Taxmann Daily
Dear Reader,
Today’s newsletter analytically summarizes the top stories reported at?taxmann.com.
In the instant case, the Hon’ble Supreme Court held that the findings of fact generally recorded by the ITAT are treated as conclusive. The High Court can interfere with the findings of fact while deciding a substantial question of law when the findings are not supported by the material on record, so as to be treated as perverse. For this, however, the High Court must frame a separate substantial question of law and only then interfere with the findings of fact by the ITAT, while applying the strict parameters.
In the present case, the High Court did not frame a specific substantial question of law and thus, the interference with the findings of fact is unwarranted. Accordingly, the additions made by the AO and affirmed by the High Court are deleted and the order passed by the ITAT is affirmed.
We have noticed that some employers deduct the contribution of employees towards Provident funds, superannuation funds, and other social security funds but do not deposit these contributions within the specified time. For the employees, this means a loss of interest or income. In cases where an employer later becomes financially unviable, non-deposit results in a permanent loss for the employees. In order to ensure that employees' contributions are deposited on time, I reiterate that the late deposit of employee's contribution by the employer will not be allowed as deduction to the employer.
SPEECH OF NIRMALA SITHARAMAN
MINISTER OF FINANCE
FEBRUARY 01, 2021
1. Backdrop to social welfare funds & its treatment under Income tax
With the intention to provide financial stability and social security to the employees, various welfare fund schemes have been introduced by the Government of India from time to time. Many such schemes cast responsibility on the employers to deposit the contribution into the fund in a fiduciary capacity. In the said contribution, employers are required to make a part payment out of their own pocket and a balance to collect from the employees to deposit in the said fund. To ensure that the employers pay the contribution received from the employees into the fund in a timely manner, the provisions of the Income-tax Act, 1961 ('the Act') were amended w.e.f. April 01, 1988, to provide that such contribution is a deemed income of the employer and if the same is not paid within the timelines prescribed under the Act, then the employer shall be liable to pay tax on such income. As a consequence, the employers shall firstly pay tax on the deemed income and then statutorily also required to deposit such contribution to the fund under the respective statutes. However, if the contribution is made in a timely manner then the deduction of such employees' contribution is allowed against the deemed income to the employers.
We have briefly captured below the treatment of the employer's contribution and employee's contribution to the provident fund, for ease of understanding as follows:-
The judiciary in the past had occasion to adjudicate in various cases that if the contribution received from the employee is deposited in the fund before the due date of filing ITR by the employer then no tax needs to be paid by the employer on the funds collected. However, the government of India had expressed its concern?vide?Finance Bill, 2021, in providing the leeway to the employers to deposit the contribution by the due date of filing ITR as against the due date provided under the respective statutes.
To overcome the mismatch of the principles highlighted in the judicial precedents and the concern of the government, the Finance Act, 2021 has amended the provisions of the Act to clarify that the provision of section?43B?does not apply and is deemed to never have been applied for the purposes of determining the due date of employees contribution. Accordingly, if the employee contribution is not deposited by the due date prescribed under the specified statutes then the employer needs to pay tax on such contribution under the Act. The said amendments were made effective from AY 2021-22 by the Finance Bill,2021.
It is worth noting that the finance bill, 2021 has declared that the amendment shall be effective from April 01, 2021. However, the provisions of the Act had clarified that the amendment is brought in to "remove the doubts" and such amendment is "clarificatory in nature". This has led to controversy on the amendment being prospective or retrospective in nature.
2. Judicial Interpretation on the effective date of the aforesaid amendment
On account of controversy around amendment being prospective or retrospective in nature, the Appellate Tribunal in the case of?Crescent Roadways (P.) Ltd.?v.?Dy. CIT?[IT Appeal No. 1952 (Hyd.) of 2018, dated 1-7-2021] and?Insta Exhibitions (P.) Ltd.?v.?Addl. CIT?[IT Appeal No 6941 (Delhi) of 2017, dated 3-8-2021] has held that the amendments are operative prospectively basis the effective date of the amendment as provided under notes on clauses to Finance Bill, 2021.
3. Controversy on the deductibility of employee contribution for the years not covered by the aforesaid amendment
There are a series of High Court judgements wherein it was held that employee contribution was covered under the provisions of section 43B of the Act and if the contribution is deposited to the fund by the due date of filing the ITR, the employer shall be allowed a deduction of such contribution. However, few High Courts on the other side did not endorse the view in favour of such an interpretation of the law. Surprisingly, the courts had commonly placed reliance on the Supreme Court ruling in the case of?CIT?v.?Alom Extrusions Ltd.?[2009] 185 Taxman 416/319 ITR 306/227 CTR 417?but have given their contrary views. One set of rulings says that the Supreme Court had settled the position on the deductibility of only employer contribution being paid by the due date of filing ITR by the employer and another set of rulings has adjudicated that it covers the deductibility of both employer and employee contribution.
On account of such divergent views of the various High Courts, the question of law was placed before the Supreme Court in the case of?Checkmate Services (P.) Ltd.?v.?CIT?[CA No. 2383 of 2016] to decide whether its previous judgement was made to cover only the employer contribution deductibility by the due date of filing ITR or both employer and employee contribution. Accordingly, to adjudicate whether contributions collected by the employer from employees and not deposited by the due date prescribed under the respective statutes will be allowed as a deductible expense to the employer.
In this regard, we have briefly highlighted below the principles settled by the Supreme Court in the case of?Alom Extrusions Ltd. (Supra), the interpretation of the Supreme Court ruling by various High Courts while adjudicating their divergent views, and the ultimate settlement of the controversy by the Supreme Court in the case of?Checkmate Services Pvt. Ltd.?(Supra).
4. Impact of Hon'ble Supreme Court ruling in?Alom Extrusions Ltd.?(Supra)
4.1 The issue before the Hon'ble Supreme Court in the case of?Alom Extrusions Ltd.?(supra) was to decide whether the deletion of the second proviso to section 43B of the Act by Finance Act 2003 is applicable prospectively or retrospectively w.e.f April 01, 1988. It may be noted that the Second proviso to then section 43B of the Act had put restrictions on the employer to deposit its contribution to the welfare fund by the due date prescribed in the respectively applicable statutes to get the deduction under section 43B of the Act. In the said case, the Court had adjudicated that deletion of the said proviso is curative in nature and to be applied retrospectively. The extract of the second proviso to the section 43B of the Act is as follows:-
"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by the issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date"
4.2 The ruling has not explicitly commented whether the contribution referred to in the said ruling denotes the employers' part or employees' part or both. In this regard, some courts have interpreted the ruling of the Hon'ble Supreme Court to cover both employer and employee contribute to be allowed as a deductible expense if the same is paid by the due date of filing the ITR and some other courts have held that the ruling gives such leeway only on the employer's contribution.
The relevant extract of Judicial precedents wherein deduction under section 43B of the Act allowed for both employer and employee contribution basis the Supreme Court ruling in the case of Alom Extrusions
??The?Hon'ble High Court of Allahabad?in the case of?Sagun Foundry (P.) Ltd.?v.?CIT?[2017] 78 taxmann.com 47/291 CTR 557?has relied on the ruling of Supreme Court in the case of?Alom Extrusion Ltd.?(Supra) and held that both employer and employee contributions are covered under section 43B of the Act. Relevant extract is as under:-?
"From the aforesaid judgment, we find that irrespective of the fact that deduction in respect of sum payable by employer contribution was involved, but Court did not restrict observations, findings and declaration of law to that context but looking to the objective and purpose of insertion of Section 43B applied it to both the contributions. It also observed clearly that Section 43B is with a non-obstante clause and therefore override even if, anything otherwise is contained in section 36 or any provision of Act 1961.?Therefore, we are clearly of the view that law laid down by High Courts of Karnataka, Rajasthan, Punjab & Haryana, Delhi, Bombay and Himachal Pradesh have rightly applied Section 43B in respect to both contributions?i.e.?employer and employee. Otherwise view taken by Gujrat High Court and followed by Kerala High Court, with great respect, we find expedient to dissent therewith."
??The?Hon'ble High Court of Bombay in the case of?CIT?v.?Ghatge Patil Transports Ltd.?[2015] 53 taxmann.com 141/228 Taxman 340/[2014] 368 ITR 749?has relied on the ruling of Supreme Court in the case of?Alom Extrusion Ltd.?(Supra) and held that both employer and employee contributions are covered under section 43B of the Act. Relevant extract is as under:-?
"The amendment provided by Finance Act, 2003 put on par the benefit of deductions of tax, duty, cess and fee on the one hand with contributions to various Employees' Welfare Funds on the other. All this came up for consideration before the Hon'ble Supreme Court in the case of Alom Extrusions Ltd. (supra). The Tribunal in the case at hand relied upon the said judgment. There is no reason to fault the order passed by the Tribunal. We are of the view that the decision of the Supreme Court in Alom Extrusions Ltd. (supra) applies to employees' contribution as well as employers' contribution."?
Relevant extract of Judicial precedents wherein deduction under section 43B of the Act allowed only for employer contribution basis the Supreme Court ruling in the case of Alom Extrusions Ltd.
??The?Hon'ble High Court of Gujarat?in the case of?CIT?v.?Gujarat State Road Transport Corpn.?[2014] 41 taxmann.com 100/223 Taxman 398/366 ITR 170/265 CTR 64 (Guj.)?has considered the aforesaid ruling and held that:-?
领英推荐
"It is also required to be noted that in the case before the Hon'ble Supreme Court, the controversy was with respect to employers' contribution as per section 43(B)(b) of the Act and not with respect to employees' contribution under section 36(1)(va). Before the Hon'ble Supreme Court in the case of Alom Extrusions Ltd. (supra) the Hon'ble Supreme Court had no occasion to consider deduction under section 36(1)(va) of the Act and with respect to employees' contribution"
??The?Hon'ble High Court of Kerala?in the case of?Popular Vehicles & Services (P.) Ltd.?[2018] 96 taxmann.com 13/257 Taxman 120/406 ITR 150?has considered the aforesaid ruling and held that?"The Supreme Court in Alom Extrusions Ltd.'s case (supra), as was noticed, was specifically considering the issue with respect to the employer's contribution"
4.3 Subject to the aforesaid controversies on the interpretation of the Hon'ble Supreme Court ruling, one may also look into one of the observations made in the said Supreme Court ruling which appears to consider the employee contribution as well under section 43B of the Act. The said observation was also emphasised by a counsel in the case of?Popular Vehicles & Services?(Supra) but still the ruling was held against the assessee:-
The reason also stated by the Supreme Court "to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds". It is this declaration by the Supreme Court which is relied on by the appellant to contend that the Supreme Court was considering the question of employee's contribution also. Otherwise, there would not have been a reference to an 'employer sitting on the collected contribution', is the compelling argument.
4.4 In light of the ongoing controversies, the matter reached the Hon'ble Supreme Court in the batch of appeals to settle the aforesaid issue. In the said case,?Berger Paints India Ltd.?v.?CIT?[C.A No. 2830 of 2016] was a lead matter however, the parties to the appeal agreed to treat?Checkmate Services Pvt. Ltd.?(supra) as the lead appeal. The key arguments from the appellant, revenue and observations by the Hon'ble Supreme Court are tabulated below for ease of understanding:-
5. Thoughts to Ponder
A.?The Hon'ble Supreme Court in the case of?Checkmate?(Supra) has held that this Court did not consider section?2(24)(x)?and 36(1)(va) in the case of?Alom Extrusion Ltd.?(Supra). However, the Court while adjudicating the aforesaid issue in the case of?Alom Extrusion Ltd.?(Supra) has referred to section 2(24)(x) (in Pg.4 of the order) and 36(1)(va) (in Pg.6 & 7 of the order) of the Act. Whether this reference means that the issue of employee contribution was also considered by the Court though not expressly worded? Whether the comment in Checkmate's judgement that Alom Extrusion's judgement did not consider section 2(24)(x) & section 36(1)(va) of the Act can rise to further controversy? Is it worth filing a miscellaneous petition?
B.?In addition to the above, the Hon'ble Supreme Court in the case of?Alom Extrusion Ltd.?(Supra) while adjudicating the question of law had specifically set aside the order of the Bombay High Court and settled the case in favour of the assessee. It may be noted that the question of law placed before the Bombay High Court in the case of?CIT?v.?Pamwi Tissues Ltd.?[2009] 313 ITR 137/[2008] 215 CTR 150 was to adjudicate on the correct interpretation of sections 43B, 2(24)(x) read with section 36(1)(va) and as to the claim of deductions in respect of the PF, EPF and ESIC contributions. The said issue was held in favour of revenue by the Bombay High Court and reversed in the case of?Alom Extrusion Ltd.?(supra). However, The Hon'ble Supreme Court in the case of?Checkmate Services (P.) Ltd.?(Supra) has held that this Court did not consider section 2(24)(x) and 36(1)(va) in the case of?Alom Extrusion Ltd.?(Supra). Does that mean the Hon'ble Supreme Court has set aside the order of the Bombay High Court on the issue of section 2(24)(x) r.w.s 36(1)(va) but did not adjudicate on the issue of the employee contribution?
C.?Whether Supreme Court observation in the case of?Alom Extrusion Ltd.?(supra) that "the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits" has any connection to the employee contribution which can be the subject matter of miscellaneous petition?
D.?Whether the aforesaid Supreme Court ruling in the case of?Checkmate Services (P.) Ltd.?(Supra) may lead to the reopening of the cases of the past years under section 148, section 154 and section 263 of the Act?
E.?Whether the amendment by Finance Act 2021 being prospective or retrospective in nature would any more be a matter of dispute in light of the fact that the Supreme Court has clarified that employee contribution was never covered under the ambit of section 43B of the Act.
Disclaimer:?Please note that the views expressed in this article are the personal opinion of the authors and do not represent the view of any organisation or any other person. No assurance is given if such a view is acceptable by any judicial or tax authorities. It is advisable to have independent research before reaching any conclusion.
That’s it from us for today! Stay Tuned for more updates from?Taxmann.com
Register for Taxmann’s Live Webinar | Inverted Duty Refunds under GST
?? 11th January 2023 (Wednesday) | ?? 5:00 PM – 6:00 PM (IST)
?? Register Now For FREE! (Limited Slots Available):?https://taxmann.social/OeCVM
?? Coverage of the Webinar:
?? Brief introduction on the various refunds under GST
?? Specific instances where inverted duty refunds may arise
?? Procedure to be followed for claiming inverted duty refund
?? Legal provisions for claiming inverted duty refund
?? Cases where an inverted duty refund is not permitted
?? Cases where inverted duty refund can be disputed
?? Speaker:
? Adv. Akella A.S. Prakasa Rao
He graduated from BITS, Pilani, and completed his LLB from Andhra University with a Gold Medal. He worked in CBIC for 15 years and later worked with KPMG, Toyota, and Biocon before starting his consulting practice in Bangalore. He has 28 years of experience in all branches of Indirect taxes.
?? Relevant For:
? Chartered Accountants
? Advocates
? CFOs
? Revenue Officers