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PF/ESI – Disclosure in Tax
Audit Report
Introduction:
The ESI and PF are 2 important schemes
introduced by the Government of India to help
improve the lives and welfare of the working class
population of the Country. It cast a duty on the
employers to register with both schemes.
However, while this is a commendable initiative
and scheme by the Government, the complex
impact of this on Income Tax was completely
unexpected.
Treatment Delayed Contribution to PF/ESI as
per Income Tax Act – Before Amendment:
The due date of remittance of PF/ESI by the
employer of both the Employer and Employee
share is 15th of the following month. Normally
both are remitted together. However, for the
purposes of the Income Tax Act, 2 separate
provisions guide the disallowance of the same.
Section 43B – Employer’s Contribution to
PF/ESI:
The Act is very clear when it comes to employer’s
contribution to PF/ESI. Under Section 43B, the
due date for allowance of contribution by the
Employer to PF/ESI will be the date as per the Act
or the, or the due date of filing the return of
income u/s 139(1). Therefore, even if there was a
delay by a few months in the remittance of
PF/ESI, the employer’s contribution is
indisputably allowable u/s 43B of the Act
Section 36(1)(va) – Employee’s Contribution to
PF/ESI:
When it comes to Employee’s contribution to
PF/ESI, it is covered by Section 36(1)(va) and the
same provision of law has always been clear on
plain reading of the Act. In the case of the
employee's contribution, the assessee is only
Dr. CA Abhishek Murali
President, All India Tax Payers Association
entitled to a deduction under section 36(1)(va)
if the sums received from the employee are
credited in a specified account by the due date
established by the applicable statute. There is
no benefit afforded till the due date of Filing
the Return of Income.
Even though section 43B of the Act only
covers employer contributions and not
employees' contributions, many courts have
applied section 43B to employees'
contributions as well, allowing the employer to
deduct the contribution even if the employees'
contribution is deposited by the due date for
filing the Income Tax Return (ITR) as
specified in section 139 (1).
Finance Act 2021 – Amendments to
Employees Contribution to PF/ESI:
However, vide Finance Act, 2021, has
amended both Section 36(1)(v) and Sec 43B of
the Act to specifically modify it as follows:
1) Modify section 36(1)(va) of the Act by
adding a new explanation 2 to the clause,
stating that section 43B does not apply and
is presumed never to have been applied to
establish the due date under this
subsection;
and
2) Explanation 5 should be added to section
43B of the Act to explain that the rules of
that section do not apply and are never
regarded to have applied to any funds
received by the assessee from any of their
workers, that is subject to the provisions of
paragraph (24) of section 2.
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Disclosure in Tax Audit Report - Automatic
adjustment under section 143(1):
The Tax Audit Report filed by Chartered
Accountants require a disclosure of any
delayed contribution to PF/ESI and hence is
usually furnished in 3CA/3CD. However, if a
disclosure is made in the Tax Audit Report then
CPC will make an automatic adjustment u/s
143(1) in the intimation.
While the position of law is clear from AY
2021-22 onwards, the question arises if it is a
retrospective amendment and the impact of the
same on earlier orders allowed for AYs before
AY 2021-22, on the basis of judicial decisions.
Landmark Decision Treating Amendment to
Employees Contribution to PF/ESI will only
be Prospective:
While the wording of the Act itself implies the
amendment is retrospective in nature, a slew of
important judicial decisions have now allowed
the same to be treated as prospective
amendment.
In Sri Ramesh Colour Match Works vs DCIT,
it was held by the Hon’ble ITAT as follows:
“The amendment to Sec.36(1)(va) by way of
insertion of explanation-2 would operate
prospectively only. This view has been taken
by the bench considering the ratio of decision
of Hon’ble Supreme Court in the case of CIT v.
Vatika Township (P.) Ltd. [2014] 49
taxmann.com 249/227 Taxman 121/367 ITR
466 (SC) and it was finally held that the
amendment
brought in by Finance Act, 2021 to the
provisions of Section 36(1)(va) as well as to
the provisions of Sec.43B would have
prospective application only.”
Conclusion
While the position of law from AY 2021-22
onwards is clear, the Tax Auditor is mandated
to disclose any delay in the remittance of
PF/ESI in the Tax Audit Report and this will
automatically cause disallowance u/s 36(1)(v)
vide the intimation order u/s 143(1). For any
addition made for the earlier years (earlier to
AY 2021-22), it will be advisable to file an
Appeal and fight the case to win the case.
The ESI and PF are 2 important schemes
introduced by the Government of India to help
improve the lives and welfare of the working
class population of the Country. It cast a duty
on the employers to register with both
schemes. However, while this is a
commendable initiative and scheme by the
Government, the complex impact of this on
Income Tax was completely unexpected
(The Author is member of Institute. He can be
reached at abhishekmurali@gmail.com)
NELLORE
16
AUG 2022