Treatment of Contribution towards Provident Fund under Income Tax Act, 1961

Contribution towards Provident Fund is one of the area, which requires due consideration of Auditor while conducting Tax Audit. In industry, there are some confusions regarding the treatment of Contribution towards Provident Fund. Through this Article, I am trying to interpret the intent of the Act with regard to these provisions.

Employer’s Contribution

As per section 36(1)(iv) Deduction shall be allowed in respect of any sum paid by the employer by way of contribution towards a Recognized Provident Fund subject to limits prescribed in the recognition of the provident fund accorded by the Chief Commissioner or Commissioner of Income Tax.

Analysis

Employer’s contribution towards provident fund is allowable as deduction subject to the following conditions:

o    First condition is that, provident fund should be recognized. Thus, the employer will not get deduction in respect of contribution towards unrecognized provident fund.

o    Further, the deduction is subject to the conditions laid down under Section 43B.

As per the provisions of Section 43B, any sum payable by assessee as an employer by way of contribution towards provident fund shall be allowed as deduction only in the previous year in which such sum is actually paid by him. However, if such sum is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) in respect of previous year in which liability to pay such sum was incurred by the assessee, then deduction shall be allowed in the previous year in which liability was incurred.

Below illustration will further clarify the above provisions:

Illustration: Employer’s contribution towards PF for the month of October, 2014 is Rs. 10,000. The due date for depositing the same is 15^th November, 2014 under the PF Act. Assuming due date for filing the return for the said assessee is 30^th September, 2015.

Case 1: Employer deposits the PF on 12^th November, 2014-

Deduction for the same will be allowed in A.Y. 2015-16.

Case 2: Employer deposits the PF on 20^th November, 2014-

Deduction for the same will be allowed in A.Y. 2015-16.

Case 3: Employer deposits the PF on 25^th September, 2015-

Deduction for the same will be allowed in A.Y. 2015-16.

Case 4: Employer deposits the PF on 18^th October, 2015-

Deduction for the same will be allowed in A.Y. 2016-17.

Employee’s Contribution

As per section 36(1)(va) Deduction shall be allowed for any sum received by the assessee from his employees as their contribution towards provident fund, if such sum is credited by the assessee to the employees account in the provident fund on or before the due date.

For the purpose of this section Due Date means the date of depositing PF as prescribed under PF Act.

Further as per section 2(24)(x) Income includes any sum received by the assessee from his employees as their contribution to provident fund.

Analysis

Employee’s contribution towards provident fund is allowable as deduction, subject to the following conditions:

o    Deduction shall be allowed if payment is made before the due date prescribed under PF Act i .e. 15^th of the following month. However, as per the Guidance Note on Tax Audit issued by ICAI, the deduction under section 36(1)(va) shall be allowed even if the payment is made within the grace period falling after the due PF Act prescribes 5 grace days for depositing PF. Thus the deduction under section 36(1)(va) shall be allowed even if PF is deposited by 20^th of the following month.

o    Deduction shall not be allowed if PF is deposited after 20^th of the following month.

o    Provision of section 43B does not apply to employee’s contribution towards provident fund. Below illustration will further clarify the above provisions:

Illustration: Employee’s contribution towards PF for the month of October, 2014 is Rs 10,000. The due date for depositing the same is 15^th November, 2014 under PF Act. Assuming due date for filing the return for the said assessee is 30^th September, 2015.

Case 1: Employer deposits the PF on 12^th November, 2014-

Deduction for the same shall be allowed in A.Y. 2015-16.

Case 2: Employer deposits the PF on 20^th November, 2014-

Deduction for the same shall be allowed in A.Y. 2015-16 as per the Guidance Note on Tax Audit issued by ICAI.

Case 3: Employer deposits the PF on 25^th September, 2015-

Deduction for the same shall not be allowed.

However, few High Courts have given identical judgments which are contrary to the above provisions of the act. I am quoting relevant extract of Delhi High Court Judgment in the case of CIT vs. AIMIL LIMITED for the reader’s reference.

“If the employee’s contribution is not deposited by the due date prescribed under the relevant acts and is deposited late, the employer not only pays interest on delayed payments but can incur penalties also, for which specific provisions are made in the provident fund act. Therefore, the act permits the employer to make the deposit with some delay, subject to aforesaid consequences. Insofar as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before due date of filing the return under section 139(1).”

Below illustration will further clarify the above provision:

Illustration: Employee’s contribution to PF for the month of October, 2014 is Rs 10,000. The due date for depositing the same is 15^th November, 2014 under PF Act. Assuming due date for filling the return for the said assessee is 30^th September, 2015.

Case 1: Employer deposits the PF on 25^th September, 2015-

Deduction for the same shall be allowed in A.Y. 2015-16 in the light of Delhi High Court Judgment in the case of CIT vs. AIM IL Limited.

Case 2: Employer deposits the PF on 18^th October, 2015-

Deduction for the same shall not be allowed as the provision of section 43B does not apply to employee’s contribution towards PF.

Thus, we can still claim deduction for employee’s contribution to PF if the same is deposited before the due date of filing the return (CIT vs. AIMIL LIMITED). However, deduction cannot be claimed if the employee’s contribution to PF is deposited after due date of filing the return as the provisions of section 43B does not apply to employee’s contribution towards PF.

(Submitted by – Tarun Kumar (B.Com, CA-Final) Mobile: +91-888-282-8112 Email-ID: tktarun786@gmail.com)