PF Premature Withdrawal: ITAT Bangalore Rules on Taxation of Employee’s Own Contribution
1. Background of the Dispute
The Bengaluru Bench of the Income Tax Appellate Tribunal in Philippe Raymond Godet Vs ACIT (ITAT Bangalore) has addressed an important controversy relating to taxability of amounts withdrawn from a recognised provident fund (PF) before completion of five years of continuous service.
In Assessment Year 2016-17, the assessee, a salaried individual, had withdrawn ₹49,69,708 from a recognised PF account. As the withdrawal took place before five years of continuous service, the Assessing Officer treated the entire withdrawal as taxable and brought it to tax while completing assessment under section 143(3) of the Income Tax Act 1961.
The core legal question before the Tribunal was:
- When exemption under
section 10(12)is denied due to premature withdrawal, can the entire PF payout be taxed, including the amount originally contributed by the assessee from his own salary, or - Should only the employer’s contribution and interest components be taxed, while the assessee’s own contribution is treated as non-taxable return of capital?
The ITAT Bangalore answered this issue in favour of the assessee in principle, subject to factual verification.
2. Brief Facts and Assessment Proceedings
2.1 Return Filing and Scrutiny Selection
- The assessee filed his original return of income on
06.08.2016, declaring a total income of₹1,41,78,890. - The return was processed under
section 143(1)and later selected for complete scrutiny under CASS for examination of:- exempt income,
- large foreign remittances, and
- foreign bank accounts.
Subsequently, notice under section 143(2) dated 04.09.2019 and notice under section 142(1) dated 01.10.2018 were issued.
During the course of assessment, the Assessing Officer noticed that the assessee filed two revised returns for the same year, successively reducing his declared income in each revision. This prompted further enquiry.
2.2 PF Withdrawal and Addition by the AO
On verification of records and replies to the show cause notice dated 19.12.2018, the Assessing Officer observed that the assessee had withdrawn ₹49,69,708 from a recognised PF.
Since the assessee had not completed five years of continuous service, the Assessing Officer held that:
- the exemption under
section 10(12)was not available; and - the entire withdrawal amount of ₹49,69,708 was liable to be added to the total income.
Accordingly, the full PF withdrawal was taxed in the assessment order dated 22.12.2018 passed under section 143(3).
3. Proceedings Before CIT(A)
3.1 Assessee’s Contention
In appeal before the CIT(A), the assessee made a component-wise bifurcation of the PF withdrawal and argued as follows:
- The employer’s contribution, interest on employer’s contribution, and interest on the employee’s contribution could be treated as “profits in lieu of salary” under
section 17(3)(ii)and taxed accordingly. - The employee’s own contribution to the PF, being money already taxed as part of salary in earlier years, should not be taxed again merely because the withdrawal occurred before five years.
- He placed reliance on
section 10(12)read with relevant provisions to contend that employee’s contribution represents capital and is not “income” when refunded.
In substance, the assessee’s stand was that only the incremental benefits (employer’s contribution and interest components) can be taxed, while the original capital contributed by him should be excluded.
3.2 CIT(A)’s Finding
The assessee identified an amount of ₹32,57,829 as his own PF contribution within the total PF withdrawal.
However, the CIT(A):
- treated this amount of ₹32,57,829 as “interest on employee’s contribution”,
- brought it to tax as income under
section 56, and - effectively rejected the assessee’s classification of this figure as principal employee contribution.
The CIT(A) thus partly agreed with the Assessing Officer’s approach and sustained taxation of ₹32,57,829, treating it as taxable income from other sources instead of recognising it as non-taxable employee contribution.
The appeal was accordingly dismissed by the CIT(A).