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CA Sunil AroraCA Gunjan JainSunil Arora & Associates
Chartered Accountants
An employer while making payment of wages or salaries to its employee is under an obligation to deduct a certain amount in accordance with the Provident Fund and Employees State Insurance laws. The said deduction which is made from the salary paid to the employees is in a way held in trust by the employer till the time the same is deposited with the requisite authorities. Under normal circumstances this deduction of employee’s contribution from salaries and wages and the depositing of the same with the necessary statutory authority should not affect the taxable Income of an assessee that is the employer in this particular case.
On the contrary the Income Tax Act, 1961 provides for a peculiar treatment of this employee’s contribution deducted by the employer. The said deduction is treated as Income in the hands of the employer in accordance with sub-section 24 of Section 2 of the Act. On the other hand the said sum is allowed as a deduction while computing the taxable Income of the employer as and when the same is paid in accordance with Section 36(1)(va) of the Act. It is further provided in Section 36(1)(va) that the deduction will be available only in case when the amount is deposited to the account of the employee on or before the due date. Explanation to Section 36(1)(va) further provides that the due date means the date by which the employer is required to deposit the employees contribution in accordance with the relevant Act and Rules applicable thereto.
The relevant Sections have seen huge litigation with respect to allowability of employee’s contribution paid after the due date prescribed under those Act but nevertheless before the due date of filing of Return under Section 139(1) of the Income Tax Act, 1961.
In other words there was controversy with respect to the interpretation of the word due date in the clause ‘va’ of sub-Section 1 of Section 36 of the Act Hon’ble Delhi High Court in the case CIT vs. AIMIL Ltd., [2010] 188 Taxman 265 (Delhi) as well as the High Courts of Karnataka, Madras and Bombay had held that the aforesaid due date in Section 36 sub-Section 1 clause ‘va’ implies the due date of filing of Income Tax Return under Section 139(1) of the Act. Implying thereby even if an assessee has deposited the amount after the due dates prescribed under the Provident Fund Act as well as Employees State Insurance Act, 1948 but before the due date of filing of returns under Section 139(1), the benefit of deduction will be available to the assessee and the Income would be computed after deducting the said about from the Taxable Income of the employer.
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On the contrary the Hon’ble High Court of Kerala held otherwise and held that in the event of depositing the employee’s contribution after the due date prescribed under the relevant applicable laws, deduction under Income Tax Act,1961 for computing taxable income will not be available to the assessee and the benefit of such expense being allowed as an expense under the Income Tax Act, 1961 will be lost and the assessee at no point of time will be allowed deduction for the said sum although it has already been treated as Income in accordance with Section 2(24) of the Income Tax Act, 1961.
It is but natural that one notices the irrationality of the said provision as an expense incurred by the assessee should by no stretch of imagination be disallowed in spite of the fact that there are enough safeguards under the applicable laws with respect to Provident fund and ESI fund. It is not logical and sensible that the deduction with respect to the said employee’s contribution should not be allowed to the assessee in accordance with Section 43B of the Income Tax Act, 1961 in case the same has been paid or deposited before the due date of filing of return under Section 139(1). Instead of rationalisation and simplification of the law the respected legislature of the country extended the controversy by further inserting Explanation ‘2’ to the clause va of sub-Section 1 of Section 36 of the Act. The said explanation instead of removing the anomaly further extended the irrationality by stating that the due date referred to earlier in the Section would not imply Section 43B of the Income Tax Act, 1961. This started the next round of litigation with respect to the retrospective applicability of the said explanation.
After hours and hours of wastage of precious judicial time of the Courts the matter reached the Hon’ble Apex Court of the country which in the case Checkmate Service Pvt. Ltd. vs. Commissioner of Income Tax -1, in Civil Appeal No. 2833 of 2016 held that the reference to due date under Section 36(1)(va) is the due dates prescribed under the relevant Provident Fund and Employees State Insurance Laws and any payment after the due date prescribed will not be allowed to the assessee even if assessee has deposited the said amount even before the due date of filing of ITR u/s 139(1) of the Act.
Finance Act, 2021 had inserted explanation to in clause va of sub-Section 1 of Section 36 to clarify that the due date mentioned in the said Section does not refer to due date under Section 43B of the Income Tax Act, 1961. Although the purpose of bringing in the amendment should have been to rationalise the provision and to finish the controversy with respect to the same as well as a litigation which has happened in this regard but to the contrary the amendment made by the Finance Act, 2021 worked in absolutely the opposite direction.
We can just hope that this ruling of the Hon’ble Apex Court of the country in the case of Checkmate Service Pvt. Ltd. vs. Commissioner of Income Tax -1, in Civil Appeal No. 2833 of 2016 is the final word which settles the law in this regard and the same is followed prospectively and the department does not embark upon a drive to reverse all the earlier rulings in favour of the assessee.
Considering the ruling of the Hon’ble Supreme Court, a pertinent issue which arises whether the addition can henceforth be made in the intimations issued under Section 143(1) of the Income Tax Act, 1961 as of now even prior to the ruling of the Hon’ble Supreme Court, the Central Processing Centre of the Income Tax Department has been disallowing the employees contribution based on information contained in the Income Tax Return as well as a Tax Audit Reports submitted by the assessee. It needs to be seen whether department would be initiating action in all the cases where the said deduction was allowed to the assessee in spite of the subsequent Amendments made by the Finance Act, 2021.
In the meantime the law has become abundantly clear now that the Employees Contribution with respect to Provident Fund and ESI deposited beyond the due date prescribed under those laws will not be allowed as a deduction for computing the Taxable Income of the assessee before as well as after the insertion of Explanation 2 to Section 36(1)(va).
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