Cases of Late Payment of Employees’ ESI and PF Contributions: A Comprehensive Review

In a significant ruling pertaining to the Income Tax Appellate Tribunal (Delhi), a series of hearings involving multiple appellants highlights the contentious issue of late payment of employees’ contributions towards Employee State Insurance (ESI) and Provident Fund (PF). The tribunal, in case number ITA 915/DEL/2022, along with others, analyzed the amendments brought in by the Finance Act, 2021, regarding the deductions for employee contributions paid beyond the due date as prescribed under the respective legislations.

The crux of the issue lies in whether the contributions towards ESI and PF if paid by the employer after the due date but before the due date of filing income tax returns, qualify for a deduction. Historically, courts have had a divided opinion on this, leading to a plethora of litigations on this front. The recent amendments aim to provide clarity, yet have sparked further debate on their retrospective applicability.

The bench of Shri Challa Nagendra Prasad, Judicial Member, and Shri Pradip Kumar Kedia, Accountant Member, delved into this matter and highlighted key judgments and Tribunal decisions to arrive at a conclusion. They referenced settled precedents to assert that if the employer deposits the employees’ contribution before the filing of the return, it should be allowed as a deduction. This interpretation aligns with the judgment in the case of CIT Vs. AIMIL Ltd., further reinforced by the Supreme Court’s decision in CIT Vs. Alom Extrusions Limited.

Furthermore, the bench critically examined the amendments introduced by the Finance Act, 2021, to Sections 36(1)(va) and 43B of the Income Tax Act. While the amendments inserted explanations clarifying the ‘due date’ for depositing employees’ contributions do not apply retrospectively. This standpoint was cemented by relying on the Supreme Court’s principles in M.M. Aqua Technologies Ltd. Vs. CIT, elucidating the non-retroactive application of clarificatory amendments if they alter the law.

In confronting the discord between administrative convenience and strict statutory compliance, the Tribunal underscored the legislature’s intent – to penalize misappropriation of employee funds without hampering genuine compliance efforts. It was held that amendments by the Finance Act, 2021, be effectuated prospectively from April 1, 2021, hence not influencing the assessees’ cases for the previous assessment years.

In conclusion, the Tribunal’s decision in allowing the appeal sheds light on the intricate balance between ensuring employees’ welfare through statutory contributions and providing a safeguard for employers against inadvertent delays. This pivotal ruling not only guides the applicability of legislative amendments but also reinforces the judiciary’s role in interpreting the law in alignment with the larger good.

The decision marks a significant step towards resolving longstanding ambiguities and ensures that the welfare of employees remains paramount without unjustly penalizing employers for procedural delays.

Cases of Late Payment of Employees’ ESI and PF Contributions: A Comprehensive Review