(2022) 448 ITR 518 (SC)
Deductions related to employee welfare and benefits; deductions allowed only on actual payment
No. Employees' contributions are held in trust by the employer and must be deposited by the due date under the governing welfare legislation. The relaxation for payments made before the return due date applies only to the employer's own contributions.
If an employer deposits employees' provident fund and insurance contributions after the due date under those laws but before the income tax return is filed, is the deduction allowed?
The appellant deducted employees' contributions to provident fund and employees' state insurance from their wages, but deposited the amounts with the respective authorities after the due dates prescribed under the Provident Funds Act and the Employees' State Insurance Act. The deposits were, however, made before the due date for filing the income tax return. The Assessing Officer disallowed the deduction on the footing that the condition attaching to employees' contributions had not been met. Large numbers of similar assessments across the country turned on the same point, with High Courts divided on whether the relaxation in Section 43B — permitting deduction where payment is made before the return due date — extended to employees' contributions.
High Courts had taken conflicting positions, several holding that Section 43B cured a delayed deposit of employees' contributions. The Supreme Court took up the question to resolve the conflict, and its decision governs a very large volume of assessments.
For the assessee
Both categories of contribution are deductible business expenditure, and Section 43B operates on a non obstante basis allowing deduction where payment is actually made before the return due date. There is no warrant for treating the two categories differently once payment has in fact been made, and the deduction should follow.
For the Revenue
The two contributions differ fundamentally in character. The employer's contribution is its own liability. The employees' share is money deducted from wages, deemed to be the employer's income on receipt, and allowed as a deduction only if credited to the employees' account by the due date under the relevant welfare statute. Section 43B addresses liabilities of the employer, not sums held on behalf of employees.
The Court drew a firm distinction between the two kinds of contribution and held it to be fundamental to the scheme. The employer's own contribution is a liability it incurs, and Section 43B permits deduction on actual payment, including payment made after the year end but before the return due date. The employees' share is different in character: it is money deducted from the employees' wages, which the statute treats as the employer's income upon receipt and permits as a deduction only if it is credited to the employees' account within the time fixed by the governing welfare legislation. The Court emphasised that the employer holds that money in a fiduciary capacity — it is the employees' money, deducted from their earnings, and the welfare statutes fix strict timelines precisely because delayed deposit prejudices the employees' entitlements. The condition is therefore not a mere procedural requirement but the very basis on which the deduction is granted. Missing the deadline extinguishes the deduction permanently, and a later deposit does not revive it. The Court held that Section 43B, which is concerned with deductions otherwise allowable in respect of the assessee's own liabilities, cannot be read as dispensing with a condition attaching to a different category of sum altogether.
One of the most practically significant recent decisions, affecting a very large number of assessments and closing off a position many taxpayers had relied on. The same architecture appears in the IT Act 2025 — Section 29 governs employee welfare deductions and imposes the deposit condition, while Section 37 carries the actual-payment rule. The distinction between the two contributions survives intact, so payroll compliance calendars remain directly tax-relevant.