Can Employer Claim Income Tax Deduction On Delayed PF-ESI Deposits? Supreme Court To Settle Conflicting Decisions
The Supreme Court agreed to examine the contentious issue under the tax law of whether an employer is entitled to claim income tax deductions for employees' Provident Fund (PF) and Employees' State Insurance (ESI) contributions that are deposited after the prescribed due date.
A bench of Justices JB Pardiwala and Sandeep Mehta issued notice in an appeal filed against the Delhi High Court's decision, which held that employees' PF and ESI contributions deposited by the employer after the statutory due date under the respective welfare laws are not eligible for deduction, even if paid before filing the income tax return.
At the heart of the dispute is the interpretation of Sections 2(24)(x), 36(1)(va), and 43B of the Income Tax Act, 1961.
While Section 2(24)(x) treats employees' PF/ESI contributions as income of the employer, Section 36(1)(va) governs the deduction for employee contributions to welfare funds (PF, ESI) collected by an employer. Such contributions are allowed as a deduction only if deposited into the respective funds on or before the statutory due dates, not the return filing date.
On the other hand, Section 43B allows certain deductions, including statutory payments such as employee fund contributions, if made before the due date of filing the income tax return. Unlike Section 36(1)(va), Section 43B doesn't require the employer to deposit contributions before the due date.
This has led to two competing judicial views across High Courts. One line of decisions adopts a strict interpretation, holding that employees' contributions must be deposited within the statutory due date under Section 36(1)(va), failing which the deduction is lost. The opposing view allows deduction if the payment is made before filing the return, applying Section 43B.
Noting divergence of opinions regarding the issue, the bench issued a notice to returnable within four weeks and agreed to deliver an authoritative ruling.
Cause Title: WOODLAND (AERO CLUB) PRIVATE LIMITED DIRECTOR VERSUS ASSISTANT COMMISSIONER OF INCOME TAX