The Chennai Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that no disallowance should be made for employee contributions to the Provident Fund ( PF ) and Employee State Insurance ( ESI ) if the contributions were remitted before the return filing deadline.
M/s.Heylands Exports Pvt. Ltd., the appellant-assessee,contested the Assessing Officer’s (AO) decision to allow deductions for employee contributions to the PF/ESI. The AO had previously requested details regarding these contributions through a notice issued under Section 142(1) of the Act, prompting the appellant to provide comprehensive information about the contributions, including the due dates and actual payment dates.
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Upon receiving the appellant’s response, which included a detailed breakdown of contributions, the AO allowed the deduction amounting to Rs. 8,36,020. This decision was based on the prevailing jurisdictional High Court ruling, which indicated that if contributions were remitted before the due date for filing the return of income, no disallowance should occur.
The assessee’s representative argued that the AO’s decision aligned with the established legal precedent and that the AO could not have anticipated the later Supreme Court ruling in the Checkmate Services case, which occurred after the AO had made the assessment. Therefore, they maintained that the AO’s actions were justified and did not constitute an erroneous judgment.
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The Principal Commissioner of Income Tax (PCIT) had invoked revisional jurisdiction under Section 263, asserting that the AO’s decision was erroneous and prejudicial to the revenue.
The tribunal examined the circumstances surrounding the AO’s decision and noted that it was based on the law as it stood at the time of the assessment, which had not been overturned or challenged at that point. It emphasized that the PCIT’s jurisdiction under Section 263 must be exercised based on the material available at the time of the assessment.
The appellate tribunal further highlighted that the AO had conducted due diligence by inquiring about the remittance of employee contributions and had acted in accordance with the established precedent of the jurisdictional High Court. It concluded that the AO could not be deemed to have erred in law simply because the Supreme Court later reversed the legal landscape in the Checkmate Services case.
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The two member bench comprising Aby T. Varkey (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) determined that the PCIT had improperly exercised his revisional jurisdiction. It found that the action of the AO in allowing the deductions was both reasonable and consistent with the law as understood at the time of the assessment.
Consequently, the tribunal quashed the PCIT’s order, resulting in a favorable outcome for the assessee regarding the deduction for employee contributions to PF and ESI.
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