[Opinion] Applicability of section 43B for deductibility of employees’ contribution to PF/ESI

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  • Last Updated on 4 November, 2022

employees’ contribution to PF/ESI

Mukesh Kohli – [2022] 144 taxmann.com 48 (Article)

There was debate on whether the provision of section 43B(b) would apply only to employer’s contribution to specified fund or it also applies in case of employee’s contribution to such funds.

The Various High Courts in few judgments, as follows, had taken a view that provision of section 43B overrides other provisions of the Act including section 36(1) (va); therefore, payment of employee’s contribution to the specified fund is allowable as deduction if it is paid beyond the due date specified under relevant applicable provision but before the due date of filing of return.

(i) CIT v. State Bank of Bikaner & Jaipur [2014] 43 taxmann.com 411/225 Taxman 6 (Mag.)/363 ITR 70 (Raj.);
(ii) CIT v. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. [2013] 35 taxmann.com 616/217 Taxman 64 (Mag.)/ (2014)366 ITR 163 (Raj.);
(iii) CIT v. Rajasthan State Ganganagar Sugar Mills Ltd. [2017] 88 taxmann.com 522/393 ITR 421(Raj.);
(iv) Bihar State Warehousing Corporation Ltd. v. CIT [2016] 71 taxmann.com 247/242 Taxman 142/386 ITR 410 (Pat.);
(v) CIT v. Ghatge Patil Transports Ltd. [2015] 53 taxmann.com 141/228 Taxman 340/[2014] 368 ITR 749 (Bom.);
(vi) CIT v. Hemla Embroidery Mills (P.) Ltd. [2013] 37 taxmann.com 160/217 Taxman 207 (Mag.)/ [2014] 366 ITR 167 (Punj. & Har.);
(vii) CIT v. Magus Customers Dialog (P.) Ltd. [2015] 57 taxmann.com 94/231 Taxman 379/371 ITR 242 (Kar.);
(viii) Essae Teraoka (P.) Ltd. v. Dy. CIT [2014] 43 taxmann.com 33/222 Taxman 170 (Mag.)/366 ITR 408 (Kar.);
(ix) CIT v. Hindustan Organics Chemicals Ltd. [2014] 48 taxmann.com 421/366 ITR 1 (Bom.);
(x) CIT v. Mark Auto Industries Ltd. [2013] 40 taxmann.com 482/ [2014] 220 Taxman 75 (Mag.)/ [2013] 358 ITR 43 (Punj. & Har.);
(xi) CIT v. Kichha Sugar Co. Ltd. [2013] 35 taxmann.com 54/216 Taxman 90/ 356 ITR 351(Uttarakhand)
(xii) Pr. CIT v. Hind Filter Ltd. [2018] 90 taxmann.com 51 (Bom.).

However, the other High Courts had taken a different view that provision of section 43B does not apply in case of employee’s contribution, in the following decisions:

(i) Unifac Management Services (India) (P.) Ltd. v. Dy. CIT [2018] 100 taxmann.com 244/ [2019] 260 Taxman 60/[2018] 409 ITR 225 (Mad.);
(ii) Popular Vehicles & Services (P.) Ltd. v. CIT [2018] 96 taxmann.com 13/257 Taxman 120/406 ITR 150 (Ker.);
(iii) CIT v. Merchem Ltd. [2015] 61 taxmann.com 119/235 Taxman 291/378 ITR 443 (Ker.);
(iv) CIT v. Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100/223 Taxman 398/366 ITR 170 (Guj.).

To end this controversy, the Finance Act, 2021 inserted Explanation 5 to section 43B to clarify that the provisions of said section do not apply and deemed to never have been applied to a sum received by the assessee from any of his employee to which provisions of sub-clause (x) of clause (24) of section applies. In other words, employee’s contribution to PF, ESI etc will be deductible only under section 36(1)(va), if deposited in time specified therein and the provisions of section 43 B will not apply in that case.

The Finance Act 2021 also inserted Explanation 2 to section 36(1) (va) to clarify that provision of section 43B does not apply and shall be deemed to have been never applied for the purposes of determining the “due date” under this clause.

Now first of all we will try to see the relevant sections like 43B, 36 (1)(iv) and 36(1)(va) and amendments made by the various Finance Acts and specially Finance Act 2021.

Section 43B

Section 43B specifies the list of deductions that are admissible under the Act only upon their actual payment. Employer’s contribution is covered in clause (b) of section 43B. According to it, if any sum towards employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date for furnishing return of income under section 139(1), the assessee would be entitled to deduction under section 43B and such deduction would be admissible for the accounting year. This provision does not cover employee’s contribution referred to in section 36(1)(va).

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