Decision of the Apex Court under discussion

CHECKMATE SERVICES P. LTD. VERSUS COMMISSIONER OF INCOME TAX-1 [2022 (10) TMI 617 - SUPREME COURT] 

Question raised before the Apex Court:

Whether the appellant assessees are entitled to deduction of amounts deposited by them towards contribution in terms of The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter, “EPF Act”), The Employees’ Provident Funds Scheme, 1952 (hereinafter, “EPF Scheme”), The Employees’ State Insurance Act, 1948 (hereinafter, “ESI Act”), The Employees’ State Insurance (Central) Regulations, 1950 (hereinafter, “ESI Regulations”) or any other provident or superannuation fund.

Origin of the issue:

Berger Paints India Ltd. v Commissioner of Income Tax, Kolkata-IV & Anr [2012 (10) TMI 239 - CALCUTTA HIGH COURT] was the lead matter while hearing this batch of appeals. However, the parties agreed to treat Checkmate Services Pvt. Ltd. v Commissioner of Income Tax-I [2014 (11) TMI 641 - GUJARAT HIGH COURT] as the lead appeal, for convenience.

Appellants’ Contentions:

If the scheme of the IT Act were to be kept in mind, the restrictive condition in Section 36(1)(va) i.e., the stipulation that the employees’ contribution must be paid within the time specified, failing which no deduction was permissible, was in fact intended to be expressly overridden by Section 43B.

The philosophy behind Section 43B (which was introduced 01.04.1984) was to ensure actual payment of certain specified and statutory dues, before a particular date. These dues either by way of tax or other levies, (including interest-payment towards loan or contributions deducted by statutes such as EPF Act) were to be made within a specified date under such enactments which cast those obligations. This was only a condition for the grant of deduction. The second proviso to Section 43B had imposed further restrictive condition which was omitted in 2003. Therefore, the non-obstante clause of Section 43B was operative propriae vigore entitling the assessees to claim deduction made by them in respect of contributions to PF authorities provided the entire amounts were paid before the return of income was filed.

As urged to this court to adopt an interpretation that would be pragmatic and in consonance with fairness. So long as the assessee concerned deposited PF and other dues before the date of filing the return, no fiscal consequence of it being taxed should take place. Counsel submitted that deposit after due date would be visited with fine or other adverse consequences under the relevant statute.

Revenue’s Contentions:

As in terms of provisions of Section 36(1)(va) with respect to any sum received by the assessee from any of its employees to which provision of Section 2 (24 (x) applied, if credited by the assessee to the employees’ account in the relevant fund or funds on or before the due date, the assessee was entitled to the deduction. It was submitted that even the Explanation to Section 36(1) (va) made it clear that for the purpose of that provision, “due date” meant the date by which the assessee, as an employer, had to credit the employees' contribution to the employees’ account in the relevant fund under any law or rule or regulation issued thereunder or under any standing order, etc. Therefore, during the relevant assessment year, if the employer did not deposit the entire amount towards employees' contribution with the PF authorities on or before the due date under the EPF/ESI Act, to the extent there was shortfall in deposit of the employees' contribution/ESI contribution, the assessee was not entitled to the deduction.

Analysis and Conclusions:

Non-deposit of employees contribution within the due date prescribed under the respective statute is disallowable u/s 36 (1) (BA)r.w.s. 2 (24) (x)r.w.s. 43B of the act. 

Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e. employees’ contribution is linked to payment before the due dates specified in the respective Acts and employer’s contribution is linked to the payment before the prescribed due date for filing of return of income under Section 139(1) of the Act.

The result of any failure to pay within the prescribed dates also leads to different results. In case of employees’ contribution, any failure to pay within the prescribed dates under the respective PF Act of Scheme, will result in negating the employer’s claim for deduction permanently forever under Section 36(1)(va) of the Act. On the other hand, delay in payment of employer’s contribution is visited with deferment of deduction on payment basis u/s 43B of the Act and is therefore not lost totally.

The intent of the lawmakers was clear that sums referred to in clause (b) of Section 43B, i.e., “sum payable as an employer, by way of contribution” refers to the contribution by the employer. The reference to “due date” in the second proviso to Section 43B was to have the same meaning as provided in the explanation to Section 36(1)(va). Parliament therefore, through this amendment, sought to provide for identity in treatment of the two kinds of payments: those made as contributions, by the employers, and those amounts credited by the employers, into the provident fund account of employees, received from the latter, as their contribution. Both these contributions had to necessarily be made on or before the due date.

There is no doubt that in Commissioner of Income Tax Versus M/s. Alom Extrusions Limited - 2009 (11) TMI 27 - Supreme Court this court did consider the impact of deletion of second proviso to Section 43B, which mandated that unless the amount of employers’ contribution was deposited with the authorities, the deduction otherwise permissible in law, would not be available. This court was of the opinion that the omission was curative, and that as long as the employer deposited the dues, before filing the return of income tax, the deduction was available.

Deductions are to be granted only when the conditions which govern them are strictly complied with. 

The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd. [2009 (12) TMI 38 - DELHI HIGH COURT]; Commissioner of Income-Tax and another v. Sabari Enterprises [2007 (7) TMI 169 - KARNATAKA HIGH COURT], Commissioner of Income Tax v. Pamwi Tissues Ltd. [2008 (2) TMI 400 - BOMBAY HIGH COURT] , Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. [2014 (8) TMI 677 - RAJASTHAN HIGH COURT] and Nipso Polyfabriks [2012 (11) TMI 592 - HIMACHAL PRADESH HIGH COURT] would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation.

Primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act.

Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned.

Thus, amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of “income” amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time – by way of contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained.

Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure.

This court is of the opinion that there is no infirmity in the approach of the impugned judgment.

The decision went in favor of Revenue and against the assessee. 

Full Text of the case:

2022 (10) TMI 617 - Supreme Court