2012 (11) TMI 592 - HC - Income Tax

Employee PF and ESI Contributions Deductible If Paid Before Filing Return Under Section 36(1)(va) and 43B

The HC held that contributions received from employees for provident fund and ESI, though not deposited by the due dates under the respective statutes, ... Deduction under Section 36(1)(va) for employees' contributions - Treatment of employees' contributions as income under Section 2(24)(x) - Interplay between Section 36(1)(va) and Section 43B and reading the provisions together - Retrospective and curative effect of the 2003 amendment deleting proviso to Section 43B - Non obstante operation of Section 43B and cash basis disallowance to curb mercantile accruals - No distinction between employer's and employee's contributions for deduction where payment made before filing returnDeduction under Section 36(1)(va) for employees' contributions - Interplay between Section 36(1)(va) and Section 43B and reading the provisions together - Retrospective effect of deletion of second proviso to Section 43B by the Finance Act, 2003 - Amounts collected from employees as contributions to provident fund and ESI but not credited by the statutory due date, yet deposited before filing the return, are allowable as deduction under Section 36(1)(va) when read with Section 43B. - HELD THAT: - The Court held that the statutory scheme must be read so that deductions under Section 36(1)(va) are considered in conjunction with Section 43B. Section 2(24)(x) treats sums collected from employees as income of the employer, and Section 36(1)(va) allows deduction if credited to employees' accounts on or before the due date as defined. Section 43B, commencing with a non obstante clause, curbed mercantile accruals by making certain deductions dependent on actual payment. Parliament inserted provisos and later deleted the second proviso by the Finance Act, 2003, and the Apex Court in Alom Extrusions held that the 2003 amendment is curative and retrospective to April 1, 1988. Applying that ratio, there is no tenable distinction between employer and employee contributions where the contribution, although not credited by the due date under the welfare Acts, was deposited before furnishing the return. The employer may face separate statutory consequences (interest/penalties/criminal liability) under welfare enactments, but those do not disentitle the assessee from claiming deduction under the Income tax Act where payment was made prior to filing the return. The Court therefore affirmed the Tribunal's conclusion that such employee contributions deposited before filing the return are deductible under Section 36(1)(va) read with Section 43B. [Paras 21, 22, 23]Appeal dismissed; employee contributions deposited before filing the return are allowable as deduction under Section 36(1)(va) read with Section 43B.Final Conclusion: The revenue's appeal is dismissed. The Court applies the ratio of the Apex Court in Alom Extrusions to hold that amounts collected from employees and deposited before filing the return, though not credited by the statutory due date, are deductible under Section 36(1)(va) when Section 36(1)(va) is read with Section 43B; no distinction is to be drawn between employer and employee contributions for this purpose. ISSUES: Whether amounts received by the assessee from employees for crediting to their provident fund and ESI accounts, but not credited on or before the due dates specified under the respective statutes, are allowable deductions under Section 36(1)(va) of the Income Tax Act.Whether a distinction exists between the employer's contribution and the employees' contribution for the purposes of claiming deduction under Sections 36(1)(va) and 43B of the Income Tax Act when such amounts are deposited after the due date but before filing the income tax return. RULINGS / HOLDINGS: On the issue of deductibility of employees' contributions not deposited by the due date but paid before filing the return, the Court held that such amounts are allowable deductions under Section 36(1)(va) read with Section 43B of the Act, rejecting the argument that employees' contributions should be treated differently from employer contributions.The Court held that the provisos to Section 43B, including the Explanation under Section 36(1)(va), must be read together, and that the amendment by the Finance Act, 2003, which deleted the second proviso to Section 43B(b), is curative and retrospective, applying from April 1, 1988.The Court concluded that the employer is entitled to deduction if the contributions (both employer and employee) are deposited before filing the return, even if not deposited by the due date under the welfare statutes, in line with the Apex Court's decision in Commissioner of Income Tax versus Alom Extrusions Ltd. RATIONALE: The Court applied the statutory framework comprising Section 2(24)(x), Section 36(1)(va), and Section 43B of the Income Tax Act, along with their provisos and explanations, as amended over time.The Court relied heavily on the Apex Court's ruling in Commissioner of Income Tax versus Alom Extrusions Ltd., which clarified that Section 43B's non obstante clause overrides other provisions to disallow deductions unless payment is actually made, but also recognized a relaxation allowing deduction if payment is made before filing the return.The Court noted that the legislative purpose behind these provisions is to prevent employers from 'sitting on the collected contributions and depriving the workmen of the rightful benefits under social welfare legislations.'The Court rejected the revenue's contention that Section 43B should not be read into Section 36(1)(va), emphasizing that the Explanation to Section 36(1)(va) defines 'due date' in a manner consistent with Section 43B's provisions.The Court further endorsed the reasoning of the Delhi High Court in Commissioner of Income-Tax versus Aimil Ltd., which held that late deposit of employees' contributions before filing the return entitles the employer to deduction, subject to statutory penalties or interest under welfare laws.The Court recognized that the Finance Act, 2003's deletion of the second proviso to Section 43B(b) was 'curative in nature' and retrospective, thus extending the benefit of late deposit before return filing to both employer and employee contributions.No dissenting or differing opinions were noted.