Checkmate Services P. Ltd. v. Commissioner of Income TAX-1
S. RAVINDRA BHAT, J.
1. Leave granted. Berger Paints India Ltd. v Commissioner of
Income Tax, Kolkata-IV & Anr.1was the lead matter while hearing this
batch of appeals. However, the parties agreed to tr eat Checkmate
Services Pvt. Ltd. v Commissioner of Income Tax-I 2as the lead appeal,
for convenience. In all these appeals, the common question involved is
with respect to the interpretation of Section 36(1)(va) and Section 43B
of the Income Tax Act, 1961 (hereinafter, “IT Act”), and whether t he
appellant assessees are entitled to deduction of amounts deposi ted by
them towards contribution in terms of The Employees’ Provident Funds
and Miscellaneous Provisions Act, 1952 (hereinafter, “EPF Act”), The
Employees’ Provident Funds Scheme, 1952 (hereinafter, “EPF Scheme”),
The Employees’ State Insurance Act, 1948 (hereinafter, “E SI Act”),
The Employees’ State Insurance (Central) Regulations, 1950 (hereinafter,
“ESI Regulations”) or any other provident or superannuation fund.
2. In the years under consideration, the Assessing Officers
(hereinafter, “AO”) had ruled that the appellants had belatedly deposited
their employees’ contribution towards the EPF and ESI, considering the
due dates under the relevant acts and regulations. Consequently, the AO
ruled that by virtue of Section 36(1)(va) read with Section 2(24)(x) of
the IT Act, such sums received by the appellants co nstituted
“income”.Those amounts could not have been allowed as deductions
1 Berger Paints India Ltd. v Commissioner of Income T ax, Kolkata-IV & Anr., Civil
Appeal No. 2830 of 2016.
2 Checkmate Services Pvt. Ltd. v Commissioner of Inco me Tax-I, C.A. No. 2383 of
2016.
1073
under Section 36(1)(va) of the IT Act when the payment was made
beyond the relevant due date under the respective acts. In other words,
as per the AO, as such sums were paid beyond the du e dates as
prescribed under the respective acts, the right to claim suc h sums as
allowable deduction while computing the income was lost forever. The
assessees’ pleas were unsuccessful before the Income Tax Appellate
Tribunal (hereafter, “ITAT”). Ultimately, in the case of the impugned
judgment, the Gujarat High Court too rejected its pleas.3
3. Noticing a division of opinion on the issue, with the High Courts
of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi favouring
the interpretation beneficial to the assesses on the one ha nd, and the
High Courts of Kerala and Gujarat preferring the interpretation in favour
of the Revenue on the other, this court granted special leave to appeal in
all these cases.
The relevant statutory provisions of the IT Act
4.The relevant provisions of the IT Act, with amendments, made
from time to time, are as extracted below:
“Section 2. Definitions.
In this Act, unless the context otherwise requires, -
***
(24) “income” includes —
-***
(x) any sum received by the assessee from his employee s as
contributions to any provident fund or superannuatio n fund
or any fund set up under the provisions of the Empl oyees’
State Insurance Act, 1948 (34 of 1948), or any other fund for
the welfare of such employees;…” 4
***
“Section 36. Other deductions.
(1) The deductions provided for in the following clauses shal l
be allowed in respect of the matters dealt with the rein, in
computing the income referred to in section 28-
***
3 Commissioner of Income Tax-I v Checkmate Services P. Ltd., Tax Appeal No. 680 of
2014, dated 14.10.2014.
4 Inserted by the Finance Act, 1987 (11 of 1987), w.e .f. 01.04.1988.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
(iv) any sum paid by the assessee as an employer by wa y of
contribution towards a recognized provident fund or an
approved superannuation fund, subject to such limits as may
be prescribed for the purpose of recognizing the pr ovident
fund or approving the superannuation fund, as the case may
be; and subject to such conditions as the Board may think fit
to specify in cases where the contributions are not in the nature
of annual contributions of fixed amounts or annual
contributions fixed on some definite basis by reference t o the
income chargeable under the head “Salaries” or to t he
contributions or to the number of members of the fund;”
***
(va) any sum received by the assessee from any of h is
employees to which the provisions of sub-clause (x) of claus e
(24) of section 2 apply, if such sum is credited by the ass essee
to the employee’s account in the relevant fund or funds on or
before the due date .
Explanation 1. -For the purposes of this clause , “due
date”means the date by which the assessee is required as an
employer to credit an employee’s contribution to the employee’s
account in the relevant fund under any Act. rule, order or
notification issued thereunder or under any standing order,
award, contract of service or otherwise. ”
Explanation 2.-For the removal of doubts, it is hereby clarifi ed
that the provisions of section 43B shall not apply and shall
be deemed never to have been applied for the purpos es of
determining the “due date” under this clause.” 5
(Emphasis supplied)
5. With effect from 01.04.1984, Section 43B was inserted. It reads
inter alia, as follows:
“Section 43B. Certain deductions to be only on actua l
payment.
Notwithstanding anything contained in any other pro vision
of this Act, a deduction otherwise allowable under this Act in
respect of—
5 Explanation 2 inserted by Act No. 13 of 2021, w.e.f . 01.04.2021.
1075
***
(b) any sum payable by the assessee as an employer b y way
of contribution to any provident fund or superannuation fund
or gratuity fund or any other fund for the welfare of
employees, or
***
shall be allowed (irrespective of the previous year i n which
the liability to pay such sum was incurred by the a ssessee
according to the method of accounting regularly emp loyed
by him) only in computing the income referred to in section
28 of that previous year in which such sum is actually p aid
by him:
Provided that nothing contained in this section shall apply in
relation to any sum which is actually paid by the assessee on
or before the due date applicable in his case for furnishin g
the return of income under sub-section (1) of sectio n 139in
respect of the previous year in which the liability to pay such
sum was incurred as aforesaid and the evidence of s uch
payment is furnished by the assessee along with such return .6
Explanation : For the removal of doubts, it is hereby declared
that where a deduction in respect of any sum referre d to in
clause (a) or clause (b) of this section is allowed in com puting
the income referred to in section 28 of the previous year ( being
a previous year relevant to the assessment year commencin g
on the 1st day of April, 1983, or any earlier assessment year)
in which the liability to pay such sum was incurred by the
assessee, the assessee shall not be entitled to any de duction
under this section in respect of such sum in comput ing the
income of the previous year in which the sum is actually p aid
by him.”
(Emphasis supplied)
By Section 9 of the Finance Act, 1989, the following second
proviso was added:
“Provided further that no deduction shall, in respect o f any
sum referred to in clause (b), be allowed unless such sum has
6 Second proviso w.e.f. 1989.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
actually been paid in cash or by issue of a cheque or draft or
by any other mode on or before the due date as defined in the
Explanation below clause (va) of sub-section (1) of se ction
36, and where such payment has been made otherwise tha n
in cash, the sum has been realised within fifteen d ays from
the due date.”
By Section 21 of the Finance Act, 2003, the above second proviso
was omitted.
Thereafter, by Finance Act, 2021 the following Explanation 5 was
added, w.e.f. 01.04.2021:
“Explanation 5.-For the removal of doubts, it is her eby
clarified that the provisions of this section shall not apply
and shall be deemed never to have been applied to a sum
received by the assessee from any of his employees to wh ich
the provisions of sub-clause (x) of clause (24) of section 2
applies.”
6. The time limit for deposit of employees’ contribution under the
relevant acts / regulations are follows:
A. EPF Scheme:
Chapter VI: Declaration, Contribution Cards, and
Returns
38. Mode of payment of contributions
“(1)The employer shall, before paying the member his
wages in respect of any period or part of period fo r
which contribution are payable, deduct the employee’s
contribution from his wages which together with his own
contribution as well as an administrative charge of such
percentage of the pay (basic wages, dearness allowance,
retaining allowance, if any, and cash value of food
concessions admissible thereon) for the time being
payable to the employees other than an excluded
employee and in respect of which provident fund
contributions are payable, as the Central Government
may fix, he shall within fifteen days of the close of ev ery
month pay the same to the Fund electronic through
internet banking of the State Bank of India or any other
1077
Nationalised Bank or through Pay Gov platform or
through scheduled banks in India including private
sector banks authorized for collection on account o f
contributions and administrative charge:
(Emphasis supplied)
7. In addition to the above, a five-day grace period was allowed
to employers in terms of the Manual of Accounting Procedure ( Part-I
General). However, the grace period was discontinued by circular bearing
No. WSU/9(1)(2013)/Settlement/35631 dated 08.01.201 6, made
applicable to contributions for January 2016 onwards.
B. ESI Regulations:
“31. Time for payment of contribution - An employer
who is liable to pay contributions in respect of an y
employee shall pay those contributions within 21 days
of the last day of the calendar month in which the
contributions fall due”
(Emphasis supplied)
8. A circular 7 had explained the rationale for introduction of
Section 43B:
“Disallowance of unpaid statutory liability - Section 43B
***
35.2 Several cases have come to notice where taxpayer s do
not discharge their statutory liability such as in respect of
excise duty, employer’s contribution to provident f und,
Employees’ State Insurance Scheme, etc., for long per iods of
time, extending sometimes to several years. For the purpose
of their income-tax assessments, they claim the lia bility as
deduction on the ground that they maintain accounts on
mercantile or accrual basis. On the other hand, they dispute
the liability and do not discharge the same. For some reason
or the other, undisputed liabilities also are not paid.
35.3 To curb this practice, the Finance Act has ins erted a
new section 438 to provide that deduction for any sum payable
by the assessee by way of tax or duty under any law for the
7 Circular No. 372 dated 08-12-1983.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
time being in force or any sum payable by the assessee a s an
employer by way of contribution to any provident fu nd or
superannuation fund or gratuity fund or any other fund for
the welfare- of employees shall irrespective of the previous
year in which the liability to pay such sum was incurred, b e
allowed only in computing the income of that previous year
in which such sum is actually paid by the assessee.”
9. The scope and effect of the newly inserted Section 36(1) (va)
and the newly inserted provisos to Section 43B of the IT Act were
elaborated in a Central Board of Direct Taxes (hereinafte r, “CBDT”)
circular bearing No. 495.8 Relevant extracts of the circular are as follows:
“Measures of penalising employers who misutilise
contributions to the provident fund or any fund set up un der
the provisions of the Employees’ State Insurance Act, 1948,
or any other fund for welfare of employees
12.1 The existing provisions provide for a deduction in respect
of any payment by way of contribution to a provident fund or
superannuation fund or any other fund for welfare o f
employees in the year in which the liability is act ually
discharged [section 438]. The effect of the amendment brought
about by the Finance Act, is that no deduction will be allo wed
in the assessment of the employer(s) unless such cont ribution
is paid to the fund on or before the “due date”. Du e date
means the date by which an employer is required to credit the
“contribution” to the employee’s account in the relevant fund
under the provisions of any law or term of contract of se rvice
or otherwise [Explanation to section 36(1 )(va) of the Finance
Act]).”
Appellants’ Contentions
10. Mr. Arvind P. Datar, learned senior counsel appearing for
some of the appellants, relied upon the judgment of this court in
Commissioner of Income Tax v. Alom Extrusions Ltd. 9 It was urged
that this decision had considered the effect of deletion of the second
proviso to Section 43B of IT Act (by Finance Act, 2003) and whe ther
the same operated prospectively. The court rejected the Revenue’s appeal
8 Circular No. 495 dated 22.09.1987.
9 Commissioner of Income Tax v. Alom Extrusions Ltd., (2010) 1 SCC 489.
1079
and held that the omission of the second proviso to Section 43B w as
curative and therefore operated retrospectively. Mr. Datar urged that in
Alom Extrusions, the court took note of the fact that the law as existing
prior to the omission of the second proviso to Section 43B restri cted
deductions in respect of any sums payable by an employer as contribution
to the PF / superannuation fund etc. for employees’ welfare unless they
were paid within the specified due date. Under the second provis o to
Section 43B, a further constraint was placed on the employer – it was
eligible for deduction only if it paid the contribution before the date for
filing of return of income, and necessarily enclosed with the return of
income, which resulted in a lot of hardship to the employer s. On a
representation to the Government about this, the Kelkar committee was
setup by the Central Government, which considered the issue, and based
upon its recommendation, the relevant provisions of the Financ e Act,
2003 were introduced, resulting in the deletion of the second proviso of
Section 43B. Mr. Datar also highlighted that the court in AlomExtrustions
took note of the fact that the first proviso which came into force from
01.04.1988 was not on the statute book when the assessments were
made in the previous decision of Allied Motors (P) Ltd. v Commissioner
of Income Tax. 10
11. Reliance was placed upon the judgment in Alom Extrustions
to say that this court was alive to the inconvenience caused to the
assesses, if the Revenue’s contention was to be accepted that the Finance
Act, 2003 was operative prospectively. It was submitted tha t the ratio
and logic in Alom Extrustions was followed by no less than forty High
Courts. Examples include the Allahabad High Court in Sagun Foundry
Pvt Ltd v. Commissioner of Income Tax11; the Rajasthan High Court in
Commissioner of Income Tax v. State Bank of Bikaner 12; the
Karnataka High Court in Essae Teraoka Pvt. Ltd. v. Deputy
Commissioner of Income Tax13; and the Himachal Pradesh High Court
in Commissioner of Income Tax v. Nipso Polyfabriks Ltd. 14
12. It was submitted that only the impugned judgments of the
Gujarat High Court and Kerela High Court in Commissioner of Income
10 Allied Motors (P) Ltd. v Commissioner of Income Tax, (1997) 3SCC 472.
11 Sagun Foundry Pvt Ltd v. Commissioner of Income Tax , ITA/87/2006.
12 Commissioner of Income Tax V. State Bank of Bikaner, (2014) 363 ITR 70.
13 Essae Teraoka Pvt. Ltd. v. Deputy Commissioner of I ncome Tax, (2014) 366 ITR
408.
14 Commissioner of Income Tax v. Nipso Polyfabriks Ltd ., (2013) 350 ITR 327.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
Tax v. Merchem Ltd.15 have taken a different view and distinguished
Alom Extrusions. It was submitted that views of the Gujarat and Kerela
High Court were incorrect. Counsel urged that Section 43B had to b e
understood in the context of the existing laws. Mr. Datar e mphasized
that under the EPF Act and ESI Act, the employer was liable to make a
composite payment. The liability comprised of the employer’s contribution
and the contribution collected from the employee. If this were to be kept
in mind, the deletion of the second proviso to Section 43B, and the opening
non-obstante clause in Section 43B had to be given full meaning. As a
consequence, under Section 43B, at the time of paying the employers’
contribution, the employer is under legal obligation to pay not only its
contribution but also that of the employee, as a single payment to the PF
authority under the governing law. The insistence upon payment of actual
payment of employees’ contribution in Explanation to Section 36(1)(va)
was expressly overridden by the non obstanteclause.
13. It was argued that the Parliament was alive to the fact that
both explanation to Section 36(1)(va) and second proviso to Section 43B
were brought in together in 1989. Therefore, the deletion of the latte r
i.e., second proviso to Section 43B was intended to give relief to the
assesses.The interpretation in the impugned judgment of the Guj arat
High Court and that of the Kerala High Court, focusing only on Section
36(1)(va) is contrary to what Parliament intend.It was argued by learned
counsel that Alom Extrusions correctly found that the law hindered and
caused practical difficulties to assesses; as a result, it was omitted. To
give full effect to the omission was that amendment de clared to be
retrospective in effect by this court. Further, the non-obstante clause in
the opening phrase in Section 43B was deemed sufficient to override
other provisions, including Section 36(1).
14. Lastly, it was submitted that the scheme of the IT Act was
such that business income or its deductions were spelt out under Section
36, and Section 37 was a residual deduction clause whereby expenditures
other than those falling within Sections 28-36, expressly lai d out for
commercial or business purposes, were allowed as deductions . If the
scheme of the IT Act were to be kept in mind, the restrictive condition in
Section 36(1)(va) i.e., the stipulation that the employees’ contr ibution
must be paid within the time specified, failing which no deduction was
permissible, was in fact intended to be expressly overridden by Section
15 Commissioner of Income Tax v. Merchem Ltd., ITA No. 402/2009.
1081
43B. The philosophy behind Section 43B (which was i ntroduced
01.04.1984) was to ensure actual payment of certain speci fied and
statutory dues, before a particular date. These dues either by way of tax
or other levies, (including interest-payment towards loan or contributions
deducted by statutes such as EPF Act) were to be made within a specified
date under such enactments which cast those obligations. This was only
a condition for the grant of deduction. The second proviso to Sect ion
43B had imposed further restrictive condition which was omitted in 2003.
Therefore, the non-obstante clause of Section 43B w as operative
propriae vigore entitling the assessees to claim deduction made by them
in respect of contributions to PF authorities provided the entire amounts
were paid before the return of income was filed.
15. Mr. Tushar Hemani, learned senior counsel appearing on behalf
of Suzlon Energy Ltd. supported the submissions of Mr. Datar. He relied
upon Section 2(c) of the EPF Act and highlighted that the contribution
payable by the employer was a composite amount - refer red to as the
amount payable in respect of an employee under the scheme. It was
submitted that similarly Section 6 of the Act and paragraphs 28, 30 & 38
of the EPF Scheme establish that what was payable as contribution by
the employer was not only the contribution in respect of its obligation to
deposit amounts in the account of the employee, but its contribution as
well as the contribution of the employee. Pointedly, Mr. Hemani referred
Section 30 of EPF Act:
“30 (1) The employer shall in the first instance, pay bot h the
contribution payable by himself (in this Scheme referr ed to
as the employer’s contribution) and also, on behalf of the
member employed by him directly or by or through a
contractor, the contribution payable by such member (i n the
scheme referred to as the member’s contribution):
(2) In respect of employee employed by or through a
contractor, the contractor shall recover the contri bution
payable by such employee (in this Scheme referred to as the
member’s contribution) and shall pay to the principal employer
the amount of member’s contribution so deducted tog ether
with an equal amount of contribution (in this Scheme referred
to as the employer’s contribution) and also adminis trative
charges.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
(3) It shall be the responsibility of the principal em ployer to
pay both the contributions payable by himself in res pect of
the employees directly employed by him and also in respec t of
the employees employed by or through a contractor and also
administrative charges.”
Likewise, Regulation 31 of the ESI Regulations spells out the time
for payment – within 21 days of the last day of the calendar month in
which the contribution was due.
16. Learned senior counsel referred to clause 2(c) of the fourth
schedule of the IT Act:
“Part A
Recognized Provident Funds
Definitions.
2. In this Part, unless the context otherwise requires, —
***
(c) “contribution” means any sum credited by or on behalf of
any employee out of his salary, or by an employer out of his
own moneys, to the individual account of an employe e, but
does not include any sum credited as interest.”
The EPF Act, EPF Scheme, ESI Act and ESI Regulations as well
as provisions of the IT Act refer to employee’s contributi on as part of
the contribution that the employer has to make under the relevant Act.
Parliament was alive to this: consequently, the term ‘sum payable by
the assessee as an employer by way of contribution” in Section 43B(b)
of the IT Act means both its contribution and the sum collected from the
employees as the latter’s contribution.
17. An alternative submission was that any sum paid b y the
employer / assessee as contribution included both emp loyee’s and
employer’s contributions and was allowed as deduction under Section
36(1)(iv) of the IT Act. What was contemplated under Section 36(1)(va)
was the amount which was received and not deducted by the employer
assessee from its employees. Both Sections 2(24)(x) read with Section
36(1) (va) refer to any sum received by the assessee from its employees
as contributions as against any sum deducted by the assessee from the
payments made to employees. Received and deducted are two different
terms and cannot be used interchangeably.
1083
18. Again, reference was made to Clause 30 of the EPF Scheme
and Regulations under the ESI Act, and it was submitted that under both
the EPF & ESI Acts, when employees were employed by or through a
contractor, the latter was supposed to recover the contribution payable
by such employee, with the amount of such member’s contribution paid
to the principal employer, deducted together with an equal amount of its
contribution along with administrative charges. Such contribution was
received by the principal employer. But for Section 2(24)(x) read with
Section 36(1)(va) of the IT Act, such transaction would re main in the
Balance Sheet as receivable and payable. However, by deeming fiction,
such receipt was treated as income first and upon payment of the said
sum so received by the due date so defined under the respective statutes,
the same was allowed as deduction while computing the income under
the provisions of the IT Act. Therefore, Section 36 (1)(va) of the IT Act
had limited operation to allow such sum so received from the employees.
The deduction from the employees’ salary as contribution was governed
by Section 36(1)(iv) of the IT Act. Contributions of employees engaged
as contract labour were to be recovered by such contractor and then
paid over to the principal employer. This, coupled with the principal
employer contribution along with administrative charges, was to be
remitted to the EPF account within the specified time.
19. Mr. Preetesh Kapoor, learned senior counsel appearing for
one of the appellants, adopted the submissions of the other senior counsels.
He urged, besides, that the Parliamentary concern in omitting the second
proviso to Section 43B was to avoid the difficulties faced by the assessees
which they would now re-experience ifw the Gujarat and Kerala High
Court views were to be accepted. He urged that the Kelkar’s
Committee’s recommendations resulted in the 2003 amendments, the
object and purport of which would be negated if the Revenue’ s views
were to prevail.
20. Mr. Kapoor urged this court to adopt an interpretation th at
would be pragmatic and in consonance with fairness. So long as the
assessee concerned deposited PF and other dues before the date of
filing the return, no fiscal consequence of it being taxed should t ake
place. Counsel submitted that deposit after due date would be visited
with fine or other adverse consequences under the relevant st atute.
Revenue’s Contentions
21. The learned Additional Solicitor General (hereinafter, “ASG”),
Mr. Balbir Singh, for the Revenue argued that in Alom Extrusions, the
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
issue involved was with respect to the employer’s contributi on to PF
account. In the present cases, the issue involved was with re spect to
employees’ contribution to PF account. It was urged that the I T Act
differentiated between employees’ contribution and employers’
contribution to PF account. With respect to employers’ cont ribution,
Section 43B was applicable. However, with respect to e mployees’
contribution, Section 36(1)(va) was applicable, as it was s pecific and
pointed to the kind of contribution, and when it could be made, to qualify
as a deductible expense. Both the provisions i.e., Section 43B and Section
36(1)(va) operated in different fields, with respec t to different
contributions. Consequently, Section 43B was inapplicable and could not
override Section 36(1)(va).
22. The learned ASG further submitted that by Section 2(24)(x),
any sum “received by the assessee ” from the employees as
contribution to any provident fund or superannuation fund etc. the
welfare of such employees was deemed to be included in the income of
the assessee. This was introduced in the Finance Act of 1988. This
inclusion, and the amendments to Section 36 and 43B were part of the
scheme. Therefore, the deletion of second proviso to Section 43B could
not result in that provision overriding the conditions imposed for obtaining
deduction, specifically that were part of Section 36.
23. It was argued that it was with introduction of Section 4 3B
with effect from 01.04.1984, that the law insisted upon actual payment
of amounts claimed as deductions, enumerated under the provisi on.
Section 43B(b) spoke of sum payable by the employer by way of
contribution to a welfare or provident fund. It could be understood that
the provision took in both employee’s and employer’s contributi on.
Parliament then took note of the circumstance that many as sessees
claimed deductions on the ground of their maintaining accounts on
mercantile or accrual basis and failed to discharge the liability.
Consequently, by Finance Act 1987, Section 2(24) (x), and Section 36(1)
(va) as well as second proviso to Section 43B were inserted. From that
date the statute treated employee’s and employer’s contribution
differently.
24. It was urged that but for the above interpretation the re was
no rationale to bring within the fold of “income” – by Section 2(24)(x)
– employee’s contribution received by the employer and provi ding a
deduction by Section 36 (1)(va) and permitting the deduction only if that
1085
contribution were paid in accordance with the statute governing the fund
(EPF/ESI Act). The second proviso to Section 43B then underwent a
cosmetic change and later was deleted. There was also a new proviso
added under Section 43B for permitting deduction on contributions paid
before the returns were filed.
25. This took in only the employer’s contribution especially since
Section 2(24) and sub-clause (va) were retained. The employee’s
contributions, as Merchem Ltd. noticed, stood on a different footing,
since it was collected from the employee as a deduction in their salary
itself. This would in effect be deemed income of the assessee, as had
been specifically indicated in the definition of “income” under Section
2(24)(x), a provision introduced w.e.f. 01.04.1988 under the Finance
Act, 1987.
26. The Revenue further contended that in terms of provisions of
Section 36(1)(va) with respect to any sum received by the ass essee
from any of its employees to which provision of Section 2 (24 (x) applied,
if credited by the assessee to the employees’ account in t he relevant
fund or funds on or before the due date, the assessee was entitled to the
deduction. It was submitted that even the Explanation to Section 36(1)
(va) made it clear that for the purpose of that provision, “due date”
meant the date by which the assessee, as an employer, had to credit the
employees’ contribution to the employees’ account in the relevant fund
under any law or rule or regulation issued thereunder or under any standing
order, etc. Therefore, during the relevant assessment year, if the employer
did not deposit the entire amount towards employees’ contribution with
the PF authorities on or before the due date under the EPF/ESI Act, to
the extent there was shortfall in deposit of the employees’ contribution/
ESI contribution, the assessee was not entitled to the deduction.
27. The learned ASG further submitted that Section 43B which
was applicable to employers’ contribution to any provident fund or any
other fund for the welfare of the employees, and the amendment t o
Section 43B, which enacted that any such amount of employers’
contribution was deposited by the employer on or before the due date of
filing of the return under Section 139 was entitled to deduction in t he
relevant year, was not applicable with respect to employees’ contribution.
It was argued therefore, that when the assessee did not depos it the
employees’ contribution in the PF account before the due date provided
under the EPF/ESI Act, the assessee was disentitled to deduction under
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
Section 36 in the relevant assessment order, though the assessee might
have deposited the employees’ contribution on or before the due date of
filing of the return under Section 139 of the IT Act.
28. It was also urged that the difference in language betwee n
Sections 36 and 43B was because the two provisions had d iffering
objectives. Whereas Section 36 dealt with deductions that were not
covered in the previous provisions, Section 36(1)(va), with its Explanations,
was directly concerned with the meaning of “due date” which was the
date by which the assessee was required as an employer “to credit an
employee’s contribution to the employee’s account in t he relevant
fund under any Act.” On the other hand, Section 43B was introduced
to ensure that sums that could otherwise be treated as deductions,
particularly, those shown as payable, based on the mercantile method of
accounting, would not be eligible to such treatment, unless those payments
were actually made when they fell due: such as tax dues, sta tutory or
interest liabilities. The limited exception carved out by t he proviso to
Section 43B was that if such amount wa[s actually paid by the assessee
“on or before the due date applicable in his case for furnishin g the
return of income under sub-section (1) of section 139 in resp ect of
the previous year in which the liability to pay such sum was incurred”
and the assessee furnished evidence of such payment along wi th the
return, there would be entitlement for deduction.
29. It was urged that Section 43B spoke of sum payable by the
employer or the ‘employer’s contribution’, payable by the employer
without deduction from the salary of the employee. Employees’
contribution was remitted to the fund by the employer, and t hey were
deducted from the employees’ salary. Such deduction was stat utorily
enabled. Deduction from the salary of the employee, no doubt, was the
responsibility of the employer, as was the remittance, to the fund. That
nevertheless, did not change the basic nature of the contribution, which
was of the employee. A contribution deducted from the employee’s salary
and deposited by the employer, could not be termed as empl oyer’s
contribution. A distinction existed so far as contributions payable under
the EPF Act and the ESI Act. The employer’s contribution had to be
paid by the employer itself. In that case there was no deduction from the
employees’ salary. The employee’s contribution, on the other hand, was
to be deducted from the salary payable to the employee into the relevant
fund.
1087
Analysis and Conclusions
30. The factual narration reveals two diametrically opposed views
in regard to the interpretation of Section 36(1)(va) on the one hand and
proviso to Section 43(b) on the other. If one goes by the legislative history
of these provisions, what is discernible is that Parliament’s endeavour in
introducing Section 43B [which opens with its non-obstante clause] was
to primarily ensure that deductions otherwise permissible and hitherto
claimed on mercantile basis, were expressly conditioned, in certain cases
upon payment. In other words, a mere claim of expenditure in the books
was insufficient to entitle deduction. The assessee had to, b efore the
prescribed date, actually pay the amounts – be it towards tax liability,
interest or other similar liability spelt out by the provision.
31. Section 43B falls in Part-V of the IT Act. What is apparent is
that the scheme of the Act is such that Sections 28 to 38 deal with
different kinds of deductions, whereas Sections 40 to 43B spell out special
provisions, laying out the mechanism for assessments and e xpressly
prescribing conditions for disallowances. In terms of this scheme, Section
40 (which too starts with a non-obstante clause overriding Sections 30-
38), deals with what cannot be deducted in computing income under the
head “Profits and Gains of Business and Profession”. Likewise, Section
40A(2) opens with a non-obstante clause and spells out what expenses
and payments are not deductible in certain circumstances. Section 41
elaborates conditions which apply with respect to certain de ductions
which are otherwise allowed in respect of loss, expenditur e or trading
liability etc. If we consider this scheme, Sections 40- 43B, are
concerned with and enact different conditions, that the tax
adjudicator has to enforce, and the assessee has to comply with, to
secure a valid deduction.
32. The scheme of the provisions relating to deductions, such as
Sections 32-37, on the other hand, deal primarily with business, commercial
or professional expenditure, under various heads (including depreciation).
Each of these deductions, has its contours, depending upon the expressions
used, and the conditions that are to be met. It is therefore necessar y to
bear in mind that specific enumeration of deductions, dependent upon
fulfilment of particular conditions, would qualify as allowable
deductions: failure by the assessee to comply with those conditions, would
render the claim vulnerable to rejection. In this scheme t he deduction
made by employers to approved provident fund scheme s, is the
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
subject matter of Section 36 (iv). It is noteworthy, that this provision
was part of the original IT Act; it has largely remained unaltered. On the
other hand, Section 36(1)(va) was specifically inserted by the Finance
Act, 1987, w.e.f. 01-04-1988. Through the same amendment, by Section
3(b), Section 2(24) – which defines various kindsof “income” – inserted
clause (x). This is a significant amendment, because Parliament intended
that amounts not earned by the assessee, but received by it, - whether
in the form of deductions, or otherwise, as receipts, were to be treated
as income. The inclusion of a class of receipt, i.e., amounts received (or
deducted from the employees) were to be part of the employer/assessee’s
income. Since these amounts were not receipts that belonge d to the
assessee, but were held by it, as trustees, as it were, Sec tion 36(1)(va)
was inserted specifically to ensure that if these receipts were deposited
in the EPF/ESI accounts of the employees concerned, they coul d be
treated as deductions. Section 36(1)(va) was hedged with the condition
that the amounts/receipts had to be deposited by the employer, with the
EPF/ESI, on or before the due date.The last expression “due date”
was dealt with in the explanation as the date by which such amounts had
to be credited by the employer, in the concerned enactments s uch as
EPF/ESI Acts. Importantly, such a condition (i.e., depositing the amount
on or before the due date) has not been enacted in rel ation to the
employer’s contribution (i.e., Section 36(1)(iv)).
33. The significance of this is that Parliament treated contributions
under Section 36(1)(va) differently from those under Section 36(1)(iv).
The latter (hereinafter, “employers’ contribution”) is described as “sum
paid by the assessee as an employer by way of contribut ion towards
a recognized provident fund”. However, the phraseology of Section
36(1)(va) differs from Section 36(1)(iv). It enacts that “any sum
received by the assessee from any of his employees to which the
provisions of sub-clause (x) of clause (24) of sect ion 2 apply, if
such sum is credited by the assessee to the employee’ s account in
the relevant fund or funds on or before the due date.” The essential
character of an employees’ contribution, i.e., that i t is part of the
employees’ income, held in trust by the employer is underlined by the
condition that it has to be deposited on or before the due date.
34. It is therefore, manifest that the definition of contribution in
Section 2 (c) is used in entirely different senses, in the relevant deduction
clauses. The differentiation is also evident from the fac t that each of
1089
these contributions is separately dealt with in different clauses of Section
36 (1). All these establish that Parliament, while introduci ng Section
36(1)(va) along with Section 2(24)(x), was aware of the dis tinction
between the two types of contributions. There was a statutory
classification, under the IT Act, between the two.
35. It is instructive in this context to note that the Finance Act,
1987, introduced to Section 2(24), the definition clause (x), with effect
from 1 April 1988; it also brought in Section 36(1)(va). The memorandum
explaining these provisions, in the Finance Bill, 1987, presented to the
Parliament, is extracted below:
“Measures of penalising employers mis-utilising contrib utions
to the provident fund or any funds set up under the provisio ns
of the Employees State Insurance Act, 1948, or any other fund
for the welfare of employees -
12.1. The existing provisions provide for a deduction in respec t
of any payment by way of contribution to the provident f und
or a superannuation fund or any other fund for welf are of
employees in the year in which the liabilities are actually
discharged (Section 43B). The effect of the amendment brou ght
about by the Finance act, is that no deduction will be allowe d
in the assessment of the employer, unless such contribution is
paid into the fund on or before the due date. “Due date”
means the date by which an employer is required to credit the
contribution to the employees account in the relevant fund or
under the relevant provisions of any law or term of the contract
of service or otherwise.
(Explanation to Section 36 (1) of the Finance Act)
12.2. In addition, contribution of the employees to the various
funds which are deducted by the employer from the salari es
and wages of the employees will be taxed as income w ithin
brackets insertion of new [clause (x) in clause (24) of S ection
2] of the employer, if such contribution is not credited by the
employer in the account of the employee in the relevant fun d
by the due date. Where such income is not chargeable to tax
under the head “profits and gains of business or profession”
it will be assessed under the head “income from oth er
sources.”
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
36. Significantly, the same Finance Act, 1987 also introduced
provisos to Section 43B, through amendment (clause 10 of the Finance
Bill). The memorandum explaining the Bill, pertinently states, in relation
to second proviso to Section 43B that:
“…The second proviso seeks to provide that no deduc tion
shall be allowed in regard to the sum referred to in clause (b )
unless such sum has actually been paid during the prev ious
year on or before the due date. The due date for the purposes
of this proviso shall be the due date as under Explanation to
clause (va) of sub-section (1) of Section 36.”
37. It is evident that the intent of the lawmakers was cle ar that
sums referred to in clause (b) of Section 43B, i.e., “sum payable as an
employer, by way of contribution” refers to the contribution by the
employer. The reference to “due date” in the second proviso to Section
43B was to have the same meaning as provided in the explana tion to
Section 36(1)(va). Parliament therefore, through this amendment, sought
to provide for identity in treatment of the two kinds of payments: those
made as contributions, by the employers, and those amounts credited by
the employers, into the provident fund account of employees, received
from the latter, as their contribution. Both these contributions had to
necessarily be made on or before the due date.
38. This court had occasion to consider the object of introducing
Section 43B, in Allied Motors. The court held, after setting out extracts
of the Budget speech of the Finance Minister, for 1983-84, that:
“Section 43B was, therefore, clearly aimed at curbi ng the
activities of those tax-payers, who did not dischar ge their
statutory liability of payment of excise duty, empl oyer’s
contribution to provident fund, etc., for long period s of time
but claimed deductions in that regard from their inc ome on
the ground that the liability to pay these amounts ha d been
incurred by them in the relevant previous year. It was to st op
this mischief that Section 43B was inserted.”
39. Original Section 43B(b) enabled the assessee/employe r to
claim deduction towards contribution as an employer, “by way of
contribution to any provident fund” . The second proviso was
substituted by Finance Act, 1989 with effect from 01.04.1989 and read
as under:
1091
“…Provided further that no deduction shall in respect of any
sum referred to in clause (b) be allowed unless such sum has
actually been paid in cash or to by issue of a cheque or draft
or by any other mode on or before the due date as defined in
the explanation below Clause (va) of sub-section (1) of Sect ion
36, and where such payment has been made otherwise tha n
in cash, the same has been realised within 15 days from the
due date.”
40. The position in law remained unchanged for 14 years. The
Central Government then constituted the Kelkar Committee, to suggest
tax reforms. The report suggested amendments inter alia, to Section
43B. The relevant extract of the report is as follows:
“In terms of the provisions of section 43B of the In come-tax
Act, deduction for statutory payments relating to labour, tax es
and State and public financial institutions are allo wed as
deductions, if they are paid during the financial year. However,
under the provisions payment of taxes and interest to State
and public financial institution are deemed to have been paid
during the financial year even if they are paid by the due
date of filing of return. Further if the liability is discharged
in the subsequent year after the due date of filing o f return,
the payment is allowed as a deduction in the subsequent year.
In the case of statutory payment relating to labour , the
deduction for the payment is disallowed if such pay ment is
made any time after the last date of payment of the about
related liability. Trade and industry across the co untry
represented that the delayed payment of statutory l iability
related to labour should be accorded the same treatmen t as
delayed payment of taxes and interest, i.e. they sh ould be
allowed in the year of account.
Since the objective of the provision is to ensure th at a tax-
payer does not avail of any statutory liability without act ually
making a payment for the same, we are of the view that t hese
objectives would be served if the deduction for the stat utory
liability relating to labour are allowed in the year of paym ent.
The complete disallowance of such payments is too h arsh a
punishment for delayed payments. Therefore, we recommend
that the deduction for delayed payment of statutory l iability
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
relating to labour should be allowed in the year of paym ent
like delayed taxes and interest.”
Based on the report, the Union introduced amendments to the IT
Act, including an amendment to Section 43B; the memorandum explaining
the provisions in the Finance Bill, 2003 in the matter of Section 43B.
inter alia, reads thus:
“The Bill also proposes to provide that in case of deduction
of payments made by the assessee as an employer by way of
contribution to any provident fund or superannuatio n fund
or any other fund for the welfare of the employees sha ll be
allowed in computing the income of the year in which such
sum is actually paid. In case the same is paid before the due
date of filing the return of income for the previous yea r, the
allowance will be made in the year in which the liability was
incurred.
These amendments will take effect from 1st April, 200 4 and
will accordingly apply in relation to the assessment year 2004-
05 and subsequent years.”
41. The Notes on Clauses inter alia, reads as follows:
“It is also proposed to amend the first proviso to the said
section so as to omit the references of clause (a), clau se (c),
clause (d), clause (e) and clause (f) which is consequential in
nature.
It is also proposed to omit the second proviso to t he said
section. These amendments will take effect from 1st April, 20 04
and will, accordingly, apply in relation to the assessment year
2004-2005 and subsequent years.”
42. The rationale for introduction of Section 43B was explained
by this court in M.M. Aqua Technologies Ltd. vs. Commissioner of
Income Tax, Delhi: 16
“19. The object of Section 43B, as originally enacted, is to
allow certain deductions only on actual payment. This is made
clear by the non-obstante Clause contained in the begin ning
of the provision, coupled with the deduction being allowed
16 M.M. Aqua Technologies Ltd. vs. Commissioner of Inc ome Tax, Delhi, 2021 SCC
OnLine SC 575.
1093
irrespective of the previous years in which the liability t o pay
such sum was incurred by the Assessee according to the
method of accounting regularly employed by it. In sh ort, a
mercantile system of accounting cannot be looked at when a
deduction is claimed under this Section, making it clear that
incurring of liability cannot allow for a deduction, but only
“actual payment”, as contrasted with incurring of a liabil ity,
can allow for a deduction.”
43.This condition, i.e., of payment of actual amount on or before
the due date to enable deduction, continued for 14 ye ars. By the
amendment of 2003, the second proviso was deleted. This court
interpreted the law, in the light of these developments, in Alom Extrusions.
The court considered the effect of omission of the second proviso, and
observed as follows:
“10. “Income” has been defined under Section 2(24) of the
Act to include profits and gains. Under Section 2(24)(x), any
sum received by the assessee from his employees as
contributions to any provident fund/superannuation f und or
any fund set up under the Employees’ State Insuranc e Act,
1948, or any other fund for the welfare of such emp loyees
constituted income. This is the reason why every asses see(s)
[employer(s)] was entitled to deduction even prior to 1-4-
1984, on mercantile system of accounting as a busin ess
expenditure by making provision in his books of account s in
that regard. In other words, if an assessee(s) [employer (s)] is
maintaining his books on accrual system of accounting, even
after collecting the contribution from his employee(s) and even
without remitting the amount to the Regional Provident Fund
Commissioner (RPFC), the assessee(s) would be entit led to
deduction as business expense by merely making a provis ion
to that effect in his books of accounts. The same s ituation
arose prior to 1-4-1984, in the context of assessees colle cting
sales tax and other indirect taxes from their respe ctive
customers and claiming deduction only by making provi sion
in their books without actually remitting the amoun t to the
exchequer. To curb this practice, Section 43-B was in serted
with effect from 1-4-1984, by which the mercantile sys tem of
accounting with regard to tax, duty and contribution to welfare
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
funds stood discontinued and, under Section 43-B, it became
mandatory for the assessee(s) to account for the aforesta ted
items not on mercantile basis but on cash basis. This situation
continued between 1-4-1984 and 1-4-1988, when Parliament
amended Section 43-B and inserted the first proviso to Section
43-B.
11. By this first proviso, it was, inter alia, laid down, in the
context of any sum payable by the assessee(s) by way of tax,
duty, cess or fee, that if an assessee(s) pays such ta x, duty,
cess or fee even after the closing of the accounting year but
before the date of filing of the return of income under Sect ion
139(1) of the Act, the assessee(s) would be entitle d to
deduction under Section 43-B on actual payment basis and
such deduction would be admissible for the accounting year.
This proviso, however, did not apply to the contribution made
by the assessee(s) to the labour welfare funds. To this ef fect,
the first proviso stood introduced with effect from 1 -4-1988.
***
15. By the Finance Act, 2003, the amendment made in the
first proviso equated in terms of the benefit of de duction of
tax, duty, cess and fee on the one hand with contributions to
the Employees’ Provident Fund, superannuation fund and
other welfare funds on the other. However, the Finance A ct,
2003, bringing about this uniformity came into forc e with
effect from 1-4-2004. Therefore, the argument of th e
assessee(s) is that the Finance Act, 2003, was cura tive in
nature, it was not amendatory and, therefore, it ap plied
retrospectively from 1-4-1988, whereas the argument of the
Department was that the Finance Act, 2003, was amendatory
and it applied prospectively, particularly when Par liament
had expressly made the Finance Act, 2003 applicable only
with effect from 1-4-2004.
***
18. However, as stated above, the second proviso resul ted in
implementation problems, which have been mentioned
hereinabove, and which resulted in the enactment of the
Finance Act, 2003, deleting the second proviso and bringi ng
1095
about uniformity in the first proviso by equating t ax, duty,
cess and fee with contributions to welfare funds. On ce this
uniformity is brought about in the first proviso, then, in our
view, the Finance Act, 2003, which is made applicab le by
Parliament only with effect from 1-4-2004, would be come
curative in nature, hence, it would apply retrospectively with
effect from 1-4-1988.
19. Secondly, it may be noted that, in Allied Motor s (P)
Ltd. v. CIT [(1997) 3 SCC 472 : (1997) 224 ITR 677] , the
scheme of Section 43-B of the Act came to be examine d. In
that case, the question which arose for determinati on was,
whether sales tax collected by the assessee and paid after the
end of the relevant previous year but within the time allowed
under the relevant sales tax law should be disallowed unde r
Section 43-B of the Act while computing the business income
of the previous year? That was a case which related to
Assessment Year 1984-1985. The relevant accounting per iod
ended on 30-6-1983. The Income Tax Officer disallowed the
deduction claimed by the assessee which was on account of
sales tax collected by the assessee for the last quarter of the
relevant accounting year. The deduction was disallowed under
Section 43-B which, as stated above, was inserted with effect
from 1-4-1984
***
22. It is important to note once again that, by the Finance
Act, 2003, not only is the second proviso deleted but even the
first proviso is sought to be amended by bringing a bout a
uniformity in tax, duty, cess and fee on the one hand vis- à-vis
contributions to welfare funds of employee(s) on th e other.
This is one more reason why we hold that the Finance Act,
2003 is retrospective in operation. Moreover, the j udgment
in Allied Motors (P) Ltd. [(1997) 3 SCC 472 : (1997 ) 224
ITR 677] was delivered by a Bench of three learned Jud ges,
which is binding on us. Accordingly, we hold that the Finance
Act, 2003 will operate retrospectively with effect from 1-4-
1988 (when the first proviso stood inserted).
23. Lastly, we may point out the hardship and the invi dious
discrimination which would be caused to the assesse e(s) if
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
the contention of the Department is to be accepted that the
Finance Act, 2003, to the above extent, operated prospectivel y.
Take an example, in the present case, the respondent s have
deposited the contributions with RPFC after 31st March (end
of accounting year) but before filing of the returns unde r the
Income Tax Act and the date of payment falls after t he due
date under the Employees’ Provident Fund Act, they wil l be
denied deduction for all times. In view of the second proviso,
which stood on the statute book at the relevant time, each of
such assessee(s) would not be entitled to deduction under
Section 43-B of the Act for all times. They would l ose the
benefit of deduction even in the year of account in which
they pay the contributions to the welfare funds, wh ereas a
defaulter, who fails to pay the contribution to the welfare f und
right up to 1-4-2004, and who pays the contribution after 1-
4-2004, would get the benefit of deduction under Section 43-
B of the Act.”
44. There is no doubt that in Alom Extrusions, this court did
consider the impact of deletion of second proviso to Section 43B, which
mandated that unless the amount of employers’ contribution was deposited
with the authorities, the deduction otherwise permissible in law, would
not be available. This court was of the opinion that the om ission was
curative, and that as long as the employer deposited the dues , before
filing the return of income tax, the deduction was available.
45. A reading of the judgment in Alom Extrusions, would reveal
that this court, did not consider Sections 2(24)(x) and 36(1)(va).
Furthermore, the separate provisions in Section 36(1) for employe rs’
contribution and employees’ contribution, too went unnoticed. The court
observed inter alia, that:
“15. …It is important to note once again that, by F inance
Act, 2003, not only the second proviso is deleted but even the
first proviso is sought to be amended by bringing ab out an
uniformity in tax, duty, cess and fee on the one hand vis- a-vis
contributions to welfare funds of employee(s) on th e other.
This is one more reason why we hold that the Finance Act,
2003, is retrospective in operation. Moreover, the judg ement
in Allied Motors (P) Limited (supra) is delivered by a Bench
1097
of three learned Judges, which is binding on us. Accordingly,
we hold that Finance Act, 2003 will operate retrosp ectively
with effect from 1st April, 1988 [when the first proviso stood
inserted]. Lastly, we may point out the hardship an d the
invidious discrimination which would be caused to t he
assessee(s) if the contention of the Department is to be
accepted that Finance Act, 2003, 2003, to the above ext ent,
operated prospectively. Take an example - in the present ca se,
the respondents have deposited the contributions wi th the
R.P.F.C. after 31st March [end of accounting year] but before
filing of the Returns under the Income Tax Act and th e date
of payment falls after the due date under the
Employees’ Provident Fund Act, they will be denied deduction
for all times. In view of the second proviso, which stood on
the statute book at the relevant time, each of such assessee( s)
would not be entitled to deduction under Section 43B of the
Act for all times. They would lose the benefit of d eduction
even in the year of account in which they pay the contributions
to the welfare funds, whereas a defaulter, who fails to pay the
contribution to the welfare fund right upto 1st Apri l, 2004,
and who pays the contribution after 1st April, 2004, would
get the benefit of deduction under Section 43B of the A ct. In
our view, therefore, Finance Act, 2003, to the extent indi cated
above, should be read as retrospective. It would, th erefore,
operate from 1st April, 1988, when the first provis o was
introduced. It is true that the Parliament has explicitly s tated
that Finance Act, 2003, will operate with effect from 1st Ap ril,
2004. However, the matter before us involves the principle of
construction to be placed on the provisions of Finan ce Act,
2003".
46. A discussion on the Principles of interpretation of tax statutes
is warranted . In Ajmera Housing Corporation & Ors. vs.
Commissioner of Income17 this court held as follows:
“27. It is trite law that a taxing statute is to be construed
strictly. In a taxing Act one has to look merely at what is said
in the relevant provision. There is no presumption as to a tax.
Nothing is to be read in, nothing is to be implied. There i s no
17 Ajmera Housing Corporation & Ors. vs. Commissioner of Income, 2010 (8) SCC
739.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
room for any intendment. There is no equity about a tax. (See:
Cape Brandy Syndicate v. Inland Revenue Commissione rs
(1921) 1 KB 64 and Federation of A.P. Chambers of Commerce
and Industry and Ors. v. State of A.P. and Ors.(2000) 6 SCC
550. In interpreting a taxing statute, the Court mu st look
squarely at the words of the statute and interpret them.
Considerations of hardship, injustice and equity are entirely
out of place in interpreting a taxing statute. (Als o see:
Commissioner of Sales Tax, Uttar Pradesh v. The Modi Sugar
Mills Ltd. 1961 (2) SCR 189.)”
47.Likewise, this court underlined the rule, regarding interpretation
of taxing statutes, in Commissioner of Income Tax-III v Calcutta
Knitwears, Ludhiana.18 Recently, in Union of India & Ors. vs. Exide
Industries Limited &Ors,19 this court examined, and repelled a challenge
to the constitutionality of Section 43B, especially the provision requiring
actual payment, in respect of leave encashment benefit of emp loyees.
The court observations in this regard are relevant:
“20. Section 43B, however, is enacted to provide fo r
deductions to be availed by the Assessee in lieu of liabiliti es
accruing in previous year without making actual payment to
discharge the same. It is not a provision to place any embargo
upon the autonomy of the Assessee in adopting a part icular
method of accounting, nor deprives the Assessee of any lawf ul
deduction. Instead, it merely operates as an additi onal
condition for the availment of deduction qua the sp ecified
head.
21. Section 43B bears heading “certain deductions to be only
on actual payment”. It opens with a non-obstante clause. As
per settled principles of interpretation, a non obstante Cl ause
assumes an overriding character against any other provision
of general application. It declares that within the sphere
allotted to it by the Parliament, it shall not be control led or
overridden by any other provision unless specifically provid ed
for. Out of the allowable deductions, the legislatu re
consciously earmarked certain deductions from time to time
and included them in the ambit of Section 43B so as to subject
18 Commissioner of Income Tax-III v Calcutta Knitwears, Ludhiana 2014 (6) SCC 444.
19 Union of India & Ors. vs. Exide Industries Limited & Ors., 2020 (5) SCC 274.
1099
such deductions to conditionality of actual payment . Such
conditionality may have the inevitable effect of being dif ferent
from the theme of mercantile system of accounting on accrual
of liability basis qua the specific head of deducti on covered
therein and not to other heads. But that is a matter for the
legislature and its wisdom in doing so.
22. The existence of Section 43B traces back to 1983 w hen
the legislature conceptualised the idea of such a provision in
the 1961 Act. Initially, the provision included dedu ctions in
respect of sum payable by Assessee by way of tax or dut y or
any sum payable by the employer by way of contributio n to
any provident fund or superannuation fund. It is notewo rthy
that the legislature explained the inclusion of these deduc tions
by citing certain practices of evasion of statutory liabilities
and other liabilities for the welfare of employees...”
***
23. With the passage of time, the legislature inser ted more
deductions to Section 43B including cess, bonus or
commission payable by employer, interest on loans paya ble
to financial institutions, scheduled banks etc., payment in l ieu
of leave encashment by the employer and repayment of dues
to the railways. Thus understood, there is no onene ss or
uniformity in the nature of deductions included in Section
43B. It holds no merit to urge that this Section only provides
for deductions concerning statutory liabilities. Se ction 43B
is a mix bag and new and dissimilar entries have been inserted
therein from time to time to cater to different fiscal sc enarios,
which are best determined by the government of the day. It i s
not unusual or abnormal for the legislature to create a new
liability, exempt an existing liability, create a dedu ction or
subject an existing deduction to override regulatio ns or
conditions.
24. The leave encashment scheme envisages the payment of a
certain amount to the employees in lieu of their unused pa id
leaves in a year. The nature of this payment is beneficial and
pro-employee. However, it is not in the form of a bounty and
forms a part of the conditions of service of the employee. An
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
employer seeking deduction from tax liability in advance , in
the name of discharging the liability of leave enca shment,
without actually extending such payment to the employee as
and when the time for payment arises may lead to abhorrent
consequences. When time for such payment arises upo n
retirement (or otherwise) of the employee, an emplo yer may
simply refuse to pay. Consequently, the innocent em ployee
will be entangled in litigation in the evening of h is/her life
for claiming a hard-earned right without any fault on his part.
Concomitantly, it would entail in double benefit to the employer
- advance deduction from tax liability without any burden of
actual payment and refusal to pay as and when occas ion
arises. It is this mischief Clause (f) seeks to subjugat e.”
48. One of the rules of interpretation of a tax statute i s that if a
deduction or exemption is available on compliance with certain conditions,
the conditions are to be strictly complied with.20 This rule is in line with
the general principle that taxing statutes are to be construed strictly, and
that there is no room for equitable considerations.
49. That deductions are to be granted only when the conditions
which govern them are strictly complied with. This has been laid down
in State of Jharkhand v Ambay Cements 21as follows:
“23…. In our view, the provisions of exemption clause should
be strictly construed and if the condition under wh ich the
exemption was granted stood changed on account of a ny
subsequent event the exemption would not operate.
24. In our view, an exception or an exempting provision in a
taxing statute should be construed strictly and it is not open
to the court to ignore the conditions prescribed in the
industrial policy and the exemption notifications.
25. In our view, the failure to comply with the requi rements
renders the writ petition filed by the respondent liab le to be
dismissed. While mandatory rule must be strictly ob served,
substantial compliance might suffice in the case of a dir ectory
rule.
20 See for e.g., Eagle Flask Industries Ltd. v. Commissioner of Cent ral Excise, 2004
Supp (4) SCR 35.
21 State of Jharkhand v Ambay Cements , (2005) 1 SCC 368.
1101
26. Whenever the statute prescribes that a particular act i s to
be done in a particular manner and also lays down that failure
to comply with the said requirement leads to severe
consequences, such requirement would be mandatory. It is
the cardinal rule of interpretation that where a statute provides
that a particular thing should be done, it should be do ne in
the manner prescribed and not in any other way. It i s also
settled rule of interpretation that where a statute is penal in
character, it must be strictly construed and followe d. Since
the requirement, in the instant case, of obtaining prior
permission is mandatory, therefore, non-compliance with t he
same must result in cancelling the concession made in favour
of the grantee, the respondent herein.”
This was also reaffirmed in a number of judgments, such as
Commissioner of Income Tax v. Ace Multi Axes Systems Lt d.22
50. The Constitution Bench, in Commissioner. of Customs v. Dilip
Kumar & Co. 23 endorsed as following:
“24. In construing penal statutes and taxation statut es, the
Court has to apply strict rule of interpretation. T he penal
statute which tends to deprive a person of right to life and
liberty has to be given strict interpretation or el se many
innocents might become victims of discretionary dec ision-
making. Insofar as taxation statutes are concerned, Article
265 of the Constitution [ “265. Taxes not to be imposed save
by authority of law.—No tax shall be levied or collected excep t
by authority of law.”] prohibits the State from extractin g tax
from the citizens without authority of law. It is axiomatic that
taxation statute has to be interpreted strictly because t he State
cannot at their whims and fancies burden the citizens without
authority of law. In other words, when the competen t
legislature mandates taxing certain persons/certain objects
in certain circumstances, it cannot be expanded/int erpreted
to include those, which were not intended by the legislature.
***
34. The passages extracted above, were quoted with approval
by this Court in at least two decisions being CIT v. Kastur i &
22 Commissioner of Income Tax v. Ace Multi Axes Systems Ltd., 2018 (2) SCC 158
23 Commissioner. of Customs v. Dilip Kumar & Co,2018 (9) SCC 1.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
Sons Ltd. [CIT v. Kasturi & Sons Ltd., (1999) 3 SCC 346]
and State of W.B. v. Kesoram Industries Ltd. [State of
W.B. v. Kesoram Industries Ltd., (2004) 10 SCC 201]
(hereinafter referred to as “Kesoram Industries cas e [State
of W.B. v. Kesoram Industries Ltd., (2004) 10 SCC 201]”, for
brevity). In the later decision, a Bench of five Jud ges, after
citing the above passage from Justice G.P. Singh’s t reatise,
summed up the following principles applicable to th e
interpretation of a taxing statute:
‘(i) In interpreting a taxing statute, equitable consider ations
are entirely out of place. A taxing statute cannot be inter preted
on any presumption or assumption. A taxing statute has to be
interpreted in the light of what is clearly expressed; it cannot
imply anything which is not expressed; it cannot im port
provisions in the statute so as to supply any defici ency;
(ii) Before taxing any person, it must be shown that he falls
within the ambit of the charging section by clear words us ed
in the section; and
(iii) If the words are ambiguous and open to two
interpretations, the benefit of interpretation is g iven to the
subject and there is nothing unjust in a taxpayer esc aping if
the letter of the law fails to catch him on account of the
legislature’s failure to express itself clearly.’”
51. The analysis of the various judgments cited on behalf of the
assessee i.e., Commissioner of Income-Tax v. Aimil Ltd. 24;
Commissioner of Income-Tax and another v. Sabari Enter prises25;
Commissioner of Income Tax v. Pamwi Tissues Ltd. 26; Commissioner
of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sah akari
Sandh Ltd.27 and Nipso Polyfabriks (supra) would reveal that in all
these cases, the High Courts principally relied upon omission of second
proviso to Section 43B (b). No doubt, many of these decisions also dealt
24 Commissioner of Income-Tax Vs. Aimil Ltd., [2010] 321 ITR 508 (Delhi High Court).
25 Commissioner of Income-Tax and another Vs. Sabari E nterprises, [2008] 298 ITR
141 (Karnataka High Court).
26 Commissioner of Income Tax Vs. Pamwi Tissues Ltd., [2009] 313 ITR 137 (Bombay
High Court).
27 Commissioner of Income-Tax, Udaipur v. Udaipur Dugdh Utpadak Sahakari Sandh
Ltd., [2013] 35 taxmann.com 616 (Rajasthan High Court).
1103
with Section 36(va) with its explanation. However, the primary
consideration in all the judgments, cited by the assessee, was that they
adopted the approach indicated in the ruling in Alom Extrusions. As
noticed previously, Alom Extrutions did not consider the fact of the
introduction of Section 2(24)(x) or in fact the other provisions of t he
Act.
52. When Parliament introduced Section 43B, what was on the
statute book, was only employer’s contribution (Section 34(1)(iv)). At
that point in time, there was no question of employee’s contribution being
considered as part of the employer’s earning. On the application of the
original principles of law it could have been treated only as receipts not
amounting to income. When Parliament introduced the amendments in
1988-89, inserting Section 36(1)(va) and simultaneously inserti ng the
second proviso of Section 43B, its intention was not to treat the disparate
nature of the amounts, similarly. As discussed previously, the memorandum
introducing the Finance Bill clearly stated that the provisions – especially
second proviso to Section 43B - was introduced to ensure timely payments
were made by the employer to the concerned fund (EPF, ESI, etc.) and
avoid the mischief of employers retaining amounts for long periods. That
Parliament intended to retain the separate characte r of these two
amounts, is evident from the use of different language. Section 2(24)(x)
too, deems amount received from the employees (whether the am ount
is received from the employee or by way of deduction authorized by the
statute) as income - it is the character of the amount that is important,
i.e., not income earned. Thus, amounts retained by the employer from
out of the employee’s income by way of deduction etc. were treated as
income in the hands of the employer. The significance of this provision
is that on the one hand it brought into the fold of “income” amounts that
were receipts or deductions from employees income; at the time, payment
within the prescribed time – by way of contribution of the employees’
share to their credit with the relevant fund is to be treated as deduction
(Section 36(1)(va)). The other important feature is that this distinction
between the employers’ contribution (Section 36(1)(iv)) and employees’
contribution required to be deposited by the employer (Section 36(1)(va))
was maintained - and continues to be maintained. On the other ha nd,
Section 43B covers all deductions that are permissible as expenditures,
or out-goings forming part of the assessees’ liability. The se include
liabilities such as tax liability, cess duties etc. or interest liability having
regard to the terms of the contract. Thus, timely payment of these alone
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
entitle an assessee to the benefit of deduction from the tota l income.
The essential objective of Section 43B is to ensure that if assessees are
following the mercantile method of accounting, nevertheless, the deduction
of such liabilities, based only on book entries, would not be given. T o
pass muster, actual payments were a necessary pre-condition for allowing
the expenditure.
53. The distinction between an employer’s contribution which is
its primary liability under law – in terms of Section 36 (1)(iv), and its
liability to deposit amounts received by it or deducted by it (Section
36(1)(va)) is, thus crucial. The former forms part of the employers’
income, and the later retains its character as an income (albeit deemed),
by virtue of Section 2(24)(x) - unless the conditions spelt by Explanation
to Section 36(1)(va) are satisfied i.e., depositing such amount received
or deducted from the employee on or before the due date. In ot her
words, there is a marked distinction between the nature and character
of the two amounts – the employer’s liability is to be paid out of its
income whereas the second is deemed an income, by definition, since it
is the deduction from the employees’ income and held in trust by the
employer. This marked distinction has to be borne while interpreting the
obligation of every assessee under Section 43B.
54. In the opinion of this Court, the reasoning in the impugned
judgment that the non-obstante clause would not in any manner dilute or
override the employer’s obligation to deposit the amounts retained by it
or deducted by it from the employee’s income, unless the condition that
it is deposited on or before the due date, is correct and just ified. The
non-obstante clause has to be understood in the context of the enti re
provision of Section 43B which is to ensure timely payment before the
returns are filed, of certain liabilities which are to be borne by the assessee
in the form of tax, interest payment and other statutory liability. In the
case of these liabilities, what constitutes the due date is defined by the
statute. Nevertheless, the assessees are given some leew ay in that as
long as deposits are made beyond the due date, but before t he date of
filing the return, the deduction is allowed. That, however, cannot apply
in the case of amounts which are held in trust, as it is in the case of
employees’ contributions- which are deducted from their income. They
are not part of the assessee employer’s income, nor are they heads of
deduction per se in the form of statutory pay out. They are others’
income, monies, only deemed to be income, with the object of
1105
ensuring that they are paid within the due date spe cified in the
particular law. They have to be deposited in terms of such welfare
enactments. It is upon deposit, in terms of those enactments and on or
before the due dates mandated by such concerned law, that the amount
which is otherwise retained, and deemed an income, is treate d as a
deduction. Thus, it is an essential condition for the deduction that such
amounts are deposited on or before the due date. If such interpretation
were to be adopted, the non-obstante clause under Sect ion 43B or
anything contained in that provision would not absolve the assessee from
its liability to deposit the employee’s contribution on or before the due
date as a condition for deduction.
55. In the light of the above reasoning, this court is of the opinion
that there is no infirmity in the approach of the impugned judgment. The
decisions of the other High Courts, holding to the contrary, do not lay
down the correct law. For these reasons, this court does not fi nd any
reason to interfere with the impugned judgment. The appeals are
accordingly dismissed.
Bibhuti Bhushan Bose Appeals dismissed.
(Assisted by : Preetam Bharti, LCRA)
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]