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  • Writer's pictureShreyanth Nalam

Tax Snippet - The matter of dis-allowance of labor contributions under Income Tax Act

Tax officials and assessees lock horns every year post filing of returns when tax officials send notices to assessees to add back labor law contributions when made post the respective due dates to their taxable income. This has been a matter of excessive debate and litigation through the years in all forms of courts.

We look into the fine lines of this topic in this blog post and what stand can an assessee take when they face such situations. 

CBDT vide circular number 22 of 2015 dated 17/12/15 clarified that the settled position is that if the assessee deposits any sum payable by it way of tax, duty, cess or fee by whatever name called under any law for the time being in force, or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, on or before the ‘due date’ applicable in his case for furnishing the return of income under section 139(1) or Income Tax Act, 1961 (‘the Act’) no disallowance can be made under section 43B of the Act. This circular throws light only on the employee contribution. How about the contribution made by the employer for his share?

The aspect of employer's share also to be considered in the above meaning is derived from the following settled laws in various levels of courts and a fine reading of the sections of the Act. For this purpose the relevant sections are 43B, 36(va), 2(24)(x) and 139(1) of the Act.

It was held in the following cases that contributions of both employee and employer in respect of labour law payments comes under the purview of the word “contribution” under clause b of Section 43B and that the scope is not restricted only to employer contributions but also employee contributions.

1)  Supreme Court in Alom Extrusions Ltd (2009

2) Punjab and Haryana HC in Commissioner of Income Tax vs Hemla Embroidery P Ltd (2013)

3) Karnataka HC in Essae Teroka P Ltd vs Deputy Commissioner of Income Tax (2014)

From the above case laws, it can be understood that the word “contribution” under clause b of the Section 43B includes employee and employer contributions and if such contributions are made within the due dates as provided in section 139(1) of the Act, then no disallowance under this section is attracted. The courts while passing the above judgments relied or came to a conclusion that even if the matter of disallowance of the employer’s contribution is brought under section 36(va) read with section 2(24)(x), it is to be understood that an assessee can claim deduction of both the contributions under section 43B if the contribution has been remitted to the relevant authorities on or before the due date under 139(1) of the Act. The spirit and intent of the section 43B when introduced back in 1984 was to penalize those employers who have made accounting entries under accrual system and have claimed deduction for tax purposes but have not passed on the benefit to employees for their welfare and also for those employers who are sitting on money that was deducted from employees payments but have not remitted to the respective labor funds. Also, section 43B also contains an non-obstinate clause, strengthening the claim of assessees who have made contributions after respective due dates but before 139(1) due dates.   

Thus, from the above reading, those assessees who have genuinely made contributions in a delayed manner, but ahead of the 139(1) can claim refuge under section 43B for both employee and employer contributions of labor law contributions. 

Disclaimer - It is to be noted that all reasonable care has been taken by the author to avoid errors. The author accepts no responsibility for any error crept in any manner and shall not bear any kinds of losses/damages incurred by a reader on account of such errors. This article should be treated only for informational and knowledge gain purposes only. The author shall not accept any responsibility for any loss occurred by anyone on acting on this article.

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