22 Nov 2022
Supreme Court settles judicial conflict on the due date for payment of employees’ contributions to statutory funds
On 12 October 2022, the Supreme Court, in a batch of appeals led by Checkmate Services P. Ltd. v CIT, held that employees’ contributions towards employees’ provident fund (EPF), state insurance (ESI) and other similar funds must be deposited by the employer on or before the due dates specified under the statutes governing such funds (Statutory Due Dates). Otherwise, such employees’ contributions would constitute taxable income for the employer for the subject year.
Under the scheme of the (Indian) Income Tax Act (ITA), employees’ contributions towards statutory funds received by an employer-taxpayer are treated as its business income, if such sums are not deposited with the concerned authorities before the Statutory Due Dates prescribed under the applicable labour welfare laws. On the other hand, under Section 43B of the ITA, employer’s contributions towards these funds for a particular financial year may be claimed as tax deductible expenditure for such year even if such contributions by the employer are paid beyond the Statutory Due Dates, so long as the deposits are made before the due date for filing the annual tax return of the employer-taxpayer.
The ITA did not explicitly provide this extended timeline (i.e., up to the due date for filing the annual tax return) in respect of employees’ contributions towards such funds. However, in several cases, High Courts have held that employees’ contributions paid beyond the Statutory Due Dates prescribed under the applicable labour welfare laws but before the due date for filing the annual tax return should not be considered as the taxable income of the employer-taxpayer. In doing so, the High Courts have generally relied on an earlier ruling of the Supreme Court in the case of Alom Extrusions (2009).
In the present appeals as well, the employer-taxpayers had deposited employees’ contributions towards EPF and ESI after the Statutory Due Dates but before the due date for filing the annual tax return. The tax authorities treated such contributions as the taxable income of the employer-taxpayers. Therefore, the key issue under consideration was whether the employer must deposit employees’ contributions towards statutory funds before the Statutory Due Dates prescribed under the applicable labour welfare laws, or if it would suffice to deposit such amounts before the due date for filing the annual tax return.
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