Employee’s contribution to ESI/PF paid before filing of ITR not deductible: SC

Case Details: Checkmate Services (P.) Ltd. v. CIT - [2022] 143 taxmann.com 178 (SC)

Judiciary and Counsel Details

• • Uday Umesh Lalit, CJI, S. Ravindra Bhat & Sudhanshu Dhulia, JJ.

Facts of the Case

The issue before the Supreme Court was with respect to the interpretation of Section 36(1)(va) and Section 43B. Whether deposit of employee’s contribution towards the EPF and ESI after the expiry of the due date under the relevant acts eligible for the deduction?

Supreme Court Held

The Supreme Court of India held that the Parliament treated contributions under Section 36(1)(va) differently from those under Section 36(1)(iv). The latter is described as

“sum paid by the assessee as an employer by way of contribution towards a recognized provident fund”.

However, the phraseology of Section 36(1)(va) differs from Section 36(1)(iv). It enacts that

“any sum received by the assessee from any of his employees to which the provisions of section 2(24)(x) apply if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.”

These establish that Parliament while introducing Section 36(1)(va) along with Section 2(24)(x), was aware of the distinction between the two types of contributions. There was a statutory classification, under the IT Act, between the two.

The essential character of an employee’s contribution, i.e., that it is part of the employee’s income, held in trust by the employer is underlined by the condition that it has to be deposited on or before the due date.

Amounts retained by the employer from out of the employee’s income by way of deduction etc. were treated as income in the hands of the employer. The significance of this provision is that on the one hand, it brought into the fold of “income”; at the time, payment within the prescribed time is to be treated as a deduction (Section 36(1)(va)).

The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained and continues to be maintained.

Since there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, this marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.

Accordingly, the benefit of section 43B can’t be made available for the employee’s contribution deposited before the filing of the Income-tax Return.