Section 43B is applicable to employees PF contributions also so held by Supreme Court:

[C.A. DEV KUMAR KOTHARI]

Employees contributions:

Contributions of employees to various funds including provident funds are deducted by way of book entry at the time of making provision for salary and wages payable for any period or at the time of actual payment as per procedure followed in any organization and timing of book entry and actual payment. Thus, any actual money is not received from employee at the time of such deduction.

No money received:

In respect of deductions by way of book entries made during any previous year it can reasonably be argued that it is not taxable as income as no money was received but a deducted from the salary of employees by way of book entry was made and credited to the employees provident fund account on the day of deduction itself.  Therefore, the sums deducted is not taxable u/s 2(24)(x) because S.2(24)(x) is a charging section and a deeming section and it need to be strictly followed. A book entry adjustment for such deduction cannot be considered as any money received.

Considering two related aspects of the deduction and credit to employees PF contribution a/c it can also be said that under section 2(24)(x) 'any sum received' by the assessee from his employees as contribution to any provident fund, super-annuation fund or any fund set up under the provisions of employees State Insurance Act, 1948(34 of 1948) or any other fund for welfare of such employees is deemed as income by way of fiction created under the law. A deduction from salary or wage is just an accounting entry and it does not amount to any sum received.  Furthermore, the sum is credited to employees provident fund account on the day of deduction itself.  Therefore, requirement of section 36(1)(va) as to crediting the sum by the assessee to the employees account in the relevant fund or funds on or before the due date is also complied with. There is no requirement of actually depositing. One cannot read such words in the section.

S.43B is attracted:

In case any sum is considered as income u/s 2(24)(x), then for allowability of the same provisions of S. 36 (1) (va) will apply. According to this provision requirement is to credit the said sum to the respective account of employees funds. However, S. 43B requires that any contribution to employees welfare funds will also be allowed only in the year of actual payment. Thus, in a situation such sums may be allowable u/s 36 merely on book entry (crediting to respective fund a/c), however, because of S. 43B, such sum shall be allowed only in year of actual payment. This is pertinent to note that, an assessee is required to deposit even contributions of employees in respective funds accounts. Therefore S. 43B is applicable to employees contributions also.

Supreme Court's observations about employees contributions:

In CIT Vs. Alom Extrusions Limited 2009 -TMI - 35073 - SUPREME COURT it has made detailed observations which are analyzed below:

"…  we need to understand the Scheme of the Income Tax Act, 1961, as it existed prior to 1st April, 1984, and as it stood after 1st April, 1984.

"Income" has been defined under Section 2(24) of the Act to include profits and gains. Under Section 2(24)(x), any sum received by the assessee from his employees as contributions to provident fund/superannuation fund or any fund set up under Employees' State Insurance Act, 1948, or any other fund for welfare of such employees constituted income.

This is the reason why every assessee(s) [employer(s)] was entitled to deduction even prior to 1st April, 1984, on Merchantile system of Accounting as business expenditure by making provision in his Books of Accounts in that regard.

In other words, if an assessee(s)-employer(s) is maintaining his books on Accrual System of Accounting, even after collecting the contribution from his employee(s) and even without remitting the amount to the Regional Provident Fund Commissioner [R.P.F.C.], the assessee(s) would be entitled to deduction as business expense by making a provision to that effect in his Books of Accounts.

The same situation arose prior to 1st April, 1984, in the context of assessees collecting sales tax and other indirect taxes from their respective customers and claiming deduction only by making provision in their Books without actually remitting the amount to the exchequer.

To curb this practice, Section 43-B was inserted with effect from 1st April, 1984, by which the Merchantile System of Accounting with regard to tax, duty and contribution to welfare funds stood discontinued and, under Section 43-B, it became mandatory for the assessee(s) to account for the afore-stated items not on Merchantile basis but on cash basis.

This situation continued between 1st April, 1984, and 1st April, 1988, when the Parliament amended Section 43-B and inserted first proviso to Section 43-B. By this first proviso, it was, inter alia, laid down, in the context of any sum payable by the assessee(s) by way of tax, duty, cess or fee, that if an assessee(s) pays such tax, duty, cess or fee even after the closing of the accounting year but before the date of  filing of the Return of income under Section 139(1) of the Act, the assessee(s) would be entitled to deduction under Section 43-B on actual payment basis and such deduction would be admissible for the accounting year.

This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds. To this effect, first proviso stood introduced with effect from 1st April, 1988

Vide Finance Act, 1988, the second proviso came to be inserted. It reads as follows: 

"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36."

The Explanation below clause (va) of sub-section (1) of Section 36:

"Explanation.-- For the purposes of this clause, 'due date' means 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."

The second proviso stood further amended vide Finance Act, 1989, with effect from 1st April, 1989, which reads as under:

"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date."

On reading the above provisions, it becomes clear that the assessee(s)-employer(s) would be entitled to deduction only if the contribution stands credited on or before the due date given in the Provident Fund Act.

However, the second proviso once again created further difficulties. In many of the Companies, financial year ended on 31st March, which did not coincide with the accounting period of R.P.F.C. For example, in many cases, the time to make contribution to R.P.F.C. ended after due date for filing of Returns. Therefore, the industry once again made representation to the Ministry of Finance.

Taking cognizance of this difficulty, the Parliament inserted one more amendment vide Finance Act, 2003, which, as stated above, came into force with effect from 1st April, 2004. In other words, after 1st April, 2004, two changes were made, namely, deletion of the second proviso and further amendment in the first proviso, quoted above.

The amendment made in the first proviso equated in terms of the benefit of deduction of tax, duty, cess and fee on the one hand with contributions to Employees' Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from 1st April, 2004.

Therefore, the argument of the assessee(s) is that the Finance Act, 2003, was curative in nature, it was not amendatory and, therefore, it applied retrospectively from 1st April, 1988, whereas the argument of the Department was that Finance Act, 2003, was amendatory and it applied prospectively, particularly when the Parliament had expressly made the Finance Act, 2003, applicable only with effect from 1st April, 2004.

It was also argued on behalf of the Department that even between 1st April, 1988, and 1st April, 2004, Parliament had maintained a clear dichotomy between payment of tax, duty, cess or fee on one hand and payment of contributions to the welfare funds on the other. According to the Department, that dichotomy continued upto 1st April, 2004, hence, looking to this aspect, the Parliament consciously kept that dichotomy alive upto 1st April, 2004, by making Finance Act, 2003, come into force only with effect from 1st April, 2004. Hence, according to the Department, Finance Act, 2003 should be read as amendatory and not as curative [retrospective] with effect from 1st April, 1988.

The courts order:

The court did not find merit in these civil appeals filed by the Department for the following reasons:

firstly, as stated above, Section 43-B [main section], which stood inserted by Finance Act, 1983, with effect from 1st April, 1984, expressly commences with a non-obstante clause, the underlying object being to disallow deductions claimed merely by making a Book entry based on Merchantile System of Accounting.

At the same time, Section 43-B [main section] made it mandatory for the Department to grant deduction in computing the income under Section 28 in the year in which tax, duty, cess, etc., is actually paid.

Parliament took cognizance of the fact that accounting year of a company did not always tally with the due dates under the Provident Fund Act, Municipal Corporation Act [octroi] and other Tax laws. Therefore, by way of  first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the Return under the Income Tax Act [due date], the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under Social Welfare legislations by delaying payment of contributions to the welfare funds.

However, as stated above, the second proviso resulted in implementation problems, which have been mentioned hereinabove, and which resulted in the enactment of Finance Act, 2003, deleting the second  proviso and bringing about uniformity in the first proviso by equating tax, duty, cess and fee with contributions to welfare funds. Once this uniformity is brought about in the first proviso, then, in our view, the Finance Act, 2003, which is made applicable by the Parliament only with effect from 1st April, 2004, would become curative in nature, hence, it would apply retrospectively with effect from 1st April, 1988.

In the case of Allied Motors (P) Limited vs. Commissioner of Income Tax, reported in 2008 -TMI - 5575 - SUPREME Court, the Scheme of Section 43-B of the Act came to be examined. In that case, the question which arose for determination was, whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant Sales Tax law should be disallowed under Section 43-B of the Act while computing the business income of the previous year? That was a case which related to Assessment Year 1984-1985. The relevant accounting period ended on June 30, 1983. The Income Tax Officer disallowed the deduction claimed by the assessee, which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year. The deduction was disallowed under Section 43-B which, as stated above, was inserted with effect from 1st April, 1984. It is also relevant to note that the first proviso which came into force with effect from 1st April, 1988 was not on the statute book when the assessments were made in the case of Allied Motors (P) Limited (supra). However, the assessee contended that even though the first proviso came to be inserted with effect from 1st April, 1988, it was entitled to the benefit of that proviso because it operated retrospectively from 1st April, 1984, when Section 43-B stood inserted. This is how the question of retrospectivity arose in Allied Motors (P) Limited (supra). This Court, in Allied Motors (P) Limited (supra) held that when a proviso is inserted to remedy unintended consequences and to make the section workable, a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this Court, in Allied Motors (P) Limited (supra), held that the first proviso was curative in nature, hence, retrospective in operation with effect from 1st April, 1988.

It is important to note once again that, by Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about an uniformity in  tax, duty, cess and fee on the one hand vis-a-vis contributions to welfare funds of employee(s) on the other.

This is one more reason why the court held that the Finance Act, 2003, is retrospective in operation.

The judgement in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which was considered as binding on the bench of two judges.

Therefore, the court held that Finance Act, 2003, will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted].

The court also considered that the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of the Department is to be accepted that Finance Act, 2003, to the above extent, operated prospectively. The court illustrated the same as follows:

In the present case, the respondents have deposited the contributions with the R.P.F.C. after 31st March [end of accounting year] but before filing of the Returns under the Income Tax Act and the date of payment falls after the due date under the Employees' Provident Fund Act, they will be denied deduction for all times. In view of the second proviso, which stood on the statute book at the relevant time, each of such assessee(s) would not be entitled to deduction under Section 43-B of the Act for all times. They would lose the benefit of deduction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right upto 1st April, 2004, and who pays the contribution after 1st April, 2004, would get the benefit of deduction under Section 43-B of the Act. In our view, therefore, Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate with effect from 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003.

K. Court also extracted from CIT vs. J. H. Gotla, 2008 -TMI - 5903 - SUPREME Court, as under:

"We should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction."

In view of all above factors the court held that Finance Act, 2003, to the extent indicated above, (that is amendment of S. 43B ) is curative in nature, hence, it is retrospective and it would operate with effect from 1st April, 1988 [when the first proviso came to be inserted].

Employees contributions is expressly considered:

As discussed above the Supreme Court has thoroughly examined the provisions of S. 2(24)(x), 36(1)(va) and S. 43B. The court has expressly held that prior to S. 43B employees contributions was allowed even if it was not actually paid. However, after introduction of s. 43B such contributions are also subject to s. 43B.

Delhi High Courts Ruling:

In CIT Vs. P. M. Electronics Ltd. (2009) 313 ITR161 considering the subsequent amendment to the provisions of section 43B of  the Act by virtue of the Finance Act, 2003, with effect from April 1, 2004 and the order dismissing SLP of revenue in Vinay Cement Ltd.'s case [2007] 213 CTR 268 ; [2009] 313 ITR (St.) 1 the Delhi High Court held that the assessee is entitled to claim the benefit under section 43B particularly in view of the fact that it had contributed (meaning thereby actually deposited) provident fund contributions of employees, before the due date for filing of the return. The department perhaps have challenged this decision and refuted its application as far as deposit of employee's share of PF contribution beyond the due date referred to in Explanation under clause (va) of section 36 (1). One would understand the dispute as far as the plea of curative effect of subsequent amendment but wonder how would the dispute holds any water in a period falling after F A 2003 amendment. 

CIT Vs. SABARI ENTERPRISES 2008 -TMI - 3490 - KARNATAKA HIGH COURT decided on Date - 03 July 2007

In this case also it was decided that S. 36(1)(va) clear that amounts actually paid on or before the due date of filing return u/s 139 are allowable deductions - so contributions by assessee to P.F. & Employees State Insurance are deductible even if made beyond period prescribed u/s 36(1)(va) but before the due date for furnishing return. 

Hitech (India) Pvt. Ltd. and others vs. UOI (1997) 227 ITR 446

This decision is about the constitutional validity of section 43B and section 36(1)(va) of the Income-tax Act, 1961. It was held that clause (b) of section 43B would include both employer share as well as employee share in so far as both would admit of deduction only when actually paid in accordance with the scheme of section 43B. The High Court held as follows:

" A combined reading of clause (va) of section 36(1) and section 43B of the Income-tax Act, 1961, makes it clear that if the assessee (employer) credited any sum received by him from any of his employees covered by section 2(24)(x) of the Income-tax Act in the relevant fund on or before the due date, that is, the date by which the assessee (employer) is required to credit the employees' contribution to the employees' account in the relevant fund under any Act, Rules, order or notification issued thereunder or under any standing order, award, contract of service or otherwise, he will be entitled to deduct the said amount in computing his business income, but section 43B controls the allowability of deduction of payment specified in clauses (a) to (d) thereof and provides certain conditions subject to which alone the deductions may be permissible. Section 43B which commences with a non obstante clause, mandates that the sum referred to in any one of the clauses, will be allowed as deduction in computing the income under section 28 of that previous year only, in which such sum is actually paid by the assessee, irrespective of the fact that the said deduction is otherwise allowable under the Act, and irrespective of the previous year in which the liability to pay such sum was incurred by the assessee, according to the method of accounting regularly employed by him. The first proviso to section 43B relaxes the rigour of the section if the sum referred to in clause (a) or clause (c) or clause (d) is actually paid by the assessee before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to any such sum was incurred and evidence of such payment is furnished by the assessee along with such return. The second proviso imposes a further restriction on the allowability of deduction of any sum referred to in clause (b). It provides that unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date, it shall not be allowed as deduction. For this purpose, the definition of "due date" as given in the Explanation to clause (va) of sub-section (1) of section 36 is adopted. Sub-clause (x) of clause (24) of section 2 includes within the meaning of "income" 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. Thus, it is clear that the employees' contribution received by the employer would be "income" in his hands and that would be allowed as permissible deduction under clause (va) of sub-section (1) of section 36 in computing the business income under section 28 provided the assessee credits the same to the relevant fund. Under section 43B, the sum referred to in clause (b) of section 43B is treated differently, as it relates to the sum payable by the assessee as an employer which includes the employer's contribution as well as employees' contribution. If such contributions which are payable to any provident fund or superannuation fund or any fund are paid within the due date, the employer will be able to avail of the benefit of deduction under section 43B. Though the general rule embodied in section 43B is one of allowability of deduction based on actual payment, the rule contained in the second proviso is an exception to the rule. There, actual payment is not enough, the payment should also be made within the due date as defined therein."

Subsequent amendment: 

We find omission of second proviso in section 43B vide the Finance Act, 2003, with effect from the assessment year 2004-05. In view of this amendment, the conditions of payment and clearing of cheques within prescribed time was omitted and delayed payment of provident fund thus became  permissible deduction in the year of actual payment just like any other items covered by section 43B.

ITAT Cochin bench decision:

In Parry Agro Industries Vs. ACIT (2009) 314 ITR AT 181the additions were made in by applying section 2(24)(x)/36(1)(va) for unpaid employees provident fund contributions. On appeal the ITAT Cochin bench observed and held as follows: 

"The hon'ble Supreme Court in the case of CIT v. Vinay Cement Ltd. [2009] 313 ITR (St.) 1, has held, while upholding the judgment of the Gauhati High Court in CIT v. George Williamson (Assam) Ltd. [2006] 284 ITR 619, that statutory items like PF and ESI if paid before the due date of filing of the return have to be allowed as a deduction irrespective of the fact whether the contributions related to the employer or employee. Regarding the amendment brought in respect of employer' s contribution, the Supreme Court has held that the amendment was retrospective as held in Allied Motors (P) Limited vs. Commissioner of Income Tax, reported in 2008 -TMI - 5575 - SUPREME Court. In the said decision, the Supreme Court has held that the amendment is retrospective and in the later decision of the Supreme Court in the case of CIT v. Vinay Cement Ltd. [2009] 313 ITR (St.) 1 it has held that the payments should be allowed as a deduction if they were made before the due date of filing of the return. 

In view of the above decisions, the decision of the jurisdictional High Court in the case of CIT v. South India Corporation Ltd. [2000] 242 ITR 114 (Ker) stands disapproved. Therefore, the expenses claimed by the assessee have to be allowed under section 43B of the Act."

The bench further observed as follows: 

"The application of section 36(1)(va)/2(24)(x) and treating the unpaid contributions as income, could be valid only where no payment was made by the assessee as required under section 43B within the prescribed time. If the employers' contribution were not paid within the time allowed under section 43B, no deduction will be allowed for that amount, but at the same time, those unpaid contributions will not become the income of the assessee. In the case of employees' contribution, if the payments are not made within the period allowed under section 43B, those contributions are not only to be disallowed if claimed as expenditure but also to be treated as income of the assessee under section 2(24)(x). In both the above circumstances, satisfaction or dissatisfaction under section 43B is paramount. In the case of employees' contribution if payments are not made within the time allowed so as to get the benefit of section 43B, then the provisions of sections 36(1)(va)/2(24)(x) will apply and the consequence will follow. Where the payment is found to be deductible under section 43B, no further consequence follows. Therefore, the contention of the Revenue that this issue has to be considered independent of section 43B is not acceptable. 

Therefore, we accept the contention of the assessee and direct the Assessing Officer to give deduction for the amount of Rs. 16,20,040 while computing the taxable income of the assessee." 

Subsequently in Harrisons Malayalam Ltd. Vs. ACIT (2009) 315ITR AT 1 similar relief was allowed for similar reasons. 

In CIT Vs. M. N. Chari (2009) 310 ITR 445 (Kar.) it was held that the belated payment of the employer` s contribution to provident fund beyond the stipulated period under the said Act, cannot be treated as the income of the assessee under section 36(1)(va) read with section 2(24)(x) of the Act in view of the amendment to section 43B of the Act as the amounts were paid by the assessee on or before the due date for furnishing the return under section 139(1) of the Act.

Disallowances by revenue authorities:

The revenue authorities are disallowing any late deposit of employees PF contribution by applying S. 36(1)(v)(a) and ignoring S. 43B. Even a single day beyond grace period is considered as a ground that employees Pf contribution will never be allowed. In some cases AO allowed deductions of late payment by following then prevailing decisions of Tribunal in favor of other assesses. However, the CIT revised the assessment u/s 263 and directed to disallow late payments. In some  cases the author had taken grounds on following lines according to the forum of appeal. For illustration grounds before ITAT against order of CIT u/s 263:

For that learned CIT was wrong in holding that the order passed by the A.O. is erroneous in so far it is prejudicial to the interest of revenue. While holding so, learned CIT failed to appreciate that the A.O. did not made addition to income raking a possible and reasonable  view which is supported by  binding judgments and therefore  there was no error in the order u/s 143(3) passed by  the learned A.O.

For that learned CIT was wrong in considering notional deduction by way of book entries  as 'any sum received from employees' within the meaning u/s 2 (24) (x) of the Income-tax Act, 1961.

For that learned CIT was wrong in not considering that deductions so made (even if they are considered as receipts by any stretch of imagination) were credited to the account of employees provident fund  on the day of deduction itself and therefore requirement of S. 36 (1) (va) were satisfied.

For that learned CIT erred in ignoring that the provident fund contribution of employees are also payable by the assessee as an employer, to the concerned authorities , and therefore S. 43B is applicable in respect of the same also and therefore payments actually made were correctly allowed.

For that learned CIT was wrong in not fully considering written submission and in not following binding judgments on the issue, copy of  which were filed before him.

For that the order of learned CIT u/s 263 deserves to be quashed.

For the in the facts and circumstances of the case the honorable Tribunal may be pleased to pass order u/s 254(2B) and award cost in favor of the assessee because the assessee has been forced to face litigation due to wrong order u/s 263.

For that the appellant seeks permission to raise new contentions and new grounds of appeal.

In a case the above ground were taken up and written submission with all relevant judgments were submitted including judgment of SC in case of Vinay Cement, Guwhati HC in case of George Williamson, Delhi HC in case of In CIT Vs. P. M. Electronics Ltd. (2009) 313 ITR161 and karnataka HC in case of Sabari Enterprises and many decisions of co-ordinate benches in which employees PF contributions were also allowed if paid before due date to file return u/s 139(1). However, Tribunal confirmed the order of the CIT holding that in case of employees contributions s. 36(1) (va) will apply. This sort of decisions of Tribunal ignoring judgments of co-ordinate benches, and other high courts and Supreme Court on principals, are shocking and can do nothing but tarnish images of the Tribunal, which is expected to provide timely justice at low cost.

After judgment in case of Alom Extrusions, there remains no doubt that section 43B apply even to Employees contributions. Therefore, it is expected that the Tribunals must rectify their orders in which the employees contributions have been disallowed for delay of few days.

Litigation is going on:

We find litigation going on by way of rectification, revision and reassessment proceedings on this issue in spite of several judgments of courts including the Supreme Court. In some recent assessments also the assessing officer have made disallowance of employes contribution if there was delay in actual deposit of sums by applying S. 36 (1)(v) (a) although deposits were made before the due date of filing of return.

Thanks a lot to Tax Officers:

If we professionals keep our personal interest alone in mind, then we must thank a lot to all tax officers who keep litigation going on. However, we must have some sense of national interest, and all professionals, government and its officers must think in a broader frame work, to accept settled legal position, do not unsettle or try to un-settle settled legal position and avoid unnecessary litigation which gives benefit only to professionals but causes brain drain, which is not in interest of public at large.