Employee’s welfare funds- S.43B not to apply to employees contributions- drafting of proposed amendment need to be modified.

[DEV KUMAR KOTHARI]

On reading of the proposed amendment, notes, explanation and speech of honorable FM in this regard it appears that the proposed clause need correction.

As per notes the amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

Therefore, the amendment will apply to previous year ending on 31^st March 2021. Ten months of the said previous year had already  lapsed when budget was presented.

Therefore it is not justified to apply the amendment from AY 2021-22. In all fairness, it can apply prospectively from next accounting year which will begun on 01.04.201 and should be applied from AY 2022-23 only.

Another controversy is due to use of phrase  ‘and shall be deemed never to have been applied’ in the proposed Explanation which reads as follows:

“Explanation 5.––For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.”.

 As per proposed clause, as above, controversy will arise that as per this clause employees contributions shall never be covered by S.43B at all times, that is including all earlier periods since S.2.24.x was inserted.

Then again disputes will arise that as per explanatory notes, the amendment will apply only from 01.04.2021 (AY 2021-22)

Therefore the clause need to be amended (rather say rectified by deleting the phrase ‘and shall be deemed never to have been applied’

In the notes a reference or clarification has been made about present situation. As the note is in relation to the proposed clause, it can be said that in the notes it seems that it  is admitted that the employees contributions are also covered by provisions of S.43B and the sums are allowable in the year of actual payment and also if the sum is actually paid before due date u/s 139.1 and evidence is filed with ROI.

This is true also because “any sum payable by the assessee as an employer by way of contribution…. “ will naturally cover employers contribution and employees contribution. Because both are payable by employer to concerned funds.

However, in reality, at present department is not accepting this position and disputes

are going in different appellate forums including the honorable Supreme Court.

In spite of judgments of High Courts and Supreme court ( though disputed by revenue) additions are being made even in intimations issued u/s 143.1.a by CPC.

Therefore, a clarification is desired that before coming into force of the proposed amendment employees contributions shall be allowed as per S.43B that is as per proviso if paid before due date u.s. 139.1 at option of assesse and always in the year of actual payment as per main provision of s.43B.

The provision of. S. 2.24.x are wrongly applied:

The provision is applicable to sums received from employees that means sums paid by employees to the employer. There must be a person giving ( employee) and another person receiving ( employer).

This does not cover situation of book entries whereby certain sums are deducted from gross salary and wages. Therefore, S.2.24.x is not applicable to deductions made from salary.

Misconception in minds:

There is misconception in minds that some  employers do not deposit deductions deliberately. In fact when business or employers  organization  run into losses and cash shortfall  , first priority is to run the organization and homes of employees. So efforts are made to make ash payments for essentials, which cannot be deferred.

In provisions of EPF, SAF, ESIC, Graturity funds etc. there are some flexibility under which due date can be extended and for that interest is charged.

The delays occur due to difficulties.

I recall that in case of Gujarat State Road Transport Corporation (GSRTC) EPF was deposited late and it was disallowed by the Gujarat High Court also. The matter is pending before the supreme Court. I also recall that at relevant time Shri Narendra Modi was CM of Gujarat.

Therefore there should not be complete ban on disallowing payment made belatedly.

The provision of S.2.24.x is unconstitutional:

Sums received from employees are for onward payment to respective funds. In case of delay, employer has to pay statutory interest and penalty can also be levied. The arrears can be recovered like arrears of land revenue. For not depositing and even for delayed deposit employer can be prosecuted and put behind bars.

Therefore sums received from employees cannot be considered as ‘income’ within the empowering provisions to levy tax on income.

This provision was perhaps not challenged because, employers got deduction on payment.

However, the  proposed amendment if enacted,  will raise need  to challenge the provision of S.2.24.x vis a vis the constitution of India.

The proposed clause, notes and relevant portion in the budget speech are reproduced below with highlights added:

Statutory Provisions

FINANCE BILL, 2021

Amendment of section 43B.

9. In section 43B of the Income-tax Act, after Explanation 4, the following Explanation shall be inserted, namely:––

“Explanation 5.––For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.”.

Notes and explanatory memorandum:

 Clause 9 of the Bill seeks to amend section 43B of the Income-tax Act relating to certain deductions to be only on actual payments.

Clause (b) of the said section provides that 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 shall be allowed (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) only in computing the income referred to in section 28 of that previous year, in which such sum is actually paid by him.

Proviso to the said section provides that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or 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 pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

It is proposed to insert Explanation 5 to the said section so as to clarify that the provisions of that section shall not apply and shall be deemed never to have been applied to a sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

From budget speech of FM

Labour Welfare

171.  We have noticed that some employers deduct the contribution of employees towards  Provident funds, superannuation funds,  and other social security funds but do not deposit these contributions within the specified time. For the employees, this means a loss of interest or income. In cases where an employer later becomes financially unviable, non-deposit results in a permanent loss for the employees.

172.  In order to ensure that employees’ contributions are deposited on time, I reiterate that the late deposit of employee’s contribution by the employer will not be allowed as deduction to the employer.

Un quote:

As discussed earlier also, the delays occur due to difficulties and there are provisions for interest payable by employer. Therefore, it is wrong to assume that employers deliberately delay or do not pay EPF, ESI, etc.

By making a disallowance, provision it cannot be ensured that employers will pay such sums.

Delay or non –payment occur when there are losses and if such sums are not allowed, it will not create tax liability. Therefore, reason given for such amendment and also original provisions of S. 24.24.x and 36.1.va are wrong.

Such thinking need to be changed in minds of politicians including FM and also bureaucrats.  

For timely collection  the authorities of funds must be active to work in favor of employees and not in favor of employers by adopting liberal attitude for reasons best known to them and employers who took advantage of delayed deposit of EPF or non depositing the same and then availed liberal installment payments, as I recall from news reports read from time to time.