ITO vs. LKP Securities Ltd (ITAT Mumbai)

Employees’ PF/ ESI Contribution is not covered by s. 43B & is only allowable as a deduction u/s 36(1)(va) if paid by the “due date” prescribed therein

In AY 2008-09 the assessee collected employees’ contribution to the Provident Fund and ESIC but did not pay it within the due date prescribed by the relevant legislation. The amount was, however, paid before the due date of filing the ROI. The AO assessed the said amounts as income u/s 2(24)(x) but declined to grant a deduction u/s 36(1)(va) as the amount had been paid after the due date. The CIT(A), relying on Alom Extrusions 319 ITR 306 (SC) and AIMIL 321 ITR 508 (Del) held that the amounts had to be allowed as a deduction u/s 43B as they had been paid before filing the ROI. On appeal by the department to the Tribunal, HELD reversing the CIT(A):

S. 43B covers only the sums payable by way of contribution by the assessee as an employer, i.e., the employer’s contribution to the PF and ESI funds. It does not cover the employees contribution. While the employer’s contribution is allowable u/s 37(1), the employees’ contribution collected by the employer is deemed to be his income u/s 2(24)(x) and is allowable as a deduction u/s 36(1)(va) only if it is paid to the relevant fund by the due date as prescribed in the relevant legislation. Even if one assumes that s. 43B(b) applies to s. 36(1)(va) payments, a deduction would not be admissible because the s. 36(1)(va) payments are not ‘otherwise allowable’ if they are paid beyond the “due date”. The decisions in Vinay Cement 213 CTR (SC) 268 & Alom Extrusions 319 ITR 306 (SC) are not an authority on the point that employees’ contributions are also covered by s. 43B. Though in AIMIL 321 ITR 508 (Del) it was held that employees’ contribution to EPF and ESI funds are covered by s. 43B, it cannot be followed because (i) the Court moved on the premise that employees’ contribution is subject to clause (b) of s. 43B and did not notice the condition in s. 36(1)(va), (ii) the decision by the tribunal, which was approved by the High Court in AIMIL was rendered without considering the decision of the Special Bench in ITC Ltd & (iii) it is inconsistent with Godaveri (Mannar) Sahakari 298 ITR 149 (Bom). Accordingly, AIMIL cannot be followed and the deductibility of employees’ contribution has to be seen only with reference to s. 36(1)(va) (together with grace period) (Bengal Chemicals & Pharmaceuticals (included in file) & ITC Ltd 112 ITD 57 (Kol)(SB) followed)