Payment of Employees Contribution to the National Pension Scheme Prior to the Due Date of the Income Tax Return is a Permissible Deduction Payment of Employees Contribution to the National Pension Scheme Prior to the Due Date of the Income Tax Return is a Permissible Deduction

A brief analysis of the case is encapsulated below:

Facts of the case:

• For the assessment year (AY) 2019-20, the taxpayer’s income was adjusted with an addition of INR 8,19,544 due to delays in depositing employee contributions to the NPS, as reported in the tax audit report. The Centralised Processing Centre (CPC) disallowed the NPS contributions, treating them as delayed payments to the provident fund or ESI.
• The taxpayer argued that the PFRDA Act does not specify a due date for these contributions and cited previous decisions in similar cases involving related parties. Despite these arguments, the CPC rejected the taxpayer’s claims, leading the taxpayer to appeal to the National Faceless Assessment Centre.
• The Learned Commissioner of Income Tax Appeals, however, upheld the decision based on the Hon’ble Supreme Court’s ruling in M/s Checkmate Services Pvt Ltd, resulting in an unfavourable order for the taxpayer. Consequently, the taxpayer filed an appeal with the Hon’ble Ahmedabad ITAT.

Ruling of Ahmedabad ITAT:

• The Hon’ble ITAT reviewed the provisions of the PFRDA Act and opined that the PFRDA Act does not stipulate any due date for employee contributions to the NPS. Additionally, section 12(3)(iii) of the PFRDA Act explicitly excludes its applicability to contributions under the Employee’s Contribution to Provident Funds and Miscellaneous Provisions Act, 1952.

• The Hon’ble ITAT observed that the taxpayer had made the NPS contributions before the due date for filing the return of income for AY 2019-20 in accordance with the provisions of Section 43B(b) of the Act.

• Given these observations, the Hon’ble Ahmedabad ITAT determined that the disallowance of the employee’s contribution to NPS by the lower authorities was not justified and allowed the appeal in favour of the taxpayer.

KNAV Comments:

1. The disallowance of employee contributions to statutory funds has been a contentious issue in courts for years. Under Section 36(1)(va) of the Act, employee contributions received by the employer are considered income until they are deposited on or before the due date specified by the relevant statutes.
2. In cases where a specific law, such as the PFRDA Act, does not specify a due date for the payment of employee contributions to the NPS, the provisions of section 36(1)(va) of the Act do not apply.
3. In this case, the ITAT assessed the allowability of employee contributions to the NPS by evaluating two key factors:

• • The due date under the PFRDA Act
  • Adherence to section 43B, given that section 36(1)(va) of the Act was not applicable.

4. Corporate taxpayers widely use NPS contributions as a tax planning tool to incentivize employees. This ruling is important for managing and addressing delays in the payment of employee contributions to the NPS.

[1] Adani Petronet (Dahej) Port Pvt. Ltd v AO, ITA No. 343/Ahd/2021 Assessment Year 2019-20