# CHECKMATE SERVICES P. LTD v. COMMISSIONER OF INCOME TAX-1

- **Citation:** [2022] 10 S.C.R. 1065
- **Court:** Supreme Court of India
- **Decided:** 2022-10-12
- **Case number:** Civil Appeal No. 2833 of 2016
- **Bench:** Uday Umesh Lalit Cji, S. Ravindra Bhat, Sudhanshu Dhulia
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/checkmate-services-p-ltd-v-commissioner-of-income-tax-1-35359
- **Pages:** 41

## Headnote

Income Tax Act, 1961 - s.36(1)(va) and s.43B - Allowable
deductions - Assessee-appellants had belatedly deposited their
employees' contribution towards the EPF and ESI, considering the
due dates under the relevant acts and regulations - Whether by
virtue of s.36(1)(va) r/w s.2(24)(x), such sums received by appellants
constituted "income" and could not be allowed as deductions u/
s.36(1)(va) when the payment was made beyond the relevant due
date under the respective acts - Held: The essential character of
an employees' contribution, i.e., that it 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 - There is
distinction between an employer's contribution which is its primary
liability under law - in terms of s.36(1)(iv), and its liability to deposit
amounts received by it or deducted by it (s.36(1)(va)) - The former
forms part of the employers' income, and the later retains its
character as an income (albeit deemed), by virtue of s.2(24)(x) -
unless the conditions spelt by Explanation to s.36(1)(va) are satisfied
i.e., depositing such amount received or deducted from the employee
on or before the due date - There is thus a marked distinction
between the nature and character of the two amounts - This marked
distinction has to be borne while interpreting the obligation of every
assessee under s.43B - The non-obstante clause u/s.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 - Employees' Provident Funds
and Miscellaneous Provisions Act, 1952 - Employees' Provident
Funds Scheme, 1952 - Employees' State Insurance Act, 1948 -
Employees' State Insurance (Central) Regulations, 1950
Interpretation of Statutes - Tax statute - Deduction or
exemption, when available - Held: If a deduction or exemption is
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available on compliance with certain conditions, the conditions are
to be strictly complied with - Deductions are to be granted only
when the conditions which govern them are strictly complied with.
Dismissing the appeals, the Court
HELD : 1.1. Section 43B falls in Part-V of the Income Tax
Act, 1961. The 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, before the prescribed date, actually pay the
amounts - be it towards tax liability, interest or other similar
liability spelt out by the provision. [Para 30][1087-B-C]
1.2. 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 expressly prescribing
conditions for disallowances. In terms of 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. [Para 31][1087-C-D, E-F]
2.1. 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 necessary 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. [Para
32][10

## Text

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1065
 [2022] 10 S.C.R. 1065
1065
CHECKMATE SERVICES P. LTD.
v.
COMMISSIONER OF INCOME TAX-1
(Civil Appeal No. 2833 of 2016)
OCTOBER 12, 2022
[UDAY UMESH LALIT CJI, S. RAVINDRA BHAT AND
SUDHANSHU DHULIA, JJ.]
Income Tax Act, 1961 - s.36(1)(va) and s.43B - Allowable
deductions - Assessee-appellants had belatedly deposited their
employees' contribution towards the EPF and ESI, considering the
due dates under the relevant acts and regulations - Whether by
virtue of s.36(1)(va) r/w s.2(24)(x), such sums received by appellants
constituted "income" and could not be allowed as deductions u/
s.36(1)(va) when the payment was made beyond the relevant due
date under the respective acts - Held: The essential character of
an employees' contribution, i.e., that it 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 - There is
distinction between an employer's contribution which is its primary
liability under law - in terms of s.36(1)(iv), and its liability to deposit
amounts received by it or deducted by it (s.36(1)(va)) - The former
forms part of the employers' income, and the later retains its
character as an income (albeit deemed), by virtue of s.2(24)(x) -
unless the conditions spelt by Explanation to s.36(1)(va) are satisfied
i.e., depositing such amount received or deducted from the employee
on or before the due date - There is thus a marked distinction
between the nature and character of the two amounts - This marked
distinction has to be borne while interpreting the obligation of every
assessee under s.43B - The non-obstante clause u/s.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 - Employees' Provident Funds
and Miscellaneous Provisions Act, 1952 - Employees' Provident
Funds Scheme, 1952 - Employees' State Insurance Act, 1948 -
Employees' State Insurance (Central) Regulations, 1950
Interpretation of Statutes - Tax statute - Deduction or
exemption, when available - Held: If a deduction or exemption is
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available on compliance with certain conditions, the conditions are
to be strictly complied with - Deductions are to be granted only
when the conditions which govern them are strictly complied with.
Dismissing the appeals, the Court
HELD : 1.1. Section 43B falls in Part-V of the Income Tax
Act, 1961. The 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, before the prescribed date, actually pay the
amounts - be it towards tax liability, interest or other similar
liability spelt out by the provision. [Para 30][1087-B-C]
1.2. 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 expressly prescribing
conditions for disallowances. In terms of 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. [Para 31][1087-C-D, E-F]
2.1. 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 necessary 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. [Para
32][1087-F-H]
2.2. The Parliament treated contributions under Section
36(1)(va) differently from those under Section 36(1)(iv). The latter
["employers' contribution"] is described as "sum paid by the
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assessee as an employer by way of contribution 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 section 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 it 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. [Para 33][1088-E-G]
2.3. The differentiation is also evident from the fact that
each of these contributions is separately dealt with in different
clauses of Section 36(1). All these establish that Parliament, while
introducing Section 36(1)(va) along with Section 2(24)(x), was
aware of the distinction between the two types of contributions.
There was a statutory classification, under the IT Act, between
the two. [Para 34][1088-H; 1089-A-B]
3. The intent of the lawmakers was clear 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 explanation
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. [Para 37][1090-C-E]
4. One of the rules of interpretation of a tax statute is that
if a deduction or exemption is available on compliance with certain
conditions, the conditions are to be strictly complied with. 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. Deductions are to be granted only when the
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conditions which govern them are strictly complied with. [Paras
48 and 49][1100-C-E]
5. 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 198889, inserting Section 36(1)(va) and simultaneously inserting the
second proviso of Section 43B, its intention was not to treat the
disparate nature of the amounts, similarly. 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 character 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
amount 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 hand,
Section 43B covers all deductions that are permissible as
expenditures, or out-goings forming part of the assessees' liability.
These include liabilities such as tax liability, cess duties etc. or
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interest liability having regard to the terms of the contract. Thus,
timely payment of these alone entitle an assessee to the benefit
of deduction from the total 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.
To pass muster, actual payments were a necessary pre-condition
for allowing the expenditure. [Para 52][1103-B-H; 1104-A-B]
6. 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 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 other 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. [Para 53][1104-B-E]
7. The non-obstante clause in Section 43B has to be
understood in the context of the entire 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 leeway
in that as long as deposits are made beyond the due date, but
before the 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
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form of statutory pay out. They are others' income, monies, only
deemed to be income, with the object of ensuring that they are
paid within the due date specified 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 treated 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 Section 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.
[Para 54][1104-F-H; 1105-A-C]
Commissioner of Income Tax v. Alom Extrusions Ltd.,
(2010) 1 SCC 489 : [2009] 15 SCR 1154 -
distinguished.
Commissioner of Customs v. Dilip Kumar & Co, 2018
(9) SCC 1 : [2018] 7 SCR 1191 - followed on.
Eagle Flask Industries Ltd. v. Commissioner of Central
Excise, 2004 Supp (4) SCR 35; State of Jharkhand v
Ambay Cements (2005) 1 SCC 368 : [2004] 6 Suppl.
SCR 125; Commissioner of Income Tax v. Ace Multi Axes
Systems Ltd., (2018) 2 SCC 158 : [2017] 12 SCR 21;
Ajmera Housing Corporation & Ors. v. Commissioner
of Income, 2010 (8) SCC 739 : [2010] 10 SCR 183 and
Commissioner of Income Tax-III v Calcutta Knitwears,
Ludhiana 2014 (6) SCC 444 : [2014] 5 SCR 855 -
relied on.
Allied Motors (P) Ltd. v. Commissioner of Income Tax,
(1997) 3 SCC 472 : [1997] 2 SCR 780; M.M. Aqua
Technologies Ltd. v. Commissioner of Income Tax, Delhi,
2021 SCC OnLine SC 575 and Union of India & Ors.
v. Exide Industries Limited & Ors., (2020) 5 SCC 274 -
referred to.
Commissioner of Income Tax v. State Bank of Bikaner,
(2014) 363 ITR 70; Essae Teraoka Pvt. Ltd. v. Deputy
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Commissioner of Income Tax, (2014) 366 ITR 408;
Commissioner of Income Tax v. Nipso Polyfabriks Ltd.,
(2013) 350 ITR 327; Commissioner of Income-Tax Vs.
Aimil Ltd., [2010] 321 ITR 508 (Delhi High Court);
Commissioner of Income-Tax and another v. Sabari
Enterprises, [2008] 298 ITR 141 (Karnataka High
Court); Commissioner of Income Tax v. Pamwi Tissues
Ltd., [2009] 313 ITR 137 (Bombay High Court) and
Commissioner of Income-Tax, Udaipur v. Udaipur
Dugdh Utpadak Sahakari Sandh Ltd., [2013] 35
taxmann.com 616 (Rajasthan High Court) - referred
to.
Case Law Reference
[2009] 15 SCR 1154
distinguished
Para 10
[1997] 2 SCR 780
referred to
Para 10
[2010] 10 SCR 183
relied on
Para 46
[2014] 5 SCR 855
relied on
Para 47
(2020) 5 SCC 274
referred to
Para 47
2004 Supp (4) SCR 35
relied on
Para 48
[2004] 6 Suppl. SCR 125
relied on
Para 49
[2017] 12 SCR 21
relied on
Para 49
[2018] 7 SCR 1191
followed
Para 50
CIVIL APPELLATE JURISDICTION : Civil Appeal No.2833
of 2016.
From the Judgment and Order dated 14.10.2014 of the High Court
of Gujarat at Ahmedabad in Tax Appeal No.680 of 2014.
With
Civil Appeal Nos.2830 Of 2016, 159 Of 2019, 2832, 2831 of 2016,
7248, 7249, 7251-7253, 7254, 7247, 7246, 7245, 7250, 7243, 7244 of 2022
Balbir Singh, ASG, Arvind Datar, Tushar Hemani, Arvind P. Datar,
Pritesh Kapur, Arijit Prasad, Sr. Advs., S. Santanam Swaminadhan, Rahul
Sharma, Ms. Rubina Virmani, Ms. Abhilasha Shrawat, Anubhav Gupta,
Kartik Malhotra, Ms. Nishtha Khurana, Ms. Aarthi Rajan, Ms. Manisha
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1
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T. Karia, Ms. Sukhda Kalra, Ms. Nidhi Nagpal, Adarsh Kumar, Haris
Beeran, Mushtaq Salim, Azhar Assees, Usman Ghani Khan, Radha
Shyam Jena, Ms. Anushree Prashit Kapadia, Ms. Vaibhavi Parikh, Ravi
Singh Chhikara, Ms. Radha Rangaswamy, Ms. Ranjeeta Rohatgi, Ms.
Vishakha, Ms. Seema Bengani, Rupesh Kumar, Adit Khorana, Udai
Khanna, Rajan Kr. Chourasia, Raj Bahadur Yadav, Mohit D. Ram, Ms.
Monisha Handa, Rajul Shrivastav, Anubhav Sharma, Nachiketa Joshi,
Deepak Shah, Ms. Sucheta Joshi, Ms. Himadri Haksar, Anand Sukumar,
S. Sukumaran, Bhupesh Kumar Pathak, Ms. Meera Mathur, Aniruddha
Deshmukh, Judy James, Ramesh Babu M. R., Purvish Jitendra Malkan,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
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 treat Checkmate
Services Pvt. Ltd. v Commissioner of Income Tax-I2as 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 the
appellant assessees are entitled to deduction of amounts deposited 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, "ESI 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 constituted
"income".Those amounts could not have been allowed as deductions
1 Berger Paints India Ltd. v Commissioner of Income Tax, Kolkata-IV & Anr., Civil
Appeal No. 2830 of 2016.
2 Checkmate Services Pvt. Ltd. v Commissioner of Income Tax-I, C.A. No. 2383 of
2016.
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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 due dates as
prescribed under the respective acts, the right to claim such 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 hand, 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 employees as
contributions to any provident fund or superannuation fund
or any fund set up under the provisions of the Employees'
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 shall
be allowed in respect of the matters dealt with therein, 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.]
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(iv) any sum paid by the assessee as an employer by way 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 provident
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 to the
income chargeable under the head "Salaries" or to the
contributions or to the number of members of the fund;"
***
(va) any sum received by the assessee from any of his
employees to which the provisions of sub-clause (x) of clause
(24) of section 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.
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 clarified
that the provisions of section 43B shall not apply and shall
be deemed never to have been applied for the purposes 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 actual
payment.
Notwithstanding anything contained in any other provision
of this Act, a deduction otherwise allowable under this Act in
respect of5 Explanation 2 inserted by Act No. 13 of 2021, w.e.f. 01.04.2021.
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***
(b) 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, or
***
shall be allowed (irrespective of the previous year in which
the liability to pay such sum was incurred by the assessee
according to the method of accounting regularly employed
by him) only in computing the income referred to in section
28 of that previous year in which such sum is actually paid
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 furnishing
the return of income under sub-section (1) of section 139in
respect of the previous year in which the liability to pay such
sum was incurred as aforesaid and the evidence of such
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 referred to in
clause (a) or clause (b) of this section is allowed in computing
the income referred to in section 28 of the previous year (being
a previous year relevant to the assessment year commencing
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 deduction
under this section in respect of such sum in computing the
income of the previous year in which the sum is actually paid
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 of 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.]
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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 section
36, and where such payment has been made otherwise than
in cash, the sum has been realised within fifteen days 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 hereby
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 which
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 for
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 every
month pay the same to the Fund electronic through
internet banking of the State Bank of India or any other
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Nationalised Bank or through Pay Gov platform or
through scheduled banks in India including private
sector banks authorized for collection on account of
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 08.01.2016, 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 any
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 circular7 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 taxpayers do
not discharge their statutory liability such as in respect of
excise duty, employer's contribution to provident fund,
Employees' State Insurance Scheme, etc., for long periods of
time, extending sometimes to several years. For the purpose
of their income-tax assessments, they claim the liability 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 inserted 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.]
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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 shall irrespective of the previous
year in which the liability to pay such sum was incurred, be
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 (hereinafter, "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 under
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 of
employees in the year in which the liability is actually
discharged [section 438]. The effect of the amendment brought
about by the Finance Act, is that no deduction will be allowed
in the assessment of the employer(s) unless such contribution
is paid to 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 employee's account in the relevant fund
under the provisions of any law or term of contract of service
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 whether
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.
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and held that the omission of the second proviso to Section 43B was
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 restricted
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 proviso 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 employers. 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 Finance 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 that 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 Bikaner12; 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 Income 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.]
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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 be
understood in the context of the existing laws. Mr. Datar emphasized
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 latter
i.e., second proviso to Section 43B was intended to give relief to the
assesses.The interpretation in the impugned judgment of the Gujarat
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 declared 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 laid 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' contribution
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.
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43B. The philosophy behind Section 43B (which was introduced
01.04.1984) was to ensure actual payment of certain specified 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 Section
43B had imposed further restrictive condition which was omitted in 2003.
Therefore, the non-obstante clause of Section 43B was 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 - referred 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 both the
contribution payable by himself (in this Scheme referred 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 (in 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 contribution
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 together
with an equal amount of contribution (in this Scheme referred
to as the employer's contribution) and also administrative
charges.
CHECKMATE SERVICES P. LTD. v. COMMISSIONER OF
INCOME TAX-1[S. RAVINDRA BHAT, J.]
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(3) It shall be the responsibility of the principal employer to
pay both the contributions payable by himself in respect of
the employees directly employed by him and also in respect 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 employee, 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 contribution 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 by the
employer / assessee as contribution included both employee'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.
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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 remain in the
Balance Sheet as receivable and payable.