Delayed payment of PF/ESIC Contribution & its deduction in the hands of the employer

There are lot many taxpayers who are subject to similar disallowance not only in AY 2017-18 but also in earlier and subsequent assessment years. CPC, Bengaluru is also processing the return by making disallowance of ESIC/PF in respect of employee’s share of contribution if the amount is deposited after the due date of deposit permissible under the relevant PF/ESIC Act. Let us first check the provision of Income Tax Act – 1961 on the issue and then we can discuss the available recourse for it.

1. Under section 2(24)(x), any sum received by employer from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the ESIC Act, 1948  or any other fund for the welfare of such employees is considered as “Income” in the hands of the employer. However, deduction in respect of such amount is admissible u/s 36(1)(va) if such amount is deposited within due date under the relevant ESIC/PF Act.
   In short, amount deducted by employer as employee’s share of PF/ESIC etc is first treated as income in the hands of the employer and then deduction is given to the employer u/s 36(1)(va) if the amount is deposited within due date prescribed under those Act. Coming to your specific query, if there is a delay in payment of employee’s share of PF/ESIC etc then said sum is clearly disallowable u/s 36(1)(va).
2. However, there is another provision, section 43B which allows the deduction towards some expenditure on actual payment basis. Clause (b) to Section 43B provides for deduction towards payment of PF/ESIC etc contribution if the payment is done before the due date of filing Income Tax Return (ITR). Question arises, whether deduction u/s 43B shall be available even in respect of payment of “employee’s share of PF/ESIC” covered u/s 36(1)(va) also or it is available in respect of “Employer’s share” alone?
3. CBDT has issued Circular No. 22/2015 dated 17.12.2015 wherein it has clarified that,
   a] Deduction u/s 43B is permissible towards “Employer’s share of contribution” if it is deposited by the employer before the due date of filing the income tax return (i.e., even if it is deposited after the due date specified under PF/ESIC Act)
   b] Deduction u/s 43B is not permissible towards “Employee’s share of contribution” if it is deposited by the employer after the due date specified under PF/ESIC Act even though the deposit is done before the due date of filing ITR.
4. In my opinion, above circular appears to be against the legislative intent for the following reasons.
   a] Clause (b) to section 43B refers to “any sum payable by the assessee….”. It doesn’t distinguish between employer contribution vis a vis employee contribution. In my view, Section 43B applies to both ‘contributions’ i.e. employers’ and employees’.
   b] Section 43B have an overriding effect over other provisions of the Act as it starts with a non-obstante clause and overrides all other provisions of the Act [including section 36(1)(va)]. The validity of deduction has been upheld in the following cases as well:
5. iSagun Foundry Private Limited vs. CIT (2017) 291 CTR 557 (All)
6. iiCIT Vs Ghatge Patil Transports Ltd., (2014) 368 ITR 749 (Bombay)
7. iii.  CIT Vs Hemla Embroidery Mills (P.) Ltd (P&H).
   1. CIT Vs Udaipur Dugdh Utpadak Sahakari Sangh Ltd., (2014) 366 ITR 163 (Raj)
   2. CIT Vs Rai Agro Industries Ltd., (2011) 334 ITR 122
   3. CIT Vs Sabri Enterprises, (2008) 298 ITR 141 (Kar).
   Remedy:
   Whether it is a disallowance in scrutiny assessment or by CPC, taxpayer have no other options but to file an appeal with the Commissioner of Income Tax (Appeal) for seeking relief u/s 43B.
   Suggestion:
   Availability of above deduction u/s 43B is rightly upheld by various courts. Circular No. 22/2015 has caused in hardship in numerous cases as CPC processing is system driven which is mechanically disallowing the claim without considering the judicial pronouncements of allowing deduction u/s 43B. For ease of business, the said Circular should be withdrawn by the CBDT immediately as it is not in accordance with the basic provision of taxation which provides for allowance of all business expenditure & taxation of real income. Refer:-https://thetaxtalk.com/2020/01/13/delayed-payment-of-pf-esic-contribution-its-deduction-in-the-hands-of-the-employer/