GANNON DUNKERLEY & CO LTD,MUMBAI vs. DY COMMISSIONER OF INCOME TAX CIRCLE-1(1)(1), MUMBAI

PER OM PRAKASH KANT, AM

This appeal has been preferred by the assessee against the order dated 29.06.2022 passed by the Ld. Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre (NFAC), Delhi [in short, ‘the Ld. CIT(A)’] for A.Y. 2019-2020, raising a sole issue of delay deposit of employees contribution of PF/ESI. The relevant ground raised by the assessee is reproduced as under:

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“1. The Ld. CIT(A) has grossly erred both on facts and in 1. The Ld. CIT(A) has grossly erred both on facts and in 1. The Ld. CIT(A) has grossly erred both on facts and in law law law in in in upholding upholding upholding impugned impugned impugned addition addition addition of of of Rs. Rs. Rs. 7,30,91,698/ 7,30,91,698/- u/s 36(1)(va) of the IT Act for delayed u/s 36(1)(va) of the IT Act for delayed deposit of employee shares of PF/ESI ignoring the fact deposit of employee shares of PF/ESI ignoring the fact deposit of employee shares of PF/ESI ignoring the fact that such payments are paid before due date of filing of h payments are paid before due date of filing of h payments are paid before due date of filing of return of income us 139(1) of the IT Act and therefore return of income us 139(1) of the IT Act and therefore return of income us 139(1) of the IT Act and therefore are allowable under law as per decision of jurisdictional are allowable under law as per decision of jurisdictional are allowable under law as per decision of jurisdictional Bombay High Court and Honble Delhi High Court. Bombay High Court and Honble Delhi High Court.” ”

“7.5 With respect payment of PF dues, the facts of the 7.5 With respect payment of PF dues, the facts of the 7.5 With respect payment of PF dues, the facts of the case are carefully considered. It is pertinent to note that case are carefully considered. It is pertinent to note that case are carefully considered. It is pertinent to note that the EPF & MP Act 1952, which governs provident funds the EPF & MP Act 1952, which governs provident funds the EPF & MP Act 1952, which governs provident funds in certain sectors of the economy, speaks of two types of ctors of the economy, speaks of two types of ctors of the economy, speaks of two types of contributions, namely contributions, namely

-the Employee's share and the Employee's share and

- The Employee’s share The Employee’s share

Both the above shares are unequal since the employer's Both the above shares are unequal since the employer's Both the above shares are unequal since the employer's share is capped at 12% of the eligible salary but the share is capped at 12% of the eligible salary but the share is capped at 12% of the eligible salary but the employee may opt to pay a hi employee may opt to pay a higher contribution also. gher contribution also. Similarly, there are Employer and Employee shares Similarly, there are Employer and Employee shares Similarly, there are Employer and Employee shares under the ESI Act, 1948 also. under the ESI Act, 1948 also.

The Employer deducts the Employees' share towards The Employer deducts the Employees' share towards The Employer deducts the Employees' share towards PF/ESI at the time of payment of their wages/salaries. PF/ESI at the time of payment of their wages/salaries. PF/ESI at the time of payment of their wages/salaries. Thus, the employer acts in a fiduciary capacity Thus, the employer acts in a fiduciary capacity when it when it retains the deduction made from the employees' retains the deduction made from the employees' retains the deduction made from the employees' wages/salaries and till the emplo wages/salaries and till the employer makes over the er makes over the

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same to the concerned Fund. As a precautionary same to the concerned Fund. As a precautionary same to the concerned Fund. As a precautionary measure under the Income Tax Act, 1961, Section measure under the Income Tax Act, 1961, Section measure under the Income Tax Act, 1961, Section 2(24)(x) makes the employees' share as a deemed 2(24)(x) makes the employees' share as a deemed 2(24)(x) makes the employees' share as a deemed income in the hands of the employer. e in the hands of the employer. Section 2(24)(x) of Section 2(24)(x) of the Act includes within the definition of income 'any sum the Act includes within the definition of income 'any sum the Act includes within the definition of income 'any sum received by the assessee from his employees as received by the assessee from his employees as received by the assessee from his employees as contributions to any provident fund or superannuation contributions to any provident fund or superannuation contributions to any provident fund or superannuation fund....................etc. ....................etc.

However, the emp However, the employer gets a deduction from its taxable loyer gets a deduction from its taxable income when it makes over the employees' shares to the income when it makes over the employees' shares to the income when it makes over the employees' shares to the respective Funds. The employer is mandated by law to respective Funds. The employer is mandated by law to respective Funds. The employer is mandated by law to ensure that the employees' share gets deposited within ensure that the employees' share gets deposited within ensure that the employees' share gets deposited within the 'due date provided under the respective PF/ESI Ac the 'due date provided under the respective PF/ESI Ac the 'due date provided under the respective PF/ESI Act. This is so because the under the PF/ESI Acts the This is so because the under the PF/ESI Acts the This is so because the under the PF/ESI Acts the employees' interests are protected and they get their employees' interests are protected and they get their employees' interests are protected and they get their interest on their deposits and pension/life cover under interest on their deposits and pension/life cover under interest on their deposits and pension/life cover under PF/ESI irrespective of the date of deposit of their share PF/ESI irrespective of the date of deposit of their share PF/ESI irrespective of the date of deposit of their share by the Employer. Even if the employe by the Employer. Even if the employees share is not es share is not deposited by the employer after it is received by the deposited by the employer after it is received by the deposited by the employer after it is received by the employer from their salary/wages, the EPFO/ESI is employer from their salary/wages, the EPFO/ESI is employer from their salary/wages, the EPFO/ESI is mandated to pay social security benefits to the mandated to pay social security benefits to the mandated to pay social security benefits to the employees. Hence, the EPFO/ESI gets burdened by employees. Hence, the EPFO/ESI gets burdened by employees. Hence, the EPFO/ESI gets burdened by social security liability and in order t social security liability and in order to curb any o curb any tendency on the part of the employers to delay the tendency on the part of the employers to delay the tendency on the part of the employers to delay the deposit of the employees contributions retained by deposit of the employees contributions retained by deposit of the employees contributions retained by them, such contributions are taxed if these are them, such contributions are taxed if these are them, such contributions are taxed if these are deposited after the 'due date' of payment. The deposited after the 'due date' of payment. The deposited after the 'due date' of payment. The employers are not permitted to claim any deducti employers are not permitted to claim any deducti employers are not permitted to claim any deduction on payment made subsequent to the due date. payment made subsequent to the due date.

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Thus, under the Income Tax Act, 1961 the employees' Thus, under the Income Tax Act, 1961 the employees' Thus, under the Income Tax Act, 1961 the employees' contribution is deemed to be the income of the employer contribution is deemed to be the income of the employer contribution is deemed to be the income of the employer and a deduction is allowed us 36(1)(va) only when the and a deduction is allowed us 36(1)(va) only when the and a deduction is allowed us 36(1)(va) only when the said sum is deposited in the respective Fund be said sum is deposited in the respective Fund before. the fore. the due date prescribed under PF/ESI Acts. due date prescribed under PF/ESI Acts.

7.6 The treatment of the employer's own contribution 7.6 The treatment of the employer's own contribution 7.6 The treatment of the employer's own contribution towards the PF/ESI of its employees is different. Here towards the PF/ESI of its employees is different. Here towards the PF/ESI of its employees is different. Here the outgo is only from the profits/income of the employer the outgo is only from the profits/income of the employer the outgo is only from the profits/income of the employer and no fiduciary element is involved. The and no fiduciary element is involved. Therefore, the refore, the employer gets the benefit of deduction u/s 37 and u/s employer gets the benefit of deduction u/s 37 and u/s employer gets the benefit of deduction u/s 37 and u/s 43B if the payment is made before the date of filing of 43B if the payment is made before the date of filing of 43B if the payment is made before the date of filing of return of income. The deeming section 2(24)(x) in terms return of income. The deeming section 2(24)(x) in terms return of income. The deeming section 2(24)(x) in terms has no application and does not extend to the has no application and does not extend to the has no application and does not extend to the contribution of the employer. It contribution of the employer. It is also necessary to note is also necessary to note that Section 43B has application only in respect of the that Section 43B has application only in respect of the that Section 43B has application only in respect of the Employer's share. Employer's share.

7.7 The claim of the appellant that payment of 7.7 The claim of the appellant that payment of 7.7 The claim of the appellant that payment of employees' contributions which were not paid within the employees' contributions which were not paid within the employees' contributions which were not paid within the 'due date' specified under the SI and PF Acts should 'due date' specified under the SI and PF Acts should 'due date' specified under the SI and PF Acts should be allowed as a deduction u/s 43B is not as per the allowed as a deduction u/s 43B is not as per the allowed as a deduction u/s 43B is not as per the Statute. Under the provisions of section 2(24)(x) of the Statute. Under the provisions of section 2(24)(x) of the Statute. Under the provisions of section 2(24)(x) of the Act, the contributions from 'employees' are deemed Act, the contributions from 'employees' are deemed Act, the contributions from 'employees' are deemed income and subject to tax in the hands of the employer. subject to tax in the hands of the employer. Further the belated payment of the PF/E Further the belated payment of the PF/ESI sums in the SI sums in the employee's account in the relevant fund per se will not employee's account in the relevant fund per se will not employee's account in the relevant fund per se will not entitle the employer to a deduction under section entitle the employer to a deduction under section entitle the employer to a deduction under section 36(1)(va) of the Act unless the employer had credited 36(1)(va) of the Act unless the employer had credited 36(1)(va) of the Act unless the employer had credited such contribution to the employee's account in the such contribution to the employee's account in the such contribution to the employee's account in the relevant fund within the relevant fund within the 'due date applicable for that date applicable for that

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relevant fund. (incidentally Section 36(1)(va) was relevant fund. (incidentally Section 36(1)(va) was relevant fund. (incidentally Section 36(1)(va) was inserted by the Finance Act, 1987 w.e.f 1.4.1988]. inserted by the Finance Act, 1987 w.e.f 1.4.1988]. inserted by the Finance Act, 1987 w.e.f 1.4.1988].

Section 43B deals with what is deductible otherwise for Section 43B deals with what is deductible otherwise for Section 43B deals with what is deductible otherwise for the computation of income under the head 'Business or the computation of income under the head 'Business or the computation of income under the head 'Business or Profession'. The no Profession'. The non-obstante clause with which the obstante clause with which the section begins is confined to 'in respect of matters dealt section begins is confined to 'in respect of matters dealt section begins is confined to 'in respect of matters dealt with in clauses 'a to g* and does not extend beyond with in clauses 'a to g* and does not extend beyond with in clauses 'a to g* and does not extend beyond them. In effect, the sweeping nature of the section is them. In effect, the sweeping nature of the section is them. In effect, the sweeping nature of the section is restricted by the subject matter covered therein. The restricted by the subject matter covered therein. The restricted by the subject matter covered therein. The subject matter covered in section 43B(b) is only the ject matter covered in section 43B(b) is only the ject matter covered in section 43B(b) is only the employer's contribution. employer's contribution.

Here it is also necessary 16 refer to the Finance Here it is also necessary 16 refer to the Finance Here it is also necessary 16 refer to the Finance Minister's Budget speech while introducing the Finance Minister's Budget speech while introducing the Finance Minister's Budget speech while introducing the Finance Bill, 1987 wherein the object of the introduction of the Bill, 1987 wherein the object of the introduction of the Bill, 1987 wherein the object of the introduction of the sections 36(1)(va), sections 36(1)(va), 56(2)(ic) and 57 (ia) was explained as 56(2)(ic) and 57 (ia) was explained as under:

Let me now come to the measures for the welfare Let me now come to the measures for the welfare Let me now come to the measures for the welfare of workers, members of armed forces and the of workers, members of armed forces and the of workers, members of armed forces and the handicapped. There are number of cases where handicapped. There are number of cases where handicapped. There are number of cases where the employers do not credit their own contribution the employers do not credit their own contribution the employers do not credit their own contribution or those of the emplo or those of the employees to the credit of yees to the credit of provident fund and State Insurance Fund. it is provident fund and State Insurance Fund. it is provident fund and State Insurance Fund. it is also unfortunate that a separate fund is not being also unfortunate that a separate fund is not being also unfortunate that a separate fund is not being kept by employers in respect of gratuity of kept by employers in respect of gratuity of kept by employers in respect of gratuity of workers. To prevent this anti labour practices, we workers. To prevent this anti labour practices, we workers. To prevent this anti labour practices, we propose to penalize such delinquent emplo propose to penalize such delinquent employers by yers by providing that the contribution of employees to providing that the contribution of employees to providing that the contribution of employees to these funds will be taxed as income of the these funds will be taxed as income of the these funds will be taxed as income of the employer and allowed as a deduction only when employer and allowed as a deduction only when employer and allowed as a deduction only when they are made over to the separate accounts they are made over to the separate accounts they are made over to the separate accounts

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relating to these funds within the time allowed relating to these funds within the time allowed relating to these funds within the time allowed under the statute." under the statute."

The 'due date' is explained in the Explanation below The 'due date' is explained in the Explanation below The 'due date' is explained in the Explanation below Section 36(1)(va) to mean "the date by which the Section 36(1)(va) to mean "the date by which the Section 36(1)(va) to mean "the date by which the assessee is required as an employer to credit an assessee is required as an employer to credit an assessee is required as an employer to credit an employee's contribution to the employee's account in the employee's contribution to the employee's account in the employee's contribution to the employee's account in the relevant fund relevant fund............... or otherwise".

7.8 In the Tax Audit Report, Form 3CD Clause 16(b) In the Tax Audit Report, Form 3CD Clause 16(b) In the Tax Audit Report, Form 3CD Clause 16(b) specifically requires the tax auditor to report the sums specifically requires the tax auditor to report the sums specifically requires the tax auditor to report the sums falling under the preview of section 2(24)(x), the due falling under the preview of section 2(24)(x), the due falling under the preview of section 2(24)(x), the due dates for payment of such sums and the actual dates of dates for payment of such sums and the actual dates of dates for payment of such sums and the actual dates of payment to the concerned payment to the concerned authorities under section r section 36(1)(a). The significance attached to the due dates and 36(1)(a). The significance attached to the due dates and 36(1)(a). The significance attached to the due dates and the actual dates of payment in respect of employee's the actual dates of payment in respect of employee's the actual dates of payment in respect of employee's contributions in the Tax Audit Report is different from contributions in the Tax Audit Report is different from contributions in the Tax Audit Report is different from the employer's contribution dealt with under clause 21. the employer's contribution dealt with under clause 21. the employer's contribution dealt with under clause 21. Clause 21 distinguishes Clause 21 distinguishes the employer's contribution on the employer's contribution on the basis of its occurrence in a given previous year or the basis of its occurrence in a given previous year or the basis of its occurrence in a given previous year or prior to it and its payment in the previous year. Thus, prior to it and its payment in the previous year. Thus, prior to it and its payment in the previous year. Thus, the Tax Audit Report also maintains a conscious the Tax Audit Report also maintains a conscious the Tax Audit Report also maintains a conscious differential differential differential approach between approach between approach between the the the two two two types of types of types of payments, employer payments, employer and employee's contributions. and employee's contributions.

7.9 Therefore, it seems clear that the argument that the 7.9 Therefore, it seems clear that the argument that the 7.9 Therefore, it seems clear that the argument that the delayed deposit of employees contribution towards delayed deposit of employees contribution towards delayed deposit of employees contribution towards PF/ESI can be permitted as a deduction from the income PF/ESI can be permitted as a deduction from the income PF/ESI can be permitted as a deduction from the income of the assessee is of no avail and section 43B is not of the assessee is of no avail and section 43B is not of the assessee is of no avail and section 43B is not involved. The matter has also been consi involved. The matter has also been considered by dered by various High Courts. The Hon'ble Gujarat High Court in various High Courts. The Hon'ble Gujarat High Court in various High Courts. The Hon'ble Gujarat High Court in the case of CIT v/s Gujarat State Road Transport the case of CIT v/s Gujarat State Road Transport the case of CIT v/s Gujarat State Road Transport

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Corporation (2014) 41 taxmann.com 100, has held as Corporation (2014) 41 taxmann.com 100, has held as Corporation (2014) 41 taxmann.com 100, has held as under:

If If If employees employees employees contribution contribution contribution received received received by by by the the the assessee is not credited to the employees' assessee is not credited to the employees' account account in the relevant fund or funds on or before the due in the relevant fund or funds on or before the due in the relevant fund or funds on or before the due date mentioned in the Explanation to section date mentioned in the Explanation to section date mentioned in the Explanation to section 36(1)(va) i.e. due dates under PF Act, ESI 36(1)(va) i.e. due dates under PF Act, ESI 36(1)(va) i.e. due dates under PF Act, ESI Act/other law], the assessee shall not be entitled Act/other law], the assessee shall not be entitled Act/other law], the assessee shall not be entitled to deduction of such amount in computing the to deduction of such amount in computing the to deduction of such amount in computing the income referr income referred to in section 28 of the Act even if ed to in section 28 of the Act even if contributions deposited on or before due date contributions deposited on or before due date contributions deposited on or before due date under section 43B [i.e. due date for filing income under section 43B [i.e. due date for filing income under section 43B [i.e. due date for filing income tax return under section 36(1)(va)] for depositing tax return under section 36(1)(va)] for depositing tax return under section 36(1)(va)] for depositing employers' contributions to those funds". employers' contributions to those funds".

In arriving at this decisio In arriving at this decision, Hon’ble High Court of n, Hon’ble High Court of Gujarat has considered the Gujarat has considered the decision of the Hon'ble decision of the Hon'ble Supreme Court in CIT vs. Alom Extrusions Limited 319 Supreme Court in CIT vs. Alom Extrusions Limited 319 Supreme Court in CIT vs. Alom Extrusions Limited 319 IT 306 and held that the same is not applicable to the IT 306 and held that the same is not applicable to the IT 306 and held that the same is not applicable to the "employees' contribution" to the PF Act. This judgment "employees' contribution" to the PF Act. This judgment "employees' contribution" to the PF Act. This judgment was again followe was again followed by Hon'ble' Gujarat High Court in d by Hon'ble' Gujarat High Court in the case of PCIT vs. Suzion Energy Ltd. 115 the case of PCIT vs. Suzion Energy Ltd. 115 the case of PCIT vs. Suzion Energy Ltd. 115 taxmann.com 340. taxmann.com 340.

The Hon'ble Delhi High Court in the case of CIT vs. The Hon'ble Delhi High Court in the case of CIT vs. The Hon'ble Delhi High Court in the case of CIT vs. Bharat Bharat Hotels Hotels Ltd. Ltd. 410 410 ITR ITR 417 417 Order Order dated dated 06/09/2018 has also decided this issue in favour of 06/09/2018 has also decided this issue in favour of 06/09/2018 has also decided this issue in favour of Revenue and Revenue and not followed the judgement of Aimil Ltd. not followed the judgement of Aimil Ltd. 321 IT 508 of Delhi High Court of 2014. 321 IT 508 of Delhi High Court of 2014. Hon'ble ITAT Hon'ble ITAT Delhi in the case of Eagle Trans Shipping & Logistics Delhi in the case of Eagle Trans Shipping & Logistics Delhi in the case of Eagle Trans Shipping & Logistics (India) (P.) Ltd. 109 taxmann.com 426 vide order dated (India) (P.) Ltd. 109 taxmann.com 426 vide order dated (India) (P.) Ltd. 109 taxmann.com 426 vide order dated 25/07 2019 has also decided this issue in favour of 25/07 2019 has also decided this issue in favour of 25/07 2019 has also decided this issue in favour of

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Revenue. The case of Hon'ble Supreme Court in the case evenue. The case of Hon'ble Supreme Court in the case evenue. The case of Hon'ble Supreme Court in the case of Vinay Cement and Alom Extrusions Ltd are related to of Vinay Cement and Alom Extrusions Ltd are related to of Vinay Cement and Alom Extrusions Ltd are related to Employer's contribution of provident fund and not to the Employer's contribution of provident fund and not to the Employer's contribution of provident fund and not to the Employee's contribution. Employee's contribution.

7.10 The issue is also covered against the assessee by The issue is also covered against the assessee by The issue is also covered against the assessee by CBDT Circular lar No. 22/2015 issued by the Department. No. 22/2015 issued by the Department. A similar view has been taken by the Kerala High Court A similar view has been taken by the Kerala High Court A similar view has been taken by the Kerala High Court in the case of CIT vs. Merchem Ltd (2015) 378 ITR 443. in the case of CIT vs. Merchem Ltd (2015) 378 ITR 443. in the case of CIT vs. Merchem Ltd (2015) 378 ITR 443.

7.11 But at the same time, on the identical issue the But at the same time, on the identical issue the But at the same time, on the identical issue the following decisions are in following decisions are in favour of assessee. i. favour of assessee. i. AIMIL Ltd. (2010) 321 ITR 508 (Del.), ii. State Bank of Bikaner Ltd. (2010) 321 ITR 508 (Del.), ii. State Bank of Bikaner Ltd. (2010) 321 ITR 508 (Del.), ii. State Bank of Bikaner & Jaipur [(2014) 363 ITR 70 (Rajasthan)]. ii. Essae & Jaipur [(2014) 363 ITR 70 (Rajasthan)]. ii. Essae & Jaipur [(2014) 363 ITR 70 (Rajasthan)]. ii. Essae Teraoka (P) Ltd. (2014) 366 ITR 408 and iv. Spectrum Teraoka (P) Ltd. (2014) 366 ITR 408 and iv. Spectrum Teraoka (P) Ltd. (2014) 366 ITR 408 and iv. Spectrum Consultants India P. Ltd [(2014) 2 ITR Consultants India P. Ltd [(2014) 2 ITR-OL 622., v. South OL 622., v. South India Corporation Ltd. and vi. India Corporation Ltd. and vi. GhatgePatil Transports GhatgePatil Transports Ltd. 368 IT 749, CIT Versus Sabari Enterprises 298 IT Ltd. 368 IT 749, CIT Versus Sabari Enterprises 298 IT Ltd. 368 IT 749, CIT Versus Sabari Enterprises 298 IT 141 (Karn) CIT, Jaipur 141 (Karn) CIT, Jaipur-II Versus Jaipur Vidyut Vitran II Versus Jaipur Vidyut Vitran Nigam Ltd and Rajasthan Rajya Vidyut Utpadan Nigam Nigam Ltd and Rajasthan Rajya Vidyut Utpadan Nigam Nigam Ltd and Rajasthan Rajya Vidyut Utpadan Nigam Ltd (2014] 363 IT 307, CIT Versus. State Bank Of Ltd (2014] 363 IT 307, CIT Versus. State Bank Of Ltd (2014] 363 IT 307, CIT Versus. State Bank Of Bikaner & Jaipur And Jai Bikaner & Jaipur And Jaipur Vidyut Vitaran Nigam Ltd. pur Vidyut Vitaran Nigam Ltd. [2014] 363 IT 70. It is held that "contribution" used in 363 IT 70. It is held that "contribution" used in 363 IT 70. It is held that "contribution" used in Section 43-B(b) of the IT Act means the contribution of B(b) of the IT Act means the contribution of B(b) of the IT Act means the contribution of the employer and the employee. That being so, the employer and the employee. That being so, the employer and the employee. That being so, contribution made on or before the due date under contribution made on or before the due date under contribution made on or before the due date under section 139(1) th section 139(1) the employer is entitled for deduction. e employer is entitled for deduction.

As on date there is no Supreme Court judgment on this As on date there is no Supreme Court judgment on this As on date there is no Supreme Court judgment on this issue i.e., delayed payment of employees' contribution issue i.e., delayed payment of employees' contribution issue i.e., delayed payment of employees' contribution of PF dues.

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7.12 7.12 7.12 But, But, But, the the the Finance Finance Finance Act, Act, Act, 2021 2021 2021 has has has inserted inserted inserted Explanation 5 to section 43B so as to clarify that t Explanation 5 to section 43B so as to clarify that t Explanation 5 to section 43B so as to clarify that the provisions of the section shall not apply and shall be provisions of the section shall not apply and shall be provisions of the section shall not apply and shall be deemed never to have been applied to a sum received deemed never to have been applied to a sum received deemed never to have been applied to a sum received by the assessee from any of his employees to which the by the assessee from any of his employees to which the by the assessee from any of his employees to which the provisions of sub provisions of sub-clause (x) of clause (24) of section 2 clause (x) of clause (24) of section 2 applies. The relevant portion of t applies. The relevant portion of the act is:

In order to provide certainty, it is proposed to In order to provide certainty, it is proposed to In order to provide certainty, it is proposed to amend clause (a) of sub amend clause (a) of sub-section (1) of section 36 section (1) of section 36 of the Act by inserting another explanation to the of the Act by inserting another explanation to the of the Act by inserting another explanation to the said clause to clarify that the provision of section said clause to clarify that the provision of section said clause to clarify that the provision of section 43B does not apply and deemed to never hav 43B does not apply and deemed to never hav 43B does not apply and deemed to never have been applied for the purposes of determining the been applied for the purposes of determining the been applied for the purposes of determining the due date under this clause and amend section due date under this clause and amend section due date under this clause and amend section 43B of the Act by inserting Explanation 5 to the 43B of the Act by inserting Explanation 5 to the 43B of the Act by inserting Explanation 5 to the said section to clarify that the provisions of the said section to clarify that the provisions of the said section to clarify that the provisions of the said section do not apply and deemed to never said section do not apply and deemed to never said section do not apply and deemed to never have been appl have been applied to a sum received by the ied to a sum received by the assessee from any of his employees to which assessee from any of his employees to which assessee from any of his employees to which provisions of sub provisions of sub-clause (x) of clause (24) of clause (x) of clause (24) of section 2 applies. section 2 applies.

Hence, I hold that if the employer fails to deposit the Hence, I hold that if the employer fails to deposit the Hence, I hold that if the employer fails to deposit the entire amount towards entire amount towards employees' contribution on employees' contribution on account of P account of PF & SI with concerned department on or F & SI with concerned department on or before the due date under PF & ESI act, the assessee before the due date under PF & ESI act, the assessee before the due date under PF & ESI act, the assessee shall not be entitled for deduction to that extent. In fine shall not be entitled for deduction to that extent. In fine shall not be entitled for deduction to that extent. In fine if employees contribution received by the assessee is if employees contribution received by the assessee is if employees contribution received by the assessee is not credited to the employees' account in the rele not credited to the employees' account in the rele not credited to the employees' account in the relevant fund or funds on or before the due date mentioned in fund or funds on or before the due date mentioned in fund or funds on or before the due date mentioned in the Explanation to section 36(1)(va) [i.e. due dates under the Explanation to section 36(1)(va) [i.e. due dates under the Explanation to section 36(1)(va) [i.e. due dates under

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PF Act, ESI Act/other law], the assessee shall not be PF Act, ESI Act/other law], the assessee shall not be PF Act, ESI Act/other law], the assessee shall not be entitled to deduction of such amount in computing the entitled to deduction of such amount in computing the entitled to deduction of such amount in computing the income referred to in section 2 income referred to in section 28 of the Act even if 8 of the Act even if contributions deposited on or before due date [i.e. due contributions deposited on or before due date [i.e. due contributions deposited on or before due date [i.e. due date for filing income tax return under section 36(1)(va)] date for filing income tax return under section 36(1)(va)] date for filing income tax return under section 36(1)(va)] for depositing employers' contributions to those funds. for depositing employers' contributions to those funds. for depositing employers' contributions to those funds. In result, the appeal is dismissed. In result, the appeal is dismissed.”

“52. When Parliament introduced 52. When Parliament introduced Section 43B, what , what was on the statute book, was only employer’s was on the statute book, was only employer’s was on the statute book, was only employer’s contribution ( contribution (Section 34(1)(iv)). At that point in time, ). At that point in time, there was no question of employee’s contribution being there was no question of employee’s contribution being there was no question of employee’s contribution being considered as part of the employer’s earning. On the considered as part of the employer’s earning. On the considered as part of the employer’s earning. On the application of the original principles of law it could have application of the original principles of law it could have application of the original principles of law it could have been treated only as receipts not amounting to income. been treated only as receipts not amounting to income. been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988 When Parliament introduced the amendments in 1988 When Parliament introduced the amendments in 1988- 89, 89, inserting inserting Section 36(1)(va) and and simultaneously simultaneously inserting the second proviso of inserting the second proviso of Section 43B Section 43B, its intention was not to treat the disparate nature of the intention was not to treat the disparate nature of the intention was not to treat the disparate nature of the

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amounts, similarly. As discussed prev amounts, similarly. As discussed previously, the iously, the memorandum introducing the Finance Bill clearly stated memorandum introducing the Finance Bill clearly stated memorandum introducing the Finance Bill clearly stated that that the the provisions provisions – especially especially second second proviso proviso to Section 43B Section 43B - was introduced to ensure timely was introduced to ensure timely payments were made by the employer to the payments were made by the employer to the concerned concerned fund (EPF, ESI, etc.) and avoid the mischief of employers fund (EPF, ESI, etc.) and avoid the mischief of employers fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That retaining amounts for long periods. That Commissioner Commissioner of Income-Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi High Court).

Commissioner of Income Commissioner of Income-Tax and another Vs. Sabari Tax and another Vs. Sabari Enterprises, [ Enterprises, [2008] 298 ITR 141 (Karnataka High 2008] 298 ITR 141 (Karnataka High Court).

Commissioner of Income Tax Vs. Pamwi Tissues Ltd., Commissioner of Income Tax Vs. Pamwi Tissues Ltd., Commissioner of Income Tax Vs. Pamwi Tissues Ltd., [2009] 313 ITR 137 (Bombay High Court). [2009] 313 ITR 137 (Bombay High Court).

Commissioner of Income Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Utpadak Sahakari Sandh Ltd., [2013] 35 taxmann.com ., [2013] 35 taxmann.com 616 (Rajasthan High Court). 616 (Rajasthan High Court).

Parliament intended to retain the separate character of Parliament intended to retain the separate character of Parliament intended to retain the separate character of these two amounts, is evident from the use of different these two amounts, is evident from the use of different these two amounts, is evident from the use of different language. Section 2(24)(x) Section 2(24)(x) too, deems amount received deems amount received from the employees (whether the amount is received from the employees (whether the amount is received from the employees (whether the amount is received from the employee or by way of deduction authorized by from the employee or by way of deduction authorized by from the employee or by way of deduction authorized by the statute) as income the statute) as income - it is the character of the amount it is the character of the amount that is important, i.e., not income earned. Thus, that is important, i.e., not income earned. Thus, that is important, i.e., not income earned. Thus, amounts retained b amounts retained by the employer from out of the y the employer from out of the employee’s income by way of deduction etc. were employee’s income by way of deduction etc. were employee’s income by way of deduction etc. were treated as income in the hands of the employer. The treated as income in the hands of the employer. The treated as income in the hands of the employer. The significance of this provision is that on the one hand it significance of this provision is that on the one hand it significance of this provision is that on the one hand it brought into the fold of “income” amounts that were brought into the fold of “income” amounts that were brought into the fold of “income” amounts that were

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receipts or ded receipts or deductions from employees income; at the uctions from employees income; at the time, payment within the prescribed time time, payment within the prescribed time – by way of by way of contribution of the employees’ share to their credit with contribution of the employees’ share to their credit with contribution of the employees’ share to their credit with the relevant fund is to be treated as deduction ( the relevant fund is to be treated as deduction (Section Section 36(1)(va)). The other important feature is that this ). The other important feature is that this ). The other important feature is that this distinction between the employers’ contribution ( distinction between the employers’ contribution (Section Section 36(1)(iv)) and employees’ contribution required to be ) and employees’ contribution required to be ) and employees’ contribution required to be deposited by the employer ( deposited by the employer (Section 36(1)(va) Section 36(1)(va)) was maintained maintained - and continues to be maintained. On the and continues to be maintained. On the other hand, Section 43B covers all deductions that are covers all deductions that are permissible as expenditures, or out permissible as expenditures, or out-goings forming part oings forming part of the assessees’ liability. These include liabilities such of the assessees’ liability. These include liabilities such of the assessees’ liability. These include liabilities such as tax liability, cess duties etc. or interest liability as tax liability, cess duties etc. or interest liability as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely having regard to the terms of the contract. Thus, timely having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the payment of these alone entitle an assessee to the payment of these alone entitle an assessee to the benefit of de benefit of deduction from the total income. The essential duction from the total income. The essential objective of Section 43B is to ensure that if assessees is to ensure that if assessees are following the mercantile method of accounting, are following the mercantile method of accounting, are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, base nevertheless, the deduction of such liabilities, base nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass only on book entries, would not be given. To pass only on book entries, would not be given. To pass muster, actual payments were a necessary pre muster, actual payments were a necessary pre muster, actual payments were a necessary pre- condition for allowing the expenditure. condition for allowing the expenditure.

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received or deducted from the employee on or before the received or deducted from the employee on or before the received or deducted from the employee on or before the due date. In other words, there is a marked distinction due date. In other words, there is a marked distinction due date. In other words, there is a marked distinction between the nature and character of the two amounts between the nature and character of the two amounts between the nature and character of the two amounts – the employer’s liability is the employer’s liability is to be paid out of its income to be paid out of its income whereas the second is deemed an income, by definition, whereas the second is deemed an income, by definition, whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and since it is the deduction from the employees’ income and since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction held in trust by the employer. This marked distinction held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every has to be borne while interpreting the obligation of every has to be borne while interpreting the obligation of every assessee under assessee under Section 43B.

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are others’ income, monies, only deemed to be income, are others’ income, monies, only deemed to be income, are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the with the object of ensuring that they are paid within the with the object of ensuring that they are paid within the due date specified in the particular law. They have to be due date specified in the particular law. They have to be due date specified in the particular law. They have to be deposited in terms of such welfa deposited in terms of such welfare enactments. It is re enactments. It is upon deposit, in terms of those enactments and on or upon deposit, in terms of those enactments and on or upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, before the due dates mandated by such concerned law, before the due dates mandated by such concerned law, that the amount which is otherwise retained, and that the amount which is otherwise retained, and that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is deemed an income, is treated as a deduction. Thus, it is deemed an income, is treated as a deduction. Thus, it is an essential condition an essential condition for the deduction that such for the deduction that such amounts are deposited on or before the due date. If amounts are deposited on or before the due date. If amounts are deposited on or before the due date. If such interpretation were to be adopted, the non interpretation were to be adopted, the non interpretation were to be adopted, the non- obstante obstante clause clause under under Section 43B or or anything anything contained in that provision wou contained in that provision would not absolve the ld not absolve the assessee from its liability to deposit the employee’s assessee from its liability to deposit the employee’s assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for contribution on or before the due date as a condition for contribution on or before the due date as a condition for deduction.

3.1 Respectfully following the same, we do not find any infirmity Respectfully following the same, we do not find any infirmity Respectfully following the same, we do not find any infirmity in the order of the Ld. CIT(A) on the issue in the order of the Ld. CIT(A) on the issue-in- -dispute and accordingly we uphold the same. accordingly we uphold the same.

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Order pronounced under Rule 34(4) of Order pronounced under Rule 34(4) of the ITAT Rules, the ITAT Rules, 1963 on 22/12/2022. /12/2022. Sd/- Sd/- - (RAHUL CHAUDHARY RAHUL CHAUDHARY) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 22/12/2022 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, BY ORDER, //True Copy// (Sr. Private Secretary) (Sr. Private Secretary) ITAT, Mumbai ITAT, Mumbai