Supreme Court To Decide If Delayed PF-ESI Deposits Qualify For Income Tax Deduction; Notice Issued In Appeal Against Delhi High Court Ruling

Supreme Court To Decide If Delayed PF-ESI Deposits Qualify For Income Tax Deduction; Notice Issued In Appeal Against Delhi HC Ruling

Introduction

The Supreme Court agreed to examine the recurring and contentious issue under the Income Tax Act, 1961, as to whether an employer can claim deduction of employees’ Provident Fund (PF) and Employees’ State Insurance (ESI) contributions when such amounts are deposited after the prescribed due date under the respective welfare legislations but before the due date for filing the income tax return. Recognising divergent views taken by various High Courts, the Court issued notice in the appeal and indicated that an authoritative pronouncement would be rendered.

Factual Background

The dispute arises from the interpretation of Sections 2(24)(x), 36(1)(va), and 43B of the Income Tax Act, 1961. Section 2(24)(x) treats employees’ contributions to PF/ESI collected by the employer as income of the employer. Section 36(1)(va) permits deduction of such contributions only if they are deposited into the relevant welfare fund on or before the statutory due date prescribed under the respective PF or ESI laws.

In contrast, Section 43B allows certain statutory payments, including contributions to employee welfare funds, as deductions if paid before the due date for filing the income tax return, without expressly linking it to the statutory due date under welfare laws.

The appellant challenged the Delhi High Court’s decision which held that employees’ PF and ESI contributions deposited after the statutory due date under the respective welfare laws are not eligible for deduction, even if such deposits were made prior to filing the income tax return.

Procedural Background

Aggrieved by the Delhi High Court’s decision adopting a strict interpretation of Section 36(1)(va), the appellant approached the Supreme Court. The appeal was placed before a Bench comprising Justice J.B. Pardiwala and Justice Sandeep Mehta.

The Court noted that conflicting judicial opinions exist across various High Courts on whether Section 43B can override the stricter timeline prescribed under Section 36(1)(va) for employees’ contributions.

Considering the divergence of views, the Bench issued notice returnable within four weeks and decided to examine the issue comprehensively.

Issues

1. Whether employees’ PF and ESI contributions deposited by the employer after the statutory due date under the respective welfare laws are eligible for deduction under the Income Tax Act.

2. Whether Section 43B permits deduction of such contributions if paid before the due date of filing the income tax return, notwithstanding the mandate of Section 36(1)(va).

3. How Sections 2(24)(x), 36(1)(va), and 43B are to be harmoniously interpreted.

Contentions of the Parties

The appellant contends that once the employees’ contributions are deposited before the due date of filing the income tax return, deduction should be allowed by virtue of Section 43B, which permits statutory payments to be claimed if made before the return filing date.

On the other hand, the Revenue relies on the strict language of Section 36(1)(va), arguing that employees’ contributions are distinct from employer’s contributions and must be deposited within the statutory due date under the respective welfare enactments. Failure to comply with the prescribed timeline disentitles the employer from claiming deduction.

Reasoning and Analysis

At this stage, the Supreme Court has not rendered a final determination on merits. However, the Bench acknowledged the existence of conflicting interpretations by High Courts on the interplay between Sections 36(1)(va) and 43B. One line of judicial reasoning adopts a strict approach, holding that delay beyond the statutory due date under welfare laws results in permanent disallowance. The other line permits deduction if the payment is made before the due date for filing the income tax return.

In view of the divergence and the recurring nature of the controversy affecting numerous assessments nationwide, the Court deemed it appropriate to settle the law authoritatively.

Decision

The Supreme Court issued notice in the appeal and agreed to adjudicate the issue. The matter has been listed for further hearing, with the Bench indicating that it will deliver a definitive ruling to resolve the conflicting interpretations.