ORDER
Shri. I.S. Verma (JM)
3. Ground numbers 2 and 3 are as under :
“II. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the addition of an amount of Rs. 4,23,567 as deemed income under section 2(24)(x) r.w.s. 36(va) (being Employees’ Contribution towards Provident Fund) and that too without assigning any proper reasons. On the facts and in the circumstances of the case and in law, the learned CIT (A) ought to have directed the allowance of the amount of Rs. 4,23,567 as deduction under section 36(va) of the Income-tax Act, 1961. The Hon’ble ITAT may order accordingly.
III. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the disallowance under section 43B of an amount of Rs. 5,98,578 and that too without assigning proper reasons. He ought to have decided the addition made by the Assessing Officer. The Hon’ble ITAT may order accordingly.”
4. We have heard the ld. assessee’s counsel as well as the ld. D.R. The assessee’s counsel addition to reiterating the submissions made before the lower authorities has submitted that the assessee was advised by its income-tax advisors that the employees and the employers contribution towards EPF, EFPF, ESIS, Insurance Fund, Administrative charges, etc. were to be deposited within 15 days from the date of payment of salary or wages as the case may be and the same being 7th of every month the assessee remained under the bona fide belief that the amounts were to be deposited by 15th day of next month starting after the date of disbursement of salary and wages which in this case was 7th of every month (the assessee was paying salary and wages on 7th of every month). He further supported this aspect by submitting that it was not a case where either the assessee has disputed the liability or has not deposited the same. Rather, as far as payments of EPF are concerned most of the same have been made on 22nd day of the month i.e., within 15 days from the date of disbursement of salary and wages which goes to strengthen that the assessee was under a bona fide belief; otherwise, he submitted, when the assessee could pay on 22nd day, then it could have paid the same on 15th day also and, therefore, payments were not intentionally delayed, if there is any delay. He further submitted that when the assessee was to pay the amounts within next month then by intentionally delaying the payments the assessee was not deriving any benefit; rather was putting it to the risk of stringent penal consequences, which no person would dare to invite especially when the assessee was not getting any benefit out of it.
5. As regards the payment of EPF made after 22nd day of the month and the payment of EFPF, ESIS, administrative charges and insurance, he submitted that here also though the payments were made after 22nd day of the month but all payments were made between 16th and 29th day of the month and as stated earlier, the assessee having not derived any benefit by delaying the payments would not have dare to put it on to the risk of penal consequences by delaying the payments intentionally. He, therefore, submitted that the delay in payment of these amounts was due to availability of funds.
6. The assessee’s counsel further submitted that the provisions of sections 43B and 2(24)(x) read with section 36(1)(va) being in the nature of prohibitive/penal provisions they should be interpreted to avoid any injustice to the assessee as well as to avoid absurdity, if any. He further, submitted that the intention of the Legislature while inserting these provisions was not to penalise each and every assessee; rather, it was to penalise those assessees who, after deducting the amount from the salary and wages of the employees, were claiming the deduction of the same including their own contribution on the plea of maintenance of accounts on mercantile basis but later on were either not paying the same or disputing the liability itself. He further submitted that the payments having been made within the previous year, though may not be allowable if the strict interpretation of the provisions of sections 43B and 2(24)(x) is made. But if the interpretation is made in the light of the Legislative intention while enacting these provisions, then the assessee is entitled to the deductions and for this purpose he referred to the CBDT Circular No. 372 dated 8th December, 1983.
In view of these facts, he submitted that the above provisions should be construed liberally, otherwise, it will be a great injustice to the assessee. The ld. counsel further submitted that if the legislative intention is not taken into account then the assessee will never get the deduction because by virtue of the provisions of sections 43B and 2(24)(x) read with section 36(1)(va) these amounts will be income for this year and as the assessee has actually paid the amounts in the year relevant to the assessment year 1992-93 itself, it will not get the deduction in any of the subsequent years. He, therefore, emphasised that such interpretation of the provisions will lead to injustice to the assessee and absurd results, which was never the intention of the legislative. Quoting his earlier submission, he submitted that short delay in depositing the amount was because of bona fide belief entertained by the assessee on the advice of its tax consultant, however mistaken it may be. The assessee is entitled to the benefit of doubt. Similarly, the delay having been caused due to want of funds may be considered as genuine and reasonable cause for delay, if any. The assessee’s counsel further submitted that even under the Employees’ Provident Fund Act and Employees’ State Insurance Act, the word “month” had not been defined. Nowhere in those Acts it is stated as to whether the “month” relates to a calendar month or a period of one month after the date of disbursement of wages and salary. Due to this ambiguity also the assessee is entitled to benefits of doubt. He, therefore, submitted that all the payments having been made within a period ranging from 9 to 22 days from the date of disbursement of wages and salary the assessee, in the light of the above submissions, is deemed to have made the payments in time and no disallowance under section 43B and addition as deemed income by applying the provisions of section 2(24)(x) read with section 36(1)(va) can be made. In support of his submission, the ld. counsel has relied on the decision of the Hon’ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 14J, the decision of the Tribunal, Madras Bench in the case of Madras Radiators & Pressings Ltd. v. Dy. CIT [1996] 59 ITD 515, the decision of the Tribunal, Bangalore Bench in the case of Hunsur Plywood Works Ltd. v. Dy. CIT [1995] 54 ITD 394 and also on an unreported decision of the Tribunal, Calcutta Bench, in the case of Sudera Services (P) Ltd. v. ITO [IT Appeal No. 1157 (Cal) of 1993 dated 20-1-1997].
7. The ld. DR, on the other hand, relied on the orders of the lower authorities and submitted that the provisions of sections 43B and 2(24)(x) read with section 36(1)(va) being prohibitory sections should be interpreted strictly and the assessee is not entitled to any deduction out of additions made by the lower authorities.
8. We have considered the rival submissions and before deciding the issue we would like to state certain facts relevant for deciding the issue which are as under. The assessee had disbursed the salary and wages to its employees for every month on 7th of succeeding month by virtue of the provisions of section 5 of the Wages Act and the details of amounts and dates of payment are as under :
For the purpose of section 43B
I. (Employer’s Contribution)
—————————————————————-
Month EFPF EPF Admn. Insurance
Charges Fund
----------------------------------------------------------------
1. 2. 3. 4. 5.
----------------------------------------------------------------
April/91 3,612 28,086 2,062 1,586
May/91 3,600 27,914 2,048 1,575
June/91 3,680 28,836 2,097 1,613
July/91 3,789 29,172 1,649 2,143
Aug/91 3,893 30,159 2,218 1,703
Sept/91 3,859 29,324 2,506 1,671
Oct/91 3,830 29,950 2,536 1,691
Nov/91 5,146 39,638 3,359 2,240
Dec/91 4,148 32,073 2,352 1,809
Jan/92 4,151 32,099 2,355 1,811
Feb/92 4,461 34,523 2,545 1,958
Mar/92 4,388 33,236 2,438 1,876
---------------------------------------------
Total Date of Payment Adm.
EFPF & EPF Charges
---------------------------------------------
6. 7. 8.
---------------------------------------------
35,346 27-05-1991 21-05-1991
35,137 19-06-1991 27-06-1991
36,226 29-07-1991 29-07-1991
36,753 22-08-1991 22-08-1991
37,973 27-09-1991 27-09-1991
37,360 28-10-1991 28-10-1991
38,007 25-11-1991 25-11-1991
50,383 19-12-1991 19-12-1991
40,382 16-01-1992 16-01-1992
40,416 22-02-1992 22-02-1992
43,487 23-03-1992 23-02-1992
41,938 12-04-1992 12-04-1992
--------
4,73,408
--------
II. ESIS Contribution (Employer's & Employees' Contribution)
Month Amount Date of Payment
------ ------ ---------------
April/91 11,239 25-05-1991
May/91 10,577 27-06-1991
June/91 12,762 29-07-1991
July/91 12,261 22-08-1991
August/91 13,422 12-10-1991
September/91 12,878 23-10-1991
October/91 9,160 25-11-1991
November/91 10,167 16-01-1992
December/91
January/92 9,499 22-02-1992
February/92 11,513 23-03-1992
March/92 11,692
III. For the purpose of section 2(24)(x) :
Employees' contribution towards EFPF & EPF
Month EFPF EPF Total Date of Payment
______ _____ _____ _____ _______________
April/91 3,612 28,086 31,698 27-05-1991
May/91 3,600 27,914 31,514 19-06-1991
June/91 3,680 28,836 32,516 29-07-1991
July/91 3,789 29,172 32,961 22-08-1991
Aug/91 3,893 30,159 34,052 27-09-1991
Sept/91 3,859 29,324 33,183 28-10-1991
Oct/91 3,830 29,950 33,780 25-11-1991
Nov/91 5,146 39,638 44,784 19-12-1991
Dec/91 4,148 32,073 36,221 16-01-1992
Jan/92 4,151 32,099 36,250 22-02-1992
Feb/92 4,461 34,523 38,984 23-03-1992
Mar/92 4,388 33,236 37,624 12-04-1992
--------
4,23,567
--------
9. The Assessing Officer disallowed the assessee’s claim for payments made by it on account of employer’s contribution towards EFPF, EPF, administrative charges, Insurance fund and ESIS by invoking the provisions of section 43B whereas the payments on account of employees’ contribution towards EFPF and EPF were added to the assessee’s income by invoking the provisions of section 2(24)(x). The issue for our consideration is that whether in spite of the fact that technically, i.e., if the provisions of sections 43B and 2(24)(x) read with section 36(1)(va), which are prohibitory and penal in character, are strictly construed the amounts in question, if having been paid after due date are covered by the mischief of these sections, the assessee can be allowed the benefit of bona fide belief and reasonable cause so that the injustice and absurdity, as pointed out by the assessee’s counsel (that by construing the provisions strictly the assessee will not get deduction either in this year or in any of the subsequent years), can be avoided, more so when the Legislature never intended so and to decide this issue we consider it necessary to consider the CBDT Circular No. 372 dated 8-12-1983 as well as the relevant provisions of Employees P.F. Scheme and ESIS for the definition of “month” etc. the relevant portion of the CBDT Circular No. 372 dated 8-12-1983 explaining the reasons for insertion of section 43B is extracted below :
“35.2 Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees’ State Insurance Scheme, etc. for long periods of time, extending sometimes to several years, for the purposes of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reasons or the other, undisputed liabilities also are not paid.
35.3 To curb this practice, the Finance Act has inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall, irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.
35.4 The section also contains an Explanation for the removal of doubt. The Explanation provides that whereas deduction in respect of any sum aforesaid is allowed in computing the income of any previous year, being a previous year relevant to the assessment year 1983-84, or any earlier assessment year, in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under section 43B in respect of such sum on the ground that the sum has been actually paid by him in that year. In other words, an assessee who has already been allowed deduction of a liability on account of tax or duty or in respect of any sum payable as contribution to any fund for the assessment year 1983-84, or any earlier year in which the liability to pay was incurred, cannot, in respect of that liability, be allowed as a deduction in the assessment year 1984-85 or any subsequent year on the ground that he has actually made a payment towards such liability in that year.
35.5 The amendment takes effect from April 1, 1984 and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years.”
10. From a plain reading of the aforesaid Explanation of the CBDT Circular, it is clear that section 43B of the Act, 1961, was inserted by the Finance Act, 1983 with effect from 1-4-1984 to curb the practice resorted by many taxpayers without discharging their statutory liabilities such as excise duty, contribution to Provident Fund, E.S.I. etc., etc., for long period but at the same time claiming such liabilities as deductions in their income-tax assessments on the ground that they maintained accounts on mercantile or accrual basis. At the same time, the liabilities were disputed and they did not discharge the liabilities. Section 43B of the Act was inserted to provide that deduction for any sum payable by the assessee by way of tax or duty under any law or any sum payable by the assessee as employer by way of contribution to any provident fund or superannuation fund or gratuity fund etc. shall be allowed as a deduction in computing the income of the year in which such sum is actually paid by the assessee. Further, the Finance Act, 1987, inserted two provisos before the Explanation to the section with effect from 1-4-1988 to the effect that the second proviso dealt with liabilities falling under clause (b) of section 43B of the Act to the effect that no deduction will be allowed in the assessment of the employers unless such contribution is paid to the fund on or before the ‘due date’. Due date means the date by which an employer is required to credit the contribution to the employees’ account in the relevant fund under the provisions of any law or terms of contract of service or otherwise.
11. As the assessee has deposited the amounts within the period relevant to the assessment year 1992-93 so, if the assessee’s claim is not allowed in this year then it will not get any deduction in any of the subsequent years. Therefore, we are in agreement with the submission of the assessee’s counsel that if a strict interpretation of sections 43B and 2(24)(x) read with section 36(1)(va) is taken then it will certainly lead to injustice and absurd result which was never the intention of the Legislature. We are, therefore, of the opinion that if on the basis of equitable construction, the construction results in equity and justice, rather than injustice and absurdity then such construction should be preferred to the strict literal construction. To support this proposition, we may usefully refer to the decision of the Hon’ble Supreme Court in the case of K.P. Varghese (supra) as well as in the case of CIT v. J.H. Gotla [1985] 156 ITR 323 (SC) where, on the facts of that case, it was held as under :
“If a strict and literal construction of the statute leads to an absurd result, i.e., a resultant intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then, that construction should be preferred to the strict literal construction. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational result.
By the Court : Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction.”
The Hon’ble Supreme Court in the case of K.P. Varghese (supra) at pages 506-606 has held as under :
“It is now a well settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even “do some violence” to it, so as to achieve the obvious intention of the Legislature and produce a rational construction : Vide Luke v. IRC [1963] AC 557; (1964) 54 ITR 692. The court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision.”
12. On careful consideration of the facts and circumstances of the case before us, as discussed above, and respectfully following the decisions of the Hon’ble Supreme Court (supra), we are of the opinion that the provisions of section 43B, section 2(24)(x) read with section 3(1)(va), so far as they are concerned with the time for making payment, should be interpreted liberally keeping in view principle of equity and legislative intent behind enacting such prohibitory provisions so that the injustice and the absurdity can be avoided.
13. Another question to be decided in this case is the determination of ‘due date’ for making payment and for this purpose, we would like to consider the provisions of sections 36(2) and 38 of the Employees’ Provident Fund Scheme, 1952 because there seems to be some ambiguity in those provisions. Section 36(2) reads as under :
“Every employer shall send to the Commissioner within 15 days of the close of each month a return –
(a) in Form 5, of the employees qualifying to become members of the Fund for the first time during the preceding month together with the declarations in Form 2 furnished by such qualifying employees, and
(b) in such form as the Commissioner may specify, of the employees leaving service of the employer during the preceding month :
Provided that if there is no employee qualifying to become a member of the Fund for the first time or there is no employee leaving service of the employer during the preceding month, the employer shall send a ‘Nil’ return.
Section 38 reads as under :
“Mode of payment of contributions. — (1) The employee shall, before paying the members his wages in respect of any period or part of period for which contributions are payable, deduct the employees’ contribution from his wages which together with his own contribution as well as an administrative charges of such percentage of the pay (basic wages, dearness allowance, retaining allowance, if any, and cash value of food concessions admissible thereon) for the time being payable to the employees other than an excluded employees, and in respect of which provident fund contributions are payable as the Central Government may fix, he shall within fifteen days of the close of every month pay the same to the Fund by separate bank drafts or cheques on account of contributions and administrative charges.”
14. Reading together sections 36 and 38 it could be said that there is certain amount of ambiguity over the expression “15 days from the close of the month”. There is also force in the submission of the assessee’s counsel that in the case of ambiguity the benefit should be given to the assessee.
15. As the term ‘month’ has not been defined in the Act, so had the assessee paid the salary and wages on the last day of the month, there would have been no difficulty in defining the month or the due date. But in the case before us, the salary and wages had been paid on the 7th day from the end of the month to which it relates. So, there arises certain amount of ambiguity with regard to the period of 15 days from the close of each month. From reading of sections 36 and 38 reproduced above it can easily be said that there is ambiguity. Therefore, we are of the opinion that there is force in the submission of the assessee that benefit of ambiguity should be given to the assessee. Viewed in this context we hold that most of the payments having been made within 9 to 22 days from the date of payment of salary and wages will be deemed to have been made within due date and, therefore, no disallowance could be made on this account.
16. As regards applicability of the provisions of section 2(24)(x) and the allowability of deduction under section 36(1)(va) of the Act, we are of the considered opinion that section 36(1)(va) yields to section 43B as the latter section starts with a non obstante clause. According to section 43B the deduction is to be regulated only on the basis of actual payment in the previous year in which it is so paid. However, first proviso and second proviso were added to section 43B by the Finance Act, 1987 with effect from 1-4-1988. The first proviso reduces the rigour of the main section by enabling the assessee to get the benefit of deduction in respect of taxes, duties, etc, even if they were paid after the end of the previous year but before the due date for furnishing of return under section 139(1) of the Act. The second proviso also introduced along with the first proviso with effect from 1-4-1988 is to the effect that unless the payment in respect of contributions to PF, etc., have been actually made during the previous years on or before the due dates as prescribed under the relevant Act or the Rules, no deduction should be allowed in respect of the same. Thus the first proviso in a sense is an enabling provision. The second proviso would appear to be a disabling provision. It reads as follows :
“Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation…”
Therefore, it could be argued that in respect of PF contributions, etc., covered by clause (b) of section 43B the payment must have been paid not only during the previous year but also within the due date prescribed under the relevant Acts. However, the Legislature in its superior wisdom has redrafted the above second proviso as follows with effect from 1-4-1989 :
“Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date.”
The notable omission in the amended proviso is the expression “during the previous year”. Because of the omission of the expression “during the previous year” in the second proviso to section 43B, we would hold that so long as the payments were made within the previous year, the payments are to be allowed as deduction under the main section. In respect of the contributions recovered on the last day of the previous year or any other subsequent date, under the second proviso deduction has to be allowed if the payment had been made without the due date prescribed under the Act. Thus, the second proviso to section 43B has also been made an enabling provision just as the first proviso by the substitution of the second proviso, with effect from 1-4-1989. Further provisos are meant to helpmate the main section rather than hinder its course. The tail cannot wag its head. In this view of the matter, even assuming that the due date for the payment of the contributions fell within a period of 15 days from the end of the month for which salaries were payable since all the payments have been made in the year itself though with a marginal delay or a few days on certain occasions. We hold that no part of the contributions received by the assessee from its employees towards PF and ESI can be disallowed, so as to consider the same as assessee’s income under section 2(24)(x) read with section 36(1)(va).
17. Considering all the facts and circumstances of the case as well as the decisions referred to above, we are of the opinion that as the assessee had paid all the amounts within a period from 9 to 22 days from the date of payment of wages/salary and therefore the submissions, regarding admissibility of benefits for having a bona fide belief entertained as a result of its advice by the tax advisors that the payment was to be made after 15 days from the date of payment of salaries and wages that the delay; otherwise had been due to financial difficulty as well as the submission that the delay was not intentional or was not to defraud the revenue because by delaying the payments by a few days the assessee was not to get any benefit rather was putting it to the risk of serious penal consequences, as envisaged in sections 43B, 2(24)(x) read with the provisions of section 36(1)(va) which no prudent person would like to do, have got force. We, therefore, are of the opinion that in the light of our decision for liberal interpretation of the provisions of the relevant sections, as observed earlier, by following the decision of the Hon’ble Supreme Court, the delay in depositing the amounts in question being under a bona fide belief and for want of funds can be said to be due to reasonable cause and, therefore, there was no justification in disallowing the assessee’s claim for payments of contributions towards, EPF, EFPF, Administrative Charges, Insurance Fund and ESIS by invoking the provisions of section 43B and in making addition of contribution on account of employee’s contribution towards EPF, EFPF by treating the same as assessee’s deemed income under section 2(24)(x) because the same should have been allowed as a deduction under section 36(1)(va) of the Act.
18. Before parting with the matter, we would like to record that a similar view has been taken by the Tribunal, Madras Bench, in the case of Madras Radiators & Pressings Ltd. (supra) where on the facts of that case it has been held that so long as the payments of PF and contribution to ESIS are made within the previous year, the same cannot be disallowed under section 43B and also cannot be considered as assessee’s income under section 2(24)(x) read with section 36(1)(va). Further, in an unreported case the ITAT Calcutta Bench, in the case of Sudera Services (P.) Ltd. (supra), on which the ld. counsel relied on (copy is placed at page 65 of the paper-book), it has been held, on the facts of that case, that the provisions of section 43B should be construed in a liberal way keeping in view the Legislative intention so that absurdity and the interpretation which leads to injustice may be avoided.
19. In view of the decisions referred to in the foregoing paragraphs of this order, and the facts and circumstances of the present case, we are of the considered opinion that none of the payments in question were hit by the provisions of section 43B or section 2(24)(x) read with section 36(1)(va), as the case may be, and the additions made by invoking these provisions are hereby deleted.