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How to report EPF and ESI due date extension in Tax Audit Report for AY 2020-21

how-to-report-epf-and-esi-due-date-extension-in-tax-audit-report-for-ay-2020-21

How to report EPF and ESI due date extension in Tax Audit Report for AY 2020-21: While filing the Tax Audit Report in Form 3CD it is important to clarify whether the grace period should be considered while determining the due date for payment of PF, ESI contributions for reporting under section 36(1)(va) read with sections 2(24)(x) in clause 20(b) of Form 3CD. Any delay in the payment of the contributions of PF and ESI may result in disallowance of the expenditure.

This is important because due to the outbreak of COVID-19 pandemic and subsequent lockdown both the due date for PF and ESI contribution is extended which have an impact in the Tax Audit Report for the AY 2020-21.

Tax Audit Reporting Requirement for Employees’ contribution to PF and ESI

Clause 20(b) of the Form 3CD required the following information to be reported towards receipt and payment of PF and ESI Contribution from the employees-

The column (4) of clause 20(b) table bearing the heading ‘Due Date for Payment’ requires reporting of the due date of payment of PF and ESI contribution received from the employees’ during a particular financial year. The reporting is required month-wise.

The reporting requirement of the due date for the month of March 2020 is discussed since the due date for payment of PF contribution the month of March 2020 is extended to 15.05.2020 against the normal due date of 15.04.2020. Similarly, the due date for payment of ESI contribution for the months of February and March 2020 is extended to 15.05.2020 against the normal due date of 15.03.2020 and 15.04.2020 respectively.

Under the circumstances, whether the normal due date or the extended due date requires reporting in the given column with the legal basis thereof is elaborated. Whether the grace period should be considered while determining the due date for payment of PF, ESI contributions for reporting under section 36(1)(va) read with sections 2(24)(x) in clause 20(b) of Form 3CD.

The EPF Act and ESI Act itself does not provide the due date for depositing the PF and ESI contributions, In fact, these Acts have delegated the power to executives to notify the due date of depositing the contributions to the account of the members. Hence, the due dates are specified by the Notifications under the respective Acts.

The due dates are notified in the schemes framed under the respective Acts. Hence, the delegated legislation prescribes the due date of payment of the contribution to the respective Funds.

Provisions of The Employees Provident Funds and Miscellaneous Provisions Act, 1952

Section 5 of The Employees Provident Funds and Miscellaneous Provisions Act, 1952 empowers the Central Government to notify the Employees' Provident Fund Scheme under the Act to provide for all or any of the matters specified in Schedule II. Section 6 of the Act provides for the contribution which shall be paid by the employer to the Fund.

Schedule-II of the Act provides the matters for which provision may be made in the scheme. Entry 2 of the Schedule provides for the time and manner in which contributions shall be made to the Fund by employers on behalf of employees as specified in section 6.

In this context, the central government has notified The Employees’ Provident Funds Scheme, 1952  as the Scheme under the Act.

Paragraph 38 of the Scheme requires the employer shall within fifteen days of the close of every month pay both the employer’s and employees’ contribution to the fund.

Paragraph 38(1) of the EPF Scheme, 1952 reads as follows-

“The employer shall, before paying the member his wages in respect of any period or part of period for which contributions are payable, deduct the employee's contribution from his wages which together with his own contribution as well as an administrative charge 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 excluded employee and in respect of which provident fund contribution payable, as the Central Government may fix. He shall within fifteen days of the close of every month pay the same to the fund [electronic through internet banking of the State Bank of India or any other Nationalized Bank] [or through PayGov platform or through scheduled banks in India including private sector banks authorized for collection on account of contributions and administrative charge:

Provided that the Central Provident Fund Commissioner may for reasons to be recorded in writing, allow any employer or class of employer to deposit the contributions by any other mode other than internet banking.”

Provisions of the Employees’ State Insurance Act, 1948

Section 43 of the Employees’ State Insurance Act, 1948 provides that the Corporation may make regulations for any matter relating or incidental to the payment and collection of contributions payable under this Act and without prejudice to the generality of the foregoing power such regulations may provide for-
(a) the manner and time of payment of contributions;
……..

Regulation 31 of The Employees’ State Insurance (General) Regulations, 1950  provides for the  Time for payment of contribution to the Employees' State Insurance Fund.

Regulation 31 of the ESI Regulations reads as follows-

An employer who is liable to pay contributions in respect of any employee shall pay those contributions within 15 days of the last day of the calendar month in which the contributions fall due.

Provisions of the Income Tax Act, 1961

After discussing the provisions of employees welfare funds - PF and ESI, let us discuss the provisions of the Income Tax Act in relation to these funds.

The Income tax Act, 1961 has created a fiction by adding sections 36(1)(va) whereby it has intended to add to income employees’ contribution u/s 2(24)(x) in the hands of the employer as business income.

Section 2(24) defines the term ‘Income’ under the Income Tax Act, 1961. As per clause(x), income includes  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.

Section 36(1)(va) of the Income Tax Act provides for deduction of 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.

Section 36(i)(va) of the Act allows deduction of PF or ESI contribution received from the employees which is included as income under section 2(24)(x) if the same is deposited by the assessee to the account of the employees in the respective statutory funds on or before the due date under the relevant Acts, rules or otherwise. In case the deposit is not made by the due date, the assessee loses the right to claim the same as deduction subsequently upon payment. Although in certain judicial decisions various courts have held that the same is eligible for deduction if paid by the due date of filing of return u/s 139(1); although certain contrary decisions are also found on the matter. 

For determining "due date" for payment of Provident Fund contributions, clause (1) of Paragraph 38 of Employees' Provident Fund Scheme, 1952 is relevant. 

For determining "due date" for payment of ESI contributions, Regulation 31 of The Employees’ State Insurance (General) Regulations, 1950  is relevant. 

While processing the return of income under section 143(1) by the CPC if there is any delay is found in the payment of the contribution beyond the due date even by one day, the same is added to the income of the assessee by way of adjustment under the provisions of section 143(1)(a). Therefore, it is very important to specify the correct due date of payment in clause 20(b) of Form 3CD.

In this backdrop, it is very crucial to know  which date as due date in clause 20(b) of Form 3CD - whether it should be the normal due date or the extended due date, is required to be reported.

Reporting of ‘due date’ in Form 3CD

Prior to February 2016, there used to be Circulars from EPFO namely Circular No. E-128(1)60/ III dated 19/3/1964 as modified by Circular No. E/II/128 (Section 14/B Amendment)/73, dated 24/10/73 which provided a grace period of 5 (five) days to the employers for payment of provident fund contribution, administrative charges and inspection charges.

The said circular also states that if payment be made within the said period of grace, no damages as per s. 14B of the Employees' Provident Funds & Miscellaneous Provisions Act, 1952 shall be levied. Furthermore, in clause (iii) of the CPFC's Circular No. E. 128(1)60-IV, dt. 29th April, 1967 it was stated that the Central Board of Trustees at its meeting on 13th April, 1967 agreed that if payment was made within grace period already allowed by it, then such payments should not be counted as default even for the purpose of counting the number of defaults. 

Consistent views were taken in judicial precedents which recognises the grace period as an extension of the due date and hence if employee’s contribution is paid by the extended due date the same is allowed as deduction.

In the case of ACIT vs Omax Auto Ltd (ITA No. 2928/Del/2009) decided on 04-09-2015 for AY 2003-04 Delhi Bench of ITAT held that the employer's contribution to PF had been deposited by the assessee with a delay of 1 to 3 days, which certainly fell within the statutory grace period of five days. The stand of the AO was, therefore, not sustainable because five days grace period had been allowed to the employer's for payment of provident fund contributions under clause (iii) of CPFC's Circular No. E. 128(1) 60-III, dated 19-3-1964 as modified by Circular No. E11/128 (section 14-B Amendment)/73, dated 24-10-1973. Moreover, the AO had quoted the provisions of section 36(1)(va) and sections 2(24Xx) which deal with the employee's contribution to PF and not the employer's contribution.

In another decision, the ITAT Bangalore Bench in the case of Hunsur Plywood Works Ltd. v. Deputy Commissioner of Income-tax (ITA No. 581/Bang/1994) for  AY 1991-92 held that from practical point of view, the five days’ period of grace after 15th of the succeeding months is to be considered merely as an extension of the early 15 days and all the consequences of making payment within the said 15 days should be considered to follow if the payment be made within the grace period following the said period of 15 days.

In addition to the above judicial decisions, the Guidance Note on Tax Audit u/s 44AB of the Income Tax Act, 1961 issued by the ICAI in para 29.5 states that employees’ P.F. manual provides for 5 days of grace period for payment of contribution. This can be taken into consideration for determining the due date of payment.

Though the Circular allowing grace period of 5 days from the prescribed due date  is withdrawn by the EPFO on 8th January 2016. However, the principles enumerated from the Tribunal’s decisions as well as ICAI Guidance note still prevails and squarely applicable for the AY 2020-21.

The recent Circular dated 15.04.2020 issued by the EPFO extended the due date for payment of contributions and administrative charges/Inspection charges due for wage month of March 2020 from 15.04.2020 to 15.05.2020. The Circular further states that the competent authority has decided to allow grace period of 30 days (from 16.04.2020 to 15.05.2020) for filing of Electronic Challan cum Return (ECR) to the employers of those establishments which have disbursed the wages for March, 2020 to their employees.

It is clarified that employers, who seek to avail the above relief, need to file ECR for wage month March, 2020 on or before 15.05.2020.

Therefore, as a relief measure due to the outbreak of COVID-19 pandemic and lockdown situation, the authority has decided to extend the due date of payment of PF contribution and allow a grace period of 30 days for the month of March 2020.

Hence based on the discussed facts it is legally settled principle that the grace period is an extension of specified due date for the purpose of payment of PF contribution and in clause 26 of the Form 3CD, the extended due date of 15-05-2020 should be filled in. The treatment does not require any separate observation or disclosure since it adheres to the settled legal propositions.

Hence, the tax auditor should fill the due date as 15.05.2020 for the contribution for the month of March 2020, instead of 15.04.2020 under column (4) of clause 20(b) in Form 3CD in the relevant utility.

At the time of writing this article, the lockdown is further extended for two weeks from Monday 4th May 2020 which surpasses the extended due date. Hence it is likely that the due date may be extended further. If this is done, then the final extended due date shall be required to be filled in the requisite column.

Similarly, ESIC has also extended the due date of payment for the month of February 2020 and March 2020 to 15.05.2020. The principles stated for the PF contribution shall equally apply for the ESI contribution while reporting the due date in clause 20(b) of Form 3CD.



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