This is one section which can really explain the implications of non-compliance of tax or labor laws. After reading this article the business entities will surely appreciate the importance of meeting the due dates as per the law.
Let me explain this through an example. The due date for depositing Employee Provident Fund contribution for the month is 20th of subsequent month. In case of M/s Multiple Facts Private Limited the total Provident Fund contribution for the month of December 2011 was Rs.3,00,000. The company is supposed to deposit the amount in the Government account on or before 20th January, 2012. However, due to oversight or inadvertently they deposited the amount on 22nd January, 2012.
Income Tax Scrutiny – Unfortunately, to the bad luck of the company, their case is taken up for scrutiny assessment by the Income Tax Officer. While carrying out the assessment, he disallowed PF contribution of Rs.3,00,000 and charged an additional tax of Rs.90,000 plus applicable interest.
I am not joking! For a delay of 2 days, the company has to cough up over Rs.1,20,000!
Now, let me run through the relevant provisions of Income Tax which necessitated the officer to take such an adverse stand.
Section 2(24)(x) of Income Tax Act states that the following is included in income:
“any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees”
Section 36(1) (va) states that following deduction shall be allowed while computing income under the head business / profession:
“any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.
Explanation.—For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise;”
Section 43B provides that deduction in respect of “any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees” shall be allowed in a particular year if the assesse maintains books on accrual basis and the remittance is made before the due date for furnishing return of income
Analysis of the above provisions:
a) Employer contribution:
As Section 43B clearly states, though the payment is delayed, if such payment is made before due date of furnishing return of income, deduction will be available in the year in which the liability was incurred
b) Employee contribution:
View # 1:
Section 2(24)(x) deems employee contribution to be income and Section 36(1)(va) allows deduction only if the payment is made before due date of respective fund’s law (i.e., 20th of subsequent month for PF and 21st of subsequent month for ESI). Therefore delay in contribution would mean permanent disallowance under the Act
View # 2:
However, there are views that as:
- Section 43B is a non-obstante provision, and
- Section 43B also covers employee contribution (as the section just states “any sum payable by the assessee as an employer”, deduction is available in par with employer contribution to such funds.
Following are some recent High Court judgements in this regard:
Recent Case Laws in favour of the assesse (allowing the deduction if it is paid on or before filing Income Tax return)
- M/s Essae Teraoka Pvt Ltd Versus Deputy Commissioner Of Income-Tax [2014 (3) TMI 386 – Kar HC] dated Feb 4, 2014 The word contribution as understood in EPF and ESI Acts refers to both employees’ and employer’s contribution and therefore no distinction is to be made while understanding Section 43B. Therefore deduction is available for employees’ contribution under section 43B
- Commissioner of Income Tax Versus M/s. State Bank of Bikaner & Jaipur and Jaipur Vidyut Vitaran Nigam Ltd. [2014 (5) TMI 222 – Raj HC] dated Jan 6, 2014 Section 43B overrides Section 36(1)(va) and deduction is available for employees’ contribution under Section 43B
- The Commissioner of Income Tax Versus M/s Kichha Sugar Company Ltd [2013 (6) TMI 98 – Uttarakhand HC] dated May 20, 2013
- Commissioner of Income Tax, Udaipur Versus M/s. Udaipur Dugdh Utpadak Sahakari Sangh Limited, Udaipur [2014 (8) TMI 677 – Rajasthan HC
Cases in favour of Income Tax department
- Commissioner Of Income Tax Ii Versus Gujarat State Road Transport Corporation [2014 (1) TMI 502 – Guj HC] dated Dec 26, 2013 Section 43B does not apply to employees’ contribution. Only Section 2(24)(x) r/w Section 36(1)(va) is applicable and therefore employees’ contribution is disallowed if not paid within due date as per EPF / ESI Act
- Pan India Network Infravest Pvt. Ltd. Versus Addl. CIT, Range – 7(1), Mumbai [2014 (7) TMI 801 – Mumbai ITAT] dated July 10, 2014
Conclusion: In the absence of a decision by Supreme Court, the issue of deduction for delayed payment of employees’ contribution still remains open. However, majority of the High Courts have decided in favour of assesses. Further Karnataka HC has been continuously providing favourable decision.
Thought for the day
So, the moral of the story is to be vigilant when it comes to adhering to the laws. Violations can hurt your interest badly.