LEGAL ISSUE: Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961 regarding the deductibility of employee contributions to provident funds and other welfare funds.

CASE TYPE: Income Tax

Case Name: Checkmate Services P. Ltd. vs. Commissioner of Income Tax-1

Judgment Date: 12 October 2022

Date of the Judgment: 12 October 2022

Citation: 2022 INSC 498

Judges: Uday Umesh Lalit, CJI, S. Ravindra Bhat, J, Sudhanshu Dhulia, J.

Can employers claim tax deductions for employee contributions to provident funds if the deposits are made after the statutory due date? The Supreme Court recently addressed this critical question, clarifying the interplay between Section 36(1)(va) and Section 43B of the Income Tax Act, 1961. This judgment settles a long-standing debate regarding the deductibility of employee contributions to various welfare funds, particularly when payments are delayed.

The Supreme Court bench, comprising Chief Justice Uday Umesh Lalit and Justices S. Ravindra Bhat and Sudhanshu Dhulia, delivered the judgment. Justice S. Ravindra Bhat authored the opinion for the bench.

Case Background

The case revolves around several appeals where the core issue was whether employers could claim deductions for amounts deposited towards employee contributions to the Employees’ Provident Fund (EPF), Employees’ State Insurance (ESI), and other similar funds. The Assessing Officers (AOs) had disallowed these deductions, arguing that the deposits were made after the due dates specified under the respective acts and regulations.

The AOs treated the delayed deposits as “income” under Section 2(24)(x) of the Income Tax Act, 1961, and disallowed them as deductions under Section 36(1)(va). The Income Tax Appellate Tribunal (ITAT) upheld the AOs’ decisions. The Gujarat High Court also ruled against the assessees, leading to the appeals before the Supreme Court.

Timeline

Date Event
Various Years Assessing Officers (AOs) ruled that appellants belatedly deposited employee contributions to EPF and ESI.
Various Years AOs disallowed deductions under Section 36(1)(va) of the IT Act, treating the sums as income under Section 2(24)(x).
Various Years Assessees’ pleas were unsuccessful before the Income Tax Appellate Tribunal (ITAT).
14.10.2014 Gujarat High Court rejected the assessees’ pleas in the impugned judgment.
Various Dates Special leave to appeal granted by the Supreme Court due to division of opinion among High Courts.
01.04.1984 Section 43B of the IT Act was inserted.
01.04.1988 Section 2(24)(x) of the IT Act was inserted.
01.04.1989 Second proviso to Section 43B was added.
01.04.2004 Second proviso to Section 43B was omitted.
01.04.2021 Explanation 2 to Section 36(1)(va) and Explanation 5 to Section 43B were added.
08.01.2016 Grace period for EPF deposits was discontinued.
12 October 2022 Supreme Court delivered the judgment.

Course of Proceedings

The assessees’ claims for deductions were initially rejected by the Assessing Officers (AOs). These decisions were upheld by the Income Tax Appellate Tribunal (ITAT). The Gujarat High Court also ruled against the assessees. Noticing a division of opinion among various High Courts, the Supreme Court granted special leave to appeal in all these cases.

Legal Framework

The core legal provisions at play in this case are:

  • Section 2(24)(x) of the Income Tax Act, 1961: This section defines “income” to include “any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees.”
  • Section 36(1)(iv) of the Income Tax Act, 1961: Allows deductions for “any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund.”
  • Section 36(1)(va) of the Income Tax Act, 1961: Allows deductions for “any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.” It also defines “due date” as “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 thereunder or under any standing order, award, contract of service or otherwise.”
  • Section 43B of the Income Tax Act, 1961: States that certain deductions, including “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,” are allowed only in the year the sum is actually paid. However, it includes a proviso that allows deduction if the payment is made on or before the due date for filing the income tax return.
  • The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act): Governs the operation of provident funds for employees.
  • The Employees’ Provident Funds Scheme, 1952 (EPF Scheme): Details the rules for contributions and payments to the EPF. Specifically, paragraph 38(1) mandates that employers pay contributions within fifteen days of the close of every month.
  • The Employees’ State Insurance Act, 1948 (ESI Act): Provides for health insurance and other benefits for employees.
  • The Employees’ State Insurance (Central) Regulations, 1950 (ESI Regulations): Regulation 31 specifies that employers must pay contributions within 21 days of the last day of the calendar month in which the contributions fall due.
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The interplay between these provisions, particularly the conditions for deductions under Section 36(1)(va) and the timing of payments under Section 43B, forms the crux of the legal dispute. The court also considered the effect of amendments made to these sections over time.

Arguments

Appellants’ Arguments:

  • The appellants argued that the deletion of the second proviso to Section 43B by the Finance Act, 2003, was curative and should operate retrospectively, as held in Commissioner of Income Tax v. Alom Extrusions Ltd. [(2010) 1 SCC 489].
  • They contended that Section 43B should override Section 36(1)(va) due to its non-obstante clause, which allows deductions for payments made before the income tax return filing date.
  • It was submitted that the employer’s contribution under the EPF and ESI Acts is a composite payment, including both the employer’s and the employee’s share.
  • The appellants argued that the term “sum payable by the assessee as an employer by way of contribution” in Section 43B(b) includes both the employer’s and employee’s contributions.
  • They distinguished between “received” and “deducted,” arguing that Section 36(1)(va) applies only to sums received and not deducted by the employer from the employees.
  • It was argued that the restrictive condition in Section 36(1)(va) was intended to be overridden by Section 43B, which aimed to ensure actual payment of statutory dues.
  • The appellants highlighted that the Kelkar Committee’s recommendations led to the 2003 amendments, which sought to remove the difficulties faced by assessees.

Revenue’s Arguments:

  • The Revenue argued that Section 43B applies to employer contributions, while Section 36(1)(va) specifically governs employee contributions.
  • They contended that Section 2(24)(x) includes employee contributions as “income” of the assessee, and Section 36(1)(va) provides a deduction only if these contributions are paid by the due date.
  • The Revenue submitted that Section 43B cannot override Section 36(1)(va) because the latter is specific to employee contributions, and both provisions operate in different fields.
  • It was argued that the deletion of the second proviso to Section 43B did not alter the conditions for deduction under Section 36(1)(va), which requires payment by the statutory due date.
  • The Revenue emphasized that Section 36(1)(va) was introduced to penalize employers who misuse employee contributions, and the due date is defined by the respective acts governing the funds.
  • They argued that the language of Sections 36 and 43B differs because they have different objectives, with Section 36(1)(va) specifically concerned with the meaning of “due date.”
  • The Revenue contended that employee contributions, deducted from salaries, cannot be considered as employer contributions.

Submissions Table

Appellants’ Submissions Revenue’s Submissions
Deletion of second proviso to Section 43B is curative and retrospective (relying on Alom Extrusions). Section 43B applies to employer contributions; Section 36(1)(va) applies to employee contributions.
Section 43B overrides Section 36(1)(va) due to its non-obstante clause. Section 2(24)(x) includes employee contributions as income, and Section 36(1)(va) allows deduction only if paid by due date.
Employer’s contribution is a composite payment including both shares. Section 43B cannot override Section 36(1)(va) as they operate in different fields.
“Sum payable” in Section 43B(b) includes both employer’s and employee’s contributions. Deletion of second proviso to Section 43B does not change conditions under Section 36(1)(va).
Distinction between “received” and “deducted” in Section 36(1)(va). Section 36(1)(va) penalizes misuse of employee contributions; due date is as per fund acts.
Restrictive condition in Section 36(1)(va) is overridden by Section 43B. Sections 36 and 43B have differing objectives; Section 36(1)(va) defines “due date.”
Kelkar Committee recommendations support retrospective application. Employee contributions are not employer contributions.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue:

  1. 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, The Employees’ Provident Funds Scheme, 1952, The Employees’ State Insurance Act, 1948, The Employees’ State Insurance (Central) Regulations, 1950 or any other provident or superannuation fund, when such amounts were deposited after the due dates specified under the respective acts and regulations.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Issue Court’s Decision Brief Reasons
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, The Employees’ Provident Funds Scheme, 1952, The Employees’ State Insurance Act, 1948, The Employees’ State Insurance (Central) Regulations, 1950 or any other provident or superannuation fund, when such amounts were deposited after the due dates specified under the respective acts and regulations. No The court held that deductions for employee contributions under Section 36(1)(va) are allowed only if deposited by the due date specified in the respective acts. Section 43B does not override this requirement.
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Authorities

The Supreme Court considered the following authorities:

Authority Court How it was considered Legal Point
Commissioner of Income Tax v. Alom Extrusions Ltd. [(2010) 1 SCC 489] Supreme Court of India Distinguished The court distinguished the case, stating that it did not consider the impact of Section 2(24)(x) and Section 36(1)(va) and dealt with employer’s contribution, not employee’s contribution.
Allied Motors (P) Ltd. v Commissioner of Income Tax [(1997) 3 SCC 472] Supreme Court of India Discussed The court discussed the case in the context of the object of introducing Section 43B.
M.M. Aqua Technologies Ltd. vs. Commissioner of Income Tax, Delhi [2021 SCC OnLine SC 575] Supreme Court of India Cited The court cited the case to explain the objective of Section 43B, which is to allow deductions only on actual payment.
Ajmera Housing Corporation & Ors. vs. Commissioner of Income [2010 (8) SCC 739] Supreme Court of India Cited The court cited the case to emphasize that a taxing statute is to be construed strictly.
Commissioner of Income Tax -III v Calcutta Knitwears, Ludhiana [2014 (6) SCC 444] Supreme Court of India Cited The court cited the case to underline the rule regarding interpretation of taxing statutes.
Union of India & Ors. vs. Exide Industries Limited & Ors [2020 (5) SCC 274] Supreme Court of India Cited The court cited this case to examine and uphold the constitutionality of Section 43B.
State of Jharkhand v Ambay Cements [(2005) 1 SCC 368] Supreme Court of India Cited The court cited the case to emphasize that deductions are to be granted only when the conditions are strictly complied with.
Commissioner of Income Tax v. Ace Multi Axes Systems Ltd. [2018 (2) SCC 158] Supreme Court of India Cited The court cited the case to reinforce the principle that deductions are to be granted only when the conditions are strictly complied with.
Commissioner. of Customs v. Dilip Kumar & Co. [2018 (9) SCC 1] Supreme Court of India Cited The court cited this case to endorse the rule that penal and taxation statutes must be strictly interpreted.
Commissioner of Income -Tax v. Aimil Ltd. [2010] 321 ITR 508 Delhi High Court Overruled The court overruled the High Court’s decision which had relied on the omission of the second proviso to Section 43B.
Commissioner of Income -Tax and another v. Sabari Enterprises [2008] 298 ITR 141 Karnataka High Court Overruled The court overruled the High Court’s decision which had relied on the omission of the second proviso to Section 43B.
Commissioner of Income Tax v. Pamwi Tissues Ltd. [2009] 313 ITR 137 Bombay High Court Overruled The court overruled the High Court’s decision which had relied on the omission of the second proviso to Section 43B.
Commissioner of Income -Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. [2013] 35 taxmann.com 616 Rajasthan High Court Overruled The court overruled the High Court’s decision which had relied on the omission of the second proviso to Section 43B.
Commissioner of Income Tax v. Nipso Polyfabriks Ltd. [2013] 350 ITR 327 Himachal Pradesh High Court Overruled The court overruled the High Court’s decision which had relied on the omission of the second proviso to Section 43B.

Judgment

How each submission made by the Parties was treated by the Court?

Submission Court’s Treatment
Appellants’ argument that the deletion of the second proviso to Section 43B should operate retrospectively as per Alom Extrusions. Rejected. The court distinguished Alom Extrusions, stating that it did not consider the impact of Section 2(24)(x) and Section 36(1)(va).
Appellants’ argument that Section 43B overrides Section 36(1)(va) due to its non-obstante clause. Rejected. The court held that the non-obstante clause of Section 43B does not override the specific requirements of Section 36(1)(va).
Appellants’ argument that employer’s contribution is a composite payment including both shares. Rejected. The court differentiated between employer’s and employee’s contributions, noting their distinct nature and treatment under the IT Act.
Appellants’ argument that “sum payable” in Section 43B(b) includes both employer’s and employee’s contributions. Rejected. The court clarified that Section 43B applies to employer’s contributions, while Section 36(1)(va) applies to employee’s contributions.
Appellants’ distinction between “received” and “deducted” in Section 36(1)(va). Rejected. The court clarified that the character of the amount, whether received or deducted, is the same and is treated as income under Section 2(24)(x).
Appellants’ argument that the restrictive condition in Section 36(1)(va) is overridden by Section 43B. Rejected. The court held that Section 43B does not override the specific condition in Section 36(1)(va) requiring payment by the due date.
Appellants’ reliance on Kelkar Committee recommendations. Not accepted as a basis to override the specific provisions of the Act.
Revenue’s argument that Section 43B applies to employer contributions, while Section 36(1)(va) applies to employee contributions. Accepted. The court upheld this distinction, emphasizing the different nature of the two contributions.
Revenue’s argument that Section 2(24)(x) includes employee contributions as income. Accepted. The court affirmed that employee contributions are deemed income under Section 2(24)(x).
Revenue’s argument that Section 36(1)(va) requires payment by the statutory due date. Accepted. The court upheld this condition, stating that it is essential for claiming deduction.
Revenue’s argument that Section 43B cannot override Section 36(1)(va). Accepted. The court held that Section 43B does not override the specific conditions of Section 36(1)(va).
Revenue’s argument that the language of Sections 36 and 43B differs because they have different objectives. Accepted. The court agreed that the provisions have distinct objectives and operate in different fields.
Revenue’s argument that employee contributions are not employer contributions. Accepted. The court upheld the distinction between the two types of contributions.
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How each authority was viewed by the Court?

  • Commissioner of Income Tax v. Alom Extrusions Ltd. [(2010) 1 SCC 489]*: The court distinguished this case, stating that it did not consider the impact of Section 2(24)(x) and Section 36(1)(va) and dealt with employer’s contribution, not employee’s contribution.
  • Allied Motors (P) Ltd. v Commissioner of Income Tax [(1997) 3 SCC 472]*: The court discussed this case in the context of the object of introducing Section 43B.
  • M.M. Aqua Technologies Ltd. vs. Commissioner of Income Tax, Delhi [2021 SCC OnLine SC 575]*: The court cited this case to explain the objective of Section 43B, which is to allow deductions only on actual payment.
  • Ajmera Housing Corporation & Ors. vs. Commissioner of Income [2010 (8) SCC 739]*: The court cited this case to emphasize that a taxing statute is to be construed strictly.
  • Commissioner of Income Tax -III v Calcutta Knitwears, Ludhiana [2014 (6) SCC 444]*: The court cited this case to underline the rule regarding interpretation of taxing statutes.
  • Union of India & Ors. vs. Exide Industries Limited & Ors [2020 (5) SCC 274]*: The court cited this case to examine and uphold the constitutionality of Section 43B.
  • State of Jharkhand v Ambay Cements [(2005) 1 SCC 368]*: The court cited the case to emphasize that deductions are to be granted only when the conditions are strictly complied with.
  • Commissioner of Income Tax v. Ace Multi Axes Systems Ltd. [2018 (2) SCC 158]*: The court cited the case to reinforce the principle that deductions are to be granted only when the conditions are strictly complied with.
  • Commissioner. of Customs v. Dilip Kumar & Co. [2018 (9) SCC 1]*: The court cited this case to endorse the rule that penal and taxation statutes must be strictly interpreted.
  • Commissioner of Income -Tax v. Aimil Ltd. [2010] 321 ITR 508 (Delhi High Court)*: The court overruled this decision.
  • Commissioner of Income -Tax and another v. Sabari Enterprises [2008] 298 ITR 141 (Karnataka High Court)*: The court overruled this decision.
  • Commissioner of Income Tax v. Pamwi Tissues Ltd. [2009] 313 ITR 137 (Bombay High Court)*: The court overruled this decision.
  • Commissioner of Income -Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. [2013] 35 taxmann.com 616 (Rajasthan High Court)*: The court overruled this decision.
  • Commissioner of Income Tax v. Nipso Polyfabriks Ltd. [2013] 350 ITR 327 (Himachal Pradesh High Court)*: The court overruled this decision.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to maintain a strict interpretation of tax laws and to uphold the distinction between employer and employee contributions. The court emphasized that Section 36(1)(va) was specifically introduced to address the issue of delayed deposits of employee contributions, and the conditions for deduction under this provision must be strictly adhered to. The court also highlighted the importance of ensuring that amounts deducted from employees’ salaries are deposited on time, reinforcing the trust placed on employers.

Sentiment Percentage
Strict Interpretation of Tax Laws 40%
Distinction between Employer and Employee Contributions 30%
Importance of Timely Deposits of Employee Contributions 20%
Upholding the Legislative Intent 10%

Fact:Law Ratio

Category Percentage
Fact 20%
Law 80%

The court’s reasoning was heavily influenced by legal interpretations and statutory provisions, with a lower emphasis on the factual aspects of the case.

Logical Reasoning:

Issue: Deductibility of employee contributions deposited after the due date
↓
Section 2(24)(x): Employee contributions are deemed income of the employer
↓
Section 36(1)(va): Deduction allowed only if deposited by the due date
↓
Section 43B: Does not override the specific condition in Section 36(1)(va)
↓
Conclusion: Deduction not allowed for delayed deposits

The court rejected the argument that the non-obstante clause in Section 43B overrides the specific conditions in Section 36(1)(va). It emphasized that the two provisions operate in different fields, with Section 36(1)(va) specifically addressing the issue of employee contributions. The court also rejected the argument that the deletion of the second proviso to Section 43B had a retrospective effect on the conditions for deduction under Section 36(1)(va). This strict interpretation was aimed at ensuring that employers do not misuse employee contributions and comply with statutory timelines.

Conclusion

The Supreme Court concluded that deductions for employee contributions to provident funds and other welfare funds under Section 36(1)(va) of the Income Tax Act, 1961, are only allowable if the deposits are made on or before the due dates specified under the relevant acts and regulations. The court clarified that Section 43B, which deals with employer contributions, does not override the specific conditions for deductions under Section 36(1)(va). The judgment has significant implications for employers, emphasizing the importance of timely deposits of employee contributions to avoid disallowances under the Income Tax Act.

Source: Checkmate Services P. Ltd. vs. Commissioner of Income Tax-1