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Penalty on EPF delay payment

Court : High court of andhra

Brief : : If any delay payments regarding EPF and ESI , CHARGED INTEREST RATE IS 12%
ON SIMPLE INTEREST

Citation : SYED SHAH MOHAMMED QUADRI AND Y.V. NARAYANA, JJ.

Judgment :

[1997] 227 ITR 446 (AP)


HIGH COURT OF ANDHRA PRADESH
Hitech (India) (P.) Ltd.
v.
Union of India
SYED SHAH MOHAMMED QUADRI AND Y.V. NARAYANA, JJ.
WRIT PETITION NOS. 7516 OF 1922, 21142 OF 1994 AND 11774 OF 1995 AND
3051 OF 1996
DECEMBER 27, 1996

JUDGMENT
Syed Shah Mohammed Quadri, J.—Common questions of law are urged in these writ petitions, so
they are heard together and are being disposed of by a common judgment. For appreciating the
facts which give rise to the questions referred to hereunder it will be enough to refer to the facts in
W.P. No. 7516 of 1992 which are representative of the facts in the other writ petitions.
The petitioners are challenging the constitutional validity of section 43B and section 36(1)(va) of
the Income-tax Act, 1961, in so far as they provide for disallowance of the employer's contribution
to provident fund, contribution to the employees' State insurance fund and the payment of
employees' contribution to the provident fund and contribution to the employees' State insurance
fund when the same are paid after the due dates in the respective Acts.

The petitioner is a private limited company. It is engaged in the business of manufacture and sale of
electronic connectors for the defence sector and it is registered as a small scale industry. It is an
assessee under the Income-tax Act. The petitioner has employed about 400 persons in its
establishment. It is covered by the Employees' Provident Funds and Miscellaneous Provisions Act,
1952 (for short "the E.P.F. Act"), and the Employees' State Insurance Act, 1948 (for short "the
E.S.I. Act"). It is under an obligation to remit the employer's as well as employees' contribution
under the said Acts before the date prescribed thereunder. In the assessment year 1991-92, it faced
some difficulties in remitting the amounts on or before the specified date (hereinafter referred to as
"the due date"). It states that for the month of April, 1990, to February, 1991, the petitioner paid the
contribution within the same financial year, however, the dues for the month of March, 1991, had
been paid on April 9, 1991, which is before the due date. There was also delay in payment of
contribution under the E.S.I. Act. Under the E.P.F. Act, the Commissioner is authorised to impose
damages on delayed payments and likewise under the E.S.I. Act penalties can be imposed for
belated payment. Under section 43B and section 36(1)(va) of the Income-tax Act the amounts of
contribution paid belatedly are not allowable deductions in the hands of the assessee and,
accordingly in the assessment year 1991-92, the petitioner was not permitted to deduct the
contributions amounting to Rs. 96,564. It is on these facts that the petitioner challenged the validity
of the said provisions of the Act.

In W.P. No. 11774 of 1995 and W.P. No. 3051 of 1996 which are filed by the same petitioner,
consequential relief is also prayed for by way of declaration that the assessment order made for the
respective years of assessment passed by the Assistant Commissioner of Income-tax, Circle 4(1),
the first respondent therein, is illegal.
In W.P. No. 3051 of 1996 an additional relief is also sought for, viz., that the Explanation to clause
(va) of sub-section (1) of section 36 of the Income-tax Act, is unconstitutional. The reliefs in these
writ petitions relate to provisos (1) and (2) to section 43B and the Explanation to clause (va) of sub-
section (1) of section 36 of the Income-tax Act and the consequential orders of assessment passed
thereunder.

Separate counter-affidavits are filed by the respondents. It is submitted that the petitioner defaulted
in payment of contributions under the E.P.F. Act and under the E.S.I. Act. It is submitted that the
intention of the Legislature in introducing section 43B read with the Explanation to section 36(1)
(va), is to encourage payment of dues to the exchequer before the due dates. The Income-tax
Department is not levying any penalty or launching any prosecution. It is not disputed that under
section 14B of the E.P.F. Act and sections 85 and 86 of the E.S.I. Act the defaulters are liable for
damages and penalty. The impugned provisions, it is submitted, were inserted to secure compliance
with the provisions of the E.P.F. Act and the E.S.I. Act which are welfare legislations enacted with
the avowed object of advancing the cause of employees. It has socio-economic prospectivity. It has
been noticed that a few employers have been dishonestly misappropriating the deductions made
from the salaries of the workers towards provident fund and have defaulted in contributing their
matching share. So to check such malpractice Parliament enacted the above provision. Parliament
only seeks to disallow deduction of expenditure where the assessee infracted the relevant law.

Therefore, the provisions cannot be said to be expropriatory nor can it be said that there was
imposition of any penalty or damages. The said provisions are not violative of any of the articles of
the Constitution, much less articles 14, 19 and 21. In the circumstances, it is prayed that the writ
petitions be dismissed.

Mr. S. Ravi, learned counsel for the petitioners in W.P. Nos. 7516 of 1992 and 21142 of 1994 and
Mr. Krishna Koundinya, learned counsel for the petitioners in W.P. Nos. 11774 of 1995 and 3051
of 1996 have contended that under section 145 of the Income-tax Act chargeability of tax is based
on the method of accounting and in these cases the method of accounting is accrual basis and
accordingly contributions were paid though not within the due dates, therefore, the amount should
have been allowed as permissible deduction. It is also contended that payment (sic) of deduction by
the second proviso to section 43B is by way of penalty. It is contended that there is no rational basis
to treat the situations mentioned in clauses (a), (c) and (d) differently from the one mentioned in
clause (b) and that the provisos (1) and (2) to section 43B are discriminatory. It is also contended
that the provisions are bad for double jeopardy.

Mr. S.R. Ashok, learned standing counsel for the respondents, has contended that the employees'
contribution is treated as income and that when the employer's contributions are not paid within the
due date they are disallowed. He has argued that the situations contemplated under clauses (a), (c)
and (d) are entirely different when compared to the situations taken note of by clause (b). On the
above contentions, the question that arises for our consideration is whether the first proviso and the
second proviso to section 43B and the Explanation to section 36(1)(va) of the Income-tax Act are
violative of articles 14, 19 and 21 of the Constitution of India.

It will be useful to refer to the relevant provisions of the E.P.F. Act and the E.S.I. Act here. Section
6 of the E.P.F. Act directs that the employer's contribution (eight and one-third per cent. of the
basic wages, dearness allowance and retaining allowance, if any, payable to each of the employees,
whether employed by him directly or by or through a contractor) and an equal sum as employees'
contribution shall be paid by the employer. An option is given to the employee to pay a higher sum
without obliging the employer to pay the contribution equal to the excess amount paid by him.
Under section 5 of the said Act the Central Government prepared a scheme, called "the Employees'
Provident Fund Scheme". Paragraph 38 of the said Scheme directs that before paying an employee
his wages in respect of any period or part of the period for which contribution is payable, the
employer shall deduct the employee's contribution from his wages and that amount together with
the employer's contribution as well as administrative charges of such percentage shall be paid
within 15 days of the close of every month. He is also under an obligation to forward the monthly
statement within 25 days of the end of the month showing recoveries made from the wages of each
employee and the amount contributed by the employer in respect of each such employee. For non-
compliance with the provisions of the Act and the Rules, section 7Q of the Employees' Provident
Funds and Miscellaneous Provisions Act, 1952, makes the employer liable to pay simple interest at
the rate of twelve per cent. per annum or at such higher rate as may be specified in the Scheme on
any amount due from him under the Act, from the date on which the amount has become so due till
the date of its actual payment. A safeguard is provided to the employer, that the rate of interest shall
not exceed the lending rate of interest charged by any scheduled bank. Further, subsection (1A) of
section 14 of the said Act prescribes punishment which shall not be less than one year and a fine of
ten thousand rupees in case of default in payment of the employees' contribution which has been
deducted by the employer from the employees' wages and in any other case it shall be not less than
six months and a fine of five thousand rupees. In the case of contravention of the provisions of
section 6C or clause (a) of sub-section (3A) of section 17 in so far as it relates to the payment of
inspection charges, the employer shall be punishable with imprisonment for a term which may
extend to one year but which shall not be less than six months and shall also be liable to fine which
may extend to five thousand rupees. Section 39 of the E.S.I. Act provides for payment of
contribution which comprises the employer's contribution and the employees' contribution to the
E.S.I. Corporation. The contributions are payable on the last day of the wage period. In case of
nonpayment of contribution in time payment of interest at the rate of twelve per cent. is also
provided. Section 85 of the E.S.I. Act provides for punishment for failure to pay contribution,
section 85B provides for recovery of damages and section 86 deals with prosecution.
Section 28 of the Income-tax Act enumerates categories of income chargeable to Income-tax under
the head "Profits and gains of business or profession". Section 29 of the Act provides that the
income referred to in section 28 shall be computed in accordance with the provisions contained in
sections 30 to 43D. Section 36 deals with other deductions. It says that the deductions provided for
in various clauses of section 36 shall be allowed in computing the income referred to in section 28.
Clause (va) of sub-section (1) of section 36, which is impugned in the writ petition, may be set out
here:
"(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."
Here, it will also be appropriate to note section 43B of the Income-tax Act in so far as it is relevant
for our purpose, which is in the following terms:
"43B. Certain deductions to be only on actual payment. — Notwithstanding anything contained in
any other provision of this Act, a deduction otherwise allowable under this Act in respect of —
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called,
under any law for the time being in force, or
(b) 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, or
(c) any sum referred to in clause (ii) of sub-section (1) of section 36, or
(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial
institution or a State Financial Corporation or a State Industrial Investment Corporation, in
accordance with the terms and conditions of the agreement governing such loan or borrowing, shall
be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by
the assessee according to the method of accounting regularly employed by him) only in computing
the income referred to in section 28 of that previous year in which such sum is actually paid by
him;
Provided that nothing contained in this section shall apply in relation to any sum referred to in
clause (a) or clause (c) or clause (d) which is actually paid by the assessee on or before the due date
applicable in his case for furnishing the return of income under sub-section (1) of section 139 in
respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the
evidence of such payment is furnished by the assessee along with such return:
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..."
Now, a combined reading of these provisions suggests that if the assessee (employer) credited any
sum received by him from any of his employees covered by section 2(24)(x) of the Income-tax Act
in the relevant fund on or before the due date, that is, the date by which the assessee (employer) is
required to credit the employees' contribution to the employees' 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, he will be entitled to deduct the said amount in computing his business
income; but section 43B controls the allowability of deduction of payment specified in clauses (a)
to (d) thereof and provides certain conditions subject to which alone the deductions may be
permissible. Clause (a) of that section deals with payment of tax, duty, cess or fee, by whatever
name called, under any law for the time being in force, payable by the assessee; clause (b) deals
with payment of employer's contribution to any provident fund or superannuation fund or gratuity
fund or any other fund for the welfare of the employees; clause (c) deals with payment of any sum
paid by the employer to the employee as bonus or commission for services rendered, where such
sum would not have been payable to him as profits or dividend if it had not been paid as bonus or
commission and clause (d) deals with an amount of interest on any loan or borrowing from any
public financial institution or a State Financial Corporation or a State Industrial Investment
Corporation in accordance with the terms and conditions of the agreement governing such loan or
borrowing. This section which commences with a non obstante clause, mandates that the sum
referred to in any one of the clauses, mentioned above, will be allowed as deduction in computing
the income under section 28 of that previous year only in which such sum is actually paid by the
assessee irrespective of the fact that the said deduction is otherwise allowable under the Act and
irrespective of the previous year in which the liability to pay such sum was incurred by the assessee
according to the method of accounting regularly employed by him. The first proviso to section 43B
relaxes the rigour of the section if the sum referred to in clause (a) or (c) or (d) is actually paid by
the assessee before the due date applicable in his case for furnishing the return of income under
sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum
was incurred and the evidence of such payment is furnished by the assessee along with such return.
The second proviso imposes further restriction on allowability of deduction of any sum referred to
in clause (b); it empowers that 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 it shall not be allowed as deduction.
For this purpose the definition of "due date" as given in the Explanation to clause (va) of sub-
section (1) of section 36 is adopted.
It would also be useful to notice here the provisions of sub-clause (x) of clause (24) of section 2 of
the Income-tax Act which reads thus:
"2. (24) 'income' includes —...
(x) any sum received by the assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act,
1948 (34 of 1948), or any other fund for the welfare of such employees."
Sub-clause (x) of clause (24) of section 2 includes within the meaning of "income" any sum
received by the assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act,
1948, or any other fund for the welfare of such employees. Thus, it is clear that the employees'
contribution received by the employer would be "income" in his hands and that would be allowed
as permissible deduction under clause (va) of sub-section (1) of section 36 in computing the
business income under section 28 provided the assessee credits the same to the relevant fund.
Under section 43B, as has already been observed above, the sum referred to in clause (b) of section
43B is treated differently as it relates to the sum payable by the assessee as an employer which
includes the employer's contribution as well as employees' contribution. Such contributions which
are payable to any provident fund or superannuation fund or any fund, if paid within the due date,
the employer will be able to avail of the benefit of deduction under section 43B. Though the
general rule embodied in section 43B is one of allow ability of deduction based on actual payment,
the rule contained in the second proviso is an exception to the rule. There actual payment is not
enough, the payment should also be made within the due date as defined therein. This is to ensure
that beneficial legislations for the welfare of the employees should be complied with strictly.
If the payment is not made within the due date there is contravention of the provisions of the EPF
Act and the ESI Act for which provision is made by way of payment of interest, damages and
prosecution. But under the Income-tax Act, the defaulter loses the benefit of deduction which is
otherwise allowable to him under the scheme of the provisions of the Act. We find no substance in
the contention of learned counsel for the petitioners that this would result in double jeopardy
because the provisions deal with different aspects and different benefits, whereas the relevant
beneficial legislations in favour of the employees provide for compliance on the pain of payment of
interest, damages and prosecution, the Income-tax Act provides for compliance by denying the
benefit of deduction which is otherwise available. This is only meant to ensure prompt payment.
We find no substance in the contention of learned counsel that the provisos (1) and (2) are
discriminatory inasmuch as the sum referred to in clause (b) is treated differently from the sums
referred to in clauses (a), (c) and (d). There can be no doubt that article 14 cuts at the root of
discrimination either by legislation or by administrative action. Though the rule of equality
contained in article 14, prohibits class legislation, it permits classification. For permissible
classification two conditions must be satisfied, viz., (i) it must be founded on intelligible differentia
which distinguishes persons or things that are grouped together from others left out of the group,
and (ii) the differentia must have a rational relation to the object sought to be achieved by the
impugned Act. As long back as in 1958 the Supreme Court laid down the principle of permissible
classification in Ram Krishna Dalmia v. Justice S.R. Tendolkar, AIR 1958 SC 538. There is indeed
a reasonable classification between a sum dealt with in clause (b) and sum dealt with in clauses (a),
(c) and (d). The subject matter of the sum under clause (b) is the sum payable by the assessee as an
employer by way of contribution. The employer who is in a dominant position deducts employees'
contribution from the wages/pay at the time of disbursement and retains the amounts with him
beyond the permissible period; further he is not discharging his obligation by paying the employer's
contribution which ought to have been parted with by him to form the total contribution. Thus he is
unauthorisedly retaining the total amount of contributions as employer. Such is not the position
with reference to the sums which are the subject-matter of clauses (a), (c) and (d). This
classification has nexus with the object sought to be achieved by provisos (1) and (2) to section
43B and the Explanation to clause (va) of sub-section (1) of section 36 and that is to ensure strict
compliance with the beneficial legislation dealing with workers' rights and benefits. Therefore, we
find no discrimination as alleged.
We shall now take up the cases referred to by learned counsel for the parties.
In CIT v. J.H. Gotla [1985] 156 ITR 323 (SC) the rule of interpretation is laid down. Speaking for
the Supreme Court, Sabyasachi Mukharji J. (as he then was) observed that where the plain literal
interpretation of a statutory provision produced 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 construction. The learned judge
further observed that in case the literal construction leads to injustice, an equitable construction
should be adopted.
From the above discussion it is clear that the interpretation of the provision we have made, does not
produce any manifestly unjust result which could be said to have never been intended by
Parliament. Indeed, the interpretation of the impugned provisions by us gives effect to the real
intention of Parliament. Therefore, the question of equitable construction, as contended by learned
counsel, may not arise.
Here, we may add that in Srikakollu Subba Rao and Co. v. Union of India [1988] 173 ITR 708, a
Division Bench of this court upheld the validity of section 43B of the Income-tax Act.
For the above reasons, we conclude that the impugned provisions, viz., the Explanation to clause
(va) of sub-section (1) of section 36 and provisos (1) and (2) to section 43B are not violative of
article 14 of the Constitution of India.
In the result we find no merit in the writ petitions. They are accordingly dismissed. Having regard
to the facts of the case, we make no order as to costs.

Posted by :Muthu Aravind

Posted on 25 June 2008


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Hello Mineral Water P. Ltd. vs Assistant P.F. Commissioner on 15 May, 2006

Cites 17 docs - [View All]


A. V. Venkateswaran, Collector Of ... vs Ramchand Sobhraj Wadhwani And ... on 4 April, 1961
Collector Of Customs & ... vs A. S. Bava on 27 July, 1967
Wellpoint Systems (P.) Ltd vs Inspecting Assistant ... on 1 May, 1989
The Bengal Immunity Company ... vs The State Of Bihar And Others on 4 December, 1954
Babu Ram Prakash Chandra ... vs Antarim Zila Parishad Muzaffar ... on 2 August, 1968

Delhi High Court


Bench: G Mittal
Hello Mineral Water P. Ltd. vs Assistant P.F. Commissioner on 15/5/2006

ORDER

Gita Mittal, J.

1. Inter alia, by this writ petition the petitioner has challenged the jurisdiction of the Regional
Provident Fund Commissioner to impose interest under Section 7Q of the Employees Provident
Fund and Miscellaneous Provisions Act, 1952 in addition to a levy of damages under Section
14B of the enactment. It is contended that Section 7Q merely prescribes the rate of interest which
is to be levied which is a factor to be considered while exercising jurisdiction under Section 14B
and does not enable the concerned official to impose or levy interest over and above what has
been assessed as damages under Section 14B. The submission therefore is that the interest
component, is at the most, a constituent of what may be considered while arriving at an
appropriate figure of damages which a party may be called upon to pay under Section 14B of the
Employees Provident Fund and Miscellaneous Provisions Act, 1957. The factors which may be
considered to constitute the penalty which may be imposed on a party under Section 14B of this
statute fell for consideration before the Apex Court in Organo Chemical Industry and Anr. v.
UOI where the court held that the penalty could constitute of the following three factors : (a) the
loss of interest to the employees account ; (b) penalty and; (c) administrative charges.
2. Based on this submission, it is contended that the impugned order dated 12th May, 2005
passed against the petitioner imposing damages to the extent of Rs. 28,20,811/- under Section
14B of the statute and an additional liability of interest under Section 7Q to the extent of Rs.
8,91,142/- is wholly without jurisdiction.
3. The petitioner has submitted that in view of the challenge to the impugned order being passed
on a lack of jurisdiction, an objection to the maintainability of the writ petition on the ground of
availability of the alternative remedy of a statutory appeal under Section 7I of the Employees
Provident Fund and Miscellaneous Provisions Act would be without substance. In this behalf, the
petitioner has placed reliance on several pronouncements of the Apex Court including Himmat
Lal Harilal Mehta v. State of Madhya Pradesh (1954) SCR 1122, 7 Judges decision in the case of
Bengal Immunity Company Ltd. v. State of Bihar , Collector of Central Excise v. A.S. Bava ,
Baburam Prakash Chandra Maheshwari v. Antarim Zilla Parishad , Government of India v. Alka
Subhash Gadia (1992) Supp. 1 SCC 496, Kuntesh Gupta v. Hindu Kaniya Mahavidlya , UOI v.
State of Haryana , Calcutta
Discount Co. Ltd. v. ITO , A.V. Venkateswaran v. Ramchand Sobhraj Wadhwani , M.G. Abrol,
Addl. Collector of Customs v. Shantilal Chhotelal and Co. , Ram and Shyam Co. v. State of
Haryana , Addl. Secy. to the Govt. of India v. Alka Subhash Gadia (Smt.) 1992 Supp (1) SCC
496, Whirlpool Corpn. v. Registrar of Trade Marks , Union of India v. State of Haryana , State of
Tripura v.
Manoranjan Chakraborty , Harbanslal Sahnia v. Indian Oil Corpn. Ltd. and Seth Chand Ratan v.
Pandit Durga Prasad .
4. In my view, the issues raised by the petitioner require consideration. Issue notice to the
respondent to show cause why rule nisi be not issued. Mr. R.C. Chawla, Advocate accepts notice
and prays for time to file a reply. Let reply, if any, be filed within six weeks. Rejoinder thereto
may be filed before the next date of hearing.
5. List this matter before the Registrar (Administration) for completion of pleadings on 21st
August, 2006.
CM No. 2940/2006
Issue notice.
6. Mr. R.C. Chawla, Advocate accepts notice.
7. It is contended on behalf of the petitioner that the petitioner has since deposited a sum of Rs.
11 lakh with the respondent on account of the demand raised by the respondents vide the
impugned order dated 10th May, 2006, subject to the petitioner depositing the remaining amount
out of Rs. 28,20,811/- which has been assessed by the respondent towards the damages under
Section 14B of the Employees Provident Fund and Miscellaneous Provisions Act and furnishing
security for the amount of Rs. 8,91,142/- which has been assessed as the interest liability of the
petitioner under Section 7Q of the enactment to the satisfaction of the Registrar of this court
within a period of our weeks from today, there shall be a stay of recovery by coercive measures
pursuant to the order dated 10th May, 2005.
8. The respondent shall keep this amount of Rs. 28,20,811/- in a fixed deposit receipt till disposal
of the writ petition and appropriate orders in this behalf shall be passed at the time of final
disposal. Learned counsel for the parties submit that this application can be disposed of in the
above terms. It is ordered accordingly.

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