Pankaj 
8 September 2023 
135 Views 
The Supreme Court of India finally settled the long standing issue as to whether deduction could be allowed in respect of Employee’s Contribution to Provident Fund (PF) & Employee State Insurance (ESI), specified under Section 36(1)(va) of the Income Tax Act, 1961, where the payments under the respective Acts had been made after the due dates specified therein.
Prior to this judgment, there had been conflicted opinions on the matter, with some High Courts disallowing deduction on Employee’s Contribution to PF & ESI if paid after the due date specified therein. Subsequently, a new position came to be taken, wherein most High Courts and benches of the Income Tax Appellate Tribunal (ITAT) allowed deduction on delayed payment of Employee’s Contribution to PF & ESI, as long as the payment was made before the due date of filing Income Tax Return.
However, the Supreme Court in the present matter firmly resolved the issue by holding that no deduction could be allowed in respect of payments towards Employee’s Contribution to PF & ESIC, where the payment had not been made within the due dates prescribed under the respective Acts.
A Larger Bench of Chief Justice Uday Umesh Lalit, Justice S Ravindra Bhat and Justice Sudhanshu Dhulia observed that leeway granted to allow deductions on deposits made beyond the due date, but before date of filing of return, could not apply in case of amounts which were held in trust, as it is in the case of employees’ contributions which were deducted from their income.
Contribution to PF and ESI were neither part of employer’s income, nor were they heads of deduction per se in the form of statutory pay out, the Bench clarified. Moreover, such contribution to PF and ESI were monies only deemed to be income, with the object of ensuring that they were paid within the due date specified in the welfare legislation.
The Appellant-Assessee was represented by Mr. Arvind P Datar, Senior Advocate, whereas the Respondent-Revenue was represented by Mr. Balbir Singh, Additional Solicitor General.
The Assessee had filed ITR, in which deduction had been claimed in respect of payment towards Employee’s Contribution to PF & ESI. On assessment, the Assessing Officer observed that the Assessee had belatedly deposited the amounts, considering the due dates prescribed under the relevant Acts and regulations.
The AO also noted that by virtue of Section 36(1)(va) r/w/s 2(24)(x), such sums received by the assessee constituted “income” and as such when paid beyond due date as prescribed under the respective acts, the right to claim such sums as allowable deduction while computing the income was lost forever.
On appeal, such findings of the AO were sustained by the ITAT and subsequently, also by the High Court of Gujarat.
On hearing the contentions of both the parties, the Larger Bench upheld the view taken by the ITAT and as sustained by the High Court, namely that the non-obstante clause would not in any manner, dilute or override the employer’s obligation to deposit the amounts retained or deducted from employees’ income, unless the condition of the deposit being made on or before the due date prescribed.
The non-obstante clause had to be understood in the context of the complete provision of Section 43B, whose intent is to ensure timely payment of certain liabilities to be borne by the Assessee in the form of tax, interest payment and other statutory liabilities, before the date of filing ITR. The due dates for these liabilities, was laid down in the respective statute itself, the Larger Bench clarified.
While some leeway was given, in the sense that deduction could be allowed as long as the deposits were made before the due date of filing ITR, deduction on such deposits could be allowed. However, the Larger Bench emphasized that such leeway could not be given in case of amounts which were held in trust, as was the case of Employee’s Contributions, which were deducted from employees’ income and held in trust by the employer.
Employees’ contributions were neither part of the employer’s income, nor were they heads of deduction per se in the form of statutory pay out. They were others’ monies which were only deemed to be income, with the object of ensuring that they were deposited within the due date specified in the respective laws, and so they had to be deposited in terms of such welfare enactments, the Larger Bench observed.
With these observations, the Larger Bench surmised that it was only on deposit in terms of the respective laws, and on or before the due dates mandated by the laws concerned, that the amount held in trust and deemed to be income, could be treated as a deduction.
Thus, it is an essential condition for the deduction that such amounts were deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction, the Larger Bench emphasized.
With these observations, the Larger Bench finally settled the issue in favour of the Revenue and sustained the orders passed by the AO and as sustained by the ITAT and the High Court.
Cause Title: Checkmate Services Pvt Ltd vs Commissioner of Income Tax [Civil Appeal No. 2833 Of 2016 / 2023-Enterslice-14-SC-IT]
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