For AYs prior to 2021-22 also, due date u/s 36(1)(va) [after amendment] applies for deductibility of employees’ contributions to PF, ESI etc. – Supreme Court

Question of law before Hon’ble Supreme Court:

• The issue revolving around the entitlement to deduction under Section 36(1)(va) of the Income Tax Act, 1961 (the Act) of amount received by the employer from the employee towards contribution to various statutory funds has been a question of law which has a division of opinion between various High Courts.
• The question of law is limited to the interpretation of Section 36(1)(va) of the Act which mentions “on or before due date” as the condition to avail deduction. Where such “due date” has been interpreted by the tax payers as due date for filing of the Income Tax return, the revenue authorities have held it as due date under the relevant statutory laws i.e., the time limit within which the employees’ contribution held by the tax payer under fiduciary capacity needs to be deposited.

Findings of Hon’ble Supreme Court:

The Supreme Court while deciding this case has also discussed its earlier decision of CIT v. Alom Extrusions Ltd. along with provisions of Section 36(1)(iv) and Section 43B of the Act.

• Section 36(1)(iv) of the Act deals with employer’s contribution and a deduction is allowable to an employer for any sums paid by way of contribution to various funds as ‘Employer Contribution’ while computing the income u/s 28 of the Act.
• Section 43B of the Act deals with deductions to be allowed only on actual payment basis and includes sum payable by the employer towards contribution of any statutory fund.
• Section 36(1)(va) of the Act deals with employees’ contribution received by employer from its employees’ and the deduction is allowable, if such sum is credited in the relevant statutory funds on or before the ‘due date’.
• While Section 36(1)(va) of the Act was inserted by Finance Act 1987, there was also insertion Section 2(24)(x) of the Act which provides that sum received by the tax payer from its employees’ shall be treated as income if not deposited in the relevant statutory funds.
• Now the term due date as it finds mention in Section 36(1)(va) of the Act has been held as the due date with relevance to due date as prescribe under the relevant statutory funds.
• The reference to Section 43B of the Act for the purposes of understanding the term due date was only for the purposes of employer’s contribution under the relevant statutory funds.
• A distinction was also brought out between employer’s contribution and employees’ contribution (which is received by the tax payer for onwards deposition) and it was stated that where employer’s contribution is not deposited as per the due date mentioned under Section 43B of the Act, the deduction of such sums of money shall not be available. However, where employees’ contribution received by the tax payer shall be first held as income under Section 2(24)(x) of the Act [as deemed income] and where it is deposited shall be then available as a deduction.

• Due to this marked distinction between Section 36(1)(iv) read with Section 43B and Section 36(1)(va) of the Act, the mention of the term due date under the later section shall be meant as due date for deposit of such sum under the relevant statutory fund.

SW Point of View:

The controversy surrounding the term due date as it finds mention in Section 36(1)(va) of the Act has been settled to understand it as the date within which the contribution is required to be deposited under the relevant statutory fund.

Lakshay Prakash Jonwal, Direct Tax Associate, SW India

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