There is a fervent debate regarding disallowance of employees’ contribution of provident fund post the “due date” and inclusion of such contribution as income of the employer owing to conflicting judgments of various high courts and the CBDT Circular No. 22/2015, dated 17-12-2015. Authors T G Suresh (Partner, Suresh & Balaji) and Arjun Suresh in their article discuss the attempt made to justify the reasons for making an amendment in the upcoming budget to put an end to this controversy. Pondering on the different treatments given by the Government to contributions made by employer and employee, authors state that “They are constructively two parts of the same payment and ...there is no concrete rationale to separate the two and make it operate as two different transactions.” The Authors further discuss the impact of the CBDT Circular which sought to withdraw all litigation made with regards to Section 43B but however made a specific statement that this shall not affect any claim or litigation with respect to Section 36(va). The authors opine that if this circular is not intended to be applicable to the employee’s contribution , one cannot understand the logical reason behind its issuance after nearly 6 years of SC decision which had held that that the omission of the Second proviso of Sec. 43B as curative in nature and hence would operate retrospectively. The authors sign off with a remark that “Considering the keenness of the Government to reduce the litigation and improve the ease of doing business , let’s hope that the upcoming budget  makes a deserving amendment in either in Sec 36(1) (va) or sec 43B so that this controversy can be finally put to rest.”  

Introduction

Allowability of  the employee’s contribution to the PF after the PF due date but before the due date for furnishing of return of Income has been subject matter of litigation for a considerable length of time.  The conflicting judgments of various high courts and the circular from the CBDT has kept this issue alive. An attempt has been made to justify the reasons for making an amendment in the upcoming budget to put an end to this controversy.

Scheme of Income tax Act and Relevant portions of the law with reference to the PF

The law with regards to PF contribution revolves primarily on 3 provisions.

Firstly, Section 2(24) (x)  which states that any sum received by the assessee from his employees as contributions to any provident fund etc., will be considered as his income.

The second Provision that needs to viewed is Section 36(va) which provides for deduction from business income , any income that is mentioned in Section 2(24)(x) provided that it is paid into the relevant fund within the “due date”. The explanation to this provision lays down that the “due date” is the date within which payment is due under the respective statute.

As far as the  PF contributions are concerned the relevant due date is 15^th of the following month.

The last provision that we would like to elaborate upon is Section 43B which provides for certain deductions only on actual payment.

Section 43B was inserted with effect from 1-4-1984, by which the Mercantile System of Accounting with regard to tax, duty and contribution to welfare funds stood discontinued and, under section 43B, it became mandatory for the assessee(s) to account for the afore-stated items not on Mercantile basis but on cash basis.

This situation continued between 1-4-1984 and 1-4-1988, when the Parliament amended section 43B and inserted first proviso to section 43B. By this first proviso, it was, inter alia, laid down, in the context of any sum payable by the assessee(s) by way of tax, duty, cess or fee, that if an assessee(s) pays such tax, duty, cess or fee even after the closing of the accounting year but before the date of filing of the Return of income under section 139(1) of the Act, the assessee(s) would be entitled to deduction under section 43B on actual payment basis and such deduction would be admissible for the accounting year.

To this effect, first proviso stood introduced with effect from 1-4-1988.

This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds.

Vide Finance Act, 1988, the second proviso came to be inserted. 

The second provisio was further modified from 1^st April 1989, since this amendment is not relevant for our discussion the same has not been considered.

The Finance Act, 2003 omitted the  2^nd proviso and the same was merged with the first proviso.

The relevant Section extracts are reproduced below :

Certain deductions to be only on actual payment

43B.  Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable  under this Act in respect of -

(a) ……………………….

(b) 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

The relevant portions of the first proviso as on date reads as under

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.

At this juncture it is worthwhile to mention that the Hon. SC as held in CIT vs Alom Extrustions Ltd [TS-31-SC-2009-O] that the omission of the Second provisoas curative in nature and hence would operate retrospectively 

The effect of the above amendment is any sum payable by the assessee as an employer by way of contribution to any provident fund etc., will be allowed as deduction in the year in which the liability to pay arises , if the same is paid on or before 139(1) due date. In the event of the same being paid after the 139(1) due date , the same will be allowed as deduction in the year of payment .

It is pertinent to note that no corresponding amendment was made in Sec 36 (1) (va).

Hence, as it stands, it appears there are two distinct “deadlines” given for claiming deduction The deadline for claiming deduction for employees’ contribution under Section 36(va) remains the “Due Date” under EPF act but for any contribution made by the employer towards EPF under Section 43B the due date has become the date of filing of returns under Section 139(1).

Thus, there remains fervent debate regarding disallowance of employees’ contribution post the “due date” and inclusion of such contribution as income of the employer.

Wading through the maze of conflicting precedent:

By far the biggest issue right now is the lack of uniformity amongst various different high courts. For instance, the following high courts(amongst others) have held in favour of the assessee:

1. The Delhi High Court in Commissioner of Income Tax v. AIMIL Ltd. &Ors. [TS-41-HC-2009(DEL)-O];
2. The Patna High Court in Bihar State Warehousing Corporation v. Deputy Commissioner of Income Tax, Patna [TS-5527-HC-2016(Patna)-O];
3. The Bombay High Court in CIT v. Gatge Patil Transports Ltd. [TS-5905-HC-2014(Bombay)-O];
4. The Karnataka High Court in Commissioner of Income Tax v. Spectrum Consultants India P. Ltd. [TS-684-HC-2013(KAR)-O];
5. The Allahabad High Court in Sagun Foundry (P.) Ltd. v. Commissioner of Income-tax, Kanpur [TS-6211-HC-2016(Allahabad)-O];

Conversely, the following High Courts have held in favour of the Department:

1. The Gujarat High Court in CIT v. Gujarat State Road Transport Corpn. [TS-681-HC-2013(GUJ)-O];
2. The Kerela High Court in Kalyan Silks Trichur (P) Ltd. vs. Joint Commissioner of Income Tax, Range-I Income Tax Appeal Nos. 68 and 70 of 2016 Following CIT v. Merchem Ltd. [TS-5481-HC-2015(Kerala)-O];
3. The Madras High Court in Unifac Management Services (India) (P.) Ltd. v. Deputy Commissioner of Income-tax, Corporate Circle 3(2), Chennai [TS-7189-HC-2018(Madras)-O].

The difference in opinion could primarily be traced to 2 main factors:

1. The existence of Section 43B and Section 36(va) in two distinct spheres governing employer’s contribution and employees’ contribution respectively.
2. Whether the provisions of Sec 43 B override Section 36(1)(va)

Naturally, the courts that favour the assessee tend to think that  Sec 43 B overrides Sec 36(1)(va) and  whereas the courts in favour of the revenue think the two section operate in distinct spheres .

Does the Non-Obstante Clause in  Section 43B apply?

The question of applicability of the non obstante clause at the beginning of Section 43B was answered in the negative in  Merchem. The court, ironically enough, referred to Alom Extrusions to hold that the purpose of the Non-Obstante Clause was to ensure the amount is actually paid and the transactions under these provisions are not subject to Mercantile or Accrual basis of accounting. While this may be true, it does not dilute the application of the Non-Obstante Clause in any way. If Employees’ contribution were to fall within the scope of Section 43B then the only way for Section 36(va) to apply would be to show that the two provisions exist in two different spheres.

The reasoning or justification given by the various courts are that the employees’ contribution is a contribution that is made out of money either given out of the employees’ salary or given by the employee himself and hence it would be unjust  for the company to “sit on such profits”. It is contendby the authors that this by itself would not mean that they operate on a different sphere and that there are enough and adequate safeguards made for this purpose in the PF Act.

Additionally, the judgement in Merchem imposes a sort of a double penalty on the employer by both disallowing his deduction for a bona fide expenditure as well as having it count towards his income. There is also a 3^rd penalty also imposed by way of a plethora of provisions in the PF act itself. Specifically, you have Section 7Q of the  Employee’s PF and miscellaneous provisions Act  and which provides for payment of interest for delayed payment as well as punishments under Section 14 of the same Act.  The gravamen of the entire contention is that there is or there ought to be no punitive punishment under the income tax act ( which in any case is not the object of the  same )  when there already exist more than enough adequate punishments in the specific Act. Denying a genuine business expenditure for delay in the payment is not only too harsh but is also unfair.

Impact of the CBDT Circular No. 22/2015, dated 17-12-2015?

This circular, in effect, seeks to withdraw all litigation made with regards to Section 43B but however they’ve made a specific statement that this shall not affect any claim or litigation with respect to Section 36(va).

The reasonable inference any person would get upon reading this circular is that Section 36(va) ought not to be equated to Section 43B and that employees’ contribution must be governed by this provision. The one fundamental logic that seem to have been missed out in this circular is that no employer or assessee will ever pay the employees’ contribution and the employer’s contribution separately. They are constructively two parts of the same payment and as stated before there is no concrete rationale to separate the two and make it operate as two different transactions. Additionally, the department have not at all considered the impact of the Non-Obstante clause to Section 43B.

If this circular is not intended to be applicable to the employee’s contribution , one cannot understand the logical reason behind itsissuance after nearly 6 years.

The Apex court Judgement in AlomExtrustion (supra) was  delivered on 25^th Nov 2009 and  neither an amendment was s made in the section  nor a review petition being filed.

Constitutionally Department is bound to follow the decision of the Hon. Supreme court. Hence issuing a circular for withdrawing the cases relating to employers contribution after 6 years of rendering the judgment defies common sense and logic. Had the circular clarified that it will apply for employee’s contcintuon also ,  then it would have helped reducing lot of litgation over a period of time.

Conclusion and Authors’ remarks:

The action of the legislature to amend Section 43B through the Finance Act of 2003 but not make any corresponding changes to Section 36(va) is a puzzling one.

This seems to be yet another situation where a vast amount of litigation in our country could have been easily avoided. 

We extract hereinbelow the relevant observations of the Hon. Supreme court  in the case of  CIT V  J.H. Gotla [TS-5024-SC-1985-O], which reads as under:

“We should find out  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 subserved 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...”  (p 339)

Considering the keenness of the Government to reduce the litigation and improve the ease of doing business , let’s hope that the upcoming budget  makes a deserving  amendment in either in Sec 36(1) (va) or Ssec 43 B  so that this controversy can  be finally put to rest.