Employers can claim tax deduction for PF payments made before date of filing returns

Providing relief to India Inc, the Income Tax Department has clarified that contributions by employers for social security and welfare benefits such as provident and superannuation funds before the date of filing returns are not liable to tax, even if they are deposited after the deadline for remittance of such payments.

“The deduction is allowable to the employer assessee if he deposits the contributions to welfare funds on or before the ‘due date’ of filing of return of income,” said the Central Board of Direct Taxes (CBDT) in a recent circular, referring to a Supreme Court judgment of 2009.For instance, under the Employees’ Provident Fund Act, employers are mandated to deduct 12 per cent of a worker’s salary for contribution to the provident and pension fund schemes and match it with a 12 per cent contribution.

These have to be remitted to the EPFO within 15 days from the month end for which wages have been paid. Additionally, they may get a grace period of five days for depositing such contributions.

The CBDT has also directed its officers not to file appeals in such cases. “The Board has decided that no appeals may henceforth be filed on this ground by the officers of the department and appeals already filed, if any, on this ground before courts and tribunals may be withdrawn and not pressed upon,” it said.

The issue came up after many field officers disallowed such contributions for tax deductions claiming Section 43B of the Income Tax Act, 1961. The Section allows for claiming tax deductions only on the basis of actual payments.

Contributions past the due date for filing returns would be taxable, said the CBDT circular.

However, such a benefit will not be available for late remittance of employee’s share of welfare funds. Accordingly, the department has said employers will only be allowed to claim tax deductions for depositing the employee’s share to provident and superannuation funds if they are paid before the due date for such contributions.

Tax experts said this would provide significant clarity to employers. “It is a positive development and recognises the slight anomaly in law under which the employer, who did not pay the contribution by March 31 but paid it before filing the tax return, could not get the benefit of deduction,” said Sunil Shah, partner, Deloitte Haskins & Sells.

“To make India’s tax environment non-adversarial and avoid litigation on settled positions, tax officers have been directed to not file an appeal on this ground. Also the circular has been made applicable retrospectively to pending appeals also, which means that pending appeals which were filed on this ground have to be withdrawn or not pressed,” said Rakesh Nangia, Managing Partner, Nangia & Co.

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