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The Chennai Bench of the Indian Income-tax Appellate Tribunal (ITAT) on 17 June 2020 issued its decision that a company’s contribution to the employee provident fund on behalf of employees deposited to the credit of employees with the fund after the due date specified in the Provident Fund Act, but by the due date for filing the company’s income tax return for the relevant year, is deductible for corporate income tax purposes in the year for which the return is filed.

Background
During the financial year 2012-13, corresponding to assessment year 2013-14, the taxpayer had deposited employee contributions to the provident fund after the date stipulated in the Provident Fund Act, but before the due date for filing the relevant income tax return.

The Assessing Officer (AO) disallowed the deduction for the employee contributions to the fund. On appeal, the Commissioner of Income-tax Appeals (CIT(A)) allowed the deduction, relying on certain judicial precedents. The AO appealed the CIT(A)’s order to the Chennai Bench of the ITAT.

Decision of the ITAT
The ITAT noted the following:

Employee contributions received towards employee welfare funds (including the provident fund, superannuation fund, etc.), are taxable as income of the employer under section 2(24)(x) of the Income-tax Act, 1961 (ITA). In accordance with section 36(1)(va) of the ITA, the employer is eligible for a deduction of the same amount where the employer deposits the contributions to the credit of the employees in the relevant fund by the date prescribed under the statute governing that fund.
Section 43B of the ITA, listing certain expenses that may be deducted only when paid (i.e., on a cash basis as opposed to on an accruals basis), was amended as from 1 April 2004, so that a deduction for any sum payable as an “employer” to an employee welfare fund is available where the amount is paid before the due date for filing the income tax return for the year in which the deduction is incurred, even if payment is after the due date prescribed via the relevant statute. Until 31 March 2004, a deduction was allowed under section 43B only where the payment was made by the date specified under section 36(1)(va) (i.e., the due date prescribed by the legislation governing the relevant fund).
The Supreme Court in an earlier decision had held that the above amendment to section 43B is curative in nature, and therefore applies with retroactive effect as from 1 April 1988. Further, the Delhi and Bombay High Court subsequently had held that the Supreme Court’s decision applied to both employer and employee contributions. Accordingly, where contributions to the provident fund are deposited by the employer with the fund by the due date of filing the income tax return, a deduction is available.
Various other cases (including that of the jurisdictional High Court), followed the decisions of the Delhi and Bombay High Court and held that a deduction for employee contributions to the provident fund deposited after the due date under the governing statute is available provided the contributions are deposited to the credit of the employee with the respective fund by the due date for filing the income tax return. One basis for the decisions was that the relevant statutes permit the employer some leeway in making the deposit, subject in certain cases to interest and penalties.
Contrary judicial precedents have held that a deduction on account of employee contributions to the provident fund is allowed only where the contributions are deposited to the credit of the employee with the relevant funds by the due date prescribed under the relevant statute, on various grounds including that:
In a case heard by the Supreme Court, the issue before the court (relating to the amendment under section 43B having retroactive effect) did not relate to employee contributions to the provident fund, but only to employer contributions, in relation to which the court held that the amendment was retroactive;
Section 36(1)(va) and section 43B(b) apply to different types of payment, with the former relevant to employee contributions and the latter to employer contributions;
Employee contributions are regulated by section 2(24)(x) and section 36(1)(va), and are not affected by section 43B; and
Section 43B, although containing a non-obstante clause (indicating that it overrides other statutory provisions of the ITA having general application), makes deductions allowable only on a paid basis when such deductions otherwise are allowable on an accruals basis.
In view of the above, the ITAT held as follows:

High Courts in India have taken different views on the allowability of employee contributions to the provident fund and other welfare funds deposited by employers to the credit of employees with the relevant fund after the due date under the relevant statute, but by the filing deadline for the income tax return.
In view of the strict and literal interpretation of the provisions, the taxpayer is not entitled to a deduction where the deposit of the employee contribution is delayed beyond the due date prescribed under the relevant statute. Consequently, the applicability of section 43B is relevant. To fall within the scope of section 43B, the deduction initially should be allowable. Where an employer fails to deposit employee contributions to the provident fund and other employee welfare funds before the due date under the relevant statute, then initially a deduction is not allowable under section 36(1)(va). Consequently, there is no question of entering further into section 43B.
Since it is a deduction provision, section 36(1)(va) must be construed strictly, with the onus on the taxpayer to prove that it fulfils all the relevant conditions before claiming the deduction. In this regard, the ITAT relied on a decision of the Supreme Court, but noted that India’s constitutional courts are empowered to read down the provisions of the ITA to make it workable and to avoid absurdity.
The Delhi and Bombay High Court, after considering, analyzing, and interpreting the Supreme Court’s decision on the subject of the amendment under section 43B having retroactive effect, have held that section 43B applies to both employer and employee contributions. Most courts (including the jurisdictional High Court) have, therefore, allowed the deduction, otherwise the taxpayer would permanently lose the deduction where the employee contribution is not deposited by the due date prescribed under the relevant statute, but is deposited by the due date of filing the income tax return. An employer is subject to interest and in certain cases penalties where employee contributions are not deposited by the due date prescribed under the relevant statute.
The ITAT held that it was bound by a decision of the jurisdictional High Court (following the cardinal principles of judicial discipline) and accordingly, allowed the taxpayer a deduction for the employee contribution to the provident fund.

1. Controversy in the past

a. Before the amendment in Finance Act 2021, various taxpayers claimed the deduction of employee’s contribution deposited after the due date specified in relevant act but before the due date specified in section 139(1) of the Income-tax Act.

b. If tax audit is also applicable on the taxpayer, then the taxpayer was required to give details of contributions received from employees for various funds as referred to in section 36(1)(va) in clause 20(b) of Form 3CD.

c. While processing the return of income [ROI], if the employee contribution was deposited after the due date in relevant act and was reposted in tax audit as mentioned in point 2(b) above and was not disallowed in ROI was disallowed by Centralized Processing Centre, Bengaluru [CPC] and communication of adjustment u/s 143(1)(a) was issued to the taxpayer regarding mismatch of disallowance in ROI and tax audit.

2. Few of the High Courts judgments had taken a view that provision of section 43B overrides other provisions of the Act including section 36(1)(va) :

a. CIT v/s AIMIL Ltd. [2010] 188 Taxman 265 (Delhi) – where the Hon’ble Court 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 pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as in the ESI Act. Therefore, the Act permits the employer to make the deposit with some delay, 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 CIT v. Vinay Cement Ltd. [2007] 213 CTR(SC) 268.” [Para 17]

b. CIT v/s Hindustan Organics Chemicals Limited [2014] 48 taxmann.com 421 (Bombay) – where the Hon’ble Court observed that “……In other words, with effect from 1st April 2004, two changes were made in section 43B viz.deletion of the second proviso to section 43B and further amendment in the first proviso which reads asunder:- Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub- section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. Therefore, the amendments introduced by the Finance Act, 2003 put on par the benefit of deductions of tax, duty, cess and fee on the one hand with contributions to various Employee’s Welfare Funds on the other”. [Para7]

c. CIT v/s Magus Chemicals Dialog (P.) Ltd. [2015] 57 taxmann.com 94 (Karnataka) – where the Hon’ble Court observed that “…….The contribution payable by the employee shall be equal to the contribution payable by the employer in respect of such employee. However, the employer shall, in the first instance, pay both the contribution payable by himself i.e. the employer’s contribution as well as the employee’s contribution and thereafter he is entitled to recover by means of deduction from the employee the contribution which he has paid as employee’s contribution. Therefore, in law, the payment of contribution by the employer to the fund under the scheme means both employer’s contribution and employee’s contribution. Whether he deducts the employee’s contribution from the salary or not, in law, he is liable to pay the said amount. Therefore, s. 2(24)(x) of the IT Act makes it clear that the employees contribution which the employer deducts from his salary before it is paid into the fund, is treated as the income of the employer, and the employer by contributing can get the deduction. That payment must be made within the due date i.e. the due date prescribed under s. 139(1) of the Act……Though such contributions are not paid within the time prescribed under the relevant Act, if those contributions are paid before the due date prescribed under s. 139(1) of the Act, the employer shall be entitled to the deductions as provided under s. 36(1) of the Act. While extending such benefit, the Parliament has not made any distinction between the employee’s contribution and the employer’s contribution. It is for the simple reason, under the provident fund scheme, an employer has to pay both the contribution and then recover from the salary of the employee. Therefore, in view of the aforesaid judgment, we do not find any substance in this appeal. Therefore, the appeal is dismissed.” [Para 8]

d. It may be noted that similar favourable view has been adopted by various other High courts, for example :

i. CIT v/s State Bank of Bikaner and Jaipur [2014] 43 taxmann.com 411 (Raj.)

ii. CIT v/s Rajasthan State Ganganagar Sugar Mills Ltd. [2017] 88 taxmann.com 522 (Raj.)

iii. Bihar State Warehousing Corporation Ltd. v/s CIT [2016] 71 taxmann.com 247 (Patna)

iv. Principal CIT v/s Hind Filter Ltd. [2018] 90 taxmann.com 51 (Bom.)

3. Few of the High Courts judgments had taken a view that provision of section 43B does not apply in case of employees contribution :

a. Unifac Management Services (India) P. Ltd. v/s DCIT [2018] 100 taxmann.com 244 (Madras) – where the Hon’ble Court observed that “A combined reading of section 2(24)(x) and section 36(1)(va) would, thus, clearly indicate that both are in respect of employee’s contribution received by the assessee and not the employer’s contribution, which alone is dealt with under section 43B(b). A careful perusal of section 43B(b) would undoubtedly show that it deals with the sum payable by the assessee as an employer by way of his contribution to any provident fund or superannuation fund or gratuity fund or any other fund for welfare of employees. It is relevant to note at this juncture that section 43B, which deals with certain deductions to be only on account of actual payment, does not include the payment made by the assessee of the sum, he received from his employees towards such contribution fund. In other words, section 43B excludes from its scope the sum so received by the assessee from his employees. The reason is obvious. The sum received by the assessee as an employer from the employee is treated as an income at the hands of the assessee, as defined under section 2(24)(x) and would be entitled for deduction only when it is paid to the concerned authority within the due date…… [Para 16] The scope of section 43B and section 36(1)(va) are different and thus, there is no question of reading both provisions together to consider as to whether the assessee is entitled to deduction in respect of the sum belatedly paid towards such contribution, especially when such sum is, admittedly, a sum received by the assessee/employer from his employee. Therefore, for considering such question, application of section 36(1)(va) read with section 2(24)(x) alone is the proper course and any other interpretation would only defeat the object and scope of both the provisions viz., 43B and 36(1)(va). [Para 27]

b. Popular Vehicles & Services (P.) Ltd. v/s CIT [2018] 96 taxmann.com 13 (Kerala) – where the Hon’ble Court observed that “Section 36(1)(va) takes care of the employee’s contribution, which stands unaffected by section 43B as the restriction available in section 43B is already available under the Explanation to the said clause, with a qualification of the payment being before the due date, as stipulated by the statute or order creating the fund…..The contributions which are deducted at the time of payment of salary is received by the employer company and is treated as income under Section 2(24). On remittance of this contribution, within the due date, it is allowed as a deduction under section 36. If it is not paid to the welfare fund within the due date provided under the relevant statute, it remains as an income in the books of account of the assessee/employer company…..At least with respect to the employee’s contributions, which the employer deducts from the salary of the employees, if it is not remitted into the fund within the due date, the employer not only has defaulted the stipulation in the labour legislation but has received an income; albeit an illegal enrichment….[Para 18]

c. It may be noted that similar different view has been adopted by various other High courts, for example :

i. CIT v/s Merchem Ltd. [2015] 61 taxmann.com 119 (Ker.)

ii. CIT v. Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100 (Guj.)

4. Amendment in Finance Act 2021

a. In order to put the controversy to rest, section 43B & section 36 of the Income-tax Act was amended in order to provide a clarification that the deduction in respect of employee contribution is available if the amount is deposited under the relevant fund before the due date specified under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise u/s 36(1)(va). Deduction in respect of employer contribution is available if it is deposited on or before the due date specified in section 139.

b. In section 36(1)(va), explanation 2 was inserted, “For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause;”

c. In section 43B, explanation 5 was inserted, “For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.”

5. Reason for the Amendment made by Finance Act 2021 – As per the memorandum to Finance Act 2021, it states that section 43B does not cover employee contribution and there is a clear distinction between employer contribution and employee contribution towards welfare fund. Employee’s contribution towards welfare fund is a mechanism to ensure compliance by the employer of labour welfare laws. By late deposit of employee contribution, the employers get unjustly enriched by keeping the money belonging to the employees. Section 36(1)(va) was inserted to the Act vide Finance Act, 1987 as a measures of penalizing employers who mis-utilize employee’s contributions.

6. Whether the amendment is retrospective in nature

a. Prima facie on plain reading of the explanations inserted in section 36 and section 43B appears to be clarificatory in nature as no new law was introduced only clears the doubt regarding the applicability of existing provisions.

b. Supreme court in the case of K. Govindan and Sons v/s CIT [2001] 114 Taxman 94/247 ITR 192 (SC) explained that the explanation is retrospective or prospective depending upon how it is read as clarificatory or amendatory provisions.

c. Supreme Court in case of CIT v/s Podar Cement (P) Ltd. [1997] 92 Taxman 541/226 ITR 625 laid down the principle that amendment brought in the Act to overcome the divergence of opinion amongst the High Court is clarificatory and declaratory in nature and consequently retrospective.

d. In case of Brij Mohan Das Laxman Das v/s CIT AIR 1997 SC 1651, Supreme Court held that amendment made in a circumstance where there are contrary views of the High Courts and there is no Supreme Court ruling, then Explanation inserted by the Parliament to clarify the legal position and to settle the controversy is clarificatory in nature.

e. In the case of CIT v/s Alom Extrusions Ltd. [2009] 185 Taxman 416 (SC), the apex court held that “…….This Court, in Allied Motors (P.) Ltd.’s case (supra) held that, when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole….[Para 9].

f. It is an open discussion whether the amendment is retrospective or prospective. Tax department might take a view that the amendment is retrospective and may apply to cases pending before the jurisdictional assessing officer, commissioner (appeals) and the taxpayer has to move to higher authorities considering the amounts involved and the cost of litigation.