January 2023

Adjustment u/s 143(1) in Respect of Employees' Contribution to Welfare Funds

Pradip Kapasi, Gautam Nayak, Bhadresh Doshi
Chartered Accountants


Under section 2(24)(x) of the Income-tax Act, 1961, any sum received by an employer from his employees as contributions to any provident fund, superannuation fund, ESIC fund or any other employees’ welfare fund is in the first place taxable as income of the employer. The employer can thereafter claim a deduction of such amount from his income under section 36(1)(va) or section 57(ia), if the amount is credited by him to the employee’s account on or before the due date. For this purpose, “due date” has been defined as the date by which the employer is required to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order, notification, or any standing order, award, contract of service, or otherwise.

Various High Courts, including the Bombay High Court in the case of CIT vs. Ghatge Patil Transports 368 ITR 749, had interpreted this provision to be on par with section 43B, which applies with respect to employer’s contribution to these welfare funds, and held that so long as such employees’ contributions were paid before the due date of filing the income tax return under section 139(1), as required by section 43B, such employees’ contributions were also allowable as a deduction even where the deposits were made outside the time limits provided by the respective welfare statutes.

On 12th October, 2022, this controversy as applicable to assessments up to AY 2020-21, is resolved by the Supreme Court in the case of Checkmate Services (P) Ltd vs. CIT 448 ITR 518, where the Supreme Court held that there was a marked difference between employer’s contribution and employee’s contribution held in trust by the employer and that for the purposes of section 36(1)(va), the payment had to be made before the due date applicable under the relevant Act applies to the contribution for an effective claim under the Income-tax Act.

An Explanation 2 to section 36(1)(va) has also been inserted by the Finance Act, 2021 with effect from A.Y. 2021-22, clarifying for removal of doubts, that the provisions of section 43B shall not apply and shall be deemed to never have applied for the purposes of determining the “due date” under section 36(1)(va). In spite of the amendment, interpreting the language of the amendment, the benches of the Tribunal have taken a view, prior to 12th October, 2022, that such amendment applied prospectively from A.Y. 2021-22, and not to earlier years and with that the disallowance where made was deleted.

In the meanwhile, prior to the Supreme Court judgment in Checkmate Services’ case (supra), even for assessment years prior to A.Y.


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