Supreme Court To Interpret "Due Date" U/s. 36(1) Of Income Tax Act For Tax On Employee Contribution Under PF And ESI Acts
The legal conflict pits the "Revenue view", requiring deposits by specific statutory fund deadlines to avoid being taxed as income, against the "Assessee view," allowing deductions if paid before the tax return filing date under Section 43B.
Justice J.B. Pardiwala, Justice Sandeep Mehta, Supreme Court
The Supreme Court has issued a notice in a petition to settle a legal dispute regarding the interpretation of the “due date” under the Income Tax Act for depositing employee contributions to welfare funds like the Provident Fund (PF) and Employee State Insurance (ESI).
The Bench addressed two conflicting "schools of thought" that have divided various High Courts. One view holds that these contributions are deemed income and must be deposited strictly by the statutory deadlines prescribed in the respective labour acts to qualify for tax deductions. Conversely, a more liberal view suggests that there is no distinction between employer and employee contributions, arguing that both should be deductible under Section 43B as long as they are paid before the deadline for filing income tax returns.
The Bench of Justice JB Pardiwala and Justice Sandeep Mehta ordered, “There are two School of thoughts as regards the interpretation of the words “due date”. A combined reading of the Section 2(24)(x) and that Section 36(1) (va) of the Act, prima facie is indicative that any sum received by the assessee - employer from any of his employees as contribution towards PF & ESI is the income of the assessee under Section 2(24)(x) and it continues to be so, unless it is credited by the assessee - employer to the employee's account in the relevant fund on or before the due date specified under the relevant PF, ESI Act…The employee's contribution towards PF, ESI received by the assessee - employer is his income under Section 2(24)(x) and if he wants to have it deducted from his income under Section 36(1)(va), he must credit the same to the employee's account in the relevant fund on or before the due date specified under the relevant PF, ESI Act.”
Senior Advocate S Ganesh appeared for the Petitioner.
“The other view is that there is no difference between employees and employer contribution to PF, ESI and both would be guided by the provisions of Section 43B of the Act so as to allow deduction in the hands of the assessee - employer if the contributions are deposited on or before the due date of filling of return under Section 139(1) of the Income Tax Act, 1961,” the Court said.
The Court was hearing a plea by Woodland (Aero Club) Private Limited assailing the judgment passed by the Delhi High Court, where it held that employer contributions under Section 36(1)(iv) and employees' contributions under Section 36(1)(va) are fundamentally different in nature and must be treated separately.
An Appeal before the Delhi High Court was filed under Section 260A of the Income Tax Act, 1961, challenging the order dated passed by the Income Tax Appellate Tribunal (“ITAT”) filed by the Revenue in respect of Assessment Year (AY) 2019-20.
The Petitioner is a Partnership Firm engaged in the business of manufacturing, supplying, and exporting leather products like leather shoes, leather garments under the name of Woodland. The Petitioner filed its return of income of ₹15,78,68,550/- electronically for assessment year 2019-20 under Section 139(1) of Act and same was selected for scrutiny by notice dated 17/12/2019 issued u/s 143(l)(a) of Act wherein adjustments to the tune of ₹4,14,22,293/- were proposed to be deducted from the income of the appellant by the APO, Centralized Processing Centre, Income Tax Department [The Assessment Officer (AO)] on account of payment of Provident Fund, Employer's State Insurance and Labour Welfare Fund to the extent of the disputed amount deposited beyond the due date of the relevant fund under the Act.
The Petitioner filed its reply against the notice by giving reasons against the proposed adjustments/deductions. It was clarified that the said employee’s contribution deposited before filing of the ITR should have been admissible, even though the same was deposited after the due date as prescribed under the relevant acts.
The High Court vide Impugned Judgment had observed that the Employer's contributions under Section 36(1)(iv) and employees’ contributions covered under Section 36(1)(va) read with Section 2(24)(x) are fundamentally different in nature and must be treated separately. It had also held that the non-obstante clause in Section 43B cannot be applied to employees' contributions governed by Section 36(1)(va). Explanation 5 to Section 43B was not considered at all while arriving at the decision that employees' contributions must be deposited on or before the due dates under relevant statutes, the High Court held.
The Supreme Court referred to various provisions of the Income Tax, such as Section 2(24)(x), any amount recovered by the employer from the employees towards their contribution to any provident or superannuation fund or any other fund set up under the provisions of the ESI Act, 1948, or any other fund for the welfare of the employees is income.
Section 36(1)(va) of the Act says that any sum so received by the assessee - employer from his employees to which provisions of Section 2(24)(x) applies, the assessee - employer shall be entitled to deduction while computing income under Section 28, if such sum is credited by the assessee - employer to the employees account before the due date.
The Explanation to Section 36(1) (va) says that the 'due date' means the date by which the assessee-employer is required to credit the employee's contribution in the relevant fund under any Act, Rule, Order or Notification issued thereunder.
The Bench mentioned that the first view is supported by the judgments hereinunder: (i) Unifac Management Services (India) (P.) Ltd. v. Dy. CIT [2018], (ii) CIT v. Gujarat State Road Transport Corpn. [2014], (iii) CIT v. Merchem Ltd. [2015] (iv) B.S. Patel v. Dy. CIT [2010] and (v) Popular Vehicles & Services Pvt Ltd v. CIT [2018].
The other view was supported by the following judgments: (i) CIT v. Aimil Ltd. [2010], (ii) Pr. CIT v. Plamman HR (P) Ltd. [2018], (iii) CIT v. Nipso Ployfabriks Ltd. [2013], (iv) Sagun Foundry (P.) Ltd. v. CIT [2017], (v) CIT v. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. [2014], (vi) CIT v. Sabari Enterprises [2008], (vii) CIT v. Hemla Embroidery Mills (P.) Ltd. [2014], (viii) CIT v. Ghatge Patil Transports Ltd. [2014], (ix) Bihar State Warehousing Corpn. Ltd. v. CIT [2016], (x) CIT v. Vijay Shree Ltd. [2014], (xi) CIT v. Industrial Security & Intelligence India Pvt. Ltd. [2015], (xii) Gauhati High Court in the case of CIT v. George Williamson (Assam) Ltd. [2006], (xiii) CIT v. Kichha Sugar Ltd. [2013], (xiv) Pr. CIT v. Plamman HR (P) Ltd, [2017].
The Court ordered, “In view of the conflicting opinion, as referred to above, we would like to look into this issue. Issue notice, returnable in four weeks. Dasti, in addition, is permitted.”
Accordingly, the Court will hear the matter at a later date.
Cause Title: Woodland (Aero Club) Private Limited v. Assistant Commissioner of Income Tax [Special Leave to Appeal (C) No.1532/2026]
Appearances:
Petitioner: Senior Advocate S Ganesh, AOR Diggaj Pathak, Advocates Anukalp Jain, Abhijit Mittal, Shweta Sharma, Trishita Bera, Nishtha Nanda, Shaivya Singh and Vaibhavi Pathak