2007 (7) TMI 169 - HC - Income Tax

PF and ESI contributions paid by income tax return due date deductible under Section 36(1)(va) read with Section 43B(b)

Karnataka HC held that contributions to PF and ESI paid on or before the due date for filing returns under section 139(1) are deductible under section ... Allowability of deduction under section 36(1)(va) for employer's contribution to provident fund and ESI - definition of 'due date' for crediting employee contributions - operation of section 43B(b) notwithstanding other provisions of the Act - first proviso to section 43B and effect of omission of its sub-clauses - effect of deletion of the second proviso to section 43B by Finance Act, 2003Allowability of deduction under section 36(1)(va) for employer's contribution to provident fund and ESI - definition of 'due date' for crediting employee contributions - operation of section 43B(b) notwithstanding other provisions of the Act - Whether employer's contributions to PF and ESI are deductible though paid after the period contemplated by other statutes, if paid on or before the due date for furnishing the return under section 139(1). - HELD THAT: - The court examined the statutory scheme comprising the definition in section 2(24)(x), the deduction provision in section 36(1)(va) (with its Explanation defining 'due date') and the proviso structure of section 43B(b). It noted that section 43B(b) was inserted to prevent abuse by deferring payment of statutory liabilities, but that the first proviso to section 43B (as amended earlier) and the Explanation to section 36(1)(va) operate to allow deduction where the employer has paid the employees' contributions on or before the applicable 'due date' for crediting and, in the present context, by the due date for filing returns under section 139(1). The court rejected Revenue's contention that deduction is permissible only if payment is made within dates prescribed under other enactments irrespective of the Income-tax Act's provisions; read together, the provisions permit the assessee to claim deduction where the contributions are paid by the due date for furnishing the return, and therefore the Tribunal was correct in allowing the deductions. [Paras 12, 13, 14]Deductions for employer's contributions to PF and ESI are allowable where such contributions were paid by the assessee on or before the due date for furnishing the return under section 139(1); answer to the substantial question is in the negative as regards Revenue.Effect of deletion of the second proviso to section 43B by Finance Act, 2003 - retrospective operation of amendments to section 43B - Whether the amendment to section 43B introduced by the Finance Act, 2003, with effect from April 1, 2004, must be read retrospectively so as to exclude applicability of section 43B to the assessee in light of Allied Motors. - HELD THAT: - The court observed that the second question was covered by earlier authority adverse to Revenue (CIT v. Bharat Earth Movers Ltd.) and, having regard to the statutory amendments and precedents (including Allied Motors and General Finance Co.), answered the question against the Revenue. The deletion effected by the Finance Act, 2003 does not operate to assist the Revenue in the appeals before the court. [Paras 15]The second substantial question is answered against the Revenue.Final Conclusion: All appeals dismissed. The Revenue is directed to accept the PF and ESI contributions paid by the assessees and allow the corresponding deductions as claimed in their returns. Issues Involved:1. Whether contributions made by the assessee to PF and ESI are allowable deductions even if made beyond the stipulated period as per section 36(1)(va) read with section 2(24)(x) and section 43B of the Income-tax Act.2. Whether the amendment to section 43B introduced by the Finance Act, 2003, should be read retrospectively.Issue-wise Detailed Analysis:1. Allowability of PF and ESI Contributions Beyond Stipulated Period:The Revenue questioned the orders of the Income-tax Appellate Tribunal, arguing that contributions to PF and ESI must be made within the specified date to avail deductions, as per section 36(1)(va) read with section 2(24)(x) and section 43B of the Income-tax Act. They relied on the Supreme Court's decision in Allied Motors P. Ltd. v. CIT, which emphasized that deductions for statutory liabilities should be allowed only in the year of actual payment to curb the practice of delayed payments.The Tribunal, however, held that the contributions made before the due date for furnishing the return of income under section 139(1) are allowable deductions. The Tribunal's decision was supported by the proviso to section 43B, which was remedial in nature and aimed at eliminating unintended hardships caused by the original wording of section 43B.The court examined the statutory provisions, including sections 2(24)(x), 36(1)(va), and 43B(b), and concluded that the amount paid by the assessee on or before the due date for filing the return under section 139(1) is deductible. The court found the Revenue's contention-that the deduction is permissible only if the statutory liability is paid within the due date under the respective enactments-untenable in law.2. Retrospective Application of the Amendment to Section 43B:The second question concerned whether the amendment to section 43B by the Finance Act, 2003, should be read retrospectively. The Revenue's counsel conceded that this issue had already been settled against them in the case of CIT v. Bharat Earth Movers Ltd., where the court held that the amendment should be read retrospectively.Conclusion:The court dismissed all appeals, directing the Revenue to accept the payments of ESI and PF contributions made by the assessees and to allow the claimed deductions in their returns. The substantial questions of law were answered in favor of the assessees, confirming that contributions made before the due date for filing the return under section 139(1) are allowable deductions.