Direct Tax

October 2022

SC affirms high court decisions which upheld revenue’s stand of denying deduction U/S 36(1)(VA) to employees’ contribution when deposited beyond the due dates specified under the relevant statutes- distinguishes section 43B from section 36(1)(VA) [checkmate services Pvt. Ltd[1] vs. CIT ( ca no 2833 of 2016)]

I. Facts and background of litigation on section 36(1)(va) of the Income Tax Act, 1961 (“the Act”):

(1.) In the years under appeal, the Appellant had deposited its employees’ contribution to PF and ESIC beyond the “due dates” specified under the relevant statutes.

(2.) The AO taxed such amounts as “income” u/s 36(1)(va) rws 2(24)(x) of the Act. Both, the ITAT and Gujarat High Court decided the appeal against the Appellant.

(3.) There was a divergence of views among High Courts; Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi had decided the issue in favour of the Assessee while Kerala and Gujarat High Courts had decided in favour of Revenue. Hence, the Apex Court granted special leave to appeal in these cases.

II. Sections 36(1)(va), 2(24)(x) and 43B:

(1.) Section 36(1)(va) allows deduction to the employer in respect of employees’ contribution to PF, ESIC, etc deducted/received from its employees, when such contribution is deposited within the “due date” specified under the relevant statute [“due date”]. If not deposited as such, it is taxed as “income” u/s 2(24)(x) of the Act in the hands of the employer.

(2.) Section 43B of the Act, inter alia, allows deduction of the employer’s contribution to the said funds on “payment basis” if such contribution is deposited before the due date of filing of return of income u/s 139(1) of the Act. This provision starts with a non obstante clause.

III. SC decision-key takeaways:

(1.) The object behind section 43B was to ensure that certain deductions, which were otherwise permitted and claimed on mercantile system of accounting, were to be allowed only if they were actually paid.

(2.) Section 36(1)(iv) grants deduction to employers for contributions to approved provident fund schemes. This provision has been on the statute from inception and is unaltered. Section 36(1)(va) and section 2(24)(x) were introduced w.e.f. April 1, 1988. The Parliament intended that the amounts not earned, yet received as deductions, were “income”. Since amount received (or deducted from employees) were receipts held by the assessee as a “trustee”, section 36(1)(va) was inserted to ensure that if the deductions were deposited before the ‘due date” deduction is available. The condition of depositing before the due date is absent in section 36(1)(iv).

(3.) Section 43B(b) refers to “sum payable as an employer, by way of contribution”. Upto AY 2003-04, deduction u/s 43B was available if such contribution was deposited by the due date specified u/s 36(1)(va) [2nd proviso to section 43B]. Based on Kelkar Committee recommendation, 2nd proviso was omitted from A Y 2004-05. In Alom Extrusion [(2010) 1 SCC 489], this Court held that omission of 2nd proviso was curative and as long as the employer deposited the dues before the due date u/s 139(1), deduction u/s 43B was available.

(4.) In Alom Extrusions (supra), this court did not consider sections 2(24)(x) and section 36(1)(va). Separate provisions for the employer’s contribution and employees’ contribution too, were unnoticed.

(5.) One of the rules of interpretation of taxing statute is that if a deduction or exemption is available subject to any condition, the conditions have to be strictly complied with. This is based on general principle that there is no room for equitable considerations in construing a taxing statute. This was endorsed by the Constitution Bench in Comm. Of Customs vs. Dilip Kumar & Co. [2018 (9) SCC 1]

(6.) In the judgments relied by the Assessee, the High Courts principally relied upon omission of 2nd proviso. Some of them, did refer to section 36(1)(va), but all these judgements relied on Alom Extrusion (supra) and did not consider section 2(24)(x) or other provisions.

(7.) When section 43B was introduced, only section 36(1)(iv) was on statute. When section 36(1)(va)and 2nd proviso were introduced, the Parliament did not intend to treat amounts of distinct nature (employees’ contribution and employer’s contribution), as same. By section 36(1)(va) and 2(24)(x), deduction from employees became “income” for the employer and payment of such deduction within the prescribed time limit is allowed u/s 36(1)(va). Further, the distinction between section 36(1)(iv) and 36(1)(va) continues to be maintained. There is a marked distinction between the nature of two amounts- the employer’s liability has to be paid out of income while employees’ contribution is income and held in trust by the employer.

(8.) For liabilities u/s 43B, due date is defined. That cannot apply to amounts which are held in trust, as the employees’ contribution. These are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified under the particular law. The non-obstante clause of section 43B would not absolve an assessee from depositing employees’ contribution before the due date, to claim deduction. 

IV. Decision

The appeals of the Assessees were dismissed based on the above reasoning.

V. Our comments

Finance Act, 2021 has introduced Explanation 2 to section 36(1)(va) and Explanation 5 to section 43B wef April 1, 2021 to clarify that section 43B shall not apply to determine the “due date” u/s 36(1)(va). For prior years, there was a divergence of views among High Courts. Appeals for the prior years would now have to consider this decision which, as per Article 141 is binding on all courts in India.

The above article is contributed by Ms. Krupa Gandhi

[1] Treated as the lead appeal in the bunch of appeals

Disclaimer: The views expressed in this document are personal views of the author. This document is intended to provide certain general information and should not be construed as professional advice. It should neither be regarded as comprehensive nor sufficient for the purposes of decision making. The author does not take any responsibility for accuracy of the document nor undertakes any legal liability for any of the contents in this document. Without prior permission of the author, this document may not be quoted in whole or in part or otherwise.