Kerala HC: Delayed payments made to Employees' Provident Fund, Labour Welfare Fund and Employees' State Insurance is NOT allowable as deduction under Section 36(1)(va)of the Income Tax Act, 1961

Summary of Case:

Order date: 14-06-2019

Assessee claimed deduction u/s 36(1)(va) for the payments made as employer’s contribution to EPF / ESI, where payments were made to respective funds after the due date as prescribed under relevant Acts of EPF / ESI etc.

AO disallowed such deduction on the basis of opinion that delayed payment is not allowed as deduction.

Assessee claimed that such deduction should be allowed as payments were made before filing of return of income and filed to ITAT for allowance of such deduction.

The Tribunal has found that payments have to be made only before the due date prescribed under Section 139(1) of the Act for filing return of income to claim the benefit under Section 36(1)(va) of the Act.

Revenue filed appeal to High court as it became substantial question of law.

The substantial question of law is answered in favour of the revenue and against the assessee.

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Details of Order:

JUDGMENT

R.Narayana Pisharadi, J The revenue has filed these appeals challenging the common order dated 14.05.2015 of the Income Tax Appellate Tribunal, Cochin Bench in I.T.A.Nos.456/Coch/2014 to 459/Coch/2014.

2. The respondent/assessee is a company engaged in the manufacture/production of tea, rubber etc. The issues in the appeals relate to assessment of income tax for the assessment years 2007-08 to 2010-11.

3. The substantial questions of law for consideration in these appeals are the following:

(i) Whether the delayed payments made to Employees' Provident Fund, Labour Welfare Fund I.T.A.Nos.252/2015 and Employees' State Insurance is allowable as deduction under Section 36(1)(va)of the Income Tax Act, 1961 (for brevity "the Act")?

(ii) Whether licence fee paid to RPG Enterprises Limited is allowable as a deduction under Section 37of the Act?

(iii) Whether the consideration obtained on sale of old and unyielding rubber trees is exigible to tax in the light of Rules 7 and 7A of the Income Tax Rules?

(iv) Whether the sale proceeds of grevellea trees can be treated as capital gains and brought to tax?

(v) Whether the provision for gratuity can be added in computing the income under Section 115JB of the Act?

4. Heard learned Standing Counsel for Government of India (Taxes) and the learned counsel for the respondent. Question No.(i) - Belated Payments Made to EPF, LWF and ESI I.T.A.Nos.252/2015

5. Learned Standing Counsel for Government of India (Taxes) would submit that this issue is covered by the decision of this Court in Popular Vehicles and Services Private Limited v. Commissioner of Income Tax [(2018) 406 ITR 150].

6. In the instant cases, we are concerned with remittance of employees' contribution and not employers' contribution. In Popular Vehicles (supra), it has been held as follows:

"Section 36(1)(va) speaks of the employee's contribution to a welfare fund for the benefit of the employees alone, by virtue of the specific reference to section 2(24). Section 2(24) includes as income, any contribution received by the employer from the employee for the purpose of remittance to a fund created for the welfare of the employees; including inter alia a provident fund and that under the ESI Act.

When the same is remitted on the due date as prescribed in the statute or order creating such fund, then it is eligible for deduction under Section 36. The contributions which are deducted at the time of payment of salary is received by the employer-company and is treated as income under section 2(24). On remittance of this contribution, within the due date, it is allowed as a deduction under Section 36. If it is not paid to the welfare fund within the I.T.A.Nos.252/2015 due date provided under the relevant statute, it remains as an income in the books of account of the assessee/employer-company. The said contribution having not been paid to the applicable welfare fund within the due date provided, the assessee for all time is deprived of claiming such a remittance, made subsequently, as deduction from the income."

7. In the light of the aforesaid dictum laid down by the Division Bench of this Court in Popular Vehicles and Services (supra), we hold that, in order to claim the benefit of deduction under Section 36(1)(va) of the Act, payment of employees' contribution to Employees' Provident Fund, Labour Welfare Fund and Employees' State Insurance has to be made before the due date prescribed under the relevant statute. The substantial question of law is answered in favour of the revenue and against the assessee.

8. The Tribunal has found that payments have to be made only before the due date prescribed under Section 139(1) of the Act for filing return of income to claim the benefit under Section 36(1)(va) of the Act. The finding of the Tribunal in this regard is liable to be set aside. Moreover, the Tribunal has directed that the issue regarding deduction under Section 36(1) I.T.A.Nos.252/2015 (va) of the Act has to be reconsidered by the assessing officer. In the instant case, the assessee has got no plea that the remittance of employees' contribution to Employees' Provident Fund, Labour Welfare Fund, Employees' State Insurance had been made before the due date prescribed in the respective enactments. Therefore, the direction given by the Tribunal remitting this issue for reconsideration by the assessing officer is also liable to be set aside.

Question No.(ii) - Licence Fee Paid to RPG Enterprises

9. Learned Standing Counsel, Government of India (Taxes) has submitted that this issue is not pressed. In such circumstances, the order of the Tribunal on this issue does not warrant any interference.

Questions (iii) to (v)

10. Learned Standing Counsel, Government of India (Taxes) has fairly conceded that these questions are covered by the decision of the Division Bench of this Court in Commissioner of Income Tax v. Harrisons Malayalam Limited (Judgment dated 06.12.2018 in ITA No.238/2012), against the revenue. Hence, these substantial questions of law are answered against the revenue. I.T.A.Nos.252/2015

11. Consequently, the appeals are partly allowed. The impugned order of the Income Tax Appellate Tribunal in ITA Nos.456/Coch/2014 to 459/Coch/2014 to the extent of answering the issue regarding delayed payment of employees's contribution to Employees' Provident Fund, Labour Welfare Fund and Employees' State Insurance in favour of the assessee is set aside. The direction made by the Tribunal remitting the aforesaid issue to the Assessing Officer for reconsideration is also set aside and the order of the Assessing Officer in this regard is restored. The order of the Tribunal on all the four other issues raised in these appeals stands confirmed. No costs in the appeals.