CHECKMATE SERVICES P LTD vs. COMMISSIONER OF INCOME TAX-I

Leave granted. Berger Paints India Ltd. v Commissioner of Income Tax, Kolkata-IV & Anr.1 was the lead matter while hearing this batch of appeals. However, the parties agreed to treat Checkmate Services Pvt. Ltd. v Commissioner of Income Tax-I2 as the lead appeal, for convenience. In all these appeals, the common question involved is with respect to the interpretation of Section 36(1)(va) and Section 43B of the Income Tax Act, 1961 (hereinafter, “IT Act”), and whether the appellant assessees are entitled to deduction of amounts deposited by them towards contribution in terms of The Employees’ 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.

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

Noticing a division of opinion on the issue, with the High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favouring the interpretation beneficial to the assesses on the one hand, and the High Courts of Kerala and Gujarat preferring the interpretation in favour of the Revenue on the other, this court granted special leave to appeal in all these cases.

The relevant provisions of the IT Act, with amendments, made from time to time, are as extracted below:

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--

The time limit for deposit of employees' contribution under the relevant acts / regulations are follows:

Mode of payment of contributions

In addition to the above, a five-day grace period was allowed to employers in terms of the Manual of Accounting Procedure (Part-I General). However, the grace period was discontinued by circular bearing No. WSU/9(1)(2013)/Settlement/35631 dated 08.01.2016, made applicable to contributions for January 2016 onwards.

A circular7 had explained the rationale for introduction of Section 43B: "Disallowance of unpaid statutory liability - Section 43B ***

2 Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other,

3 To curb this practice, the Finance Act has inserted a new section 438 to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or 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 shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee."

The scope and effect of the newly inserted Section 36(1)(va) and the newly inserted provisos to Section 43B of the IT Act were elaborated in a Central Board of Direct Taxes (hereinafter, “CBDT”) circular bearing No. 495.8 Relevant extracts of the circular are as follows:

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.9 It was urged that this decision had considered the effect

Reliance was placed upon the judgment in Alom Extrustions to say that this court was alive to the inconvenience caused to the assesses, if the Revenue’s contention was to be accepted that the Finance Act, 2003 was operative prospectively. It was submitted that the ratio and logic in Alom Extrustions was followed by no less than forty High Courts. Examples include the Allahabad High Court in Sagun Foundry Pvt Ltd v. Commissioner of Income Tax11; the Rajasthan

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.15 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 the non obstante clause.

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 relief to the assesses. The interpretation in the impugned judgment of the Gujarat High Court and that of the Kerala High Court, focusing

Lastly, it was submitted that the scheme of the IT Act was such that business income or its deductions were spelt out under Section 36, and Section 37 was a residual deduction clause whereby expenditures other than those falling within Sections 28-36, expressly laid out for commercial or business purposes, were allowed as deductions. If the scheme of the IT Act were to be kept in mind, the restrictive condition in Section 36(1)(va) i.e., the stipulation that the employees’ contribution must be paid within the time specified, failing which no deduction was permissible, was in fact intended to be expressly overridden by Section 43B. The philosophy behind Section 43B (which was introduced 01.04.1984) was to ensure actual payment of certain specified and statutory dues, before a particular date. These dues either by way of tax or other levies, (including interest-payment towards loan or contributions deducted by statutes such as EPF Act) were to be made within a specified date under such enactments which cast those obligations. This was only a condition for the grant of deduction. The second proviso to Section 43B had imposed further restrictive condition which was omitted in 2003. Therefore, the non-obstante clause of Section 43B was operative propriae vigore entitling the assessees to claim deduction made by them in respect of contributions to PF authorities provided the entire amounts were paid before the return of income was filed.

Mr. Tushar 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

Learned senior counsel referred to clause 2(c) of the fourth schedule of the IT Act: “Part A Recognized Provident Funds Definitions.

In this Part, unless the context otherwise requires, -- ***

An alternative submission was that any sum paid by the employer / assessee as contribution included both employee’s and employer’s contributions and was allowed as deduction under Section 36(1)(iv) of the IT Act. What was contemplated under Section 36(1)(va) was the amount which was received and not deducted by the employer assessee from its employees. Both Sections 2(24)(x) read with Section 36(1) (va) refer to any sum received by the assessee from its employees as contributions as against any sum deducted by the assessee from the payments made to employees. Received and deducted are two different terms and cannot be used interchangeably.

Again, reference was made to Clause 30 of the EPF Scheme and Regulations 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

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 Parliamentary concern in omitting the second proviso to Section 43B was to avoid the difficulties faced by the assessees which they would now re-experience ifw the Gujarat and Kerala High Court views were to be accepted. He urged that the Kelkar’s Committee’s recommendations resulted in the 2003 amendments, the object and purport of which would be negated if the Revenue’s views were to prevail.

Mr. Kapoor urged this court to adopt an interpretation that would be pragmatic and in consonance with fairness. So long as the assessee concerned deposited PF and other dues before the date of filing the return, no fiscal consequence of it being taxed should take place. Counsel submitted that deposit after due date would be visited with fine or other adverse consequences under the relevant statute. Revenue’s Contentions

The learned Additional Solicitor General (hereinafter, “ASG”), Mr. Balbir Singh, for the Revenue argued that in Alom Extrusions, the issue involved was with respect to the employer's contribution to PF account. In the present cases,

The learned ASG further submitted that by Section 2(24)(x), any sum “received by the assessee” from the employees as contribution to any provident fund or superannuation fund etc. the welfare of such employees was deemed to be included in the income of the assessee. 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.

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 Section 43B then underwent a cosmetic change and later was deleted. There was also a new proviso added under Section 43B for permitting deduction on contributions paid before the returns were filed.

This took in only the employer's contribution especially since Section 2(24) and sub-clause (va) were retained. The employee's contributions, as Merchem Ltd. noticed, stood on a different footing, since it was collected from the employee as a deduction in their salary itself. This would in effect be deemed income of the assessee, as had been specifically indicated in the definition of “income” under Section 2(24)(x), a provision introduced w.e.f. 01.04.1988 under the Finance Act, 1987. 26. The Revenue further contended that in terms of provisions of Section 36(1)(va) with respect to any sum received by the assessee from any of its employees to which provision of Section 2 (24 (x) applied, if credited by the assessee to the employees’ account in the relevant fund or funds on or before the due date, the assessee was entitled to the deduction. It was submitted that even the Explanation to Section 36(1) (va) made it clear that for the purpose of that provision, “due date” meant the date by which the assessee, as an employer, had to credit the employees' contribution to the employees’ account in the relevant fund under any law or rule or regulation issued thereunder or under any standing order, etc. Therefore, during the relevant assessment year, if the employer did not deposit the entire amount towards employees' contribution with the PF authorities on or before the due date under the EPF/ESI Act, to the extent there was shortfall

The learned ASG further submitted that Section 43B which was applicable to employers' contribution to any provident fund or any other fund for the welfare of the employees, and the amendment to Section 43B, which enacted that any such 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.

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 was that if such amount wa[s actually paid by the assessee “on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in

It was urged that Section 43B spoke of sum payable by the employer or the ‘employer's contribution’, payable by the employer without deduction from the salary of the employee. Employees’ contribution was remitted to the fund by the employer, and they were deducted from the employees’ salary. Such deduction was statutorily enabled. Deduction from the salary of the employee, no doubt, was the responsibility of the employer, as was the remittance, to the fund. That nevertheless, did not change the basic nature of the contribution, which was of the employee. A contribution deducted from the employee's salary and deposited by the employer, could not be termed as employer's contribution. A distinction existed so far as contributions payable under the EPF Act and the ESI Act. The employer's contribution had to be paid by the employer itself. In that case there was no deduction from the employees’ salary. The employee’s contribution, on the other hand, was to be deducted from the salary payable to the employee into the relevant fund.

The factual narration reveals two diametrically opposed views in regard to the interpretation of Section 36(1)(va) on the one hand and proviso to Section 43(b) on the other. If one goes by the legislative history of these provisions, what is discernible is that Parliament’s endeavour in introducing Section 43B [which opens with its non-obstante clause] was to primarily ensure that deductions otherwise permissible and hitherto claimed on mercantile basis, were expressly conditioned, in certain cases upon payment. In other words, a mere 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.

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, that the tax adjudicator has to enforce, and the assessee has to comply with, to secure a valid deduction.

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 the expressions used, and the conditions that are to be met. It is therefore necessary to bear in mind that specific enumeration of deductions, dependent upon fulfilment of particular conditions, would qualify as allowable deductions: failure by the assessee to comply with those conditions, would render the claim vulnerable to rejection. In this scheme the deduction made by employers to approved provident fund schemes, is the subject matter of Section 36 (iv). It is noteworthy, that this provision was part of the original IT Act; it has largely remained unaltered. On the other hand, Section 36(1)(va) was specifically inserted by the Finance Act, 1987, w.e.f. 01-04-1988. Through the same amendment, by Section 3(b), Section 2(24) – which defines various kinds of “income” – inserted clause (x). This is a significant amendment,

The significance of this is that 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.

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

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 Section 36(1)(va). The memorandum explaining these provisions, in the Finance Bill, 1987, presented to the Parliament, is extracted below: “Measures of penalising employers mis-utilising contributions to the provident fund or any funds set up under the provisions of the Employees State Insurance Act, 1948, or any other fund for the welfare of employees -

The existing provisions provide for a deduction in respect of any payment by way of contribution to the provident fund or a superannuation fund or any other fund for welfare of employees in the year in which the liabilities are actually discharged (Section 43B). The effect of the amendment brought about by the Finance act, is that no deduction will be allowed in the assessment of the employer, unless such contribution is paid into 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 employees account in the relevant fund or under the relevant provisions of any law or term of the contract of service or otherwise. (Explanation to Section 36 (1) of the Finance Act)

In addition, contribution of the employees to the various funds which are deducted by the employer from the salaries and wages of the employees will be taxed as income within brackets insertion of new [clause (x) in clause (24) of Section 2] of the employer, if such contribution is not credited by the employer in the account of the employee in the relevant fund by the due date. Where such income is not chargeable to tax under the head “profits and gains of business or profession” it will be assessed under the head “income from other sources.”

Significantly, the same Finance Act, 1987 also introduced provisos to Section 43B, through amendment (clause 10 of the Finance Bill). The

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.

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 in the relevant previous year. It was to stop this mischief that Section 43B was inserted.”

Original Section 43B(b) enabled the assessee/employer to claim deduction towards contribution as an employer, “by way of contribution to any provident fund”. The second proviso was substituted by Finance Act, 1989 with effect from 01.04.1989 and read as under: “…Provided further that no deduction shall in respect of any sum referred to in clause (b) be allowed unless such sum has actually been

The position in law remained unchanged for 14 years. The Central Government then constituted the Kelkar Committee, to suggest tax reforms. The report suggested amendments inter alia, to Section 43B. The relevant extract of the report is as follows: "In terms of the provisions of section 43B of the Income-tax Act, deduction for statutory payments relating to labour, taxes and State and public financial institutions are allowed as deductions, if they are paid during the financial year. However, under the provisions payment of taxes and interest to State and public financial institution are deemed to have been paid during the financial year even if they are paid by the due date of filing of return. Further if the liability is discharged in the subsequent year after the due date of filing of return, the payment is allowed as a deduction in the subsequent year. In the case of statutory payment relating to labour, the deduction for the payment is disallowed if such payment is made any time after the last date of payment of the about related liability. Trade and industry across the country represented that the delayed payment of statutory liability related to labour should be accorded the same treatment as delayed payment of taxes and interest, i.e. they should be allowed in the year of account.

The Notes on Clauses inter alia, reads as follows: "It is also proposed to amend the first proviso to the said section so as to omit the references of clause (a), clause (c), clause (d), clause (e) and clause (f) which is consequential in nature.

The rationale for introduction of Section 43B was explained by this court in M.M. Aqua Technologies Ltd. vs. Commissioner of Income Tax, Delhi:16 “19. The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non- obstante Clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the Assessee according to the method of accounting regularly employed by it. In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only "actual payment", as contrasted with incurring of a liability, can allow for a deduction.”

This condition, i.e., of payment of actual amount on or before the due date to enable deduction, continued for 14 years. By the amendment of 2003, the second proviso was deleted. This court interpreted the law, in the light of these developments, in Alom Extrusions. The court considered the effect of omission of the second proviso, and observed as follows:

There is no doubt that in Alom Extrusions, this court did consider the impact of deletion of second proviso to Section 43B, which mandated that unless the amount of employers’ contribution was deposited with the authorities, the deduction otherwise permissible in law, would not be available. This court was of the opinion that the omission was curative, and that as long as the employer deposited the dues, before filing the return of income tax, the deduction was available.

A reading of the judgment in Alom Extrusions, would reveal that this court, did not consider Sections 2(24)(x) and 36(1)(va). Furthermore, the separate provisions in Section 36(1) for employers’ contribution and employees’ contribution, too went unnoticed. The court observed inter alia, that:

Likewise, this court underlined the rule, regarding interpretation of taxing statutes, in Commissioner of Income Tax-III v Calcutta Knitwears, Ludhiana.18 Recently, in Union of India & Ors. vs. Exide Industries Limited & Ors,19 this court examined, and repelled a challenge to the constitutionality of Section 43B, especially the provision requiring actual payment, in respect of leave encashment benefit of employees. The court observations in this regard are relevant:

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.20 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.

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 Cements21 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.

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.

In our view, the failure to comply with the requirements renders the writ petition filed by the respondent liable to be dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule.

Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to severe consequences, such requirement would be mandatory. It is the cardinal rule of interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, non-compliance with the same must result in cancelling the concession made in favour of the grantee, the respondent herein.”

The Constitution Bench, in Commissioner. of Customs v. Dilip Kumar & Co. 23 endorsed as following:

The analysis of the various judgments cited on behalf of the assessee i.e., Commissioner of Income-Tax v. Aimil Ltd.24; Commissioner of Income-Tax and another v. Sabari Enterprises25; Commissioner of Income Tax v. Pamwi Tissues Ltd.26; Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd.27 and Nipso Polyfabriks (supra) 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)). At that point in time, there was no question of employee’s contribution being considered as part of the employer’s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. 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. That 24 Commissioner of Income-Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi High Court). 25 Commissioner of Income-Tax and another Vs. Sabari Enterprises, [2008] 298 ITR 141 (Karnataka High Court). 26 Commissioner of Income Tax Vs. Pamwi Tissues Ltd., [2009] 313 ITR 137 (Bombay High Court). 27 Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh Ltd., [2013] 35 taxmann.com 616 (Rajasthan High Court).

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

In the opinion of this Court, 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

In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed.