Employer vs Employee PF/ESI Contributions Treatment under Income Tax: Supreme Court to Resolve Deduction Issue [Read Judgement]

The Supreme Court of India will examine the issue of allowability of deductions for delayed deposit of employees’ Provident Fund (PF) and Employees’ State Insurance ( ESI ) contributions under the Income Tax Act, 1961.

“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” said the bench of Justice J.B. Pardiwala and Justice Sandeep Mehta.

Woodland (Aero Club) Private Limited filed an appeal before the apex court against the decision of the Delhi High Court.

In the Assessment Year 2019-20, the Assessing Officer, while processing the return of the appellant under Section 143(1) disallowed employees’ PF and ESI contributions amounting to over ₹4.14 crore.

The disallowance was made on the ground that the amounts were deposited beyond the due dates prescribed under the respective welfare legislations, though admittedly paid before the due date of filing the income-tax return.

The assessee contended that such disallowance could not be made at the intimation stage and that, in any case, payments made before the return-filing due date were allowable.

The Delhi High Court, however, upheld the Revenue’s stand by drawing a clear statutory distinction between employer’s contribution and employees’ contribution.

It held that the employer's contribution is governed by Section 36(1)(iv) read with Section 43B, allowing deduction if paid up to the due date of filing the return.

In contrast, employees’ contribution deducted from salaries is deemed income of the employer under Section 2(24)(x) and can be claimed as a deduction only if deposited within the “due date” prescribed under the PF/ESI laws as mandated by Section 36(1)(va).

The Court further ruled that the non-obstante clause in Section 43B cannot override the specific conditions laid down in Section 36(1)(va) for employees’ contributions

After that the adversary ruling from the high court, the assessee approached the Supreme Court.

At the admission stage, the Apex Court noted that there exist two historically divergent lines of judicial opinion on the interpretation of “due date” for employees’ PF/ESI contribution. The two opinions by the courts are that :

1. “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”. This is supported with case laws including Unifac Management Services (India) (P.) Ltd. v. Dy. CIT [2018], Popular Vehicles & Services Pvt Ltd v. CIT [2018]..etc.

2. “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”. This is supported by case laws of CIT v. Aimil Ltd. [2010], CIT v. Udaipur Dugdh Utpadak Sahakari Sangh Ltd..etc.

According to the bench, the views were, one favouring the Revenue by insisting on statutory due dates under labour laws, and the other favouring assessees by allowing deductions if payments are made before the income-tax return filing due date under Section 139(1).

The apex court noted that there are conflicting opinions. Therefore the issue needed to be addressed.

The court issued notice to the department. The matter will be heard in detail soon.

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