Social Security Schemes (SSS) in India which provide for retirement, pension planning and social welfare of employees are principally governed by the Employees' Provident Fund (PF) and Employee State Insurance (ESI).It is imperative to note that under such schemes apart from the employer’s contribution it is also the responsibility of the employer to deduct and contribute a portion of the income of the employee to the social security organization. Therefore both employer’s and the employees’ contribution to the social security scheme has to be deposited by the employer.
This article will dwell upon the never ending controversywith regards to the employer’s tax deductibility under the Income tax Act (The Act) towards the employee’s contribution to the obligatory SSS which are deposited beyond the due date of the respective statutes’ but before the date of filing return of Incomeas specified under Section 139 of the Act.
Employees’ contribution to SSS treated as “Income”
Section 2(24) of the Act which enumerates different components of Income, inter aliadefines “Income”, to include any sum received from its employees’ as contribution towards certain specifiedSSS for the employer. However deduction for such income are available under section 36(1)(va),provided the specified social security contributions collected by the employer are credited to the respective schemes within the due date specified under the relevantlegislation of the SSS. Therefore on a cumulative reading of Section 2(24)(x) with Section 36(va) it can be implied that the employees’ contribution towards the SSS shall be treated as an Income for the employer , if such contributions are not deposited within the due date specified under the relevant legislation of the SSS.However the issue is should it be treated as income even if it is remitted belatedly?It would be pivotal to note that once the employees’ PF contribution is disallowed under the provisions of section 36(1)(va), the same cannot be claimed as deduction in the subsequent year when the payment is made.
Employers Contribution - Section 43B
Section 43Bwas introduced by the Finance Act with effect 1st April 1984, to ensure that the deductions on statutory liabilities viz, duties, tax, employer’s contributions towards SSS etc are allowed, only if such payments are actually paidby the assessee irrespective of whether the assessee follows due basis of accounting. Further the first proviso to this section, gives a benefit to the assessees’ to claim deduction provided such specified statutory liabilities are remitted within the due date for filing the return of income under section 139.There was a second proviso which specifically referred to clause (b) to section 43B namely contributions to employee Provident fund or Superannuation fund, etc, wherein it mentioned that the deduction will be available only if the sum is paid before the due date as defined in Explanation to sec 36 (1) (va) which reads as “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.” Therefore the due date shall be the date as specified in the relevant statute.
However Finance Act 2003, w.e.f AY 2004-05 deleted the second proviso and also amended the first proviso which stated that no disallowance will be called for if the payment is made before the due date of filing of return of income u/s 139(1). This amendment was brought so as to ensure equality in the treatment of tax, duty, cess etc on the one hand and employer’s PF, superannuation fund and other welfare funds on the other hand. Therefore on a plain reading of Section 43B as amended, it seems that deduction shall be allowed on the Employer’s contribution towards the SSS made before the due date for filing the return of income.
Further the supreme court in CIT V Alom Extrusions Limited 319 ITR 309 has held that the omission of second proviso should be taken as curative in nature and hence should be applied retrospectively.
However the controversy that has arisen in the recent past is whether the employees’ contribution that is paid after the due date mentioned in the relevant legislation of the SSS but before the due date of filing the return of income as there has been no corresponding amendment to section 36(1)(va).
Judicial precedents: See -Saw scenario.
The Karnataka HC in the case of Sabari Enterprises& Others (298 ITR 141)held that the employees contribution is also subject to Sec 43 B and therefore the employees contribution to SSS can be claimed as deduction if paid on or before Sec 139(1) due date.
Similar views have been taken by ;
- Delhi High court in CIT Aimil Ltd (2010) 321 ITR 508 (Delhi)
- Rajasthan High court in CIT V State bank of Bikaner and Jaipur (2014) 265 CTR 471 (Raj)
- Uttarakant High Court in CIT V Kichha Sugar Co Ltd [2013] 356 ITR 351 (Uttarakhand)
- Himachala Pradesh High court in CIT V Nipso polyfabriks Ltd [2013] 350 ITR 327 (Himachal Pradesh)
- Bombay HC in CIT (Central) v. Ghatge Patil Transports (2014) 368 ITR 749 (Bombay)
Recently Kerala High court Judgment in CIT Cochin V Merchem Ltd [2015] 280 CTR 381 (Kerala), the Kerala High court has held that the employees contribution to PF has to be paid before the PF due date to claim deduction.
The Court observed in para 28 as under “we are also conscious of the fact that if the intention of a particular provision of a statute can be gathered from the language used by the legislation, then we are bound to abide by the language used therein in order to ascertain the intention. We are also of the opinion that there was a clear logic behind Sec. 36(1)(va) and Explanation thereto since the Legislature intended that the amount received towards contribution of the employee was money belonging to the employee and the assessee was not entitled to utilise the said fund and enrich himself.”
Similar view has been taken by the Gujarat High court in CIT V Gujarat transport corporation (2014)366 ITR 170 (Guj)
The Kerala and Gujarat high court’s observations has just prolonged the controversy and there appears to be a ‘double whammy’ for the assessee as the employee contribution shall be treated as Income and also that there shall be no deduction in any year if contributions are delayed by even one day.
Recently CBDT issued a circular e CIRCULAR NO.22/2015 [F.NO.279/MISC./140/2015-ITJ], DATED 17-12-2015 that no appeals will be made against employer’s contribution to SSS if paid on or before 139(1) due date and all pending appeals will be withdrawn in light of the Supreme court decision in ALOM extrusions. However, the circular clarified that it will not apply for the employees contribution and thereby made its intention clear to keep alive the controversy on the employees’ contribution.
Concluding Remarks – Better late than Never
It is to be noted that Section 36(1)(va) of the Actwas introduced by the Finance Act, 1987. The circular explaining the amendment in respect of introduction of section 36(1)(va) is as follows:
“Measures of penalizing employers who misutilise contributions to the provident fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for welfare of employees”.
From the reading of the above it is evident that the intention for the introduction of provisions of section 36(1)(va) was to merely curb the defaulting employers from misutilising the employees’ PF contributions without depositing the same to the credit of the employees and at the same time claiming it as tax deductible expenditure. It would be important to reiterate here that once the employees’ PF contribution is disallowed under the provisions of section 36(1)(va), the same cannot be claimed as deduction in subsequent year when payment is made.
It is also imperative to note that the Delhi HC in the case of AIMIL Ltd(188 Taxman 265) has categorically mentioned that relevant legislations of the SSS themselves allows employers to pay after the due date mentioned in the relevant statute for which interest & penalty are charged and therefore with respect to Income tax, deduction shall be allowed on the employees’ contributions to the SSS so long as they are paid before the due date of filing the return of Income.
Therefore so far as the employee’s contributions to SSS are concerned, if a strict interpretation is taken then it would result in disallowance of the payment in-spite of having paid the same.
This could not have been the intention of the legislation, as this leads to an absurd and unjust result.
Will there be an amendment in this budget to settle issue and reduce litigation ? Hopefully yes.
Its always Better late than never!
