Issue for Consideration
Under the provisions of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, an eligible employee as well as his employer are required to make periodic contributions to the provident fund (PF) account of the employee. The employer deducts the employee’s contribution from his salary, and pays both the employer’s as well as the employee’s contribution together to the PF account of the employee. Similar provisions are contained under the Employees State Insurance Act, 1948 and Scheme (ESIC).
The employer’s contribution to the PF, etc., being a business expenditure, is an allowable deduction in computing the income of the employer under the head “Profits & Gains of Business or Profession” u/s.36(1)(iv) of the Income-tax Act, 1961. The employee’s PF and ESIC contribution, on deduction by the Employer, is deemed to be the income of the employer in the first place by virtue of section 2(24)(x), but is an allowable business deduction u/s. 36(1)(va). However, in order to claim either the employer’s PF contribution or the employee’s PF contribution as a deduction, the payment of such contribution has to be made by a specified date. While the time limit for the deduction of the expenditure, under the Income-tax Act, of the employer’s contribution is governed by section 43B(b), the employee’s contribution is governed by section 36(1)(va) of the Act.
Section 43B(b) provides that the expenditure would be allowed only in the year of actual payment. Till Assessment Year 2003-04, the proviso to section 43B provided that the deduction of employer’s PF contribution would be allowed only if the amount had actually been paid before the due date referred to in section 36(1)(va). Section 36(1)(va) provides that the employee’s contribution shall be allowed as a deduction if the amount is credited by the employer to the employee’s account on or before the due date by which the employer is required to credit the employee’s contribution under the relevant Act .
Therefore, till Assessment Year 2003-04, both employer’s as well as employees’ PF contributions were allowable as deductions only if the amounts were paid before the due date under the PF law. The proviso to section 43B has however been amended with effect from Assessment Year 2004-05 to provide that section 43B would not apply to payments made before the due date of filing of the return of income u/s. 139(1). In effect therefore, employer’s PF contribution is now allowed as a deduction in the same previous year in which the liability to pay the amount is incurred, so long as the payment is made before the due date of filing of the return of income for that year. No corresponding amendment has been made in section 36(1)(va).
The question has arisen before the tribunal and the courts as to whether the due date of filing of the return of income as applicable to the employer’s PF contribution under the proviso to section 43B can also be taken as the due date for the purposes of allowability of the employees’ PF contribution. Can the amended provisions of section 43B relaxing the time for payment of employer’s contribution be extended and applied even for claiming deduction for employees’ contribution? While the Mumbai and the Kolkata benches and the Special bench of the Tribunal have taken the view that the due date under the PF law is the relevant date for employees’ PF contribution and any payment beyond that date shall defer the deduction to the year of payment, the Delhi and Hyderabad benches of the Tribunal have taken the view that it is the due date of filing of the return of income which is the relevant date and the making of the payment by that date will enable the employer to claim deduction for the employees’ contribution. The latter view has also been the unanimous view of the Karnataka, Delhi, Himachal Pradesh and Uttarakhand High Courts.
Sudhir Genset’s case:
The issue came up for consideration of the Delhi bench of the tribunal in the case of DCIT vs. Sudhir Genset Ltd. 45 SOT 63 (URO).
In this case, pertaining to assessment years 2005- 06, 2006-07 and 2007-08, the assessing officer had made disallowances of employees’ contributions to PF and ESIC on the ground that the assessee failed to make the payment of employees’ contributions within the due dates as provided in those Acts. The Commissioner (Appeals) deleted the disallowance on the ground that though these payments were not made within the limitation provided in the PF Act and ESIC Act, these were paid before the due date of filing of the returns of income in all the three assessment years.
The Delhi bench of the tribunal was of the view that the issue was covered by the decision of the Delhi High Court in the case of CIT vs. P.M. Electronics Ltd., 313 ITR 161, where it had been held that if the assessee made payment in the PF and ESIC account, including the employees’ contribution, before the due date of the filing of the return u/s. 139 of the Income-tax Act, then no disallowance of such payment could be made by virtue of section 43B.
Since all the payments were made before the due date of filing of the return of income, the Delhi bench of the tribunal upheld the deletion of disallowance of the employees’ PF contribution.
A similar view was taken by the Hyderabad bench of the Tribunal in the cases of Imerys Ceramics (India) (P) Ltd 24 taxmann.com 320 and Patni Telecom Solutions (P) Ltd 35 taxmann.com 87 (Hyd), where the Tribunal followed the decisions of the Karnataka High Court in the cases of CIT vs. Sabari Enterprises 298 ITR 141 and CIT vs. ANZ Information Technology (P) Ltd. 318 ITR 123.
Besides these two Karnataka High Court decisions, the Delhi High Court in the case of CIT vs. AIMIL Ltd.321 ITR 508, the Karnataka High Court in the case of Spectrum Consultants India (P) Ltd 215 Taxman 597, the Himachal Pradesh High Court in the case of CIT vs. Nipso Polyfabriks Ltd. 350 ITR 327 and the Uttarakhand High Court in the case of CIT vs. Kichha Sugar Co Ltd. 35 taxmann.com 54 have all taken the view that employees’ PF contribution could not be added back to income or disallowed, even if the payment was made after the due date under the PF Act, so long as the payment was made before the due date of filing of the income-tax return u/s. 139.
LKP Securities’ case:
The issue came up recently before the Mumbai bench of the tribunal in the case of ITO vs. LKP Securities Ltd. ITA No 638/Mum/2012 dated 17th May 2013.
In this case, the assessee made delayed payments of employees’ PF and ESIC contributions, beyond the stipulated dates of 15th and 21st of the following month under the respective Acts. The PF payment was, however, made within the 5 days of grace permitted under PF law. The assessing officer disallowed such payments on the ground that the grace period was only for the purposes of not charging penal interest and other penalties under the PF Act, and was not an extension of the due date under that Act. The Commissioner (Appeals) deleted the disallowance on the ground that the payments were made before the due date of filing of the return of income, following the decision of the Delhi High Court in the case of AIMIL Ltd. (supra).
Before the tribunal, on behalf of the revenue, reliance was placed on the Kolkata bench tribunal decision in the case of DCIT vs. Bengal Chemicals and Pharmaceuticals Ltd., 10 taxmann.com 26, where the tribunal after considering the decisions of the Supreme Court in the case of Alom Extrusions Ltd 319 ITR 306 and the decision of the Karnataka High Court in the case of CIT vs. Sabari Enterprises (supra), has held that employees’ contributions were not governed by section 43B. It was also argued that the same view was taken by the Bombay High Court in the case of CIT vs. Pamwi Tissues Ltd. 215 CTR 150. It was therefore argued that employees’ contribution to PF/ESIC was not allowable if not paid before the due dates under the respective Acts.
On behalf of the assessee, reliance was placed on the Delhi High Court decision of AIMIL Ltd. (supra), where the court after considering the decision of the Supreme Court in the case of Vinay Cement Ltd 213 CTR (SC) 268, had clarified that the amendment to section 43B with effect from assessment year 2004-05 would apply to the employer’s as well as the employees’ contribution to the various welfare funds. The Delhi High Court had also held that the decision of the Bombay High Court in the case of Pamwi Tissues (supra) was no longer a good law after the Supreme Court decision of Vinay Cements (supra), and that there was no scope for any doubt after the Supreme Court decision in the case of Alom Extrusions (supra). It was therefore argued that any payment by the employer, whether in respect of the employer’s or the employees’ contribution, made before the due date of filing of the return of income would qualify for being allowed as a deduction for the relevant year.
After analysing the provisions of section 43B and the amendments carried out with effect from assessment year 2004-05, the tribunal noted that section 43b(b) covered only the employer’s contribution to such welfare funds, and that the employees’ contribution was not covered by section 43B(b). After considering the provisions of sections 37(1), 2(24)(x), 36(1)(va) and 43B(b), the tribunal noted that while the due date for payment of both employer’s and employees’ contribution under the PF Act was the same, the deductibility of the employer’s contribution under the Income-tax Act was governed by section 37(1) while the employees’ contribution was deemed to be income u/s. 2(24)(x) and governed by section 36(1)(va).
According to the tribunal, even if one overlooked the clear language of section 2(24)(x) read with section 36(1)(va) (on one hand) and section 43B(b) (on the other hand), which clearly concerned separate and distinct sums, and consider for the sake of argument, section 43B(b) as applicable to section 36(1) (va) payments, it would be rendered otiose . This was on account of the fact that the sum had to be otherwise allowable under the relevant provision for section 43B to apply, and since the payment had not been made before the due date specified in section 36(1)(va), it was not allowable under that section, and therefore section 43B did not apply to the case of employees’ contribution. On the other hand, if the payment was made before the due date specified u/s. 36(1)(va), section 43B had no functional relevance.
The Mumbai tribunal also relied on the Kolkata Special Bench tribunal decision in the case of Jt. CIT vs. ITC Ltd. 112 ITD 57, where the Special Bench had held that section 43B did not apply to payment of the employees’ contribution. The tribunal further noted that the decisions of the Supreme Court in the cases of Vinay Cement (supra) and Alom Extru-sions (supra) related to the provisions of section 43B, which did not govern the deductibility of the employees’ contribution, and related merely to the retrospectivity of the amendment in section 43B. This aspect, according to the tribunal, had been explained by the Bombay High Court in the case of Pamwi Tissues ( supra ). Though this decision of Pamwi Tissues has been reversed by the Supreme Court in the case of Alom Extrusions, the reversal was only in respect of the subject matter of retro-spectivity of the amendment. The tribunal observed that the Bombay High Court in Pamwi Tissues’ case endorsed its decision in CIT vs. Godaveri (Mannar) Sahakari Sakhar Karkhana Ltd 298 ITR 149, wherein issues other than those relating to the amendment to section 43B were also referred to. According to the tribunal, the question of applicability of the amendment in section 43B to the employees’ contribution remained unanswered or unaddressed by the Supreme Court in Alom Extrusions’ case (supra). The Supreme Court in that case did not consider or give any finding that the employees’ contribution, deduction of which was subject to section 36(1)(va), was further subjected to section 43B or that section 43B would apply even if the sum was otherwise not allowable.
As regards the decision of the Delhi High Court in the case of AIMIL Ltd., the Mumbai tribunal noted that the said decision was considered by the Kol-kata bench of the tribunal in the case of DCIT vs. Bengal Chemicals and Pharmaceuticals Ltd., 10 tax-mann.com 26 while deciding the issue against the assesssee. Though AIMIL’s decision covered payment of employees’ contribution to EPF and ESIC, according to the tribunal, the entire deliberation in that decision, as well as the subject matter of the decision was qua section 43B, including the amend-ments thereto. According to the tribunal, the High Court moved on the premise that the employees’ contribution was subject to section 43B(b), and accordingly interpreted the section as well as the nature of the amendments. Further, according to the Mumbai tribunal, the decision of the tribunal which was approved of by the Delhi High Court in AIMIL’s case did not consider the decision of the Special Bench of the Tribunal in the case of ITC Ltd (supra), and was also inconsistent with the decision of the jurisdictional Bombay High Court in Godaveri (Mannar) Sahakari Sakhar Karkhana’s case (supra), in so far as it related to the inapplicability of section 43B to payments specified u/s. 36(1)(va). Further, as per the tribunal, the absence of the relevant findings in Alom Extrusions’ case(supra), the decision in the case of AIMIL Ltd. was not the one that had considered all facts of the issue of deductibility of the employees’ contribution. The Mumbai bench of the tribunal therefore preferred not to follow the decision in the case of AIMIL Ltd. on the ground that it was not applicable or germane to the issue under consideration before the tribunal, but opted to follow the decision of the Special Bench of the tribunal in ITC Ltd. (supra) and the decision in the case of Bengal Chemicals and Pharmaceuticals (supra), since both of these were consistent with the jurisdictional High Court on the material aspect before the Mumbai bench.
Therefore, the Mumbai tribunal held that the due date for the purposes of allowability of employees’ PF contribution meant the relevant date under the PF Act, and not the due date of filing of the return of income under the Income-tax Act. Following the decision of the jurisdictional High Court in Godaveri (Mannar) Sahakari Sakhar Karkhana’s case (supra), the Mumbai tribunal however held that the benefit of the grace period had to be considered in computing the due date, and therefore held that any payments of the employees’ contribution made within the grace period was allowable as deduction.
Observations
The Delhi High Court in deciding the issue in favour of the assessee in AIMIL Ltd.’s case, clearly observed 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 paid interest on delayed payment but also attracted penalties, for levy of which specific provisions are made in the Provident Fund Act as well as the ESI Act. The court noted that those Acts permitted the employer to make the deposit with some delays, subject to the penal consequences. This aspect of the respective laws permitting delayed payment of the dues prevailed on the High Court in taking the view that it did. It is therefore respectfully submitted that had the Mumbai tribunal appreciated that the decision of the Delhi court was a well considered decision that took into account the comprehensive gamut of the provisions of all the statutes relevant to payment of the dues, including the provisions of the Income tax Act, it would have followed the AIMIL Ltd. decision instead of dissenting from it.
The decision of the Mumbai bench of the tribunal, as stated by it, seems to have been mainly swayed by the decision of the Bombay High Court in the case of Godaveri (Mannar) Sahakari Sakhar Karkhana. On going through this decision, while one notes that one of the issues that came up before the Bombay High Court was relating to employees’ contribution, the Bombay High Court has nowhere expressly discussed or highlighted or noted the distinction between the employees’ contribution and the employer’s contribution. The court merely took a note of the provisions of sections 43B and 36(1)(va) and the amendments to section 43B. The Bombay High Court, in that case, was primarily concerned with the issue of the retrospectivity of the amendments to section 43B, just as the Delhi High Court was in the case of AIMIL Ltd. In both the cases, the courts were mainly concerned with the applicability of the amendments in section 43B and if that was so, the Mumbai tribunal did not have much to choose between the said decisions as neither of them perhaps laid down any law as far as the deduction of the employees’ contribution was concerned. Further, the said decision of the Bombay High Court in Godaveri (Mannar) Sahakari Sakhar Karkhana’s case stood overruled by the Supreme Court decision in Alom Extrusions’ case.
The Special Bench decision in the case of ITC has been rendered on the basis of the specific language of the sections and not by keeping in mind the intention of the legislature and the spirit behind the amendments. In that case, the impact of the permission to make delayed payments under the PF and ESIC Acts on payment of interest and penalty was not examined in depth.
