22 October 2020
Assessee was asked to take registration under ESIC retrospectively from 1-2-16 in FY 19-20. Assessee pay Employer & Employee's contribution from 1-2-16 to 31-3-19 in FY 19-20. Whether employer contribution will be allowed u/s 43B. Whether employer contribution is prior period expenditure and will be disallowed under income tax?
22 October 2020
Employer contribution will be allowed u/s 43B being business expenditure. Only interest paid if any will be disallowed. Being asked to take retrospective registration it can't be considered as prior period one.
21 July 2024
Let's address the questions regarding ESIC contributions, specifically the employer's and employee's contributions, and their treatment under the Income Tax Act, 1961:
### Employer Contribution under Section 43B:
1. **Allowability under Section 43B**: - Section 43B of the Income Tax Act allows deductions for certain payments including statutory dues like ESIC contributions on an actual payment basis. This means that the employer's contribution paid during FY 2019-20 (for the period from 1st February 2016 to 31st March 2019) can be claimed as a deduction in FY 2019-20 itself.
2. **Prior Period Expenditure**: - Employer contributions for the retrospective period (1st February 2016 to 31st March 2019) are considered prior period expenditures because they relate to a period before the current financial year (FY 2019-20). - However, as long as these contributions are paid during FY 2019-20, they are allowable under Section 43B in FY 2019-20 itself.
### Interest Disallowance:
- **Interest Component**: If there is any interest component associated with delayed payment of ESIC contributions, it is typically disallowed under income tax laws unless it is paid before the due date of filing the income tax return for the relevant year. The disallowance arises because interest payments are seen as financial charges and are treated differently from the principal contribution amount.
### Employee Contribution under Section 36(1):
- **Employee Contribution**: Employee's contribution to ESIC is not allowed as a deduction under Section 36(1) of the Income Tax Act. Section 36(1) specifically allows deductions for certain expenditures incurred wholly and exclusively for the purpose of business. Since employee's contribution to ESIC is considered to be for the benefit of the employee and not directly for the business, it does not qualify for deduction under this section.
### Conclusion:
- **Employer Contribution**: Allowed as deduction under Section 43B in FY 2019-20 for payments made for the retrospective period (1st February 2016 to 31st March 2019). - **Interest Disallowance**: Interest on delayed payment of ESIC contributions is generally disallowed unless paid before the due date of filing the income tax return. - **Employee Contribution**: Not allowed as deduction under Section 36(1) of the Income Tax Act.
For accurate advice tailored to your specific circumstances and to ensure compliance with income tax regulations, it is recommended to consult with a qualified chartered accountant or tax advisor. They can provide guidance based on the latest tax laws and help navigate the complexities of ESIC contributions and their treatment under income tax.
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