Provident Fund payments made by businesses have an employer and employee component. The employer contribution is an out-of-pocket expense for the employer and the employee contribution is a social security obligation of the employee deducted and then remitted by the employer.

Under the Income Tax Act, 1961 employee’s provident fund deduction is read as “income” in the hands of the employer and then allowed as an expenditure provided it is paid before the due date as per the PF Act (which is the 15th of the subsequent month) vide Sec. 2(24)(x) r/w 36(1)(va).

The employer’s contribution is allowed as a expenditure if it is paid before the due date of filing of return as per Section 43B(b), which was in the statute since April 1, 1989. A proviso to this section allowed the employer’s contribution if it was paid and realised within 15 days of the due date as per the PF Act. Following this, for both employee/employer, contribution was far simpler.

This proviso was subsequently amended with effect from April 1, 2004, to allow the employer’s PF contribution as an expense if it was paid before the due date of filing the return of income. The Supreme Court, in CIT vs Alom Extrusions Ltd (2009 319 ITR 306 SC), upheld the retrospective reading of this proviso, basing it a beneficial provision; also affirmed by the CBDT circular 22/2015 of December 17, 2015, for employer’s contribution.

Post this, many decisions have taken a practical view that under normal circumstances both the employer/employee contributions are paid together; if they are paid before the due date of return of income they are allowable as an expense. The intent of both Sections 36(1)(va) and 43B(b) is similar — that is, employees’ welfare dues ought to be paid to their credit and employer not be unjustly enriched at the expense of the employees. The loosening of Section 43B(b), unfortunately, also gave leeway to the employer to utilise money earmarked for his obligation until the due date of filing of return of income .

Clarificatory amendment

Bereft of the above, Finance Act, 2021 ushered in a clarificatory deeming amendment wef April 1, 2021, in Section 36(1)(va) holding that the due date under Section 43B(b) shall never be deemed to have been applied for this section. A similar consequential deeming clarificatory amendment wef April 1, 2021, in Section 43B(b) was made by inserting Explanation 5, affirming that Section 43B(b) will remain watertight only for employer’s contribution and not for employee’s contribution; thus giving a possible interpretation that one may breathe only through one nostril.

The intent of the legislature was to make it clear that both Sections 36(1)(va) and 43B(b) would apply only for employee and employer’s contributions, respectively, thus unsettling the already settled dust. Their being worded as “for the removal of doubts” has triggered a new issue as to whether these amendments are retrospective or prospective? Different ITAT’s have already held the recent amendment of April 1, 2021; since creating a new tax obligation can only be read prospectively.

A SLP (special leave petition) whether the dichotomous reading of Sections 36(1)(va) and . 43B(b) is correct or otherwise is also pending before the apex court arising out of CIT vs Gujarat State Road Transport Corporation (2014 366 ITR 0170 Gujarat HC) on the topic.

As to why the amendments were made in the first place in the Finance Act, 2021 against real income/set judicial principles is unknown. Any budgetary tax amendment ought to be pragmatic and based on real income principles, though equity and tax may be strangers at times. Such amendments need to stop, else we will sink in proliferated litigations and keepsake amendments.

The writer is a chartered accountant

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