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2025 (5) TMI 980 - HC - Income TaxAssessment u/s 143 (1) (a) - disallowance of contribution towards ESI and EPF u/s 36 (1) (va) r/w Section 2(24)(x) - HELD THAT - As on the date of issuance of intimation order by the AO i.e. on 16.12.2021 u/s 143 (1) (a) of the Act of 1961 the issue as to whether the delayed deposit of employees share of contribution towards Employees State Insurance and Employees Provident Fund though deposited by the assessee beyond the due date prescribed under the relevant Acts but before the due date of filing of the return of income u/s 139 (1) of the Act of 1961 could be held as the income of the appellant/assessee u/s 36 (1) (va) read with Section 2 (24) (x) of the Act of 1961 or not or whether it is subject to the provisions contained in Section 43-B of the of the Act of 1961 was highly debatable which was pending consideration before the Supreme Court in Checkmate Services Pvt Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) and subsequently it was resolved by the Supreme Court by the judgment dated 12.10.2022. Furthermore the assessee in its audit report had only furnished the details of delayed deposit in Column 20 (b) of the Form No. 3CB and had not shown the same as disallowance. Therefore the AI has committed a grave legal error in processing the return of the assessee under Section 143 (1) (a) of the Act of 1961 in light of principles of law laid down in the matters of Kvaverner John Brown Engg. (India) Pvt. Ltd. 2008 (4) TMI 38 - SUPREME COURT and Rajesh Jhaveri Stock Brokers Pvt. 2007 (5) TMI 197 - SUPREME COURT In the instant case the ITAT has committed a grave legal error by relying upon the decision rendered by this Court in M/s. BPS Infrastructure 2024 (4) TMI 1006 - CHHATTISGARH HIGH COURT wherein this Court has dismissed the appeal preferred by the assessee as barred by limitation summarily without formulating any substantial question of law and as such the substantial question of law formulated herein in this appeal was neither involved formulated and answered in M/s. BPS Infrastructure (supra). Concludingly we are of the considered opinion that the AO should not have resorted to the provisions contained u/s 143 (1) (a) of the Act of 1961 and instead could have resorted to the provisions u/s 143 (3) of the Act of 1961 as on the date of issuance of intimation order by the AO exercising power u/s 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. The prima facie disallowance of impugned contribution towards ESI and EPF under Section 36 (1) (va) r/w Section 2(24)(x) of the Act of 1961 made by the AO under Section 143 (1) (a) by order dated 16.12.2021 is hereby set-aside. Decided against the respondent/Revenue.
1. ISSUES PRESENTED and CONSIDERED
The core legal question formulated for consideration was whether the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal were justified in dismissing the appeals by holding that the Assessing Officer rightly processed the appellant's return under Section 143(1)(a) of the Income Tax Act, 1961, ignoring the fact that due to conflicting judicial opinions on the issue of the due date for deposit of employees' contributions, the Assessing Officer ought to have invoked the provisions under Section 143(3) or Section 147 of the Act by recording a reasoned finding rather than making a prima facie disallowance. This issue arose in the context of disallowance of deduction claimed under Section 36(1)(va) of the Act for delayed deposit of employees' share of contribution towards Employees' State Insurance (ESI) and Employees Provident Fund (EPF). 2. ISSUE-WISE DETAILED ANALYSIS Issue: Whether the Assessing Officer was justified in processing the return and disallowing the deduction under Section 143(1)(a) of the Act, despite the issue being highly debatable and pending before the Supreme Court at the time of the intimation order. Relevant Legal Framework and Precedents: Section 143(1)(a) of the Income Tax Act, 1961, empowers the Assessing Officer to process returns and make adjustments limited to correcting arithmetical errors, incorrect claims apparent from the return, disallowances of losses or deductions where returns are filed late, and certain other specified adjustments. The power is summary and limited to evident errors or incorrect claims apparent on the face of the return and accompanying documents. Deeper scrutiny and adjudication on contentious issues are reserved for proceedings under Sections 143(2) and 143(3). Supreme Court precedents in Kvaverner John Brown Engineering (India) Pvt. Ltd. and Rajesh Jhaveri Stock Brokers Pvt. Ltd. have held that the Assessing Officer cannot make adjustments or adjudicate on debatable or contentious issues under Section 143(1)(a). Prima facie adjustments are only permissible where the incorrectness or error is apparent from the return and documents without the need for deeper inquiry. The Supreme Court's judgment in Checkmate Services Pvt. Ltd. settled the contentious issue regarding the claim of deduction under Section 36(1)(va) of the Act. It held that for claiming deduction in respect of employees' contributions (which are amounts deducted from employees' income and held in trust by the employer), the contributions must be deposited on or before the due dates specified under the respective welfare Acts (EPF Act, 1952 and ESI Act, 1948). If deposited after the due date, even if before the return filing date, the deduction is not allowable. Court's Interpretation and Reasoning: The Court noted that at the time of passing the intimation order dated 16.12.2021 under Section 143(1)(a), the Supreme Court's authoritative ruling in Checkmate Services Pvt. Ltd. (delivered on 12.10.2022) was not available. There existed conflicting High Court decisions on the interpretation of Section 36(1)(va), rendering the issue highly debatable and unsettled. The Court emphasized the limited scope of Section 143(1)(a) and reiterated the principle that prima facie adjustments cannot be made on debatable issues. The Assessing Officer's disallowance of the deduction under Section 143(1)(a) was thus held to be a grave legal error, as the issue required deeper scrutiny under Section 143(3) or other appropriate provisions. The Court also distinguished the reliance placed by the Income Tax Appellate Tribunal (ITAT) on a prior decision involving limitation issues, clarifying that the substantial question of law formulated in the present case was neither involved nor considered in that precedent, rendering such reliance misplaced. Regarding the retrospective effect of the Supreme Court's decision in Checkmate Services Pvt. Ltd., the Court observed that while retrospective effect of judicial decisions is generally recognized, the present appeal did not involve the question of retrospective application but rather the procedural propriety of invoking Section 143(1)(a) in a debatable matter. Key Evidence and Findings: The appellant's return declared income and claimed deduction for delayed deposit of employees' contributions. The audit report disclosed the delayed deposit but did not treat it as disallowance. The Assessing Officer processed the return and disallowed the deduction under Section 143(1)(a) without recording any detailed findings or resorting to Section 143(3). The issue was pending before the Supreme Court at that time. Application of Law to Facts: Applying the principles from Supreme Court decisions, the Court found that the Assessing Officer's action of disallowing the deduction under Section 143(1)(a) was impermissible when the issue was unsettled and debatable. The proper course was to invoke Section 143(3) for detailed scrutiny and recording of reasons. The subsequent dismissal of appeals by CIT (Appeals) and ITAT, affirming the processing under Section 143(1)(a), was also held to be erroneous. Treatment of Competing Arguments: The Revenue contended that the Assessing Officer's adjustment was within the powers under Section 143(1)(a), relying on the Supreme Court's later decision in Checkmate Services Pvt. Ltd. and the retrospective effect of that ruling. The Court rejected this, emphasizing the timing of the intimation order and the unsettled nature of the issue then. The Revenue's reliance on other judgments was distinguished as not applicable to the procedural question before the Court. The appellant relied on the principle that highly debatable issues cannot be resolved by summary adjustments under Section 143(1)(a), supported by binding Supreme Court precedents. The Court accepted this position and also noted the Revenue's withdrawal of appeals in related cases where similar issues arose, thereby estopping the Revenue from taking a contrary stand. Conclusions: The Court concluded that the Assessing Officer erred in processing the return under Section 143(1)(a) by disallowing the deduction on a debatable issue pending before the Supreme Court. The orders of CIT (Appeals) and ITAT affirming this were also set aside. The matter was remitted with liberty to the Revenue to proceed in accordance with law, presumably under Section 143(3) or other appropriate provisions. 3. SIGNIFICANT HOLDINGS The Court preserved verbatim the crucial legal reasoning from the Supreme Court's judgment in Checkmate Services Pvt. Ltd., particularly paragraphs 62 and 63, which elucidate the distinction between employer's own liability and employees' contributions held in trust, and the essential condition of timely deposit for claiming deduction under Section 36(1)(va). The Court also cited verbatim the Supreme Court's observations from Kvaverner John Brown Engineering and Rajesh Jhaveri Stock Brokers that the Assessing Officer has no authority under Section 143(1)(a) to adjudicate debatable issues. Core principles established include:
Final determinations on the issue were that the Assessing Officer's disallowance under Section 143(1)(a) was legally unsustainable, and the impugned orders of CIT (Appeals) and ITAT affirming such disallowance were set aside. The substantial question of law was answered in favor of the appellant/assessee and against the Revenue.
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