Employees' Contributions Must Be Paid By Due Date Under ESI/EPF Act, Not Income Tax Act: Delhi High Court

Section 36(1)(va) of the Income Tax Act, 196 pertains to employees' contribution. It stipulates that deductions towards any sum received by the assessee from any of his employees shall be allowed, 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.

Further, the Explanation to Section 36(1)(va) defines “due date” as per the respective labour law (EPF Act/ESI Act).

Thus a division bench of Justices V. Kameswar Rao and Vinod Kumar held,

“Employer's contributions under Section 36(1)(iv) and employees' contributions covered under Section 36(1)(va) read with Section2(24)(x) are fundamentally different in nature and must be treated separately. Employees' contribution deducted from their salaries are deemed to be income under Section 2(24)(x) and are held in trust by the employer. The employers can claim deduction only if they deposit these amounts on or before the statutory due date under Section 36(1)(va).”

The Appellant-assessee was aggrieved by the disallowance of deduction of employees' contribution from its income, for having deposited the same beyond the due date of the relevant fund.

It claimed that the amounts were deposited prior to the due date of furnishing of the ITR under Section 139(1) of the Income Tax Act.

The Appellant cited precedents which laid down that where the assessee had made EPF or ESI payments after the due dates laid down in the EPF/ESI statute but before the last date permitted for filing his ITR, then such EPF/ESI payments cannot be disallowed in the assessee's assessment.

Additionally, the Appellant argued that Explanation 5 to Section 43B of the Income Tax Act, which came into effect from 01.04.20214, shall be effective prospectively.

The provision provides a list of expenses allowed as deductions, when they are actually paid. The Explanation thereof stipulates that the provision will not apply to a sum received by the assessee from any of his employees.

The High Court however relied on Checkmate Services (P) Ltd. v. Commissioner of Income Tax (2023) which held that employees' contributions made under Section 36(1)(va) are treated differently from employers contributions made under Section 36(1)(iv).

It pointed out that since employees' contribution is the deduction from the employees' income and is held in trust by the employer, they have to be deposited in terms of 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….the non obstante clause under Section 43-B 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.”

As such, the High Court upheld disallowance of deductions.

Appearance: For the Appellant : Mr. S. Ganesh, Sr. Adv. with Mr. Anukalp Jain, Mr. Abhijit Mittal, Mr. Anukalp Jain, Ms. Nishtha Nanda & Ms. Shaivya Singh, Advs. For the Respondent : Mr. Siddhartha Sinha, SSC.

Case title: Woodland (Aero Club) Private Limited v. Assistant Commissioner Of Income Tax, Circle 49(1), New Delhi

Citation: 2025 LiveLaw (Del) 1086

Case no.: ITA 267/2023

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