Nilesh Shah writes:
E Mail: nilesh63@vsnl.
Law of Income tax on Employers & Employees' contribution to Provident Fund.
First I will deal with Employer's contribution to Provident Fund.
Section 43B of the Income tax Act deals with delay in employer's
contribution to Provident Fund. There are catena of decision's where
in, amendment to sec 43B by way of deletion of second proviso to sec
43B & amendment to first proviso w.e.f 1st April, 2004 has been
declared of curative nature & hence applicable retrospectively,
accordingly payments which have been made before the due date of
filing of return of income, have been held as allowable even in the
cases pertaining to earlier years. The same principle has been
reinforced by the tribunal in the decision of Vestas RRB Ltd 92 ITD 1
(Delhi). The Delhi Tribunal in Swarup Vegetables Industries Ltd 93
ITD 279 (Delhi) has taken a contrary view. However, the majority view
is that held in Vestas RRB Ltd's case.
I deal with Employees' contribution to Provident Fund.Section 43B is
not applicable at all to employees' contribution to Provident Fund &
ESIC & the law is laid in section 36(1)(va) & section 2(24)(x) of
the Act. The Delhi Tribunal in Vestas RRB (India) Ltd 92 ITD 1
(Delhi), has erroneously held , that the employees' contribution
towards PF & ESIC is also allowable if the same has been deposited
before the due date of filing of return of income.
Even if there is a delay of a single day, beyond the statutory period
prescribed under the PF Act, during which employees' contribution is
required to be deposited, will entail addition . Though this seems to
be very harsh & equity may demend it be allowed even if deposited by
a day's delay , yet it is a reality for the following reason.
Where there is no ambiguity in the provisions of any statute then any
other interpretation would amount to encroachment in the field of
legislation which is not permitted for the reason that it is an
obligation on the part of the legislature to review/rectify such
difficulties. It is also settled judicial principle that reasonable
construction be applied while construing the statute if the literal
construction defeats the object & purpose of the Act. Section 2(24)
(x) & sec 36(1)(va) were brought on statute w.e.f. 1st April,88, by
the Finance Act, 1987. As per circular no 495 dt 22nd September,87,
the object of enacting this provision was to take measures for
penalising the employers who misutilised the contribution to PF or
any other fund, set up under the provisions of ESI Act,1948, or any
other fund, for welfare of the employees. Further, by amendment by
the Finance Act,2003, second proviso to section 43B was deleted & its
first proviso was amended. However, correspondingly, no change in the
provisions of sec 36(1)(va) was made which again goes to show that
the legislature, in its wisdom, did not think it proper to provide
the employers any leeway in respect of the depsoit of the employees'
contribution towards PF & ESIC. Ours is a welfare State ( which I
cannot believe ) & the legislature is bound by the Directive
Principles of State Policy, as enshrined in the Constitution of
India, in making the laws although such principles are not
justiciable. It is also true that Income Tax Act,1961, is not a mere
piece of fiscal legislation. It also tries to remove imbalances in
the social & economic sphere of the country while providing fiscal
incentives in respect of the expenses incurred for social welfare
such as provisions of weighted deduction in respect of employment to
physically challenged persons etc and simultaneously it also provides
for harsh measures like this one, which is necessary to protect the
interests of the employees. The PF & ESIC are measures of social
securities to the emplyees. Therefore, the legislature has
specifically enacted a deeming provision whereby treating the
employees' contribution as income of the assessee & requiring the
assessee to get deduction of the same by depositng the amount thereof
within the due date. The rationale behind this is simple because the
employees rendering the services are supposed to get their due salary
& by deduction of their contribution out of the salary with the
obligation to deposit the same, employers act as trustees of
employees. If the employees' contribution towards ESIC is not
deposited in time, an employee may not be able to get medical
facilities, which he is legally entitled to, merely for non-deposit
of the amount by the employer, in spite of the same being deducted by
the employer. Assuming a situation, for the sake of argument, that it
it is held that the assessee may get deduction if the amount is
deposited before the due date of filing of the return of income, it
would enable the employer to deposit the employees' contribution
towards PF & ESIC deducted in the month of April,2007 by July, 2008,
which is too long a period to be given to the employers because if
any adverse business situation emerges in the intervening period,
which results in non-deposit of the employees' contribution, the
employees would be made to suffer without any default on their part.
Further, such a long period would also tempt the employers to utilise
the money for their business, which would be manifestly against the
objectives of the provisions. As far as the principle of equity is
concerned, it must be applied in favour of the weaker party. The
employer is weaker than the state & the employee is weaker than the
employer. Therefore, even on principle of equity it cannot be held in
favour of the employer; though harsh.
In conclusion the employees' contribution is required to be deposited
in time. Even if there is a delay of a single day it would be treated
as income u/s 2(24)(x).
If it is deposited in time the amount deducted would be allowed as a
deduction u/s 36(1)(va).