INCOME TAX ACT, 1961

Sections 36(1)(va) & 43B

Business deduction under section 36(1)(va) - Employees' contributions towards PF and ESI - Paid after due date under respective Acts -

AO made disallowance of employees' contributions towards PF and ESI holding that those amounts could not have been allowed as deductions under section 36(1)(va) when payments were made beyond the relevant due date under respective Acts. Assessees' pleas were unsuccessful before Tribunal and before High Court too. Thus, the assessee was in appeal before Supreme Court. It was assessee's submission that any sum paid by employer/assessee as contributions included both employer's contribution and employees' contributions and would be allowed as deduction under section 36(1)(va). On the other hand, Revenue submitted that the Act differentiated between the employer's contribution and the employees' contributions. With respect to the employer's contribution, section 43B was applicable, however, with respect to the employees' contributions, section 36(1)(va) was applicable. Both the provisions i.e., section 43B and section 36(1)(va) operated in different fields with respect to the different contributions. Consequently, section 43B was inapplicable in case of the employees' contributions and could not override section 36(1)(va). Held: There is a marked distinction between nature and character of employer's contribution and employees' contributions. The employer's contribution is to be paid out of its income whereas the employees' contributions is deemed income, since it is deduction from the employees' income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under section 43B. Further, non-obstante clause under section 43B would not in any manner dilute or override the employer's obligation to deposit the amounts retained/deducted by it from the employees' income, on or before the due date as a condition for deduction. The non-obstante clause has to be understood in the context of entire provision of section 43B, which is to ensure timely payment before the returns are filed, of certain liabilities that are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts, which are held in trust, as it is in the case of employees' contributions that are deducted from their income. They are not part of the assessee-employer's income, nor are they heads of deduction per se in the form of statutory pay out. They are others' income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount, which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. Therefore, employees' contribution to PF and ESI paid beyond due date as specified under the relevant Acts is not allowable as deduction under section 36(1)(va) when read with section 43B and same has to be added back to the income of assessee i.e., income in the hands of employer, under section 2(24)(x). Hence, in instant case, disallowance made on account of delay in deposit of employees' contributions towards PF and ESI was justified.

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