Provident fund under the Head of Business or Profession

In this particular article I wish to share some of my views about Provident Fund contribution by the Employer and Employee, its Taxability and deduction under the head of Business or Profession.

The main objective of the provident fund is to give retirement benefit in the form of lump-sum amount on retirement and also to provide pension scheme to the employees and their families.

To govern the activities of provident fund The Employees Provident Fund act, 1952 has been introduced by the government of India and also Indian Income Tax Act, 1961 governs the taxability of the contribution made towards Provident Fund by the Employer and Employee.

In this article let us see how the Income Tax Act, 1961 is applicable in particular with Employer and deduction from the business income as business expense.

Applicable section, of the income Tax Act, is as follows:

a. Section 2 (24) (x).

b. Section 36 (1) (va)

c. Section 43B (b).

d. Section 10 (11) and section 10 (12).

e. Section 80C.

Let us have a brief content of all the above mentioned section of the IT Act:

1. Section 2 (24) (x)

Any sum received by the assesse from his employee as contribution to any provident fund or superannuation fund or any fund set up under the provision  of ESI Act,1948 or any other fund for the welfare of such employee, will be treated as income of the assesse.

2. Section 36 (1) (va).

Any sum received by the assessee from any  of his employees to which provisions of sub clause (x) of clause (24) of section 2 apply, if such sum is credited by the assesse to the Employee’s account in the relevant fund or funds before due date then such payment can be allowed as business expense.

3. Section 43B (b).

Any some payable by the assessee as an employer by a way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, for such payment deduction as business expenses allowed only on the basis of payment.

4. Section 10 (11) and Section 10 (12).

In computing the total income of the a previous year of any person, any income falling within any of the following clause shall not be included –

(11) Any payment from the provident fund to which the Provident fund act, 1952 applies.

(12) The accumulated balance due and becoming payable to an employee participating in a recognized provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule.

5. Section 80C.

Contribution made by the assesse towards PPF, Recognized Provident Fund is allowed as deduction from the Total income of the assessee  

Applicability of Section:

* To Employer :  Section 2 (24) (x) , section 36 (1) (va) and Section 43B (b).  

* To Employee : Section 10 (11) , section 10 (12) and Section 80C. 

Let us analyze the above section with a small practical problem

After applicability of Provident fund to the firm “X”, for the first two months employer only borne the contribution of Employee too without making any deduction from the salary of employee and paid the same into the department of accounts. How we should treat this contribution paid by the employer?  Is this Contribution (share of contribution of Employee) also allowed as deduction as business expense under the head of Business or Profession?

Facts in the problem:

1. There is no employee contribution for the first two months after the application of PF Act.

2. Employer has borne the both contribution without making deduction from the employee salary.

3. Employer has also paid the same to the department of accounts.

According to section 2 (24) (x).

The employee contribution is income in the employer hands.

According to section 36 (1) (va).

If such income referred under U/S 2 (24) (x), is paid to the department of accounts before the due date then allowed as deduction from business income.

According to section 43B (b).

Any amount paid by the assesse as an employer towards PF is allowed as business expense.

Therefore, Sec 2 (24) (x) and Sec 36 (1) (b) is not applicable as there is no contribution of employee. And that part contribution is made by the employer only. So only applicable section is 43B (B).

According to which any amount paid by the employer towards the welfare of the employee is allowed as business expense on payment basis. So in this case total contribution of employer (employee contribution for two months) is allowed as business expenses.

By: Dhruva Kalamanji Srikanth (CA final)

Source:

1. Caclubindia

2. law.incometaxindia.gov.in