In an important ruling, the Chhattisgarh High Court has held that the Assessing Officer ( AO ) cannot disallow ESI/PF contemplated under Section 143(1)(a) of the Income Tax Act, 1961 during the pendency of Checkmate Case before Supreme Court.
The issue of the due date of depositing ESI/PF was already pending before the Supreme Court during the processing of return and thus, the officer cannot make prima facie adjustment. The Court clarified that such issues must be examined in detail through regular assessment under Section 143(3) and not through a summary processing mechanism under Section 143(1)(a).
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
The case arose from a dispute involving disallowance of ₹28.21 lakh towards delayed deposit of employees’ contributions to EPF and ESI, which the AO had disallowed while processing the return of income for AY 2020-21 under Section 143(1)(a).
At that time, the issue of whether contributions made after the statutory due date under the respective welfare laws but before the due date of return filing under Section 139(1) could still be allowed was yet to be resolved by the Supreme Court in the Checkmate Services Pvt. Ltd. case. The intimation disallowing the claim was issued on 16.12.2021, while the Supreme Court delivered its decision much later, on 12.10.2022.
The appellant’s counsel, Mr. Nikhilesh Begani, vehemently argued that although the Assessing Officer processed the assessee’s return, the intimation order under Section 143(1)(a) of the Income Tax Act, 1961, was issued at a time when the question of whether employees’ contributions to welfare funds (under Section 36(1)(va)) must be deposited by the due dates specified in the EPF Act, 1952, and ESI Act, 1948, was still unsettled and pending before the Supreme Court in the Checkmate Services Pvt Ltd case.
Expert-Led PF & ESIC Course – Enroll Now & Get Certified
He asserted that it was only on 12.10.2022 that the Supreme Court clarified such contributions must be deposited by the statutory due dates, making the issue highly debatable and contentious at the time the intimation was passed, and therefore Section 143(1)(a) permits only prima facie adjustments, not disallowance of such contentious claims-during processing of returns.
The High Court, allowing the appeal, observed that at the time of return processing, there was judicial divergence among High Courts: some favoring the assessee (Delhi, Bombay, Calcutta, Guwahati), while others sided with the Revenue (Kerala, Gujarat). In this legal context, the issue was deemed highly debatable, and thus not suitable for prima facie adjustment under Section 143(1)(a), which is limited to clear, apparent, and non-controversial errors.
Also read: Relief to Technova Imaging Systems: Bombay HC Allows Depreciation Claim Without Section 72A Approval
The Bench comprising Justice Sanjay K. Agrawal and Justice Deepak Kumar Tiwari held that when the law on a particular deduction is uncertain or unsettled, as it was prior to Checkmate, summary disallowance through Section 143(1)(a) is impermissible.
The Court stated that the AO should have instead invoked Section 143(3) for a detailed inquiry, and the disallowance in the intimation order was thus “legally unsustainable”.
Importantly, the High Court relied on the Supreme Court’s judgments in Kvaverner John Brown Engg. (India) Pvt. Ltd.and Rajesh Jhaveri Stock Brokers Pvt. Ltd., both of which restrict the AO’s powers under Section 143(1)(a) to adjustments based only on apparent errors or prima facie inadmissible claims. They held that disputed interpretations of law fall outside the scope of such adjustments.
Also: Split Smart, Save Big: Tax-Efficient Rental Income Planning for Couples
The Court also rejected the Revenue’s argument that the Checkmate ruling applied retrospectively, clarifying that retrospective effect of a Supreme Court judgment does not automatically justify summary action on unsettled legal questions, especially when the judgment was not available at the time of return processing.
The court observed that “17. Concludingly, we are of the considered opinion that the Assessing Officer should not have resorted to the provisions contained under Section 143(1)(a) of the Act of 1961 and instead could have resorted to the provisions under Section 143(3) of the Act of 1961, as on the date of issuance of intimation order dated 16.12.2021 by the Assessing Officer, exercising power under Section 143(1)(a) of the Act of 1961, the subject issue was highly debatable and ultimately, that issue was resolved by their Lordships in the matter of Checkmate Services Pvt Ltd (supra) on a later date.
Expert-Led PF & ESIC Course – Enroll Now & Get Certified
18. As a fallout and consequence of above-stated discussion, the prima facie disallowance of impugned contribution towards ESI and EPF under Section 36(1)(va) read with Section 2(24)(x) of the Act of 1961 made by the Assessing Officer under Section 143(1)(a) by order dated 16.12.2021 is hereby set-aside.”
Furthermore, the Court took note of earlier ITAT rulings in Parv Buildcon and Satpal Singh Sandhu, where similar disallowances under Section 143(1)(a) were struck down due to the debatable nature of the issue.
Therefore, the Court set aside the intimation dated 16.12.2021, the order of the CIT(A) dated 15.07.2024, and the ITAT’s order dated 26.09.2024, restoring the assessee’s claim. The Revenue, however, was given liberty to initiate appropriate proceedings under Section 143(3) if deemed necessary.
Expert-Led PF & ESIC Course – Enroll Now & Get Certified
Also read: Failure to Maintain Registered Office for Company: MCA Slaps Penalty on Company and Its Directors
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
