing the clear divide between various high courts on the issue.However, majority of high courts have held that employees contribution deposited before due date for filing tax return is allowable u/s 43B of the Income Tax Act.
Employees Contribution Allowble u/s 43B
The latest decision is from Karnataka High Court in case of Essae Teraoke P Ltd vs CIT 366 ITR 408 (Kar) [dt of order 4/02/2014] in which the facts involved was that the employer did not deposit contribution within time allowed under the PF scheme . However, he deposited the contribution before the due date contemplated under section 139(1).
The A.O disallowed the claim under section 36(1)(va).Hopwever,the CIT(Appeals) deleted the disallowance. The Tribunal allowed the revenue’s appeal and set aside the order passed by the Commissioner (Appeals).
When assessee approached High Court , it gave verdict in favour of assessee and gainst tribunal decision statinng that the word “Contribution ” used in section 43B includes payment of employees contribution also. Here is the excerpt :
18. Paragraph-30 of the PF Scheme provides for payment of contributions. Sub-para(1) of paragraph-30 states that the employer shall, in the first instance, pay both the contribution payable by himself (in this Scheme referred to as the employer’s contribution) and also, on behalf of the member employed by him directly or by or through a contractor, the contribution payable by such member (in this Scheme referred to as the member’s contribution).
19. From bare perusal of sub-para(1) of paragraph-30, it is clear that the word “contribution” is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly.
20. Paragraph-38 of the PF Scheme provides for Mode of payment of contributions. As provided in sub-para(1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under the ESI Act within fifteen days of the closure of every month pay. It is clear that the word “contribution” used in Clause(b) of Section 43B of the IT Act means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section(1) of Section 139 of the IT Act is made, the employer is entitled for deduction.
Rajasthan High Court in CIT, Udaipur vs Udaipur Dugdh Utpadak Sahakari Sangh Ltd [2014] 366 ITR 163 (Rajasthan) dt of order 13/05/2013 held by relying on Delhi High Court’s decision in
Following the observations of Hon’ble Supreme Court in Vinay Cement (supra), the Delhi High Court in CIT v. Aimil Ltd. [2010] 321 ITR 508/188 Taxman 265 held at page 518 as under:-
“We may only add that if the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. In so far as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in Vinay Cement (2009) 313 ITR (St.) 1.”
High Court of Himachal Pradesh in CIT vs Nipso Polyfabriks Ltd [2013] 350 ITR 327 (Himachal Pradesh) [order date : 7/11/2014 ] held that
22. We are dealing with cases where though the amount was not deposited by the due date under the Welfare Acts, it was definitely deposited before furnishing the returns. We see no reason to make any distinction between the employees’ contribution or the employers’ contribution. Once the contribution is there, whether by the employee or by the employer, it is a contribution to a welfare fund held in trust by the employer, who is bound to deposit the same. When the employer does not deposit the same within the time prescribed under the Welfare Acts, such as the Provident Fund Act, ESI Act etc., he may face criminal prosecution under the said Act. He may also become liable to pay interest or penalty. However, that is no reason to deny him the benefit of Section 43B, which starts with a non obstante clause and which clearly lays down that the assessee can take benefit of deduction of such contributions, if the same are paid before furnishing of the return.
Kolkata High Court in CIT Central Circle 1 vs Vijay Shree Ltd [2014] 224 Taxman 12 (Calcutta)(MAG.) Order DT 6/9/2011 while deciding the issue involved in the case before it – whether the deletion of the addition by the Assessing Officer on account of Employees ‘Contribution to ESI and PF by invoking the provision of Section 36(l)(va), read with section 2(24)(x) of the Act was correct or not, held in favour of assessee that payment of employee contribution is allowble u/s 43B if deposited before date fixed fro filing of tax return u/s 139(1).
Delhi High Court in CIT vs AIMIL Ltd [2010] 188 Taxman 265 (Delhi) [Dt of Order 23/12/2009 hled based on its judgment in case of Vinay Cemenet Ltd which was approved by Supreme Court that the employees contribution is allowable u/s 43B . The relavant portion is given as under :
17. We may only add that if the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in Vinay Cement Ltd.’s case (supra).
Mumabi High Court in CIT , Central Pune vs Ghatge Patil Transports Ltd [2014] 368 ITR 749 (Bombay) [dt of order 14/10/2014 ] dismissed the tax department appeal which raised following four questions of law before it :
| “(1) | Whether the decision of the ITAT ignoring the provisions of section 2(24)(x) r/w. 36(1)(va) as per which employee’s contribution to ESI, PF and Pension fund is deductible only if payment is made before the due date as prescribed in the respective Act, Rule, Order or Notification governing such funds is erroneous and contrary to provisions of Income Tax Act, 1961 ? | |
| (2) | Whether on the facts and circumstances of the case and in law, the Tribunal was right in ignoring the clear distinction between employee’s contribution to ESI, PF and pension fund and employer’s contribution and the fact that the decision of the Hon’ble Supreme Court in the case of Alom Extrusions Ltd. 319 ITR 306 is applicable only to employer’s contribution ? | |
| (3) | Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that payment of employees contribution to PF/ESI/pension fund is subject to provisions of section 43B of the Act ? | |
| (4) | Whether the ITAT failed to appreciate the fact that the amendment to section 43B is applicable only to employer’s contribution and not to employees contribution and hence, whether second proviso to section 43B omitted w.e.f. 01-04-04 is retrospective or not, is not germane to issue of employee’s contribution ?” |
Hon,ble High Court answered all the aforesaid questions in favour of assessee and against the Revenue . In unequivaocal terms, Mumbai High Court concluded “We hold that both employees’ and employer’s contributions are covered under the amendment to Section 43B of I.T. Act and the Alom Extrusions judgment. Hence the Tribunal was right in holding that payments thereof are subject to benefits of Section 43B”
Contrary Judgments
On the aforesaid issue , two High Courts – Kerala high Court and Gujarat High Court – have maintained a contrarian view that the allowance of employees contribution is covered by section 36(1)(va) only and not section 43B of the Income Tax Act.
In CIT vs Merchem Ltd [2015] 378 ITR 443 (Kerala) [Dt of Order 8/09/2015] the facts involved was that during scrutiny assessment , the A.O disallowed late payments of employees contribution under section 36(1)(va) read with section 2(24)(x). The Commissioner (Appeals) however , deleted the addition on the ground that contribution towards Provident Fund and ESI were made before the due date of filing of return under section 139(1) .The Tribunal upheld the order passed by the Commissioner (Appeals).
On appeal by Revenue , the Hon’ble High Court upheld the disallowance by relying on its own judgments on the same issue. The relevant part of the HC order is
22. We are dealing with cases where though the amount was not deposited by the due date under the Welfare Acts, it was definitely deposited before furnishing the returns. We see no reason to make any distinction between the employees’ contribution or the employers’ contribution. Once the contribution is there, whether by the employee or by the employer, it is a contribution to a welfare fund held in trust by the employer, who is bound to deposit the same. When the employer does not deposit the same within the time prescribed under the Welfare Acts, such as the Provident Fund Act, ESI Act etc., he may face criminal prosecution under the said Act. He may also become liable to pay interest or penalty. However, that is no reason to deny him the benefit of Section 43B, which starts with a non obstante clause and which clearly lays down that the assessee can take benefit of deduction of such contributions, if the same are paid before furnishing of the return.
Similaraly , in CIT-II vs Gujarat State Road Transport Corpn [2014] 366 ITR 170 (Gujarat) [Order dt 26/12/2013 it was held that with respect to the sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees account in the relevant fund or funds on or before the ‘due date’ mentioned in Explanation to section 36(1)(va).
In other words, Gujarat High Court did not approve the ITAT’s decision that teh contribution by employees are covered u/s 43B and allowble if paid before due date fixed u/s 139(1) of Income Tax Act.
Conclusion
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It is clear from the verdics by High Courts , the majority decision is in favour of allowance of deposit of employees contribution before due date for filing if return . My considered opinion on the subject matter is to follow respectfully majority decisions by high courts that employees contribution to PF or ESI is allowble if deposited by the due date for filing fo tax return Its Six vs Two !