Allowability of
Deduction of payment made on account of Contribution of Provident Fund and
E.S.I. - as per Sec- 43B of the Income Tax Act, 1961
. . . an
enabling provision, its applicability in Income Tax Law & Legal controversies
Every organization is responsible
to make correct and timely mandatory deductions towards contribution made on
account of Provident Fund, E.S.I and any other statutory obligations, or else
are made responsible to for withholding employees’ contribution due to failure
in remitting these amounts to respective statutory authorities. Consequences,
as simple as that –“non-allowability of claim of deduction under Income
Tax Act, 1961”.
Hence, complying with the timelines as prescribed under
the specified Acts is necessary in order to get the entitled benefit under
Income Tax Law. Therefore, one needs to be well versed with the latest rules
and regulations so as to avoid the unintended non-compliance and consequences
thereof under these Acts. These statutory deductions are complex and failure
for non-compliance leads to monetary punishments. In a way an organization end
up paying hefty amount and efforts for its necessary compliance.
Sec- 36 (1)(va) to be read with Sec- 43B of the Income Tax Act, 1961
Sec-36 (1) (va) reads as follows, -
“(va) 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 there under or under any standing order, award, contract of
service or otherwise”
Sec- 43B of the Income-tax Act, provides that,
certain expenditures, which would otherwise have been allowable as
deductions in computing the total income under the Income-tax Act, 1961 shall
be allowed as deduction only in the year of actual payment of such items
by the assessee. These expenditures are listed under clauses (a) to (f)
of the said Section.
To sum up the above, -
• Employees' contribution is an “income in the hands of the
employer/assessee” as per section 2(24)(x);
• The same is an allowable
expenditure, provided the payment thereof is made on or before the due date
prescribed under the relevant PF scheme, as per provisions of section 36 (1)
(va);
• The employer's
contribution is allowable as expenditure if the payment is made on or before
due date of filing his return of income u/s 139(1) and the proof thereof is
attached along with the return of income.
Clause (b) of the said Section refers to the sums payable by an employer by way of contribution to
any provident fund, super-annuation fund, gratuity fund, or any other fund for
the welfare of employees.
The second
proviso to Sec- 43B provides that no deduction of such sums covered by the
said clause (b) shall be allowed unless such sum has actually been paid on or
before the due date as defined in the Explanation below Sec. 36(1)(va).
Incidentally,
the aforesaid Sec. 36(1)(va) also provides that any sum received by the
assessee from his employees’ as contributions to a Provident Fund,
Superannuation Fund, ESI Fund or any other fund for welfare of employees,
regarded as income by virtue of S. 2(24)(x), shall be allowed as a deduction in
computing business income, only if such sum is credited by the assessee to the
employees’ account in the relevant fund or funds on or before the due date.
Section-
43B controls the allowability of deduction of payment specified in clauses (a)
to (d) thereof and provides certain conditions subject to which alone the
deductions may be permissible, -
Section 43B which commences with a non obstante clause,
mandates that the sum referred to in any one of the clauses, will be allowed as
deduction in computing the income under section 28 of that previous year only,
in which such sum is actually paid by the assessee, irrespective of the fact
that the said deduction is otherwise allowable under the Act, and irrespective
of the previous year in which the liability to pay such sum was incurred by the
assessee, according to the method of accounting regularly employed by him.
The first proviso to section 43B relaxes the rigour of the section
if the sum referred to in clause (a) or clause (c) or clause (d) is actually
paid by the assessee 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 any such sum was incurred and evidence
of such payment is furnished by the assessee along with such return.
The second proviso imposes a further restriction on the
allowability of deduction of any sum referred to in clause (b). It provides
that unless such sum has actually been paid in cash or by issue of a
cheque or draft or by any other mode on or before the due date, it
shall not be allowed as deduction.
Under section 43B, the sum referred to in
“clause (b)” of section 43B has been treated differently, as it relates to the sum payable
by the assessee as an employer, which includes employer's contribution as well
as employees' contribution. If such contributions which are payable to any
provident fund or superannuation fund or any fund are paid within the due date,
the employer will be able to avail of the benefit of deduction under section
43B, although the general rule embodied in section- 43B is
one of allowability of deduction based on actual payment.
The rule contained in the second proviso is an
exception to the rule.
And here, the actual payment is not enough; the payment should also be
made within the due date as defined therein.
Controversy
– Whether the amendment brought in Sec- 43B vide Finance Act, 2003 amendatory
in nature or curative (retrospective effect w.e.f. 1st April 1988)
in nature?
That vide Finance Act, 2003 an amendment was
brought in, thereby deleting the second proviso of Sec-43B made w.e.f.
Assessment year 2004-05 therefore became a permissible deduction in
the year of payment treating it on par with other items covered by section 43B.
By the Finance Act, 2003, the amendment made in the first proviso
equated in terms of the benefit of deduction of tax, duty, cess and fee on the
one hand and with the contributions to Employees' Provident Fund,
superannuation fund and other welfare funds on the other.
This amendment brought about
the uniformity came into force w.e.f. 1st
April 2004.
The Supreme Court in the case of C.I.T.
VS. Alom Extrusions Limited ( 2009) solved the said issue.
The issue
of the litigation in the above case was, -
“whether omission [deletion] of the second proviso to
Section 43-B of the Income Tax Act, 1961, by the Finance Act, 2003, operated
with effect from 1st April,
2004, or whether it operated retrospectively with effect from 1st April, 1988?”
While deciding the matter, Apex Court took into
consideration the “Principle of Construction”, thereby relied upon the
relevant observations passed in the case of Commissioner of Income Tax,
Bangalore vs. J.H. Gotla, which states, -
“the
intention from the language used by the Legislature and if strict literal
construction leads to an absurd result, i.e., a result not intended to be sub
served by the object of the legislation found in the manner indicated before,
then if another construction is possible apart from strict literal
construction, then that construction should be preferred to the strict literal
construction. Though equity and taxation are often strangers, attempts should
be made that these do not remain always so and if a construction results in
equity rather than in injustice, then such construction should be preferred to
the literal construction.”
Therefore, in the light of the above observation,
amendment to sec- 43B brought in by Finance Act, 2003 was held to be ‘curative’
in nature with retrospective effect from 1st April 1988 i.e. since
the very inception of the provision.
Controversy - Whether the assessee was entitled
to claim the benefit vide Sec.43-B for that period particularly in view of the
fact that he has contributed to provident fund before filing of the return?
In the case of C.I.T. vs.
Vinay Cement Ltd. Hon’ble Apex Court has observed and held that,
benefit u/s. 43B be given if the payment has been made before the filing of the
Income Tax return.
The issue was again adjudicated
in the case of C.I.T. vs. A.I.M.I.L. (2009). Therein, Hon’ble Delhi High
Court has held 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 the ESI
Act. Therefore, the Act permits the employer to make the deposit with some
delays, 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 Vinay Cement (supra).”
In the recent past, Calcutta High court in the case
of C.I.T. vs. Vijayshree Limited has settled an issue that whether the deletion
of an addition made by the Assessing Officer on account of Employees'
Contribution to ESI and PF by invoking the provision of Section 36(1)(va) read
with Section 2(24)(x) of the Act was correct or not.
Hon’ble
Calcutta High Court relied upon the judgment passed by Hon’ble Supreme court in
the case of Commissioner of Income Tax vs. Alom Extrusion Ltd. Accordingly,
had held that,
“the Supreme Court in the aforesaid case has held that
the amendment to the second proviso to the Sec-43(B) of the Income Tax Act, as
introduced by Finance Act, 2003, was curative in nature and is required to be
applied retrospectively with effect from 1st April, 1988. Such being the
position, the deletion of the amount paid by the Employees' Contribution beyond
due date was deductible by invoking the aforesaid amended provisions of Section
43(B) of the Act.”
After observing the plea, I find that it was not the case
of adjudicating the question of applicability of provision of sec-43B with
retrospective operation or not. And that, the plea taken by Calcutta High court
doesn’t make any difference for the reason being that the case pertained to
A.Y. 2006-07 and amendment to the
second proviso to the Sec- 43 (B) of the Income Tax Act, as introduced by
Finance Act, 2003 was already made applicable w.e.f 1st April 2004.
The question is whether the assessee would
get the benefit of deduction u/s. 43B of the I.T. Act, for payment made towards
Employer’s and Employees’ contribution to PF and ESI made after due date of the
respective Acts but paid before the due date of filing of the income tax
return.
Recently, Hon’ble
Supreme court has one again confirmed in the case of Commissioner of
Income Tax vs. Solar Exports that, the Finance Act, 2003 to be curative in
nature which would have retrospective application operating from 1st
April, 1988, when the proviso stood inserted.
To Conclude:
It is worth mentioning to
discuss in brief the main object of sec- 43B. It is an exception to the
general rule of law that a deduction should be allowed in respect of business
expenditure in the year in which the same was incurred in case of a person
following the mercantile system of accounting. The Section provides that the
deduction will be allowed in respect of the listed expenditure in computing the
income of the previous year in which the sum is actually paid. Once the
payment is shown to have been made, the intention is to confer deduction, which
is gathered clearly from the main Section as was introduced.
Hence, all provisions and Explanation added thereafter
shall ensure the fulfillment of the main object and are required to be
interpreted in a manner to achieve the aforesaid objective.
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