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TMI Blog2022 (10) TMI 617X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner 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 ..... X X X X Extracts X X X X X X X X Extracts X X X 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter, EPF Act ), The Employees Provident Funds Scheme, 1952 (hereinafter, EPF Scheme ), The Employees State Insurance Act, 1948 (hereinafter, ESI Act ), The Employees State Insurance (Central) Regulations, 1950 (hereinafter, ESI Regulations ) or any other provident or superannuation fund. 2. In the years under consideration, the Assessing Officers (hereinafter, AO ) had ruled that the appellants had belatedly deposited their employees contribution towards the EPF and ESI, considering the due dates under the relevant acts and regulations. Consequently, the 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 . Those amounts could not have been allowed as deductions under Section 36(1)(va) of the IT Act when the payment was made beyond the relevant due date under the respective acts. In other words, as per the AO, as such sums were paid beyond the due dates as prescribed under the respective acts, the right to claim such sums as allowable deduction while computing the income was lost forever. The assessees pleas were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s account in the relevant fund or funds on or before the due date. Explanation 1. -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. Explanation 2.-For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the due date under this clause. Explanation 2 inserted by Act No. 13 of 2021, w.e.f. 01.04.2021 (Emphasis supplied) 5. With effect from 01.04.1984, Section 43B was inserted. It reads inter alia, as follows: Section 43B. Certain deductions to be only on actual payment. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-- *** (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his employees to which the provisions of sub-clause (x) of clause (24) of section 2 applies. 6. The time limit for deposit of employees' contribution under the relevant acts / regulations are follows: A. EPF Scheme: Chapter VI: Declaration, Contribution Cards, and Returns 38. Mode of payment of contributions (1) The employer shall, before paying the member his wages in respect of any period or part of period for which contribution are payable, deduct the employee's contribution from his wages which together with his own contribution as well as an administrative charge of such percentage of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employee and in respect of which provident fund contributions are payable, as the Central Government may fix, he shall within fifteen days of the close of every month pay the same to the Fund electronic through internet banking of the State Bank of India or any other Nationalised Bank or through PayGov platform or through scheduled banks in India including private sector ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular are as follows: Measures of penalising employers who misutilise contributions to the provident fund or any fund set up under the provisions of the Employees State Insurance Act, 1948, or any other fund for welfare of employees 12.1 The existing provisions provide for a deduction in respect of any payment by way of contribution to a provident fund or superannuation fund or any other fund for welfare of employees in the year in which the liability is actually discharged [section 438]. The effect of the amendment brought about by the Finance Act, is that no deduction will be allowed in the assessment of the employer(s) unless such contribution is paid to the fund on or before the due date . Due date means the date by which an employer is required to credit the contribution to the employee's account in the relevant fund under the provisions of any law or term of contract of service or otherwise [Explanation to section 36(1 )(va) of the Finance Act]). Appellants Contentions 10. Mr. Arvind P. Datar, learned senior counsel appearing for some of the appellants, relied upon the judgment of this court in Commissioner of Income Tax v. Alom Extrusions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2013) 350 ITR 327. 12. It was submitted that only the impugned judgments of the Gujarat High Court and Kerela High Court in Commissioner of Income Tax v. Merchem Ltd. ITA No. 402/2009 have taken a different view and distinguished Alom Extrusions. It was submitted that views of the Gujarat and Kerela High Court were incorrect. Counsel urged that Section 43B had to be understood in the context of the existing laws. Mr. Datar emphasized that under the EPF Act and ESI Act, the employer was liable to make a composite payment. The liability comprised of the employer s contribution and the contribution collected from the employee. If this were to be kept in mind, the deletion of the second proviso to Section 43B, and the opening non-obstante clause in Section 43B had to be given full meaning. As a consequence, under Section 43B, at the time of paying the employers contribution, the employer is under legal obligation to pay not only its contribution but also that of the employee, as a single payment to the PF authority under the governing law. The insistence upon payment of actual payment of employees contribution in Explanation to Section 36(1)(va) was expressly overridden by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Hemani, learned senior counsel appearing on behalf of Suzlon Energy Ltd. supported the submissions of Mr. Datar. He relied upon Section 2(c) of the EPF Act and highlighted that the contribution payable by the employer was a composite amount - referred to as the amount payable in respect of an employee under the scheme. It was submitted that similarly Section 6 of the Act and paragraphs 28, 30 38 of the EPF Scheme establish that what was payable as contribution by the employer was not only the contribution in respect of its obligation to deposit amounts in the account of the employee, but its contribution as well as the contribution of the employee. Pointedly, Mr. Hemani referred Section 30 of EPF Act: 30 (1) The employer shall in the first instance, pay both the contribution payable by himself (in this Scheme referred to as the employer s contribution) and also, on behalf of the member employed by him directly or by or through a contractor, the contribution payable by such member (in the scheme referred to as the member s contribution): (2) In respect of employee employed by or through a contractor, the contractor shall recover the contribution payable by such employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons under the ESI Act, and it was submitted that under both the EPF ESI Acts, when employees were employed by or through a contractor, the latter was supposed to recover the contribution payable by such employee, with the amount of such member s contribution paid to the principal employer, deducted together with an equal amount of its contribution along with administrative charges. Such contribution was received by the principal employer. But for Section 2(24)(x) read with Section 36(1)(va) of the IT Act, such transaction would remain in the Balance Sheet as receivable and payable. However, by deeming fiction, such receipt was treated as income first and upon payment of the said sum so received by the due date so defined under the respective statutes, the same was allowed as deduction while computing the income under the provisions of the IT Act. Therefore, Section 36 (1)(va) of the IT Act had limited operation to allow such sum so received from the employees. The deduction from the employees salary as contribution was governed by Section 36(1)(iv) of the IT Act. Contributions of employees engaged as contract labour were to be recovered by such contractor and then paid over to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. This was introduced in the Finance Act of 1988. This inclusion, and the amendments to Section 36 and 43B were part of the scheme. Therefore, the deletion of second proviso to Section 43B could not result in that provision overriding the conditions imposed for obtaining deduction, specifically that were part of Section 36. 23. It was argued that it was with introduction of Section 43B with effect from 01.04.1984, that the law insisted upon actual payment of amounts claimed as deductions, enumerated under the provision. Section 43B(b) spoke of sum payable by the employer by way of contribution to a welfare or provident fund. It could be understood that the provision took in both employee's and employer's contribution. Parliament then took note of the circumstance that many assessees claimed deductions on the ground of their maintaining accounts on mercantile or accrual basis and failed to discharge the liability. Consequently, by Finance Act 1987, Section 2(24) (x), and Section 36(1) (va) as well as second proviso to Section 43B were inserted. From that date the statute treated employee's and employer's contribution differently. 24. It was urged that but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of employers' contribution was deposited by the employer on or before the due date of filing of the return under Section 139 was entitled to deduction in the relevant year, was not applicable with respect to employees' contribution. It was argued therefore, that when the assessee did not deposit the employees' contribution in the PF account before the due date provided under the EPF/ESI Act, the assessee was disentitled to deduction under Section 36 in the relevant assessment order, though the assessee might have deposited the employees contribution on or before the due date of filing of the return under Section 139 of the IT Act. 28. It was also urged that the difference in language between Sections 36 and 43B was because the two provisions had differing objectives. Whereas Section 36 dealt with deductions that were not covered in the previous provisions, Section 36(1)(va), with its Explanations, was directly concerned with the meaning of due date which was the date by which the assessee was required as an employer to credit an employee s contribution to the employee s account in the relevant fund under any Act. On the other hand, Section 43B was introdu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of expenditure in the books was insufficient to entitle deduction. The assessee had to, before the prescribed date, actually pay the amounts be it towards tax liability, interest or other similar liability spelt out by the provision. 31. Section 43B falls in Part-V of the IT Act. What is apparent is that the scheme of the Act is such that Sections 28 to 38 deal with different kinds of deductions, whereas Sections 40 to 43B spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme, Section 40 (which too starts with a non-obstante clause overriding Sections 30-38), deals with what cannot be deducted in computing income under the head Profits and Gains of Business and Profession . Likewise, Section 40A(2) opens with a non-obstante clause and spells out what expenses and payments are not deductible in certain circumstances. Section 41 elaborates conditions which apply with respect to certain deductions which are otherwise allowed in respect of loss, expenditure or trading liability etc. If we consider this scheme, Sections 40- 43B, are concerned with and enact different conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parliament treated contributions under Section 36(1)(va) differently from those under Section 36(1)(iv). The latter (hereinafter, employers contribution ) is described as sum paid by the assessee as an employer by way of contribution towards a recognized provident fund . However, the phraseology of Section 36(1)(va) differs from Section 36(1)(iv). It enacts that any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date. The essential character of an employees contribution, i.e., that it is part of the employees income, held in trust by the employer is underlined by the condition that it has to be deposited on or before the due date. 34. It is therefore, manifest that the definition of contribution in Section 2 (c) is used in entirely different senses, in the relevant deduction clauses. The differentiation is also evident from the fact that each of these contributions is separately dealt with in different clauses of Section 36 (1). All these establish that Parliament, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the sum referred to in clause (b) unless such sum has actually been paid during the previous year on or before the due date. The due date for the purposes of this proviso shall be the due date as under Explanation to clause (va) of sub-section (1) of Section 36. 37. It is evident that the intent of the lawmakers was clear that sums referred to in clause (b) of Section 43B, i.e., sum payable as an employer, by way of contribution refers to the contribution by the employer. The reference to due date in the second proviso to Section 43B was to have the same meaning as provided in the explanation to Section 36(1)(va). Parliament therefore, through this amendment, sought to provide for identity in treatment of the two kinds of payments: those made as contributions, by the employers, and those amounts credited by the employers, into the provident fund account of employees, received from the latter, as their contribution. Both these contributions had to necessarily be made on or before the due date. 38. This court had occasion to consider the object of introducing Section 43B, in Allied Motors. The court held, after setting out extracts of the Budget speech of the Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour should be accorded the same treatment as delayed payment of taxes and interest, i.e. they should be allowed in the year of account. Since the objective of the provision is to ensure that a tax-payer does not avail of any statutory liability without actually making a payment for the same, we are of the view that these objectives would be served if the deduction for the statutory liability relating to labour are allowed in the year of payment. The complete disallowance of such payments is too harsh a punishment for delayed payments. Therefore, we recommend that the deduction for delayed payment of statutory liability relating to labour should be allowed in the year of payment like delayed taxes and interest. Based on the report, the Union introduced amendments to the IT Act, including an amendment to Section 43B; the memorandum explaining the provisions in the Finance Bill, 2003 in the matter of Section 43B. inter alia, reads thus: The Bill also proposes to provide that in case of deduction of payments made by the assessee as an employer by way of contribution to any provident fund or superannuation fund or any other fund for the welfare of the employees shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Employees State Insurance Act, 1948, or any other fund for the welfare of such employees constituted income. This is the reason why every assessee(s) [employer(s)] was entitled to deduction even prior to 1-4-1984, on mercantile system of accounting as a 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 (RPFC), the assessee(s) would be entitled to deduction as business expense by merely making a provision to that effect in his books of accounts. The same situation arose prior to 1-4-1984, 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 1-4-1984, by which the mercantile system of accounting with regard to tax, duty and contribution to welfare funds stood discontinued an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... condly, it may be noted that, in Allied Motors (P) Ltd. v. CIT [(1997) 3 SCC 472 : (1997) 224 ITR 677] , 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 30-6-1983. 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 1-4-1984 *** 22. It is important to note once again that, by the Finance Act, 2003, not only is the second proviso deleted but even the first proviso is sought to be amended by bringing about a uniformity in tax, duty, cess and fee on the one hand vis- -vis contributions to welfare funds of employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 we hold that the Finance Act, 2003, is retrospective in operation. Moreover, the judgement in Allied Motors (P) Limited (supra) is delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that Finance Act, 2003 will operate retrospectively with effect from 1st April, 1988 [when the first proviso stood inserted]. Lastly, we may point out 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, 2003, to the above extent, operated prospectively. Take an example - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of leave encashment benefit of employees. The court observations in this regard are relevant: 20. Section 43B, however, is enacted to provide for deductions to be availed by the Assessee in lieu of liabilities accruing in previous year without making actual payment to discharge the same. It is not a provision to place any embargo upon the autonomy of the Assessee in adopting a particular method of accounting, nor deprives the Assessee of any lawful deduction. Instead, it merely operates as an additional condition for the availment of deduction qua the specified head. 21. Section 43B bears heading certain deductions to be only on actual payment . It opens with a non-obstante clause. As per settled principles of interpretation, a non obstante Clause assumes an overriding character against any other provision of general application. It declares that within the sphere allotted to it by the Parliament, it shall not be controlled or overridden by any other provision unless specifically provided for. Out of the allowable deductions, the legislature consciously earmarked certain deductions from time to time and included them in the ambit of Section 43B so as to subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for such payment arises upon retirement (or otherwise) of the employee, an employer may simply refuse to pay. Consequently, the innocent employee will be entangled in litigation in the evening of his/her life for claiming a hard-earned right without any fault on his part. Concomitantly, it would entail in double benefit to the employer - advance deduction from tax liability without any burden of actual payment and refusal to pay as and when occasion arises. It is this mischief Clause (f) seeks to subjugate. 48. 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 Supp (4) SCR 35 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. 49. That deductions are to be granted only when the conditions which govern them are strictly complied with. This has been laid down in State of Jharkhand v Ambay Cements (2005) 1 SCC 368 as follows: 23 . In our view, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State cannot at their whims and fancies burden the citizens without authority of law. In other words, when the competent legislature mandates taxing certain persons/certain objects in certain circumstances, it cannot be expanded/interpreted to include those, which were not intended by the legislature. *** 34. The passages extracted above, were quoted with approval by this Court in at least two decisions being CIT v. Kasturi Sons Ltd. [CIT v. Kasturi Sons Ltd., (1999) 3 SCC 346] and State of W.B. v. Kesoram Industries Ltd. [State of W.B. v. Kesoram Industries Ltd., (2004) 10 SCC 201] (hereinafter referred to as Kesoram Industries case [State of W.B. v. Kesoram Industries Ltd., (2004) 10 SCC 201] , for brevity). In the later decision, a Bench of five Judges, after citing the above passage from Justice G.P. Singh's treatise, summed up the following principles applicable to the interpretation of a taxing statute: (i) In interpreting a taxing statute, equitable considerations are entirely out of place. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That 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 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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