Supreme Court has issued notice to the Income Tax Department over deductions for delayed PF and ESI employee contributions deposited before return filing, questioning Section 143(1)(a) adjustments. The Court examined Sections 2(24)(x), 36(1)(va), and due-date explanations under labour laws.
NEW DELHI: The Supreme Court has issued notice to the Income Tax Department in a case concerning the allowability of deductions for delayed deposit of employees’ PF and ESI contributions. The dispute relates to contributions deposited after the statutory deadlines under labour welfare laws but before the due date for filing the income tax return, and whether such disallowance can be made through an adjustment under Section 143(1)(a) of the Income Tax Act, 1961.
During the proceedings, the Court examined the statutory framework governing employees’ contributions, including Section 2(24)(x), which treats recovered employee contributions as income, and Section 36(1)(va), which permits deduction only if the amounts are deposited within the prescribed due dates under the relevant PF and ESI laws. The Explanation defining “due date” under the welfare legislations was also taken into account.
The Supreme Court noted that High Courts across the country have adopted divergent interpretations. One line of authority holds that employees’ contributions must be deposited strictly within the statutory timelines under labour laws and that Section 43B does not override Section 36(1)(va). The opposing view equates employees’ and employers’ contributions, allowing deductions if payment is made before the return filing deadline under Section 139(1).
After recording these competing judicial views and examining the statutory provisions, the Supreme Court refrained from delivering a final verdict on merits at this stage. Instead, it passed a procedural direction stating:
“Issue notice, returnable in four weeks.”
Accordingly, while the Supreme Court has formally taken cognizance of the issue, the legal position remains unsettled in this proceeding, with a conclusive ruling yet to be rendered.
Woodland (Aero Club) Private Limited has filed a petition against the Assistant Commissioner of Income Tax (ACIT) in the Supreme Court, challenging a September 8, 2025 order issued by the Delhi High Court in ITA No. 267/2023. This order pertains to the contributions for PF and ESI made by both employees and employers.
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Factual Background of the Case:
The assessee, Woodland (Aero Club) Pvt. Ltd., filed its income tax return for AY 2019–20 declaring an income of Rs15.78 crore. During processing under Section 143(1), the CPC disallowed Rs 4.14 crore relating to employees’ contributions towards PF, ESI and labour welfare funds, as the deposits were made beyond the statutory due dates under the respective welfare laws, though before the due date of filing the return under Section 139(1).
The assessee contended that such contributions were allowable based on prevailing Supreme Court and High Court rulings at the relevant time. While the CIT(A) allowed the appeal, the ITAT reversed the decision relying on the Supreme Court’s judgment in Checkmate Services (P) Ltd. v. CIT. The matter eventually reached the Delhi High Court after a remand from the Supreme Court.
Analysis of the Delhi High Court:
During the hearing for ITA No. 267/2023, the Delhi High Court emphasized that employer contributions under Section 36(1)(iv) and employee contributions under Section 36(1)(va) (in conjunction with Section 2(24)(x)) are distinct and should be treated separately.
- Employees’ Contribution vs Employer’s Contribution: The Court reaffirmed the distinction between employer’s and employees’ contributions, as conclusively settled by the Supreme Court in Checkmate Services (P) Ltd. v. CIT (2022). It held that employees’ contributions constitute income under Section 2(24)(x) and are allowable as deductions only if deposited within the due dates prescribed under the respective welfare statutes, as mandated by Section 36(1)(va).
- Non-applicability of Section 43B to Employees’ Contribution: Relying on Checkmate Services, the Court rejected the argument that Section 43B overrides Section 36(1)(va). The benefit of deposit up to the return filing date under Section 43B applies only to employer’s contributions, not employees’ contributions held in trust.
- Finance Act, 2021 – Clarificatory in Nature: The assessee argued that Explanation 5 to Section 43B, inserted by the Finance Act, 2021, was prospective. The Court disagreed, holding that the Supreme Court in Checkmate Services interpreted the law without relying on the amendment, and that the Explanation was merely clarificatory, reinforcing the original legislative intent.
The Court distinguished reliance on CIT v. Vatika Township (2014), observing that the amendment did not alter substantive rights but clarified an existing statutory scheme.
- Scope of Adjustments under Section 143(1)(a): Addressing the argument that such disallowance involved a debatable issue, the Court held that once the law is settled by the Supreme Court, the claim becomes an “incorrect claim apparent from the return” under Section 143(1)(a)(ii).
Since the audit report (Form 3CD) clearly disclosed delayed deposits vis-à-vis statutory due dates, CPC was justified in making the adjustment at the processing stage. The Court distinguished Rajesh Jhaveri Stock Brokers (2007), noting that the present issue was no longer debatable after Checkmate Services.
- National Holiday Argument: On the limited issue where the statutory due date fell on a national holiday (15 August 2018), the Court followed its earlier decision in PCIT v. Pepsico India Holdings Pvt. Ltd., applying Section 10 of the General Clauses Act, 1897, and allowed deduction where payment was made on the next working day.
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- Under Section 2(24)(x) of the Income Tax Act, any contributions collected from employees by the employer are considered income. Conversely, Section 36(1)(va) allows employers to claim deductions only if the contributions are credited to the employee’s bank account by the statutory deadline. Typically, this deadline is set at 15 days after the end of the month, with an additional 5 days of grace for PF.
Conflicting Views:
Two conflicting views have emerged regarding the issue. The Tax Department maintains that delayed deposits of employee contributions should be viewed as income, and according to Section 36(1)(va) of the Income Tax Act, a deduction can only be claimed if deposits are made by the statutory deadline. The department supports its stance with various previous judgments, including those in the cases of Unifac Management, Gujarat State Road Transport, Merchem, B.S. Patel, and Popular Vehicles.
In contrast, the assessee argues that there is no distinction between employer and employee contributions. They further assert that Section 43B allows for deductions if deposits are made prior to filing the income tax return (ITR).
To back this argument, the petitioner has referenced several earlier judgments in cases including Aimil Ltd., Plamman HR, Nipso Polyfabriks, Sagun Foundry, Udaipur Dugdh Utpadak, Sabari Enterprises, among others.
Case Title: WOODLAND (AERO CLUB) PRIVATE LIMITED Vs ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 49(1), NEW DELHI
Read High Court Order: