Budget 2021 Employee’s welfare funds- S.36.1.va – drafting of proposed amendment need to be modified.

[DEV KUMAR KOTHARI]

Section 36.1.va with highlights added is as follows:

Other deductions.

     36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- 

¹⁰[(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, 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.

     Explanation.-For the purposes of this clause, "due date" means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise;]

………. 

10. Inserted by the Finance Act, 1987, w.e.f. 1-4-1988.

Observations of author:

On reading of the above provision we find that this applies only to any sum received from employees. A deduction by way of book entry cannot be called a ‘sum received’. Book entries and receipts or payment have been treated differently under direct tax laws and also in accounting field. 

We also find that the requirement for allowing the deduction is that ‘such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date. 

Here the requirement is crediting to employees fund account.

The employees fund account is usually credited on the day of deduction itself, that is when payroll is journalized by making journal entry   whereby a book entry is  made for deduction and credit is given to the fund account and liability is recognized in account. Recognition of liability is function of crediting the sum in books of account.

Recognition of liability and payment of liability are two different aspects in fields of accounting and also under provisions of the Income-tax Act, 1961.

S. 36.1.va  require crediting such sums in fund account and that is done on the day of deduction.                   

There is no requirement of actual payment in fund.

Section 43B applies to actual payments. Therefore, on strict provisions as per clear language, the provisions of S.36.1.va and S.43B are independent.  

Therefore, proposed amendment to S.36.1.va seems superficial.                   

The proposed amendment and explanatory note reads as follows: 

“ Amendment of section 36.

8. In section 36 of the Income-tax Act, in sub-section (1), in clause (va), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:–– ‘

Explanation 2.––For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause;’. 

Note on clause

Clause 8 of the Bill seeks to amend section 36 of the Income-tax Act, relating to other deductions.

Sub-section (1) of the said section provides for allowing of deductions provided for in the clauses thereof for computing the income referred to in section 28 of the said Act. Clause (va) of the said sub-section provides for allowance of deduction for any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, 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. Explanation to the said clause provides that for the purposes of this clause, "due date" means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.

It is proposed to insert Explanation 2 to clause (va) of sub-section (1) of the said section so as to clarify that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under the said clause.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. 

Controversy in proposed amendment:

Controversy is due to use of phrase  “ and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause;’.

Accordingly to the phrases so used, the applicability of S.43B is denied from inception of the provision of S.2.24.x and 36.1.va both of which came into force w.e.f. 01.04.1988

Therefore, as per proposed clause it will apply for all periods. Furthermore, this being explanation is intended to apply retrospectively and it will be considered retrospective when it will  become operational.

As per notes the amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

Therefore, the amendment will apply to previous year ending on 31^st March 2021. Ten months of the said previous year had already lapsed when budget was presented.

Therefore it is not justified to apply the amendment from AY 2021-22. In all fairness, it can apply prospectively from next accounting year which will began on 01.04.2021 and should be applied from AY 2022-23 only.

The conflict between the proposed clause and notes thereon need to be resolved by removing drafting mistake to bring in clarity and to avoid litigation.

Another related article:

Readers can refer to another article about proposed amendment to S.43B

Employee’s welfare funds- S.43B not to apply to employees contributions- drafting of proposed amendment need to be modified.