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Direct Tax Alert - SC rules on deductibility of employees’ contribution to PF/ESIC

14 October 2022


Contribution to Employees Provident Fund (EPF) consists of employer and employer portion. While section 36(1)(va) of the Income-tax Act, 1961 (IT Act) deals with deduction in respect of employees’ contributions, section 43B of the IT Act deals with employer’s contributions. Section 36(1)(va) of the IT Act provides that any sum received by an employer from his employee towards an employee welfare fund [including PF, superannuation fund, etc. taxable as an income of the employer under section 2(24)(x) of the IT Act] is allowed if it is deposited within the due date. As per Explanation to section 36(1)(va) of the IT Act, the term “due date” is defined to mean the due date prescribed under the relevant statute (i.e. statute governing the employee welfare fund). However, the employer’s contribution is governed by section 43B of the IT Act which provides a deduction if the amount is paid before the due date of filing the tax return. The interpretation of “due date” for the purpose of section 36(1)(va) of the IT Act has been a contentious issue with Supreme Court in the case of CIT vs. Alom Extrusion Ltd. [2009] 185 Taxman 416 (SC) allowing deduction of employees’ contribution to PF if paid before the due date of filing the tax return. Relying on this decision, there were a series of High Court Rulings granting the deduction of employees’ contributions to PF if paid on or before the due date of filing the tax return. Gujarat High Court and Kerala High Court took a different view and distinguished the Alom Extrusion decision.

Recently, Supreme Court had an opportunity to revisit its earlier decision and held that the due date for the purpose of section 36(1)(va) of the IT Act shall be the due date as per the relevant statute. We, at BDO in India, have summarised the ruling1 of the Supreme Court and provided our comments on the impact of this decision hereunder.


In the years under consideration, the taxpayer had belatedly deposited their employees’ contributions towards the EPF and ESI, considering the due dates under the relevant Acts and Regulations. The Tax Officer observed that the IT Act differentiated between employees' contributions and employers' contributions to PF accounts and that section 43B of the IT Act is applicable to only employers’ contributions to PF. However, with respect to employees' contributions, section 36(1)(va) of the IT Act is applicable. Since the contribution was not deposited before the due date prescribed in the relevant statute, the Tax Officer disallowed the same. The Tax Tribunal and High Courts upheld Tax Officer’s order. Noticing a division of opinion on the issue, with the High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favouring the interpretation beneficial to the assesses on the one hand, and the High Courts of Kerala and Gujarat preferring the interpretation in favour of the Revenue Authority on the other, Supreme Court granted special leave to appeal in all these cases.


The SC observed that in the Alom Extrusions case, the impact of amendment in section 2(24)(x) and section 36(1)(va) of the IT Act was not considered. It also observed that in the said decision, the separate provision in section 36(1) for employers’ contributions and employees’ contributions went unnoticed. Hence, SC held that deduction under section 36(1)(va) of the IT Act can be allowed only if the contribution is deposited within the due date prescribed in the relevant statute. While coming to this conclusion, the Supreme Court made the following observations:

  • The factual narration reveals two diametrically opposed views in regard to the interpretation of Section 36(1)(va) of the IT Act on the one hand and the proviso to Section 43(b) of the IT Act on the other. If one goes by the legislative history of these provisions, what is discernible is that Parliament’s endeavor in introducing Section 43B of the IT Act [which opens with its non-obstante clause] was to primarily ensure that deductions otherwise permissible and hitherto claimed on mercantile basis, were expressly conditioned, in certain cases upon payment. In other words, a mere claim of expenditure in the books was insufficient to entitle deduction. The taxpayer had to, before the prescribed date, actually pay the amounts, be it towards tax liability, interest or other similar liability spelled out by the provision
  • Section 43B of the IT Act falls under Part-V of the IT Act. What is apparent is that the scheme of the IT Act is such that sections 28 to 38 of the IT Act deal with different kinds of deductions, whereas sections 40 to 43B of the IT Act spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances
  • Sections 40 to 43B of the IT Act, are concerned with and enact different conditions, that the tax adjudicator has to enforce, and the taxpayer has to comply with, to secure a valid deduction. The scheme of the provisions relating to deductions, such as Sections 32 to 37 of the IT Act, on the other hand, deal primarily with business, commercial or professional expenditure, under various heads (including depreciation). Each of these deductions, has its contours, depending upon the expressions used, and the conditions that are to be met. The specific enumeration of deductions, dependent upon fulfilment of particular conditions, would qualify as allowable deductions. Failure by the taxpayer to comply with those conditions would render the claim vulnerable to rejection
  • In this scheme, the deduction made by employers to approved provident fund schemes is the subject matter of Section 36(iv) of the IT Act. It is noteworthy, that this provision was part of the original IT Act. It has largely remained unaltered. On the other hand, Section 36(1)(va) of the IT Act was specifically inserted by the Finance Act, 1987, w.e.f. 01 April 1988. Through the same amendment, by Section 3(b) of the IT Act, Section 2(24) of the IT Act, which defines various kinds of “income” – inserted clause (x). This is a significant amendment because Parliament intended that amounts not earned by the taxpayer, but received by it, whether in the form of deductions or otherwise, as receipts, were to be treated as income
  • The inclusion of a class of receipt, i.e. amounts received (or deducted from the employees) were to be part of the employer’s income. Since these amounts were not receipts that belonged to the taxpayer but were held by it, as trustees, as it were, Section 36(1)(va) of the IT Act was inserted specifically to ensure that if these receipts were deposited in the EPF/ESI accounts of the employees concerned, they could be treated as deductions. Section 36(1)(va) of the IT Act was hedged with the condition that the amounts/receipts had to be deposited by the employer, with the EPF/ESI, on or before the due date
  • The expression “due date” was dealt with in the explanation as the date by which such amounts had to be credited by the employer, in the concerned enactments such as EPF/ESI Acts. Importantly, such a condition (i.e. depositing the amount on or before the due date) has not been enacted in relation to the employer’s contribution (i.e. Section 36(1)(iv) of the IT Act). The significance of this is that Parliament treated contributions under section 36(1)(va) of the IT Act differently from those under section 36(1)(iv) of the IT Act.
  • It is evident that the intent of the lawmakers was clear that sums referred to in clause (b) of Section 43B of the IT Act, i.e. “sum payable as an employer, by way of contribution” refers to the contribution by the employer. The reference to “due date” in the second proviso to Section 43B of the IT Act was to have the same meaning as provided in the explanation to Section 36(1)(va) of the IT Act
  • Parliament, therefore, through this amendment, sought to provide for identity in treatment of the two kinds of payments: those made as contributions, by the employers, and those amounts credited by the employers, into the provident fund account of employees, received from the latter, as their contribution. Both these contributions had to necessarily be made on or before the due date
  • One of the rules of interpretation of a tax statute is that if a deduction or exemption is available in compliance with certain conditions, the conditions are to be strictly complied with. This rule is in line with the general principle that taxing statutes are to be construed strictly and that there is no room for equitable considerations
  • 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, by definition, since it is the deduction from the employee's income and held in trust by the employer
  • Employees’ contributions- which are deducted from their income, are not part of the taxpayer employer’s income, nor are they heads of deduction per se in the form of a statutory payout. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date


With Supreme Court observed that in Alom Extrusion it did not consider sections 2(24)(x) and section 36(1)(va) and section 36(1) of the IT Act. This observation will have far-reaching effects as many taxpayers, relying on Alom Extrusion, have claimed deduction on employees’ contribution to EPF by treating the due date for filing a tax return as the due date for purpose of section 36(1)(va) of the IT Act.

It is also pertinent to note that the Central Board of Direct Taxes (CBDT) had issued Circular No. 22/2015 dated 17 December 2015 informing that the Tax Authority shall not file any appeal or will withdraw the appeal where the addition was made under section 43B of the IT Act for the delay in depositing the employer’s contribution to PF. In the said Circular, it was specifically mentioned that it shall not apply to deduction relating to employee's contribution which is governed by section 36(1)(va) of the IT Act.

Further, Finance Act 2021 inserted Explanation 2 to section 36(1)(va) of the IT Act to clarify that the provisions of section 43B of the IT Act shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under section 36(1)(va) of the IT Act. It also introduced Explanation 5 to section 43B of the IT Act clarifying that the provisions of section 43B of the IT Act shall not apply and shall be deemed never to have been applied to a sum received by the taxpayer from any of his employees to which section 2(24)(x) of the IT Act applies. This amendment is effective from 1 April 2021.

While Alom Extrusion is an SC decision, applying the rule of interpretation, this decision being later in time, it shall have an overriding effect. Hence, relying on this Ruling, for all the years prior to the clarificatory amendment the deduction will now be available only if the same is paid on or before the due date specified in the relevant statute. The taxpayer may need to revisit their pending litigation and analyse the impact of this decision on the matters pending before different authorities.


1 Checkmate Services P. Ltd vs CIT [Civil Appeal No. 2833 of 2016]