[Opinion] Tale of two Retrospective Amendments

Every year, the announcement of the Union Budget is eagerly awaited as one of the key tax policy events in India. In recent times, we have witnessed a series of amendments in the union budget aiming to end the ongoing litigations on certain issues. Most of these amendments favor the taxman and not the taxpayers.

Through retrospective amendments, the Government generally undertakes to undo some of the decisions of courts which it believes is against the legislative intent or for removing certain incongruity in law. While the prospective amendments are undertaken considering the overall outlook of the economy at that point in time and thus, may be quite acceptable. However, retrospective amendments are generally not well accepted by the taxpayers as it brings uncertainty.

The Legislatures under our Constitution have within the prescribed limits, powers to make laws prospectively as well as retrospectively. By exercise of those powers, the Legislature can remove the basis of a decision rendered by a Competent Court thereby rendering that decision ineffective.

In this article, we are discussing some of the clarificatory or retrospective amendment made in recent budgets which got affirmed by the Hon’ble Apex Court.

1. Applicability of section 43B for deductibility of employees’ contribution to PF/ESI for AY prior to 2021-22

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.

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 43B will not apply in that case.

Now question arise whether even prior to this amendment in Section 43B by Finance Act 2021 w.e.f. 1.4.2021, section 43B will not apply to Employees’ Contribution to PF, ESIetc.

The Hon’ble Supreme Court has decided this issue in the case of Checkmate Services (P.) Ltd. v. CIT [2022] 143 taxmann.com 178/[2023] 290 Taxman 19/[2022] 448 ITR 518. The Hon’ble Apex Court held that:-

• Employers contribution referred under the provisions of section 43B covers only employer contribution
• The non-obstante clause under section 43B 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.
• The employee’s contribution held by the employer to be the income of employer under section 2(24)(x) unless deposited with concerned authorities on or before the due date as defined in section 36(1)(va) i.e. due dates under the relevant employee welfare legislation like PF Act, ESI Act etc.

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