India – Supreme Court On Provident Fund Contribution Vis-a-vis Special Allowances.

21 June, 2019

 

Do we have to now deduct and make provident fund contribution on 'special allowances'?

 

Yes, this is the very question which has been now haunting the minds of most of the employers and the same time providing a glimmer of hope to the employees who anticipate sudden windfall. The reason for such divergent views is a recent Supreme Court judgement – which has created quite a stir to say the least. In its judgement dated February 28, 2019, the Hon'ble Supreme Court ("Court"), in an appeal filed by a regional provident fund commissioner[1] ("Appeal"), along with other connected matters (the "Judgement"), has provided clarity on the applicability of the provisions of the Employees' Provident Funds And Miscellaneous Provisions Act, 1952 (the "Act") with respect to deduction of provident fund ("PF") on 'special allowances' paid to the employees and contribution accordingly to the PF account of the employees.

 

The Judgement has left many stakeholders confounded as to its legal ramifications, more so as regards the effective date of implementing the point of law laid down by the Judgement. Needless to add there has been childlike enthusiasm among the employee fraternity who expect a bounty à la sudden springing up of a hidden treasure – i.e. in the form of possible swelling of their PF balances. The employees are waiting with bated breath to find out whether their reason of ecstasy if at all turns out to be as what they happily apprehended.

 

The Appeal in the instant case was preferred by the Regional Provident Fund Commissioner (II), West Bengal, challenging the order of the division bench of the Hon’ble Calcutta High Court. The Appeal was clubbed along with a few others which essentially raised a common question of law i.e. whether the special allowances paid by establishments to its employees would fall within the term 'basic wages' under Section 2(b)(ii) read with Section 6 of the Act for computation of deduction towards PF.

 

The Court applied various tests with a view to decide the subject matter of the appeals. The crucial test was of ‘universality’ i.e. whether special allowances are ordinarily and necessarily paid to all the employees of an establishment or only to certain employees or group of employees. The test of ‘universality’ was though originally discussed by the Court in Bridge and Roof Co. (India) Ltd. vs. Union of India[2] wherein the Court analysed the expression 'basic wages' under the Act for computation of deduction towards PF. The Court in Bridge and Roof Co. (India) Ltd. (Supra), in the year 1962 (being the date of the order), clarified that for the purpose of computation of basic wages, the concerned allowances need to be paid to all the employees of the establishment to qualify for deduction of PF contribution.

 

Applying universality test in the instant cases, the Court concluded that the allowances were not paid across the board to all the employees of the establishment. The Court stated that in case any employee receives amount in excess of basic wages, such excess amount needs to be paid for extra amount of work required to be done by such employee.

 

In the cases under consideration in the appeals, the wage structure and the components of salary of the employees of the establishments were examined on facts, both by the authority and the appellate authority under the Act, who arrived at a factual conclusion that the allowances in question were essentially part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the PF account of the employees. The Court eventually, in its Judgement, passed an order in favour of the regional provident fund commissioner and dismissed the other appeals – being filed by employers.

 

Prior to the Judgement, the practice has been to deduct and make PF contribution on the 'Basic Salary' and no deductions were being made on the 'Special Allowances' and other specific allowances – now could be termed as a ‘technical ploy’. Subsequent to the Judgement, the employers will have to start making deduction for PF contribution in the manner stated therein.

 

The employers need to follow the 'Universality' rule as regards the 'Special Allowances' for the purpose of deduction of PF contribution. As such, the employer would not be required to deduct the PF contribution in respect of allowances where such allowances are paid only to certain employees for their extra work.

 

The key question which is unnerving the industry is the extent to which the PF authorities could wield their power so as to recover the historical PF dues, under the aegis of the Judgement. Interestingly, the Judgement is silent on the effective date from which the liability of the employers would be established as regards the clarification provided in the Judgement.

 

Though the Judgement does not talk about any effective date, it is pertinent to note here that the Judgement only reiterates an existing point of law – the one being laid down in Bridge and Roof Co. (Supra), in the year 1962, and as such no new principle is emanated. Thus, one can infer that the point of law would be effective from the year 1962 to such establishments to whom the Act is applicable and the establishments are as such obligated to make deductions for PF contributions based on the applicable ceiling of ‘basic wages’.

 

The Judgement neither mentions any effective date nor the Act speaks about any limitation period. The Court in Hindustan Times case[3], inter alia held that the provisions of the Indian Limitation Act, 1963 would not be applicable in respect of recovery of dues under the Act. A similar view was taken by the Court in Bhagirath Kanoria case[4]

 

There have been various judgements in which the courts have set aside the orders of the authority under the Act, on the ground of unreasonable delay in exercise of powers relying on the basis of settled legal principle that when no period of limitation is prescribed, then the power must be exercised within a reasonable time and the length of reasonable time must be determined by the facts of each case[5].

 

In case the wage structure of the employees of an establishment consists of any allowances (including Special Allowance) or payments which fall within the definition of 'basic wages' under Section 2(b) of the Act, then in such case, it may be inferred that the employer would be required to make necessary deductions for PF in terms of the Judgement from the date the Act has become applicable to the establishment, in relation to allowances and payments.

 

Therefore, the authorities under the Act may not be completely wrong in issuing show cause notice or inspect the records of the employer-establishment for previous years in the absence of any prescribed period of limitation and the period of such inspection or examination may solely depend on their department practice and inspection policies. One can only hope that a statutory clarification is provided so as to avoid varying interpretations of the Judgement thereby doing away with multiplicity of litigations. This should provide much-needed balm to calm the the jitters of the employees and at the same time offer the employers some clarity in deciphering their PF liabilities.