All About Section 36(1)(va) with Section 43B

Deductions for contributions to provident funds are an important part of lowering taxable income for businesses. In this article, we'll go over section 36(1)(va) of the Income Tax Act, which may be valuable to you. We'll also know about Section 43B, which was established in accordance with the Finance Act, 1983.

Did you know? Amendment in section 36(1)(va) and 43B was supposed to be applicable from 1st April 2021. However, the process is halted because of further changes. 

What is sec 36(1)(va)?

Sec 36(1)(va) deals with a deduction on account of an amount received by the assessee as a contribution from employees to their welfare fund, which can only be claimed if the money is credited on or before the due date.

Sections 36(1)(va) and 57(ia) stipulate that the taxpayer may deduct any sum received from their employees as a contribution to any welfare fund for such employees only if the sum is deposited to the employee's account in the relevant fund on or before the due date.

The income is specified under section 2 of the Income Tax Act of 1961, clause (24) of the Income Tax Act of 1961. As per sub-paragraph (x) of the abovementioned clause, income includes any amount collected by the assessee from their workers as payment to any superannuation fund, pension schemes fund, a fund created under the terms of the ESI Act, or any other fund for the benefit of such personnel.

Section 36(1), clause (va), allows the assessee to deduct any money received from any of the employees who are subject to the provisions of sub-paragraph (x) of clause (24) of section 2 if the sum is credited to the employee's account in the applicable fund or funds on or before the due date.

When is the due date?

The date by which the assessee, as an employer, is required to credit such payment to the employee's account in the applicable fund, whether under the terms of a service contract or otherwise, under the rules of any law.

According to the Employees Provident Funds Scheme of 1952, all payments owed to employees regarding wages for a given month must be paid within 15 days of the month's end.

What is sec 43B of the Income Tax Act?

According to Section 43B of the Income Tax Act of 1961, only some payments can be claimed as an expenditure in the year they were made, not in the year in which the obligation to pay the money was incurred. This means that certain statutory expenses can only be claimed in the year they are incurred. This section is about the profits and gains made by a business or profession.

The following amounts are only allowable as deductions if they are paid in full within the time constraints outlined in section 43B:

1. Any payment owed as a tax, duty, cess, or charge, or by any other term, under any law currently in existence.
2. Any amount paid by the assessee as an employer as a payment to a provident fund, superannuation fund, gratuity fund, or other funds for the benefit of employees.
3. Employees may be paid a bonus or commission for services done.
4. Interest on any loan or borrowing from a public financial institution, a State Financial Corporation, or a State Industrial Investment Corporation that the assessee owes.
5. Any amount payable by the assessee as interest on any loan or borrowing from a deposit-taking non-banking financial company or a quasi-financial company, in line with the terms and conditions of the loan or borrowing arrangement.
6. Any amount paid by the assessee as an employer in lieu of the employee's earned leave.
7. Any amount owing to the Indian Railways by the assessee for railway assets.

The assessee might pay the preceding sums on or before the due date for filing the return of income under section 139(1) for the preceding year. The liability to pay such a sum arose as long as the assessee provided proof of payment with the return.

Deduction under income under Section 28

Suppose a deduction is allowed in computing the income referred to in section 28 on a timely basis in the previous year relevant to the assessment year 2019-20 or any earlier assessment year in respect of any sum referred to in (e) above. In that case, the assessee is not entitled to any deduction under this section in computing the previous year's income in which he pays the sum.

The employer's contribution is covered by Section 43B, clause (b).

According to it, if the assessee contributes to any gratuity fund, superannuation fund, provident fund, or other funds for the welfare of employees on or before the deadline for providing the income tax returns under sub-section (1) of section 139, the assessee is permitted to a deduction under section 43B, which is admissible for the accounting year. 

Also Read: Section 44AD of Income Tax- Features & Applications

Conjunction of sec 36(1)(va) with 43B

Sections 36(1)(va) and 43B(b) function in distinct sectors, with the former addressing employee contributions and the latter addressing employer contributions. As a result, an assessee is only entitled to the deduction under section 43B as allowed by the proviso for the portion of the amount paid by the employer to the contributory fund. In the case of the employee's contribution, the assessee is only 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.

Section 36(1)(va) with 43B

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).

Budget 2021 proposes amending section 36(1)(va) and section 43B to offer clarification and assurance on the non-applicability of section 43B to employees' contributions to specified funds. As a result, it is argued that:

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.

Although both the Memorandum and the Finance Bill state that these revisions will take effect on April 1, 2021, and apply to the assessment year 2021-22 and following assessment years, this is not the case. However, the language  of Section 36(1)(va) and section 43B have new proposed explanations 2 and 5, respectively (where it is stated that this amendment is to clarify that the provisions of section 43B do not apply and are deemed never to have been applied on employees' contribution) sugge sts that the amendment is retroactive and that it may affect even those assesses who received favourable rulings from different courts, but whose cases are still pending before higher forums.

Amendment under Section 36(1)(va) 

The following is the rationale for the amendment, as stated in Addendum to the Finance Bill for the Year 2021:

There is a contrast between the contributions made by the employer and the contributions made by the employees to the welfare fund. It should be highlighted that employee contribution to welfare funds ensure that companies comply with labour welfare rules. As a result, it is critical to emphasize the distinction between the employer's payment to welfare funds such as ESI and PF and the employee's contribution to welfare funds. The employee's contribution is their own money, and the employer deposits it on the employee's behalf in a fiduciary position. Employers unjustly gain themselves by retaining the money that belongs to the employees by depositing employee contributions late. Finance Act 1987 included clause (va) of sub-section (1) of Section 36 of the Act as a mechanism to penalize employers who misappropriate employee contributions.

As a result of the foregoing revision, it appears that the law is now unambiguous, namely that an employee's contribution to a specified fund will not be recognized as a deduction if there is even a single day's delay in depositing according to the due dates stipulated in the relevant legislation.

Implications for employer's tax computation

If employees' contributions to respective funds are not deposited within the necessary dates, the employer must deny the spending. It's worth noting that, unlike section 43B of the Act, which enables a deduction in the year of payment, under Section 36(1)(va) allows no deduction even if an employee's contributions are made later. As these disallowances are not timing differences, the employer will not be required to create any deferred tax assets under Accounting Standard 22 or Ind AS 12.

Automatic adjustment under section 143(1)(a)(iv) while processing the ITR

The proposed amendment to section 143(1)(a)(iv) of the Act in Budget 2021 would allow for an adjustment on account of an increase in income reported in the audit report but not taken into account in computing total income. In this regard, it's worth noting that clause 20(b) of Form 3CD asks for the following information about employee payments to various funds (as defined in section 36(1)(va):

Employers must submit the above inform ation in Form 3CD if subject to a tax audit under section 44AB. A s a result, if employers do not make a disallowance in the computation of income but disclose the data in Form 3CD, the Central Processing Center may make an automatic adjustment when sending intimation under section 143(1).

Example

1. Employees’ Contribution under Section 36(1)(va)

Only a sum of ₹1,72,000/- will be allowed in the scenario above, as paid within the due period under the PF Act. The remainder of ₹1,50,000/- would never be granted, even though it was paid within 15 days from the due date.

2. Employer’s Contribution u/s 43B(b)

The full amount of ₹3,22,000/- will be permitted in the situation above because it was paid by the due date under section 139(1) of the Income Tax Act.

Also Read: Tax Deducted At Source For Business

Conclusion

The change looks to be a beneficial move from one angle. It clarifies tax computation; yet, it contains punitive provisions that would result in permanent disallowance of expenditure incurred on behalf of employees even if there is a single day's delay in deposit. Genuine employers may face difficulty due to this type of penalty clause. The goal of the modification appears to be to ensure that employees' contributions are deposited on schedule. This may have been accomplished by allowing deductions on a payment-by-payment basis. As a result, a modification to section 36(1)(va) to allow employers to claim a deduction when they make the payment would be beneficial. 

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