Syed Shah Mohammed Quadri, J.
1. 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 fact in WP No. 7516 of 1992 which are representative of the facts in the other writ petitions.
2. The petitioners are challenging the constitutional validity of s. 43B and s. 36(1)(va) of the IT 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.
3. 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 IT 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 EPF Act'), and the Employees' State Insurance Act, 1948 (for short 'The ESI 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 asst. yr. 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 9th April, 1991, which is before the due date. There was also delay in payment of contribution under the ESI Act. Under the EPF Act, the Commissioner is authorised to impose damages on delayed payments and likewise under the ESI Act penalties can be imposed for belated payment. Under s. 43B and s. 36(1)(va) of the IT Act the amounts of contribution paid belatedly are not allowable deductions in the hands of the assessee and, accordingly in the asst. yr. 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.
4. In WP No. 11774 of 1995 and WP 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 Asstt. CIT, Circle 4(1), the first respondent therein, is illegal.
5. In WP No. 3051 of 1996 an additional relief is also sought for, viz., that the Expln. to clause (va) of sub-s. (1) of s. 36 of the IT Act, is unconstitutional. The reliefs in these writ petitions relate to provisos (1) and (2) to s. 43B and the Expln. to clause (va) of sub-s. (1) of s. 36 of the IT Act and the consequential orders of assessment passed thereunder.
6. Separate counter-affidavits are filed by the respondents. It is submitted that the petitioner defaulted in payment of contributions under the EPF Act and under the ESI Act. It is submitted that the intention of the legislature in introducing s. 43B read with the Expln. to s. 36(1)(va), is to encourage payment of dues to the exchequer before the due dates. The IT Department is not levying any penalty or launching any prosecution. It is not disputed that under s. 14B of the EPF Act and ss. 85 and 86 of the ESI 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 EPF Act and the ESI 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 has Arts. 14, 19 and 21. In the circumstances, it is prayed that the writ petitions be dismissed.
7. Mr. S. Ravi, learned counsel for the petitioners, in WP Nos. 7516 of 1992 and 21142 of 1994 and Mr. Krishna Koundinya, learned counsel for the petitioners in WP Nos. 11774 of 1995 and 3051 of 1996 have contended that under s. 145 of the IT Act chargeability of tax is based on the method of accounting and in these cases the method of accounting is on 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 s. 43B is by way of penalty. It is contended that there is no rational basis to treat the situations mentioned in cls. (a), (c) and (d) differently from the one mentioned in clause (b) and that the provisos (1) and (2) to s. 43B are discriminatory. It is also contended that the provisions are bad for double jeopardy.
8. 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 cls. (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 s. 43B and the Expln. to s. 36(1)(va) of the IT Act are violative of Arts. 14, 19 and 21 of the Constitution of India.
9. It will be useful to refer to the relevant provisions of the EPF Act and the ESI Act here. Section 6 of the EPF 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 s. 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, s. 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, sub-s. (1A) of s. 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 s. 6C or clause (a) of sub-s. (3A) of s. 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 ESI Act provides for payment of contribution which comprises the employer's contribution and the employees' contribution to the ESI. Corporation. The contributions are payable on the last day of the wage period. In case of non-payment of contribution in time payment of interest at the rate of twelve per cent is also provided. Section 85 of the ESI Act provides for punishment for failure to pay contribution, s. 85B provides for recovery of damages and s. 86 deals with prosecution.
10. Section 28 of the IT 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 s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D. Section 36 deals with other deductions. It says that the deductions provided for in various clauses of s. 36 shall be allowed in computing the income referred to in s. 28. Clause (va) of sub-s. (1) of s. 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 s. 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 purpose 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 s. 43B of the IT 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-s. (1) of s. 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 s. 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-s. (1) of s. 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-s. (1) of s. 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date ......'
11. 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 s. 2(24)(x) of the IT 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 s. 43B controls the allowability of deduction of payment specified in cls. (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 s. 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 s. 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-s. (1) of s. 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 Expln. to clause (va) of sub-s. (1) of s. 36 is adopted.
It would also be useful to notice here the provisions of sub-clause (x) of clause (24) of s. 2 of the IT 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 s. 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-s. (1) of s. 36 in computing the business income under s. 28 provided the assessee credits the same to the relevant fund. Under s. 43B, as has already been observed above, the sum referred to in clause (b) of s. 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 s. 43B. Though the general rule embodied in s. 43B is one of allowability 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 IT 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 IT 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 cls. (a), (c) and (d). There can be no doubt that Art. 14 cuts at the root of discrimination either by legislation or by administrative action. Though the rule of equality contained in Art. 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 vs . Justice S. R. Tendolkar, : [1959]1SCR279 . There is indeed a reasonable classification between a sum dealt with in clause (b) and sum dealt with in cls. (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 cls. (a), (c) and (d). This classification has nexus with the object sought to be achieved by provisos (1) and (2) to s. 43B and the Expln. to clause (va) of sub-s. (1) of s. 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.
12. We shall now take up the cases referred to by learned counsel for the parties.
In CIT vs . J. H. Gotla , 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.
13. 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 & Co. vs . Union of India : [1988]173ITR708(AP) , a Division Bench of this Court upheld the validity of s. 43B of the IT Act.
14. For the above reasons, we conclude that the impugned provisions, viz., the Expln. to clause (va) of sub-s. (1) of s. 36 and provisos (1) and (2) to s. 43B are not violative of Art. 14 of the Constitution of India.
15. 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.