9911796707
TMI Blog2022 (10) TMI 617X X X X Extracts X X X X X X X X Extracts X X X X ..... unds 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 unsuccessful before the Income Tax Appellate Tribunal (hereafter, "ITAT"). Ultimately, in the case of the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 any other fund for the welfare of employees, or *** shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 banks authorized for collection on account of contributions and administrative charge: (Emphasis supplied) 7. In addition to the above, a five-day grace period was allowed to employers in terms of the Manual of Accounting Procedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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. (2010) 1 SCC 489 It was urged that this decision had considered the effect of deletion of the second proviso to Section 43B of IT Act (by Finance Act, 2003) and whether the same operated prospectively. The court rejected the Revenue's appeal and held that the omission of the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 the non obstante clause. 13. It was argued that the Parliament was alive to the fact that both explanation to Section 36(1)(va) and second proviso to Section 43B were brought in together in 1989. Therefore, the deletion of the latter i.e., second proviso to Section 43B was intended to give relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 employee (in this Scheme referred to as the member's contribution) and shall pay to the principal employer the amount of member's contribution so deducted together with an equal amount of contribution (in this Scheme referred to as the employer's contribution) and also administrative charges. (3) It shall be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 the principal employer. This, coupled with the principal employer contribution along with administrative charges, was to be remitted to the EPF account within the specified time. 19. Mr. Preetesh Kapoor, learned senior counsel appearing for one of the appellants, adopted the submissions of the other senior counsels. He urged, besides, that the Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 for the above interpretation there was no rationale to bring within the fold of "income" - by Section 2(24)(x) - employee's contribution received by the employer and providing a deduction by Section 36 (1)(va) and permitting the deduction only if that contribution were paid in accordance with the statute governing the fund (EPF/ESI Act). The second proviso to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 introduced to ensure that sums that could otherwise be treated as deductions, particularly, those shown as payable, based on the mercantile method of accounting, would not be eligible to such treatment, unless those payments were actually made when they fell due: such as tax dues, statutory or interest liabilities. The limited exception carved out by the proviso to Section 43B wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent 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, that the tax adjudicator has to enforce, and the assessee has to comply with, to secure a valid deduction. 32. The scheme of the provisions relating to deductions, such as Sections 32-37, on the other hand, deal primarily with business, commercial or professional expenditure, under various heads (including depreciation). Each of these deductions, has its contours, depending upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, while introducing Section 36(1)(va) along with Section 2(24)(x), was aware of the distinction between the two types of contributions. There was a statutory classification, under the IT Act, between the two. 35. It is instructive in this context to note that the Finance Act, 1987, introduced to Section 2(24), the definition clause (x), with effect from 1 April 1988; it also brought in Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Finance Minister, for 1983-84, that: "Section 43B was, therefore, clearly aimed at curbing the activities of those tax-payers, who did not discharge their statutory liability of payment of excise duty, employer's contribution to provident fund, etc., for long periods of time but claimed deductions in that regard from their income on the ground that the liability to pay these amounts had been incurred by them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be allowed in computing the income of the year in which such sum is actually paid. In case the same is paid before the due date of filing the return of income for the previous year, the allowance will be made in the year in which the liability was incurred. These amendments will take effect from 1st April, 2004 and will accordingly apply in relation to the assessment year 2004-05 and subsequent years." 41. The Notes on Claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and, under Section 43-B, it became mandatory for the assessee(s) to account for the aforestated items not on mercantile basis but on cash basis. This situation continued between 1-4-1984 and 1-4-1988, when Parliament amended Section 43-B and inserted the first proviso to Section 43-B. 11. 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-à-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 judgment in Allied Motors (P) Ltd. [(1997) 3 SCC 472 : (1997) 224 ITR 677] was delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that the Finance Act, 2003 will operate retrospectively with effect from 1-4-1988 (when the first proviso stood inserted). 23. Lastly, we may point out the hardship and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 43B 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 subject such deductions to conditionality of actual payment. Such conditionality may have the inevitable effect of being different from the theme of mercantile system of accounting on accrual of liability basis qua the specific head of deduction covered therein and not to other heads. But that is a matter for the legislature and its wisdom in doing so. 22. The existence of Section 43B traces back to 1983 when the legislature conceptualised the idea of such a provision in the 1961 Act. Initially, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e." 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 provisions of exemption clause should be strictly construed and if the condition under which the exemption was granted stood changed on account of any subsequent event the exemption would not operate. 24. In our view, an exception or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in the industrial policy and the exemption notifications. 25. In our view, the failure to comply with the requirements renders the writ petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [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; it cannot imply anything which is not expressed; it cannot import provisions in the statute so as to supply any deficiency; (ii) Before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section; and (iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of the legislature's failure to express itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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