2022 (10) TMI 617 - SC - Income Tax

Belated deposit of employees contribution towards the EPF and ESI - AO ruled that by virtue of Section 36(1)(va) read with Section 2(24)(x) of the IT Act, such sums received by the appellants constituted income - HELD THAT - One of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with. See for e.g., Eagle Flask Industries Ltd. v. Commissioner of Central Excise 2004 (9) TMI 102 - SUPREME COURT - This rule is in line with the general principle that taxing statutes are to be construed strictly, and that there is no room for equitable considerations. The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd. 2009 (12) TMI 38 - DELHI HIGH COURT ; Commissioner of Income-Tax and another v. Sabari Enterprises 2007 (7) TMI 169 - KARNATAKA HIGH COURT , Commissioner of Income Tax v. Pamwi Tissues Ltd. 2008 (2) TMI 400 - BOMBAY HIGH COURT , Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd. 2014 (8) TMI 677 - RAJASTHAN HIGH COURT and Nipso Polyfabriks 2012 (11) TMI 592 - HIMACHAL PRADESH HIGH COURT would reveal that in all these cases, the High Courts principally relied upon omission of second proviso to Section 43B (b). No doubt, many of these decisions also dealt with Section 36(va) with its explanation. However, the primary consideration in all the judgments, cited by the assessee, was that they adopted the approach indicated in the ruling in Alom Extrusions. As noticed previously, Alom Extrutions did not consider the fact of the introduction of Section 2(24)(x) or in fact the other provisions of the Act. When Parliament introduced Section 43B, what was on the statute book, was only employer s contribution (Section 34(1)(iv)). When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems amount received from the employees (whether the amount is received from the employee or by way of deduction authorized by the statute) as income - it is the character of the amount that is important, i.e., not income earned. Thus, amounts retained by the employer from out of the employee s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand it brought into the fold of income amounts that were receipts or deductions from employees income; at the time, payment within the prescribed time by way of contribution of the employees share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers contribution (Section 36(1)(iv)) and employees contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure. The distinction between an employer s contribution which is its primary liability under law in terms of Section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers income, and the later retains its character as an income (albeit deemed), by virtue of Section 2(24)(x) - unless the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts the employer s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the 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. The reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer s obligation to deposit the amounts retained by it or deducted by it from the employee s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non-obstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the 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- which 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. 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. This court is of the opinion that there is no infirmity in the approach of the impugned judgment.

Summary

Issues Involved:
1. Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961.
2. Whether amounts deposited by the appellant assessees towards contribution in terms of the EPF Act, EPF Scheme, ESI Act, ESI Regulations, or any other provident or superannuation fund are deductible if deposited belatedly.

Detailed Analysis:

Interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961:
The primary issue in these appeals revolves around the interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961. Section 36(1)(va) pertains to the deduction of sums received by the assessee from employees as contributions to any provident fund or superannuation fund, provided such sums are credited to the employee's account in the relevant fund on or before the due date. Section 43B, on the other hand, allows certain deductions only on actual payment, overriding other provisions of the Act.

The appellants contended that the deletion of the second proviso to Section 43B by the Finance Act, 2003, should be applied retrospectively, allowing deductions for contributions paid before the filing of the return of income. They argued that the non-obstante clause in Section 43B should override the specific condition in Section 36(1)(va) regarding the due date for depositing employees' contributions.

The Revenue, however, argued that Section 36(1)(va) specifically deals with employees' contributions and mandates that such contributions must be deposited on or before the due date specified under the relevant acts. The Revenue contended that Section 43B applies to employers' contributions and other statutory liabilities, and cannot override the specific provisions of Section 36(1)(va).

Whether amounts deposited by the appellant assessees towards contribution in terms of the EPF Act, EPF Scheme, ESI Act, ESI Regulations, or any other provident or superannuation fund are deductible if deposited belatedly:
The court analyzed the legislative intent behind the introduction of Section 36(1)(va) and Section 43B. It noted that Section 36(1)(va) was specifically introduced to ensure that amounts received from employees as contributions are deposited timely, reflecting the trust nature of such amounts. The court emphasized that Parliament intended to treat employees' and employers' contributions differently, with employees' contributions being deemed income unless deposited on or before the due date.

The court further observed that the non-obstante clause in Section 43B aims to ensure timely payment of certain liabilities, allowing deductions only upon actual payment. However, this does not apply to employees' contributions, which must be deposited within the due date specified under the relevant welfare enactments. The court concluded that the non-obstante clause in Section 43B does not override the specific condition in Section 36(1)(va) regarding the due date for depositing employees' contributions.

Analysis and Conclusions:
The court upheld the interpretation that employees' contributions must be deposited on or before the due date specified under the relevant acts to qualify for deduction under Section 36(1)(va). The deletion of the second proviso to Section 43B does not override this requirement. The court emphasized the distinction between employers' contributions, which are part of the employer's income, and employees' contributions, which are deemed income held in trust by the employer.

The court dismissed the appeals, affirming that the non-obstante clause in Section 43B does not absolve the assessee from the liability to deposit employees' contributions on or before the due date as a condition for deduction. The decisions of other High Courts holding to the contrary were not considered to lay down the correct law.

Conclusion:
The Supreme Court concluded that the appellants are not entitled to deductions for employees' contributions deposited belatedly, upholding the interpretation that such contributions must be deposited on or before the due date specified under the relevant acts to qualify for deduction under Section 36(1)(va). The appeals were dismissed, affirming the judgments of the Gujarat and Kerala High Courts.