With an objective of boosting standard of living in the country, various Central and State enactments have mandated contribution by employers and employees to funds maintained for the benefit of employees. An employer is required to deposit his/her own share of contribution as well as an employee’s share of contribution, duly deducted by the employer from the employee’s salary/ wages to the relevant fund, prior to the ‘due date’ prescribed in the relevant enactment. Non-compliance to the prescribed timeline(s) attracts penal and in some cases, criminal consequences. That apart, the fact of an employer not depositing the employee’s^[1] share of contribution to the relevant fund, prior to the due date prescribed in the relevant enactment, has considerable tax implications as well. This aspect has been prone to extensive litigation, which has recently been settled by the Supreme Court^[2].

The question before the Supreme Court was whether an employee’s contribution to a welfare fund, deposited by an employer on or before the ‘due date’ for furnishing the return of income, but beyond the expiry of the ‘due date’ in the relevant enactment, is a permissible deduction for computation of income of the employer. The Supreme Court was confronted with divergent views on the issue of allowability of an employee’s contribution, involving interpretation of Sections 36(1)(iv), 43B(b) and 36(1)(va) of the Income-tax Act, 1961 (‘ITA’)^[3].

As per Section 36(1)(iv) of the ITA, an employer’s contribution to a welfare fund maintained for the benefit of an employee is a permissible deduction for computation of the employer’s income. As per Section 43B(b) of the ITA, benefit of such deduction is provided for computation of the employer’s income only if the employer deposits the contribution to the relevant fund on or before the due date for furnishing the return of income.

Similarly, as per Section 36(1)(va) of the ITA, an employee’s contribution to a welfare fund maintained for the benefit of an employee, is also a permissible deduction for computation of the employer’s income^[4]. However, as opposed to an employer’s contribution, deduction of an employee’s contribution for computation of the employer’s income is conditioned on the same being credited to the relevant welfare fund on or before the ‘due date’ prescribed under the relevant enactment and not the ‘due date’ for furnishing the return of income.

The divergent views referred to above largely involved interpretation of the term ‘due date’ in Section 36(1)(va) of the ITA, specifically whether the term ‘due date’, in the context of an employee’s contribution, ought to be viewed in harmony with the timeline prescribed under Section 43B(b) of the ITA, which is in the context of an employer’s contribution. The view in the favour was that since reference to ‘contribution’ in the relevant enactment is a reference to collective contribution of an employer and an employee, there ought to be parity in tax treatment of the contribution made on behalf of an employer and an employee. This view resulted in a situation where an employer could deposit an employee’s contribution to the credit of a welfare fund beyond the statutory timeline, but before furnishing the return of income, and still legitimately claim deduction thereof from his income.

Contrary thereto, the view against focused on the legislative intent to maintain a legal difference between an employer’s contribution and an employee’s contribution. This was primarily because an employer holds an employee’s contribution in trust, before depositing the same to the credit of the relevant welfare fund. This view focused on the strict interpretation of the ITA and was based on the rationale that an employer should not be unduly enriched by holding onto an employee’s contribution for a period beyond the statutory timeline.

This latter view found favour with the Supreme Court. The Supreme Court took note of the settled principle that deduction under the ITA is available only upon strict compliance with requisite conditions thereunder^[5]. In light thereof, the Supreme Court opined that unless the condition in Section 36(1)(va) of the ITA, warranting deposit of an employee’s contribution on or before the due date as prescribed in the relevant enactment stands satisfied, deduction of this contribution for computation of the employer’s income is not permissible. The Supreme Court endorsed the view in the favour of the Revenue that the legislature intended on maintaining such distinction between an employer’s contribution and an employee’s contribution, owing to their separate character. The Supreme Court concluded that the term ‘due date’, in the context of an employee’s contribution, ought not to be viewed in harmony with the timeline prescribed under Section 43B(b) of the ITA, which is in the context of employer’s contribution only.

The decision of the Supreme Court is expected to have tax implications where employers have defaulted in depositing the contribution received by them from employees, beyond the due date prescribed in the relevant enactment, over and above the existing implications suffered by them under the relevant enactment.

[1] There is no dispute on an employer’s share of contribution to the relevant fund and therefore, the same is irrelevant for present purposes.

[2] Checkmate Services P. Ltd. v. CIT, Civil Appeal No. 2833 of 2016, decision dated October 12, 2022, in the context of Sections 36(1)(va) and 43B(b) of the ITA, prior to the amendment vide the Finance Act, 2021.

[3] High Courts of Bombay, Himachal Pradesh, Calcutta and Delhi preferred an interpretation favouring the employers and High Courts of Kerala and Gujarat preferred an interpretation favouring the Revenue.

[4] As per Section 2(24)(x) of the ITA, an employee’s contribution collected by an employer (for contributing to a welfare fund) is the deemed income of the employer.

[5] State of Jharkhand v. Ambay Cements, [2005] 1 SCC 368 (Supreme Court); CIT v. Ace Multi Axes Systems Ltd., [2018] 2 SCC 1 (Supreme Court); Commissioner of Customs v. Dilip Kumar & Co., [2018] 9 SCC 1 (Supreme Court).