SC CHECKMATES TAXPAYER ON THE ISSUE OF EMPLOYEE’S CONTRIBUTION

For long employees share of contribution to provident fund or superannuation fund or any pension fund had been a topic of great dispute between the assessee and the department for the reason that department used to contend that deposit made to these funds post the due date of the respective act (which usually is 15th of next month) would be treated as income under section 2(24)(x) and its deduction won`t be allowed to the assessee under section 36(1)(va). Relevant extracts are as under-

Section 2(24)(x)-

"(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 ;"

Section 36(1)(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.

Explanation 1.—For the purposes of this clause, "due date" means 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 thereunder or under any standing order, award, contract of service or otherwise."

On the contrary assessees used to contend that the same shall be allowable if paid before the due date of filing of return of income and the income tax act under section 139 in accordance with section 43B. Relevant extracts are as under-

Section 43B-

"(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees,"

The belief of assessee that the employees contribution received by them and paid before the due date of return of income would be allowed under the income tax act as an expense was based on multiple judgements in the favour. Some of the judgements are reproduced as under-

1. Pr. Commissioner of Income Tax, Jaipur v Rajasthan State Beverages Corporation Limited [2016] 157 TAXLOK.COM (IT) 285 (RAJ); Hon’ble Court held as under:
   
   5. So far as the question relating to privilege fees amounting to Rs.26.00 Crores in the instant year as well as the deduction of claim of Rs.17,80,765/- on account of Provident Fund (PF) and ESI is concerned, this Court has extensively considered the aforesaid two questions in assessee`s own case vide judgment and order dt.26.05.2016 referred to (supra) and has held that the privilege fees being a revenue expenditure, is required to be allowed as a revenue expenditure. This court in the aforesaid case has also allowed the claim of the assessee, in so far as payment of PF & ESI etc. is concerned, on the finding of fact that the amounts in question were deposited on or before the due date of furnishing of the return of income and taking in consideration judgment of this Court in CIT v. State Bank of Bikaner & Jaipur [2014] 142 TAXLOK.COM (IT) 033 (RAJ) and CIT v. Jaipur Vidhut Vitaran Nigam Ltd. [2014] 142 TAXLOK.COM (IT) 026 (RAJ) and accordingly both the questions are covered by the aforesaid judgment and against the revenue.

2. CIT Vs. Specturm Consultants India P. Ltd. [2013] 137 TAXLOK.COM (IT) 318 (KARN)
   
   8.Regard being had to the words "due date" as interpreted in Sabari Enterprises case, and affirmed by the Apex Court in ALOM Extrusions Ltd., there can be no more doubt that the assessing officer as well as the revision authority fell in error in disallowing the deduction of Rs.22,91,791/- being the employees` contribution remitted by the petitioner-employer- assessee both under the ESI and EPF Act, partly before 31/3/2006 in the financial year concerned and the balance before the filing of the returns under Sec. 139(1) of the Act, as extended upto 30/11/2006.
   
   9. In the circumstances, the question is answered in the negative and against the Revenue.
   
   10.In the result this petition is allowed. The order dt. 10/12/2010 - Annex.G of the respondent for the assessment year 2006-07 is quashed and the revision petition filed by the petitioner invoking Sec. 264 of the Act - Annex.D, is allowed. Sequentially the order of the assessing officer declining deduction of Rs.22,91,791/- being the employees` contribution remitted by the employer-petitioner, stands modified.

3. CIT Vs. Aimil Ltd. & Ors. [2009] 119 TAXLOK.COM (IT) 534 (DELHI)
   
   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 (supra) [2007] 108 TAXLOK.COM (IT) 418 (SC).

Where is on the flip side there were also multiple judgements in the favour of the revenue wherein it was held that allowability of employees contribution shall not be governed by section 43B and shall be governed by 36(1)(va). Some of the judgements are reproduced as under-

Despite conflicting judgements of various High Courts many appellate authorities be it CIT(Appeals) or ITAT were deciding the issue in favour of assessee by relying on the precedent laid down by the honorable Apex court in case of CIT Vs Vegetable Products Ltd. [1973] 13 TAXLOK.COM (IT) 025 (SC) wherein it was held that- "when two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted"

Then came the Finance Act, 2021 through which government inserted two explanations each in section 36(1)(va) and section 43B which is as under-

1. Explanation 2 to section 36(1)(va) has been added 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;

2. Explanation 5 to section 43B has been inserted to clarify that 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 subclause (x) of clause (24) of section 2 applies.

The language of the explanation is crystal clear and is clarificatory in nature giving the provisions retrospective effect but through the memorandum explaining Finance Bill, 2021 the intention of giving prospective effect to the aforementioned explanations were indicated thought the line-

"These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years."

Therefore, the clarification by insertion of explanation shall apply from A.Y. 2021-2022 and the existing case laws shall continue to apply. This was further supported by the decision of ITAT Hyderabad which is as under-

"5. Next comes the latter issue of Section 43B disallowance of Rs.8,11,648/- pertaining to employees provident fund. It is not in dispute that learned lower authorities held that the same had to be deposited before the due date prescribed in the corresponding statute than the due date for filing Section 139(1) return. The Revenue`s case in tune thereof relies on Section 36(va) read with explanation thereto that it is not Section 43B but the former provision which is applicable in such an instance. We find no merit in the Revenue`s foregoing stand. We take note of the explanatory memorandum to the, 2021 proposing amendment in both  as well as  by inserting corresponding Explanations that although the impugned employees provident fund comes under the former provision only, the same is applicable from 01-04-2021 onwards. Meaning thereby that the legislature itself has condoned the impugned default before 01-04-2021. We thus delete the impugned employees provident fund disallowance of Rs.8,11,648/- for this precise reason alone. Necessary computation to follow as per law."

Meaning thereby that clarification by way of insertion of explanation will apply for A.Y. 2021-22 and onwards. In another word the explanation does not have any bearing for prior to A.Y. 2021-22 and the case laws already decided on the issue of addition / disallowance on a/c of payment of employees’ contribution of P.F. & E.S.I.C. shall remain applicable in the instant case.

But then came the decision of SC in case of Checkmate Services (P) Ltd. vs. CIT [2022] 194 TAXLOK.COM (IT) 398 (SC) order dt. 12th Oct., 2022 relevant extracts of which are as under-

"54. 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 employees’ 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 s. 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 assessee`s 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 s. 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employees’ contribution on or before the due date as a condition for deduction.

55. 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 decision of the SC in case of Checkmate Services has become the law of the land and now even for cases prior to A.Yr. 2021-2022 contribution deposited post due date under the respective act but before the due date of filling of return of income shall be disallowed and shall not be covered by the Section 43B.